Update: You knew Sam E. Antar was comin' for dat ass.
It's a miracle, Overstock has released its remixed, er, restated financials for 2008/2009 we've been waiting for anxiously for and honestly I don't even need to look to know what's in it. Lucky for us, Gary Weiss skimmed it and found that Overstock owes California somewhere between $7.5 and $8.5 million for bad consumer practices - we aren't sure which number either entity is going with, knowing California and our little cash problem, I'm going to guess it's the larger of the two.
The least surprising of the filing is this little love letter from KPMG revealing (can I even use revealing in this context since we all knew Overstock was fucked to begin with and did not need an audit opinion - qualified or otherwise - to know as much?) Overstock has a bit of an internal control problem.
I just want to get this in print so KPMG can refer to it later - you know, put it in the scrapbook or what have you... I especially enjoyed the entire paragraph about the importance of internal control and the effect loose controls can have on statements. KPMG could have gone a step further and marked Overstock's financials toxic but that would violate the sanctity of the auditor/client relationship surely.
The Board of Directors and Stockholders
We have audited Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Overstock.com, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting (Item 9A(c)). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses related to the lack of a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for and perform adequate supervisory reviews of significant transactions and the inadequate design of information technology program change and program development controls have been identified and included in management's assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidated statements of operations, changes in stockholders' (deficit)/equity and comprehensive income (loss), and cash flows for the year ended December 31, 2009 of Overstock.com, Inc. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements, and this report does not affect our report dated March 31, 2010, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, Overstock.com, Inc. has not maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Salt Lake City, Utah
March 31, 2010
What is Overstock's answer to this? Well nothing, of course. They claim in the filing that they are "in the process" of fixing this but, uh, haven't made any progress on that to date [my emphasis].
Not content with letting the scum settle to the bottom of the glass on this one, our buddy Patrick Byrne just won't STFU and issued this cheerful little letter to shareholders (at this point, if you're long Overstock you pretty much deserve every little bit you have coming):
There were no changes in our internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As of December 31, 2009, we had not remediated the material weaknesses. We have done and/or initiated the following actions subsequent to December 31, 2009:
•We have and are continuing to hire additional accounting professionals with the necessary knowledge and experience to properly account for significant transactions.
•We have reorganized our accounting and financial reporting department to improve supervisory review.
•We are hiring additional experienced and qualified professionals for our internal audit department.
•We have reorganized our supply chain department to provide comprehensive oversight over our returns process and partner billing accuracy.
•We are reviewing the systems and controls in place to appropriately capture amounts to be paid to fulfillment partners or deducted from partner payments.
•We are enhancing our information systems testing to improve the completeness and accuracy of data provided by our information systems.
•We have engaged a consulting firm to evaluate our information systems for improvement opportunities.
In Q4 our revenues grew 27%, twice the ecommerce industry's rate, and we earned $12.7 million in net income. In 2009 we grew revenues 6%, earned $7.7 million in net income, generated $46 million in operating cash flow, and generated $39 million in free cash flow. It's nice to be profitable.
I am proud that, for the second year in a row, we rank number 2 in the NRF/Amex survey of American consumers, behind only LL Bean and ahead of Amazon, Zappos, eBay, Nordstrom, and many other fine firms.
As you may know, at the end of Q4 we engaged KPMG as our independent auditors, and announced that we were restating our FY 2008 and Q1, Q2 and Q3 2009 financial statements. I thank you for being patient with us as we worked through the questions raised by the SEC, the transition to the KPMG team, and the extra time it took to ensure that our financial statements are accurate.
I look forward to our conference call next Monday. Until then, I remain,
Your humble servant,
Patrick M. Byrne
The Company will hold a conference call and webcast to discuss its fiscal year and fourth quarter 2009 financial results on Monday, April 5, 2010 at 5:00 p.m. Eastern Time.
Be there or be square.
See also: Overstock.com Turns a Profit; Patrick Byrne Writes a Very Un-Patrick Byrne Letter to Shareholders (Going Concern) and California to Overstock.com: You Owe Us $8.5 million (or is it $7.5 million?) (Gary Weiss)