ostk the saga continued

8/3/2019 OSTK the Saga Continued

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DL | davianletter.com

Thursday,December29,2

Overstock Follow-up

New Information

ThoseofyoufollowingthestoryofOSTKorwhohavereadourlatestarticleaboutit

mighthavenoticedthe8-KfiledtodaywiththeSEC.Ifnot,hereistheoverview:

TheCompanypaidapproximately$20.1milliontoLessorinconnectionwiththe

amendmentandagreementtoterminatetheMasterLeaseAgreement,including

approximately$1.2millioninprepaymentpremiums.

.

TheCompanyamendedtheMasterLeaseAgreementinordertoeliminatethetotal

fixedchargecoverageratiocovenantundertheMasterLeaseAgreement.Asdisclosedinthe

CompanysForm10-QforthequarterendedSeptember30,2011,basedontheCompanys

resultsforthefirstthreequartersof2011,managementconsidereditlikelyatthattimethat

theCompanywouldbeoutofcompliancewiththeMasterLeaseAgreementstotalfixed

chargecoverageratiocovenantatDecember31,2011.Inordertoavoidacovenantviolation,

theCompanyamendedtheMasterLeaseAgreementtoeliminatethefinancialcovenants.

http://sec.gov/Archives/edgar/data/1130713/000110465911071476/a11-

32343_18k.htm

Thefilinghasconfirmedourpriorthesis,andhasafewimplicationsforthefuturewe

wouldliketoaddress,lestyouthinkitwasgoodnewsthattheyavoidedtheDecember31st

deadline.

What it did

EssentiallywhattheyhavedoneisboughtbacktheITequipmentthathadbeensold

andre-leasedbacktothemin2010andadditionalamountsin2011.TheMasterLease

Agreementhadtwoclausesinit,whichwerebecomingtroublesome,andtheyhadadmitted

wouldhavecausedthemtodefaultonDecember31st

ifnotnegotiatedaway.

ThelargestproblemwasthattheagreementcontainedalimitationoftheirFixed

ChargeCoverageRatio,whichtheywereviolating,anditwastiedtothemainFinance

Agreementandwouldhavecausedbothtodefault.Italsoforcedthemtomaintainabalanceof$30millionofCashEquivalents(includingtheirMarketableSecurities).

ByessentiallybuyingtheMasterLeaseouttheynolongerhavetoabidebythefixed

chargeratio,andnowtheircollateralbalancerequirementisdownto$20milliontosecurethe

FinancingAgreement.

Thisseemslikegoodnewsonthesurface,butdeepernotsomuch.

In Focus:

Newinformation

Whatitdid

Immediateimpactandquestions

Futureimplications

By:BClark,LoneWolf,andADavian

[email protected]


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Immediate impact and questions

Theimmediateimpactisthattheywillnotdefaultonthe31st

,butatacost.Theyhadtopay$1.2millioninfeesforearly

redemption.Alongwiththeincometaxestheywouldhavepaidinitially,lostdepreciation,andtheinterest(6.3%),thisMasterLease

hasturnedouttobeaverybaddealforthem.Worseyettheyhadtouse$20millionincashofsomesorttobuyitback,andthat

begsthequestionofwheredidthatcomefrom?

ItcouldhavecomefromagreatQ4,butthathasbeenaddressedinthepriorarticle,andwillbefurtheraddressedbelow.

TheotheroptionsarethattheSEChasgiventhemearlynoticethattheirshelfofferinghasbeenapproved.Itisalsopossiblethat

theycouldusesomeofthemoney/securitiesthatwouldhavebeenavailableduetothedropincollateralrequirements.

Asnotedinthepreviousarticle,Mr.Chouhasbeendeftlysupportingthestockpriceat$7.75;youcanseethisintheprice

action,theSECfilings,andthisVolumebyPricechartbelow.

WeproposehewasdoingthisinordertomakesuretheMarketableSecuritiesheldatUSBanktokeeptheirbalanceabovethe

$30millionrequirement,nowthattherequirementisreduceddownto$20millionhenolongerwillneedtoofferthissupport,and

therecentfloorinthestockpricewillbebroken.

Future Implications

We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance.

Q3 2011 p. 17

ThelargestimplicationisfromthefactthatUSBankchosenottonegotiate,ortheyatleastofferedtermsthatwereworse

thanOSTKwould/couldtake.USBanklikelyhasoneofthebestpicturesofhowhealthyOSTKreallyis,theyhavebeentheirmain

bankandcreditorforyears,andhaveinsideinformationprobablybeyondanyonebuttheboard.ByUSBankmakingsurethisdidnt

getnegotiatedtobettertermsispossiblythebiggestvoteofnoconfidenceimaginable.Thefactthatthiswasdonewith3daystogo

innegotiationsalsoshowsthattherewasnochanceofgettingthisdone.


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ThereluctancefromUSBankalsoimpliesthatQ4isnotgoingwellforthem,andbyOSTKsacrificingdesperatelyneeded

liquidity,howweaktheyareatthenegotiationtable.ThishappeningrightaftertheChristmasbuyingseasonmeanstheyknewthe

Q4resultsatthispoint,andthattheywerenotgoodenough.Thismeansthecashtopay-offtheMasterLeaseagreementisnot

comingfromQ4sales,unlesstheychoosetostringouttheirsuppliers,orpayitoffandfileChapter11togetoutofthepayables

associated.

In2010,theyhada$14milliondollarfloatbetweenQ3/Q4,duetoclients/creditcardtransactionsclearingquicklyandthei

payableshavingmoretimetillpayment,sothisishistoricallytheirstrongestcashtimeofyear,forafewweeksuntiltheyhaveto

pay,soassumingthisyearisclosetheycouldusethatcashtemporarilyandbuythemselvesafewweekstime.

Theoptionsremainingare:

GetapprovalfromSECforshelfandgotoopenmarketforfinancing,buttheywillneedtobecarefulassumingtheir

securitiesarelikelycollateralfortheremainingFinancingAgreement,sowouldneedtoaddmoretheretokeepitincheck.

Getanotherbanktogivethemasubordinateloantofundit,butthissubordinateloanwouldbeatveryunfavorableterms.

Issuenewnotesorbonds.AgainthesewouldneedtobesubordinatetotheUSBank,andtheyalsowouldbeinatime

crunchtogetthesedoneintime,andtherehavebeennofilingstosupportthisidea.

Thisresultsintheshelfofferingbeingthemostlikelycandidate.Thoughtheyhaveauthorizedupto$200million,theyonly

needapprox.$50milliontoalleviateimmediateneeds,soletusbeconservativeandassumetheyonlyissue$50millionworth.

CurrentMarketCap: 181Million

CurrentSharePrice: $7.77

NewSharesIssued: 6.4Million

Approx.NewSharePrice: $6.09

WithoutMr.Chousupportingit,andtheconfidencehitthesharepricewouldlikelygowellunder$6.

DISCLAIMER

TheinformationcontainedhereinreflectstheviewsofTheDavianLetterLLCanditsaffiliates(collectively"TDL")asof

thedateofpublication.Theseviewsaresubjecttochangewithoutnoticeatanytimesubsequenttothedateof

issue.TDLhasaneconomicinterestinthepricemovementofthesecuritiesdiscussedinthisresearchnote,butTDL's

economicinterestissubjecttochangewithoutnotice.Allinformationprovidedinthisresearchnoteisfor

informationalpurposesonlyandshouldnotbedeemedasinvestmentadviceorarecommendationtopurchaseor

sellanyspecificsecurity.Whiletheinformationpresentedhereinisbelievedtobereliable,norepresentationor

warrantyismadeconcerningtheaccuracyofanydatapresented.Inaddition,therecanbenoguaranteethatany

projection,forecastoropinioninthisresearchnotewillberealized.Alltradenames,trademarks,servicemarks,and

logoshereinarethepropertyoftheirrespectiveownerswhoretainallproprietaryrightsovertheiruse.

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