Thursday, February 23, 2012

Marital Status Disappearing from French Addresses

As in Germany (which halted use of the word "Fraulein" in official forms and documents in 1972), and following earlier steps by French municipalities, the government of France has killed "mademoiselle" from official use. Women will be addressed as "Madam" regardless of their marital status, just as men regardless of marital status are addressed as "Monsieur."

This may sound quaint, but we've done much of the same in the US with the move toward "Ms."

For an explanation why, ask yourself what's wrong with living in a world with perfect purity of language, depicted so wonderfully by Douglas Hofstadter.

Remember: the only language that doesn't change is a dead language.

Adobe Flash Takes Another Hit

Microsoft, Google, and Netflix have joined forces to request a standard for encrypted streaming of HTML5 video. The proposal isn't itself a standard yet, but it moves users away from the need for proprietary plug-ins for managing keys to ensure access to copyrighted content is limited by rights owners without a need for nonstandard software such as Microsoft Silverlight (used by Netflix) or Adobe Flash (used by Google's movie service).

Opening the field to any compliant developer would eliminate the lock-in of proprietary format vendors and, hopefully, increase the options for consumers to select player software based on factors like usability and performance.

Apple, which is not a co-author of the proposal, was an early mover in rejecting proprietary plug-ins on mobile devices due to security and performance issues. Adobe's effort to maintain its market for plug-ins on the desktop (after apparently losing the war on mobile devices) is likely doomed by a widely-supported standard for providing DRM-governed video.

T-Mobile: Competitive Disadvantage To Lack iPhone

T-Mobile announced its 2011 operating results yesterday. Dominating the results seemed to be the loss of contract customers. The announcement is especially interesting because it repeatedly mentions the iPhone 4S launch. That a cell carrier might mention the iPhone 4S seven (7) times in an earnings announcement would be less remarkable if that carrier actually carried the product. In explaining the late-in-the-year reversal of its earlier success in reducing losses of contract customers (as opposed to prepaid customers), T-Mobile blamed 4th-quarter iPhone 4S launches by three competitors.

Offering Apple's iPhones may be expensive, but it may be the price carriers pay to keep customers.

Experimental Error Explains 2011 Miracle

Italians who last year announced they had demonstrated faster-than-light travel have admitted their observed effect disappeared when they tightened a cable between a GPS receiver and a timer. Correcting the cabling issue altered the measurable transit time by 60 nanoseconds, bringing the observed facts into consistency with well-tested theories about the relationship between time and space.

Thursday, February 16, 2012

Understanding ACAS' 2011 Results

Confused by the tax asset impact of Q4? Wondering whether a dividend makes sense, and when we'd see it again?

All this and more on "Understanding American Capital's 2011 Results".

Therein, we see American Capital's real NAV improvement (that is, recognizing that the "tax asset" isn't an income-producing asset and wasn't really even new in 2011 as it resulted from crash-era loss carryforwards), revisit the share buyback, and think about the effect of taxes as ACAS changes between a RIC and a C-corp (and maybe back?). We also weigh the impact of AGNC and MTGE on ACAS' per-share results, and suggest that income investors wanting ACAS' management expertise look to MTGE and AGNC until the tax treatment of potential dividends becomes clear.

Enjoy!

Monday, February 13, 2012

Loving American Capital Before Valentine's Day

The new ACAS article is now live at Seeking Alpha.

Enjoy!

MTGE Trading At NAV Premium

MTGE's current price of $21.54 is over 3% more than its last-published NAV of 20.87. This is quite a change from the below-$17 days in October!

If run under the same playbook as MTGE, ACAS will be in a position to grow the assets behind its 2m share investment in MTGE by issuing new shares above NAV, thereby increasing both its management fees in MTGE and its ability to generate dividends to pay itself as a shareholder.

Hopefully ACAS can keep these shares, unlike its exited stake in AGNC.

And speaking of AGNC, there's a new Jaded Consumer article on AGNC at Seeking Alpha. After more than three years, it was time for a follow-up to the first article there. Upshot? Reduced AGNC dividend (exceeding 16%, not too bad) allows ACAS to reinvest more money per share at AGNC. Fun stuff.

Sunday, February 12, 2012

Butcher's "Ghost Story" Fun Prelude to Upcoming "Cold Days"

It's no spoiler to let you know that Jim Butcher's Changes (reviewed here) had a sequel called Ghost Story (the 13th in the series! Spooooky!), and that the next book in the series has an announced title of Cold Days.

Changes is a hard act to follow. In serialized fiction we wait between sequels for another snippet in the lives of the characters we like (or hate! nothing's better than a good villain!), hoping to see how they evolve. In Changes, Butcher turned Harry Dresden's life upside down. So much change in Harry's life and his allegiances and debts and powers and his relationships with his enemies and his loved ones – a terrific ride. So it's unsurprising that Ghost Story has a feeling that it is the denouement of Changes more than it is a story of the same size. It is, one might think, the high-speed film of a driver's deft gear-shift under horrible road conditions. We're left wondering if we've seen a downshift into passing gear or, or into a slow load-pulling gear ... but as with the end of Changes (in which we surely expected some trick to save Harry from certain demise), we have a pretty good idea into what peril Harry is marching at the close of Ghost Story.

And it promises to be a heck of a peril. And a mess of relationships, betrayals, heartbreak, and supernatural mayhem.

Can't wait.

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Spoiler Alert!
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When last we saw out intrepid hero Harry Blackstone Copperfield Dresden in the closing lines of Changes, he was plummeting through the icy depths into the darkness of Lake Michigan with a seemingly-fatal gunshot wound. This, after having his car crushed, his home immolated, the mother of his child murdered, his bulletproof enchanted duster obliterated with the expiration of spells that made it really tough for the big climactic battle scene, and to top it all of his promising date with longtime love interest Karrin Murphy screwed up by a rifle shot in his own chest that prevented him from keeping the date – what was left for Harry to lose but his life?

And as we read this, and review the book-ending dialogue, we're tempted to pin the deed on the assassin Kincaid (who said long-distance rifle shot would be the way to kill Harry risk-free) and to identify Harry's rescuer as Mab, Winter Queen of the Faeries, into whose cold dark realm he was sinking. But that's too, too obvious. Surely it must be misdirection. We convince ourselves it can't be the case. So we speculate. And we ask ourselves just what Butcher has in store for Harry's development.

As Changes opens, Harry is convinced to return to Earth to solve his own murder (which we know from the back cover), a task which (no surprise to the longtime reader) turns out to be a higher-stakes game than one might expect for a spook. We learn about Harry's allies and their struggles without him for the months he's been missing since the action in Changes (and its Karrin-POV short story sequel "Aftermath", available in Side Jobs), and we see as the story unfolds that some of his allies have been experiencing character development of their own while Harry's been occupied beyond the mortal veil.

Slowly we learn, as we suspected, that – as in The Princess Bride – there's a difference between "all dead" and "mostly dead". And that being shot by Kincaid isn't enough information to understand the crime at hand. And that Harry's co-rescuer Mab knows full well Harry tried to cheat her, and wants revenge.

And we wonder: how bad can revenge on Harry be, while Mab needs his services as her Winter Knight? What aid can the genius of Demonreach be to Harry while he fights for his sanity and Mab's victory? Other than due to competition over Harry, why are Mab and Demonreach at odds? What does Harry's relationship with Demonreach really mean? Now that Karrin has taken on a bloodthirsty and merciless view of the evildoers in Chicago, can we possibly avoid Karrin's transformation into Harry's new enemy? (Particularly in light of the fact that he'll be working for Mab? And her likely conviction after Ghost Story that anyone appearing to be Harry is an imposter or under mind control?) How will Molly get straightened out? (Will she be Harry's new rescuer/love interest?) What will the White Council have to say about all this? The Grey Council? Cowl and the Black Council?

The mind boggles. But, that's why we read this stuff, right?

Wasting Your Money, Or Your Time?

The Motley Fool, which the Jaded Consumer has criticized before (for offering users bizarre, opaque, and inconsistent return calculations, for selling "guidance" sure to get investors lost, and being extremely late to the party with shallow analysis based on easy-to-learn information about major worldwide companies with one of the most valuable brands on the planet, and using criminally obsolete information to support investment suggestions), published an article proclaiming that American Capital was wasting your money by repurchasing its shares on the open market.

I've submitted an article to Seeking Alpha about American Capital Ltd. (which went live here), which addresses the sensibility of the share buyback.

What I'd like to add here – because it's the sort of dufus claim that's in line with the rest of the Jaded Consumer's analysis of Motley Fool analytic powers – is that the Motley Fool article suggests that one of the reasons that ACAS' share buyback was bad for investors is that ACAS could not afford to pay a dividend. ACAS has been generating cash from profitable portfolio company investments to the tune of hundreds of millions, and even billions of dollars. (The 2010 results included $1.3 billion in cash proceeds from realizations; the 2009 results included $1.1 billion in realizations.) During the last-announced quarter, ACAS had $260 million in cash realizations. Cash isn't exactly in short supply at ACAS. While reducing investments by $615 million during the first nine months of 2011 (as measured by FAS-157-compliant "fair value"), ACAS reduced its debt by $740 million, ensuring that ACAS could not be forced to make debt payments against a deadline in the near term.

ACAS ended the first nine months of 2011 with $187 million, even after spending $75 million retiring shares under ACAS' new dividend policy, which favors share retirement to dividends while shares trade below NAV. On what basis does Mr. Smith of The Motley Fool conclude ACAS can't afford a dividend? What makes Mr. Smith think paying a dividend (especially at a time regulations do not require it) is of any interest to management when better uses of cash are available?

With respect to the superiority of ACAS' below-NAV share buybacks to a mere dividend, I'll link the Seeking Alpha article once it's live. But the short story on The Motley Fool's analysis is this: the article doesn't help you see your money wasted at ACAS, it only helps you to waste your time looking for reason in a lazy pile of drivel. The Motley Fool plainly wanted to sell clicks more than it wanted to provide well-reasoned analysis. Remember that the next time The Motley Fool advises you about your money.

Thursday, February 9, 2012

Privacy and the Mobile App

It's not just the Islamofascist "republic" of Iran that's cracking others' security these days. It's your deliberately-downloaded applications. Path intentionally uploads to its developers' servers your entire address book, straight off your smartphone.

Note to Apple: make a preference that allows you to deny access to the Address Book on a per-application basis. You want your call-placing app to connect incoming numbers to names, and to allow you to see names so you don't have to remember numbers; and you want your map app to get addresses for names you ask about; but hardly anyone needs to view the ENTIRE address book entry (birthday, social, your notes that contain their entry PIN codes, etc.) for anyone in the address book. Ever.

And for users:
Any physician who keeps patient contact information in his or her Address Book will immediately hit the $1.5 million dollar annual cap for civil monetary penalties the moment of Path's upload, and possibly twice: once for unauthorized disclosure, and once again for failure to safeguard Protected Health Information. Every physician customer is at risk of personal bankruptcy.

This is not a joke. Data privacy is extremely serious in some industries.

Military Drones Spoofed: Real Security Is Hard

Iran captured a modern US drone using cracking techniques developed through analysis of older crashed drones. First, the drone's remote operators were cut off using electronic noise. Then, once the craft was on autopilot, false GPS signals were sent to it in order to persuade it that it was landing in a safe airbase in Kandahar. The real location was a pre-prepared airstrip in Iran.

Spoofing attacks are serious. Anti-spoofing hardening such as frequent comparison of GPS coordinates to coordinates calculated from inertial sensors and camera images would make this more difficult. Highly accurate inertial positioning systems are in common use in deepwater oil and gas construction equipment, and could readily be adapted to the somewhat less hostile environment of high altitude. Both environments, of course, are subject to currents and other confounders, making them ideal places to share positioning technology.

4Q2011 at MTGE: AGNC All Over Again, And Better

After MTGE's $20 IPO, the Jaded Consumer followed the company with optimism, and I began investing at $16.75 after the ex-dividend date for its $0.20 stub-quarter dividend. After MTGE announced the size of its first full-quarter dividend, the Jaded Consumer wrote an above-average-readership article at Seeking Alpha, making the call that MTGE's total return wasn't just $0.80/sh in quarterly dividends but would include over a dime per quarter in reinvestment – churning out solid dividends atop a growing base of capital investment capable of driving share price north.

With MTGE's first full-quarter results, it appears ACAS' MTGE-managing team is following the same successful playbook it fine-tuned working on AGNC. The earnings are north of The Jaded Consumer's conservative estimates, the NAV is over $20 as expected, but – best of all – the reinvestment of undistributed income is much more than the Jaded Consumer was willing to predict in a publicly-viewable place. The result? As of this morning, MTGE at least briefly traded above its just-published December 31 NAV of $20.87.

MTGE is performing like AGNC, but faster. Very nice.

What does this mean for MTGE's manager, ACAS? Having invested $40 million in a private sale at the moment of MTGE's public launch, ACAS became a shareholder of 2 million shares, which pay a growing dividend atop an increasing NAV. To the extent MTGE comes (with a few more quarters of outstanding performance) to trade consistently at the sort of NAV premium frequently seen at AGNC, ACAS' investment will be looking pretty smart even without considering the monthly management fees it collects from MTGE in its role as manager. To the extent MTGE trades above NAV, ACAS has an incentive to issue more MTGE (above NAV), driving NAV upward beyond even the extent of reinvestment (and tax-free to MTGE!). Frankly, I hope as an ACAS shareholder that it keeps its shares. I think I'm going to like this ride.

Tuesday, February 7, 2012

Apple in the Enterprise: The Ice Melts

Yesterday's story about Halliburton migrating to iOS devices from Blackberries serves as a major milestone in Apple's transformation to an enterprise-friendly vendor. Not long ago, Apple would rather have ignored Halliburton's pleas for help. Now, Apple not only highlights enterprise iOS penetration, but actively works with enterprises looking to switch to Apple platforms.

Too bad Apple doesn't sell a rack-mounted server any more. But then, is that where the money is? At Microsoft, it certainly is: the back-end server applications and the server-branded operating system versions on which they run are all connected both to Microsoft's high-dollar consulting business and to its stranglehold on corporate desktops (which is based in large part on their requirement to access Microsoft servers' services). An attack in the server realm is certainly invited by enterprise iOS adoption – how else will iOS devices be managed and maintained, their images standardized, their applications updated, and so on? Corporate IT needs to know what version of what software is running on its users' phones, and these things need to be under the control of policy-making personnel with access to server tools capable of pushing this stuff onto Apple-vended handhelds.

Much of Research in Motion's revenues come from server subscriptions. To replace RIMM in the enterprise is to invite Apple to offer replacement parts. Not on costly subscription, perhaps, but anything Apple does to level the platform for desktop purchase decisions is a significant advantage for Apple in making desktop enterprise sales. Given the relative longevity of Apple hardware, and its reputed need for less support, this might be an easy sale if Apple bothered to invest in the infrastructure to make it feasible.

And what about RIMM? Not exactly the platform of the forward-thinking. 82% of Blackberry users are not using BlackBerry OS 6. Only half of RIMM users are even using RIMM's last-generation operating system. The rest are more than an entire generation of software behind. Given that the ability to sell apps to users depends on the support of their operating system, it seems few RIMM customers are part of the addressable market for the latest, most current mobile applications. Else, RIMM is so poor at providing a valuable platform for developers that they can't be bothered to write apps that depend on it, and are therefore writing for old operating systems. If so, what are the prospects that RIMM's OS 6 will catch on?

With RIMM looking weak in the enterprise (and falling from 20% to 16% or lower in smartphone share in less than a year), Windows still suffering in the smartphone market, and Halliburton preferring iOS to Android, Apple's star looks like it's rising not only in the enterprise (where over 90% Fortune 500 companies are either considering or deploying the iPhone), but broadly in the high-end market. (Android enjoyed a huge rise in share last year, but may have a huge chunk of the phone market, but last quarter Apple sold more smartphones than all Android vendors combined, and anecdotal evidence suggests Android satisfaction may be poor, and one article I can't find at the moment cited surveys that Android buyers generally purchased without thinking about the operating system, possibly purely on price.) In fact, last quarter Apple's highest-priced line of phones (the new 4S) outsold the next-tier phone (the 4) by 75%, and outsold the lower-tier iPhone 3GS 400% (for a 5-to-1 sales ratio). Each of these three tiers of Apple products ranked ahead of the highest-ranking non-iPhone.

Apple is certainly the leader in profit share, and while the aggregate of all Android vendors have in some quarters managed to sell more units than Apple sold by itself, Apple by itself has consistently been keeping more profit than all other smartphone vendors combined (the graph of profit share over time in this article is interesting, as it extends the graph previously published here). With but 9% of the market, Apple has 75% of the profit at present. The current performance is up from 52% of the profit with 4.2% of the market share in the quarter preceding the iPhone 4S launch. Apple isn't coming to the end of the pie, though – it's enlarging the pie as it grows, with carriers offering outsized subsidies for iPhone products in order to compete with each other for users who demonstrate willingness to switch carriers to access iPhones. Why? They want the customers, and decided to work with Apple rather than bet against them. And Apple is the top handset maker by volume in two of the last four quarters. What should it tell us about Apple's profit that it sells higher margin units, and more units, than anyone else on the planet?

Apple's effort in enterprise should lead it to improved security and improved remote management, and ultimately into the IT back office where it will be hard not to compete with Microsoft's life-sustaining back-office effort. But Apple doesn't need the back office to succeed on the desktop: Apple has long led unit sales of top-end PCs, it grows share while other vendors' sales slump, and enjoyed a 26% YoY growth in Mac units this last quarter. Apple's profit share in PCs has exceeds its share of unit sales for the same reason as in smartphones: Apple doesn't sell loss-leaders, it sells differentiated products priced to profit. Also, Apple enjoys certain margins advantages unavailable to PC commodity vendors, thus profits more even at the same price. Apple, long unranked globally in PC volume, stands to break 5% globally and become a top vendor by volume and not just by profit: the PC market may be among Apple's next frontier of growth, and deployment in enterprise may play a role in its global growth as enterprises target Apple's platforms not just for mobile apps but desktop apps and back-end user support. The enterprise could be a major part of how Apple ultimately retakes the lead in the so-called platform wars.

Friday, February 3, 2012

Odyssey Marine Best Seen on TV, Not In Your Portfolio

The Jaded Consumer recently submitted an article at Seeking Alpha with the above title, which the editors decided to rename "The Best Way To Play Odyssey Marine And Shipwreck Exploration". When I started writing the article, I wasn't yet thinking about the long/short prospects of Odyssey Marine being shorted in favor of a major offshore oil and gas support services provider such as Oceaneering International or Subsea 7, which use some of the same (or better) equipment and skill sets but do so in a business model that has actually been proven to make a profit. I was thinking that while it's cool to watch underwater exploration televised by the Discovery Channel, it really sucks to "stand under a cold shower tearing up £50 notes".

Comments quickly arrived from those who watched OMEX – a crowd that surely has interest in Odyssey's yarn about the almost-in-hand treasure, or it wouldn't be watching OMEX news. The thrust of the comments was that (a) Odyssey is about to pull up one (or more) of the wrecks, and (b) it's a ton of money on that wreck (or those wrecks) and it'll push shares to $____ (number varies with enthusiasm of advocate). The comments thus assume that Odyssey is capable of salvaging a wreck at a net profit. Built into this assumption are a several important axioms, the doubt of which would considerably impair the the bull case: (1) Odyssey is capable of recovering from the sea floor valuable cargoes, substantially intact, despite their being lost for many years, (2) Odyssey will be able to prove some ownership interest in one or more of these valuable recoveries, (3) Odyssey's timeline to proving its claim will be within a commercially reasonable time frame, and won't require multiple new share issuances to keep the enterprise's lights on (and attorneys paid) while litigation drags on for years as it did with Mel Fischer, and (4) Odyssey's cost to recover property and defend a claim to title will not only cost so much less than the value of the recovered property, and be so quick that dilution can be ignored as a risk, but will provide so much upside that the risk of the shares going nowhere forever while OMEX burns investors' cash having fun hunting treasure around the world is really outweighed by the huge upside. Of these axioms, (1) is probably the safest so long as OMEX is able to raise funds in the public markets to keep trying. The others vary considerably by project.

Reaching for the Stars

With patience and unlimited resources, incredible things are possible. We've sent Man to the Moon and filmed him teeing off a Golf ball, for goodness' sake. This doesn't prove that there's a business to be built on the fact any time soon. Thanks to advances in ROVs that make possible three-mile-deep work trips without mortal danger, three miles' depth into the blackest sea is no longer as hard to reach as the surface of the Moon. However, since it's harder to see than the near side of the Moon, we know a lot less about much of our deepest oceans than we do about the Moon. What's more, the deepest oceans have been swallowing humans whose skills were defeated by Nature, and with them their vehicles and other property (including property extorted by European sovereigns from locals who preferred not to mine precious metals and gems at gunpoint without pay), some of which was sufficient to replenish a kingdom's treasury. No wonder shipwreck exploration captures the imagination!

And for only a few bucks, you can buy a share of OMEX.

How Big A Share Will Shareholders Buy?

A look at OMEX' Sept. 2010 Form 10-Q says something interesting about management's outlook for the future appeared in the third paragraph of Note J:
During our annual meeting of stockholders on June 1, 2011, an amendment to our Articles of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 150,000,000 was approved by the stockholders.
Given the other information in Note J – the public offering of more than 5 million shares during the quarter, the conversion into common stock of certain numbers of shares of various classes of convertible preferred, and the issuance of shares to accredited investors exercising warrants – one wonders just how much further dilution is in store. After all, the company had 72,973,773 shares outstanding at the end of September, 2011, and management sought and obtained an authorization increase to more than double that number. This is rather a puzzle for a company on the supposed cusp of success. It's not like the share price is so high it scares off potential investors . . . .

Let's have a look at Note E. Between year-end 2010 and the time OMEX' quarter ended September 30, 2011, OMEX' inventories declined a few hundred thousand dollars from about $6.4m to about $6.3m. Relatively little of this decline was in "merchandise" (a few grand); most of it was in the category of "Artifacts" (from about $6.2m to about $5.9m). Several tens of thousands of dollars in "packaging" also fell off the inventory sheet over the nine-month period. Just how liquid are these artifacts, and how hard is OMEX trying to sell them? If management consistently finds it easier to raise funds by issuing shares instead of selling its "inventory", how much confidence can investors have in the business case they should be counting on for share price increases in the event of a salvage success? Won't the investors get diluted to the point the success is irrelevant?

A few years ago, excitement about the $500,000,000 value attributed to the Black Swan project in the press led people to conclude OMEX was headed to the moon. A few more years of dilutive issuance into the project, we find that (a) if OMEX were to liquidate a $500,000,000 asset without transaction costs the one-time per-share impact of this would be $6.85 before taxes, but (b) the United States Court of Appeals for the Eleventh Circuit accepted Spain's position that OMEX is not entitled to the wreck, or even a salvage share, because it was a warship over which United States law bars the exercise of federal jurisdiction. A careful read of the opinion reveals that Odyssey Marine's legal argument in favor of federal jurisdiction (and its claim to a salvage award) turned on its ability to raise doubt that the vessel was in fact the warship Odyssey Marine had been seeking. In short, Odyssey Marine hoped to win in court by deceiving the Court about the identity of its find. How is this a recipe for success?

Unsurprisingly, the distinctive 19th century warship and its peculiar cargo were recognized by the Court for what they were, and the whole find was ordered surrendered to the King of Spain. OMEX' request that the Court of Appeals reconsider was rejected. The $2.6 million discussed in Note E as a recovery cost to be carried on its inventory sheet if title to the Black Swan passed to OMEX won't enter OMEX' inventory sheet; it'll just join OMEX' ongoing losses. Shareholders' share of the Black Swan is the same share as the rest of the public: the right to follow an exciting story in the news.

OMEX has clearer rights to a wreck known to investors as the "Gairsoppa" project. In this deal, OMEX entered a competitive bidding process to obtain a license to salvage a British vessel torpedoed in the Second World War with a cargo of "up to 7 million total ounces of silver". OMEX holds the risk of failure and the burden of any expenses, in exchange for which it is permitted to retain 80% of the value of the silver recovered under the contract. OMEX chartered a Russian vessel to find the vessel, then announced it was found. Assuming a 100% recovery and a silver content that is the same as the maximum estimate, OMEX could keep 80% of about $200 million. $160,000,000 before taxes would provide a gross recovery of nearly $2.20 per share before expenses and taxes. This could really help keep the lights on for a while, and stave off the next round of dilution. To ensure this, OMEX isn't doing anything like an archaeological recovery. The plan, as I understand it, is to use a huge underwater excavator to make a (hopefully small) number of big grabs to bite into and through the wreck where the valuables are believed to be. It will destroy the wreck, and not endear OMEX to idealists keen on history or war graves. OMEX is permitted to do this under its recovery contract, and won't face government interference, but it serves to highlight OMEX' nakedly commercial objective – this isn't bad for honesty, but it's murder on prospects to be allowed to work on projects that involve cultural significance. But, OMEX is desperate to show it can really find something it can sell.

The two bucks isn't anything to sneeze at, given OMEX' pricing south of $4, but to think of ongoing revenues one would have to see a track record of turning opportunity into profit. And that record is not good: OMEX is burning millions a quarter keeping its vessel in operation, and hasn't produced much for the benefit of investors in that time (though it's gotten some exciting press for its headlining principals). The real question isn't whether there's a valuable wreck that might be salvaged if the rights could be made clear, but whether there's a business case to be made that OMEX will generate a reasonable risk-adjusted return for investors.

The Quality of the Business
Some folks, especially value folks, like metrics. Hard numbers that show management's performance can aid the unemotional evaluation of a business' management and aid in the assessment of the likelihood that management will produce outstanding shareholder returns. One not-too-unexpected place to look for a performance metric of that kind is a business' accounts receivable. Are they collecting? Are they giving free credit? Are they taking on bad risks to make short-term sales?

So let's look at Note D. Accounts receivable fell over the nine months (12/31/10 to 9/30/11) from about $2.1m to about $0.7m. Now, this might be an exciting trend if paired with cash flow that showed conversion of receivables into cash. Unfortunately, as described in The Jaded Consumer's original piece on this enterprise, cash flow is enormously negative and – far from showing $1.4 million in receipts from collected accounts – shows that the company is only able to show positive cash when it prints enough shares to outweigh its multimillion dollar quarterly expenses. The income on the balance sheet is mainly non-cash income that flows from changes in values of derivatives, a value that is dwarfed by sources of loss that cost current cash. Despite that the purported purpose of the enterprise is to sell finds obtained from the sea, there is no income line for "sales of finds" (or even "of inventory"). The closest thing on the balance sheet is "Other", which is less than sixty grand – not enough to run the boat for even a single week.

So what explains the drop in accounts receivable? Note D offers a hint. Over the period, OMEX exercised a contractual right to offset nearly $2m owed to a 41.25%-owned sea-bed-mining subsidiary against the $2m the partially-owned subsidiary owed OMEX. Dorado Ocean Resources Ltd. wasn't the only deal between siblings that seemed to have a big impact on receivables. Neptune Minerals Inc., of which OMEX was a one-third owner at some point (the note describing it strongly suggests a risk of post-transaction dilution), entered a share exchange with Dorado under which Neptune assumed debt owed to OMEX by Dorado, while OMEX entered into a debt conversion agreement with Neptune to become an equity holder instead of a holder of debt. This makes good sense if the debt payee can't make its payments, which is likely given the business Neptune is in. Neptune has paid OMEX $9.6 million and an equity stake for geological exploration services designed to find exploitable mineral deposits on the sea floor on what amounts to an underwater mineral lease previously owned by Dorado. Between its dealings with Neptune and its dealings with Dorado, OMEX owes its partially-owned customers several years of underwater exploration services. Got that? OMEX owes services – funded by dilutive share issuance – as compensation for investment in its customers' unproven underwater mining businesses.

How did OMEX get neck-deep in someone else's treasure hunt? It all began innocently enough. In February of 2011, Neptune paid Odyssey $3m and an equity stake for a 50-day survey contract. Nice piece of business for a company that otherwise would be selling shares to make payroll, right? But, no. In June, Neptune and Dorado entered into a share exchange in which Neptune acquired Dorado and OMEX became a Neptune investor (and signed away debt owed OMEX for shares of a non-voting common). Within a week, OMEX had entered into a 100-day charter agreement with a couple of entities with the word Neptune in their names to operate Dorado's vessel (OMEX' having been slated for auction in the near future) to supply services for Neptune Minerals Inc. When the charter concluded in October 2011, OMEX had been paid $6.9m and owned "approximately a 33% equity ownership in Neptune[.]" To protect its investment, OMEX will be hard-pressed to say "no" to Neptune, especially if (as I read it) Neptune's subsidiary Dorado owns the vessel OMEX is currently operating. OMEX claims that it doesn't engage in off-balance-sheet financing arrangements, but I don't see financial statements for Neptune or Dorado or any of the archaeological entities which have revenue-sharing agreements with OMEX. I find the financial arrangements of OMEX peculiarly opaque for a business that is supposed to be so straightforward as finding valuable things and preparing them to generate revenue.

Perhaps Neptune's business will pan out, and OMEX will own a valuable stake in an underwater mining company. Was investment in underwater mining operations the reason investors entrusted their money to OMEX? Did investors expect OMEX to have weighed and soberly considered underwater mining regulatory risk and associated regulatory compliance? Did OMEX' management demonstrate a special aptitude for assessing the value of illiquid portfolio companies? Did investors think the purpose of their venture was to sell survey services for $69,000 per day plus a stake in the customer? How many days can Neptune afford at $69,000 per day, and at what point will Odyssey end up selling those days at a loss in the hopes of making the equity valuable?

Odyssey's track record of executing its announced plan of monetizing wrecks is poor. Its track record for developing uncollectable receivables is concerning. Its track record for teasing valuable wrecks as just-around-the-corner has been a key to raising excitement needed to fuel interest in further equity issuance, but they haven't produced value yet. Based on the comments in the SEC filings about the expectation that its ship will be sold for scrap following the reporting period, Odyssey has literally run one ship into scrap trying to find treasure at the bottom of the sea, and so far the only treasure it's appeared to have acquired has been the property of the Kingdom of Spain, and to have been recovered without any payment at all.

The Comparison
Other firms use similar (or better) technology and get real results. Subsea 7 and Oceaneering both use deep-water sensing equipment and work-class ROVs to provide sophisticated deepwater services, but instead of being paid $69,000 per day they charge well into the six figures a day for vessel equipped to provide underwater construction services to energy companies who need to install and operate equipment on the floor of the sea. By charging a six-figure sum, these companies produce double-digit ROI for investors rather than force investors to speculate on the possibility that a customer's underwater venture will turn profitable.

Consider the risk-adjusted returns: offshore energy services companies sell services to the likes of Shell, ExxonMobil, BP, and other energy firms whose natural resource assets are gaining in demand, and whose cash flow is outstanding. To access their offshore mineral assets, they engage third-party engineering and underwater construction firms whose tools and expertise are indispensable to efficient offshore operations. They sell services of skilled employees at a steep markup, and they sell the use of complex high-tech tools platforms (ships equipped for deepwater construction work) at a steep markup. They are regularly required to report to federal regulators when they encounter wrecks discovered accidentally in the course of their operations, bu instead of building a little plan to make money on the "treasure" they intentionally pursue the sure money: the services revenues and their associated early-completion bonuses.

Volatility certainly makes OMEX a potentially interesting trading target, but The Jaded Consumer doesn't pretend to have a secret to timing buys or sells to outsmart everyone else who buys and sells. The only question I pose is whether over the long run OMEX is a suitable investment. One can certainly argue that all it takes is one home run to profit, but think about how often the math changes on what constitutes a suitable profit – every time OMEX issues new shares, the size of the "win" required to make good increases. By comparison, the same types of tools and expertise boasted by OMEX is being sharpened to a razor's edge every working day at Subsea 7 and Oceaneering (and probably Fugro and many others not included due to lack of familiarity). These are the guys who rescue ROVs that other operators lose or entangle in obstacles. These are the guys with the skills to draw the huge fees Shell and ExxonMobil pay to make their deepwater aspirations come to life.

Unlike OMEX, Subsea 7 and Oceaneering are finding treasure their customers and investors can keep. OMEX is likely over the long run to experience a hit-and-miss string of projects with potentially difficult legal environments. Imagine the multibillion-dollar San Jose, sitting in the waters of Columbia, with every treasure hunter in the world salivating over it, and the navies of Spain and Columbia both poised to sieze anything found, and personal liability overhanging any treasure hunter who enters a jurisdiction with a treaty with Spain. Then consider Subsea 7, and every deepwater installation Shell needs in Brazil, and every post-storm repair required by ExxonMobil on the underwater portion of its drilling platforms across the Gulf. How many successes must OMEX win in order to put investors where they expected to be? How many months do you think can pass without Oceaneering or Subsea 7 billing millions of dollars for deepwater services?

In the near term, I view the long/short picture painted in the Seeking Alpha article as being subject primarily to media risk. The good news is that OMEX has been in the news so many times to such little effect that at the first hint of something that might pan out, risk-averse investors have an opportunity to bail before confirmation of a real find drives OMEX anywhere it hasn't been.