Beyond, Inc. (BYON)

[drobx]

Another interesting Seeking Alpha article. This guy is a short, but there is a lot of information about the digital dividend.
https://seekingalpha.com/article/4315936-overstocks-shares-almost-dormant

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Overstock's Shares Have Been 'Almost Dormant'
Jan. 9, 2020 7:46 AM ET|3 comments | About: Overstock.com, Inc. (OSTK)
The Stock Stooge
The Stock Stooge
Long/short equity, Growth, long-term horizon
(1,025 followers)
Summary
Overstock's shares have been trading in a narrow trading range.

Shareholders are set to vote to approve a digital dividend on February 13th. I expect it will be approved.

Many of the issues affecting the digital dividend still apply. It will be a real pain for anyone receiving it.

Meanwhile the company continues to lose money and is now funding operating losses through an "at the market" offering.

"Almost Dormant"
For the last 8 weeks, Overstock's (OSTK) shares have traded within a fairly narrow range. One might say that the stock has been "almost dormant". Of course I am sarcastically borrowing the phrase that new CEO Jonathan Johnson used last fall to describe the pending SEC investigation that began in February 2018. In an interview in September 2019, Johnson said that he believed the SEC investigation was "almost dormant". The market interpreted this as you would expect, and the stock doubled from $15 to $30 over the next month. Then in November the company disclosed in its 10-Q that it received a subpoena from the SEC on October 7, 2019, requesting documents related to the company's planned digital dividend and its 10b-5-1 plans for its officers in effect during the period from January 1, 2018 through October 7, 2019. The SEC also made requests regarding its failed investment from GSR Capital Ltd. and communications with its former CEO, Patrick Byrne. The stock dropped for several reasons, one of which is this SEC investigation, and now trades in a fairly narrow range between $7 and $9. This is hardly the high level of volatility that traders have come to expect out of Overstock shares. But volatility may be coming back.

The Digital Dividend
One of the other major themes moving Overstock over the last several months has been the digital dividend. Of course confusion around the dividend was the primary cause of the spike in shares in September, and the failure and withdrawal of the digital dividend in October was the primary cause of the fall back to earth. But now the digital dividend is back, and shareholders of record as of December are set to vote on several proposals related to the dividend on February 13th. If the proposals are approved, the company will issue the digital dividend promptly thereafter. As was the case last fall, the digital dividend will be a share of preferred stock that will trade only on the alternative trading system operated by the company's subsidiary, tZERO. The company will issue one share of preferred stock for every 10 shares of Overstock stock (or one for every 20 shares of Overstock stock depending on which proposals are approved at the February 13th meeting). (see proxy)

The company has made some improvements to the digital dividend plan since last fall. Most importantly, they've registered the preferred stock with the SEC by including the security in their S-3 shelf. As a result, the preferred shares will be freely tradable from day 1, a significant improvement compared to the 6 month hold period required under the company's plan last fall. Also improved are various technical transfer restrictions that are being cleaned up by the shareholder vote, which will allow for transfers in the case of death, divorce, etc.

There Are Still Issues...
But many of the same issues that plagued the last planned digital dividend continue to apply to the current proposal. The main issues I see are:

Potential technical issues. tZERO has, to date, only handled maybe a dozen trades on its platform total. Was any of that done manually? How can the company be confident that it can handle all of the complexities in a fully automated trading system?
Hassle to set up a Dinosaur account. Anyone who wants to receive the digital dividend must set up an account at Dinosaur, the only brokerage participating in the tZERO ATS. This is a hassle, especially if you don't own many shares.
The company hasn't explained how Dinosaur is going to know how many shares you own. Is Overstock expecting Dinosaur to contact your brokerage to see how many OSTK shares you own so that it knows how many preferred shares to credit to your account? The company hasn't explained how this will work, but I don't see any way it won't be another major hassle to be the go-between between Dinosaur and your broker, and whatever other paperwork is required.
Tax issues. Overstock hasn't stated how much of your tax basis in OSTK shares will be allocated to the digital dividend. You'll need to coordinate this with your broker and Dinosaur to ensure that your tax basis is reported consistently.
IRA issues. If you own OSTK shares in an IRA, I see no way that the digital dividend doesn't represent a withdrawal from your IRA, which would be an early withdrawal for anyone under the required age. That's a big problem.
Liquidity on the tZERO ATS will be limited. You may not be able to sell the digital dividend for as much as an OSTK share trades for.
Other issues. Who knows what else might come up, or issues that are out there that I haven't thought of or covered. For instance, I don't think there are any issues for international holders of OSTK to receive the digital dividend. But I am not sure whether Dinosaur will open any non-US accounts. If they don't, then non-US holders are out of luck.
For all of these reasons, I would not want to receive the digital dividend and would vote "no" on the company's proposals if I held OSTK stock. The company's argument to its shareholders is: yes, the digital dividend is a real pain, but it's the only way to jump start the tZERO exchange, and if the tZERO exchange succeeds, your OSTK shares will appreciate. I expect most shareholders will vote "yes".

Stock Squeeze Unlikely
Of course the other reason many OSTK holders like the digital dividend proposal is that it could cause a stock squeeze. This prospect was what really lit a fire under the stock last fall, but it was shut down on September 17, 2019 when the Options Clearing Corporation (NASDAQ:OCC) published a memo stating that options would not be adjusted for the digital dividend. The company withdrew the digital dividend the next day. The original OCC memo has since been removed from the OCC's website (please post if anyone has saved it). I see no reason that the company's new proposal, if approved by shareholders, would receive different treatment by the OCC as the only substantive difference now is that there is not a 6 month hold period. Market participants expect that brokerages will follow the instruction of the OCC regarding options and not require shorts to deliver the digital dividend (or its equivalent in cash) on borrowed shares. This last point is subject to some confusion in the market; brokerage margin agreements all provide for the borrower of "short" shares to pay amounts equal to the dividends on the borrowed shares to the lender, in cash or cash equivalent value for non-cash dividends. There is thus no scenario where shorts are "stuck" because they can't deliver a non-cash dividend; margin agreements provide for the payment of an equivalent cash amount if a borrowed stock pays a non-cash dividend.

In any event, we're largely back to where we started last fall before the original digital dividend plan was withdrawn, except without the prospect of a potential short squeeze. The company continues to lose money and is now selling shares in a new "at the market" offering launched in November. We will see in a few weeks how much stock they sold in the fourth quarter to fund ongoing operational losses.

Actually, We Don't Really Use The Blockchain
A final note on the proxy statement for the shareholder vote on the digital dividend that I thought was interesting. For all of the talk about how tZERO is utilizing blockchain technology to revolutionize stock settlement, I was surprised to read that, actually, stock settlement occurs via book-entry on a record maintained by the transfer agent, Computershare. The company then creates a public blockchain "courtesy copy" of the record Computershare maintains. The blockchain "courtesy copy" is "a convenience and with no controlling effect," according to Overstock. "Following Computershare's approval of any change in record ownership, the digital wallets on the blockchain are updated to match Computershare's conventional books and records." You can read about this on pages 20 and 29 of the proxy.

Disclosure: I am/we are short OSTK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.