Overstock.com Materially Overstates EBITDA

Sam Antar has a great article today on Overstock.com (NASDAQ:OSTK) continuing to overstate EBITDA. Specifically, Sam says:

In Overstock.com’s Q1 2008 earnings release and 10-Q report the company continued to improperly remove from its EBITDA calculation, certain stock-based expenses in violation of Regulation G. As a result, Overstock.com’s reported Q1 2008 EBITDA of $3.524 million was materially overstated by $1.339 million or about 61%.

And of course, that overstatement is in addition to the overstatement that results from Overstock.com calculating EBITDA by starting with operating income, instead of net income, as required by the SEC rules. Some people erroneously believe it’s okay to start with a different figure when calculating EBITDA. That’s not true.

The SEC does not permit companies to do that because of the confusion it could cause:

Question 15: If EBIT or EBITDA is presented as a performance measure, to which GAAP financial measure should it be reconciled?

Answer 15: Because EBIT and EBITDA exclude recurring charges, companies should consider the answer to Question 8 if they intend to use EBIT or EBITDA as a performance measure. If a company is able to justify such use, EBIT or EBITDA should be reconciled to net income as presented in the statement of operations under GAAP. Operating income would not be considered the most directly comparable GAAP financial measure because EBIT and EBITDA make adjustments for items that are not included in operating income.

But the problems are even deeper than Overstock’s starting point for calculating EBITDA. The company also improperly excluded stock-based compensation from their calculation which cause further overstatement.

Sam’s article cites the SEC’s opinion with regard to improper reporting of EBITDA at CGG Veritas, which had removed stock based compensation from its calculation of EBITDA, causing EBITDA to be overstated. The SEC said:

With regard to your disclosure of a non-GAAP measure labeled EBITDA:

The acronym EBITDA refers specifically to earning before interest, tax, depreciation and amortization. However, your measure also adjusts earnings for stock option expense. We will not object to your using such a measure as a liquidity measure but request that you rename it to avoid investor confusion.

The SEC is clear. Calculate what you want, but don’t call it EBITDA when it’s not.

What’s the effect of Overstock’s bogus EBITDA calculation? Here’s what Overstock reported:

And here’s how EBITDA should have been calculated:

 

What’s the difference? A 61% overstatement of EBITDA in 2008. That sounds material to me. Oops. But we’re just picking on Overstock, right? How dare we point out that Patrick Byrne and his incompetent executives, board, and auditors are presenting numbers to the investing public that are complete fiction?

And here’s an interesting question: Exactly what are Overstock’s auditors doing? Because they certainly don’t seem to be examining the disclosures made in the SEC filings. Hello? PricewaterhouseCoopers? Are you out there? Isn’t verifying calculations and disclosures (especially ones so basic) part of your job?

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