SEC Filing Summary: Overstock.com, Inc. (Form 8-K)
Business Context and Reporting Period
Company: Overstock.com, Inc.
Filing Date: December 14, 2016
Event Date: December 15, 2016 (Closing of offering)
Context: The filing reports the closing of a rights offering for two new classes of preferred stock: Blockchain Voting Series A Preferred Stock (digital securities) and Voting Series B Preferred Stock (traditional securities). The offering was conducted via non-transferable subscription rights distributed to common stockholders.
Key Financial Metrics and Capital Structure
- Shares Issued: 695,898 total shares of Preferred Stock.
- Series A Preferred: 126,565 shares.
- Series B Preferred: 569,333 shares.
- Subscription Price: $15.68 per share.
- Dividend Rate: Annual cash dividend of 1.0% of the subscription price (approx. $0.16 per share), payable in preference to common stock dividends.
- Voting Power: The new Preferred Stock represents approximately 2.7% of the total combined voting power of common and preferred stock.
- Historical Liabilities: As of September 30, 2016, the Company reported liabilities of approximately $264.7 million.
Material Changes and Agreements
- Series A Preferred (Digital): These shares trade exclusively on the PRO Securities Alternative Trading System (ATS) using the tØ Platform (blockchain-based). They settle on the trade date (T+0) rather than the standard T+3. They cannot be held in "street name" and require a specific brokerage account with Keystone Capital Corporation.
- Series B Preferred (Traditional): These shares trade in the over-the-counter market and are expected to be quoted on the OTCQB market.
- Registration Rights Agreement: Entered into with CEO Patrick M. Byrne and affiliates. The Company agreed to file a registration statement within 90 days to register shares held by affiliates for resale. CEO Byrne purchased slightly more than 50% of the Series A Preferred.
- Corporate Structure: Certificates of Designation were filed with the State of Delaware to establish the rights of the new stock classes.
Outlook, Risks, and Contingencies
The filing highlights significant risks associated with the novelty of the Series A Preferred and the underlying technology:
- Liquidity Risk: Trading markets for both series are expected to be very limited. Series A has no market makers, requires a specific broker (Keystone), and prohibits "street name" holding, which may deter institutional investors.
- Technology and Operational Risk: The tØ Platform and PRO Securities ATS are untested for public digital securities. The subsidiaries operating these platforms (tØ.com and PRO Securities) have limited resources (PRO Securities had ~$40,000 net capital as of Sept 30, 2016). Failure of these entities could halt trading.
- Regulatory Uncertainty: The application of U.S. laws regarding virtual currencies, money transmission, and the definition of an "exchange" under the Securities Exchange Act of 1934 is unclear. The SEC could require the ATS to register as an exchange, which the Company may not have resources to do.
- Conversion Risk: The Company retains the right to convert all Series A shares into Series B shares at any time, potentially at a disadvantage to Series A holders if Series B trades at a lower price.
- Dividend Uncertainty: While preferred dividends are senior to common dividends, the Company has never paid common dividends and has no intention to do so. Credit agreement covenants may further restrict the ability to pay any dividends.
- Tax Treatment: It is uncertain whether the IRS will treat the preferred stock as common or preferred for tax purposes, and the use of the blockchain platform may have unknown tax implications.
Investor Verification Checklist
- Verify the operational status and capital adequacy of the PRO Securities ATS and tØ.com subsidiaries.
- Confirm the liquidity and trading volume of Series A on the PRO Securities ATS and Series B on the OTCQB market.
- Review the Registration Rights Agreement to understand the timeline for the resale registration statement.
- Assess the Company's ability to pay the 1.0% preferred dividend given existing debt covenants and cash flow.
- Monitor regulatory communications regarding the classification of the PRO Securities ATS and the use of the Bitcoin blockchain for settlement.
- Check for any announcements regarding the conversion of Series A to Series B.