Pink Sheets

I noticed last night that a lot of people were being referred to the blog from the Yahoo message board for OPBL. They were looking at the work I did on Sherb back in Dec 2005.

So let's take a quick look at Optionable and see if they're objectionable.

Let's start with the 10-K for the period ending Dec 31, 2006:

52 million shares on Mar 12, 2007. 2.5 million options, warrants, etc. on Dec. 31, 2006.

Formed in Feb 2000. Commodity derivative brokerage services for brokerages, financial institutions, energy traders, hedge funds. Focused on energy derivatives (like Enron did). Historically focused on natural gas. Their discussion assumes natural gas, which could be because they were too lazy to re-write it for their expanded role. Nothing wrong with that, I'd view it as a good thing, really.

Two markets: futures and OTC.

Futures are on exchanges like NYMEX. Either electronic or guys in a room shouting. Shouting adds intelligence and experience to deals.

Options are traded on the OTC. This is typically non-standard and can require a broker to seek out to match up buyers and sellers. Bigger fees for this.

Claimed trends: more interest in natural gas options, lower credit/counterparty risk on OTC, more players, need for more transparency, need for mark-to-market tracking rather than theoretical.

What does OPBL do?

• Match up buyers and sellers.
• Services on the NYMEX floor.
• Electronic brokerage platform for energy derivatives. (started in 2006)
  
• Analysis of derivatives.

Plan going forward:

• more automation
• add clients
• more derivatives
• work with other brokers on deals of some sort
• acquisitions

How they make money:

• Commission fees on the automated system and brokers ($13 million... $4 million of that with related parties)
  
• Legal kickbacks from NYMEX ($3 million)
  

The founding stockholders entered into an agreement to sell 10 million shares to NYMEX (19% of Optionable). Also selling warrants to allow NYMEX to own up to 40% of the stock via dilution and put someone on the board. As long as NYMEX owns its shares, OPBL needs NYMEX permission to do a number of things: acquisitions, related party transactions, paying dividends, adding debt, making any new big deals with other companies. NYMEX and the founding stockholders gets right of first refusal on share sales (includes convertibles), especially change of control of the company.

OPBL is making a rights offering, I think, for NYMEX. It's complicated.

Bank of Montreal was 24% of business (18% in the prior year). Apparently not a related party.

18 full-time employees. A consultant as CTO. A consultant as CFO (that's bad). Five software engineer consultants.

4 patents. Whoop-dee-doo.

$16 million revenues
$10 million gross profit
$1.5 million operating expenses
$6.2 million net income

The industry is fast paced and requires a lot of change to keep up.

Chairman Mark Nordlicht
From Platinum Partners, ran the Value Arbitrage Fund. Also West End Capital. BA Yeshiva University 1989. Owns 28% of the stock.

CEO Kevin Cassidy
Managing directory of Capital Energy Services (energy options brokerage firm on NYMEX). Business development, sales, marketing, operations oversight. No degree listed, probably a good sign (watch out for over-educated people in the financial industry). Owns 6% of the stock.

President Edward J. O'Connor
Also from Capital Energy Services. Negotiator and keeps track of the money. Owns 10% of the stock

CFO Marc-Andre Boisseau
Advises all sorts of small public companies. CFO for hire. University of Montreal. Is there some connection between this and the Bank of Montreal? Doesn't mean anything wrong if it is.

Directors and officers own 44% of the stock.

Related party stuff:
Edward J. O'Connor owns 50% of CES, CEO is managing director of CES and OPBL got a deal with CES to work on the floor of NYMEX. OPBL pays a fee to CES and assumes floor expenses. OPBL owes CES $1.5 million. CES assigned the debt rights to O'Connor and Cassidy. This was then modified in ways I don't understand. If OPBL raises capital, the loan interest rate drops from 12% (ouch) to 4.68%.

The CES agreement was cancelled in Jan 2007 and is now assumed by the OPBL subsidiary OPEX.

Some related party customers include Northern Lights Energy, Platinum Partners, Fenmore Holdings. Chairman is managing partner or stockholder of each of these. The grand total of revenues from all these is less than $1 million. But I don't see a resolution of the $4 million related party revenue. It's not Bank of Montreal, from what I can tell.

Sherb & Co auditors, 12th largest public company auditor. Don't just assume they're evil. Audit fees are cheap, as expected: $67K, with another $3K of other fees (fine).

Unqualified opinion.

Cash heavy assets. Cash and receivables is nearly all the assets. $2.5 million net cash. Roughly half equity.

Liabilities are accrued compensation, taxes payable, and a massively discounted debt to the Chairman. Also another massively discounted debt. Looks like that's just an accounting thing based on the 12% potential interest rate?

Earnings per totally diluted share are probably around 11 cents per share.

Receivables absorbed a lot of cash, which was more than offset by the income tax not yet paid and the accrued compensation (the top guys are probably not drawing all their salary).

Very low capex.

Paid $1.2 million debt to CEO, Chairman, and that other guy I mentioned above.

One company is 37% of accounts receivable.

The Chairman's father leases a seat on the exchange for CES to do its floor operations.

End of 10-K

Now how about the Q1 10-Q for the period ending March 31, 2007

Big jump in cash to $12 million from $8 million. Net cash is $4.4 million, up from $2.5 million.
AR decreased
Incentives receivable increased some

Two big new assets:
Trading rights of $1.2 million
Intangible asset of $1.1 million

Accrued compensation continues to climb to $3.1 million
Tax payable up a bit.

The discounted debts are up a bit

Equity up big time.

Revenue of $9.1 million
Gross profit of $6.1 million
Tax of $2 million
Net income of $3.1 million

Earned about 5.6 cents per fully diluted share

As expected from the balance sheet, cash from operations was very good: $5.4 million.
Looks like they had to account for fair value of warrants and options, which I've noted before could cause stock prices to oscillate (good for me).

They purchased the trading rights and intangible asset (doesn't seem so intangible, now does it?) for $1.2 million and $400K respectively. $223K capex.

Nothing in finance except some options and warrants exercised (no surprise there, given the stock price increase).

55.5 million fully diluted shares.

Trading Rights: This is an indefinite right to trade on the floor of an exchange (presumably NYMEX).

Intangible Asset that they bought with cash: customer list from HQ Trading (energy derivatives brokerage), also assumed continuing operations of HQ. $400K paid now. $400K payable in 2008, another $400K in 2010, and 900K + 600K warrants.

Nearly 20 million warrants are being issued to NYMEX. Needs investigation.

Ok, let's skip ahead to the disaster part.

8-K issued May 8, 2007
May 8: Bank of Montreal ("BMO") stops working with OPBL during an ongoing external review of BMO's commodity trading losses. BMO is a major customer of OPBL.
May 9: NYMEX is offering various options trading on the CME Globex platform in June. These will likely compete with OPBL's OPEX platform. Unknown impact on OPBL.

Let's check the news:
BMO suspends business with OPBL.
OPBL says that's the way the business works: sometimes you lose money.
Another shoe drops: NYMEX competes with OPBL.
People start thinking this is like Long Term Capital Management.
A lawyer says:

"They weren't reporting the actual trade value," says Swick, referring to the Deloitte claims reported in the National Post. "Looks to me like there was some conspiracy between Optionable and the BMO traders to hide the losses."

and then there's this:

The situation appears to have Optionable a bit worried. It is hiring a crisis management firm and asking lawyers if it has grounds for its own suit against BMO, according to a report by Toronto's Globe & Mail.

And then of course the lawsuits fly.

Ok, for starters, I'm going to guess that the BMO issue is not going to be as big a deal as it seems. There's a good chance that I'm wrong about that, but let's start here.

Next, I'm going to assume that BMO is lost forever as a customer.

I don't think the NYMEX move is as serious as it looks. Why would they buy 19% of OPBL and then waste money on duplicating their efforts?

NYMEX has this gigantic warrant to increase it's ownerhip up to 40% with a strike price of $4.30. Needs more investigation.

One customer in Q1 accounted for 30% of revenues, which I'm assuming is BMO.

If we cut the revenues by a third, I'd expect a gross profit in the next quarter of around $4 million, operating income of $3 million, and net income of perhaps $2 million. With 55.5 fully diluted shares, that's 3.6 cents per share for a quarter.

Tentatively, I'd say the stock is worth at least $2.00 per share.

It's funny because with all the bad press derivatives get, especially energy derivatives, it's odd for me to find something like this that could actually be a good deal. After considering uranium futures and how they benefit the industry, it's quite easy to see the real economic benefit of energy futures. If I'm selling heating oil in Michigan and I've got a big inventory of oil, I may need a hedge to avoid major financial disaster if oil prices go down fast.

I'm not saying there's no scam here, but I don't smell one (big difference that's easily lost on most people, especially panicking investors).

I'm seriously considering buying some of the stock if the price is right.

UPDATE Monday May 14, 2008:
They just issued an 8-K saying the CEO, Kevin Cassidy resigned on May 12. This leads me to believe that something is worse than it seems. Now I'm not considering buying stock (that could change, however).

UPDATE Monday May 14, 2008:
I just saw a notice that NYMEX is resigning from the board of directors of OPBL to avoid a conflict of interest as they investigate the situation. I don't see this in any news yet.

UPDATE same day after the close:
The CEO resignation combined with the NYMEX resignation and backing off puts this stock in a whole different category. More like a lottery ticket.