Odyssey Marine Exploration, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Odyssey conducts deep-ocean shipwreck recovery, marine exploration and charter services, artifact sales, exhibitions, and subsea mineral exploration. Key projects included SS Gairsoppa, SS Mantola, HMS Victory, Oceanica Resources, Neptune Minerals, and Chatham Rock Phosphate.
Financial position and key metrics
| Metric | Q1 2013 | Q1 2012 or March 31, 2013 balance |
|---|---|---|
| Total revenue | $863,072 | $2,899,752 |
| Operating loss | $(7,807,183) | $(4,643,061) |
| Net loss | $(9,665,379) | $(5,481,799) |
| Basic and diluted loss per share | $(0.12) | $(0.08) |
| Net cash used in operating activities | $(16.2) million | $(4.5) million |
| Net cash used in investing activities | $(2.4) million | $(0.3) million |
| Net cash provided by financing activities | $19.5 million | $1.9 million |
| Cash and cash equivalents at period end | $11.0 million | $5.1 million at March 31, 2012 |
| Total debt and loans | $16.3 million | $18.8 million at December 31, 2012 |
| Total liabilities | $35.1 million | $47.7 million at December 31, 2012 |
| Stockholders’ deficit | $(7.1) million | $(20.8) million at December 31, 2012 |
Revenue declined 70% year over year because Q1 2012 included $2.8 million of expedition charter revenue, primarily related to Chatham Rock Phosphate. Q1 2013 included $803,072 of artifact and other sales and $60,000 of exhibit revenue, but no expedition revenue.
Operating expenses increased 15% to $8.7 million, including $5.7 million of operations and research expense and $2.8 million of marketing, general and administrative expense. The resulting operating margin was approximately negative 905%; the net loss margin was approximately negative 1,120%.
Interest expense was $1.1 million. Fair-value losses on derivative liabilities were $662,410, compared with derivative income of $123,069 in the prior-year quarter. Share-based compensation expense was $688,580, compared with $388,419 in Q1 2012.
Material changes versus the prior comparable period
- Revenue decreased by $2.0 million, or 70%, driven by the absence of prior-year expedition charter revenue.
- Net loss increased by $4.2 million, or approximately 76%, primarily because of lower revenue, higher operating expenses, and unfavorable derivative fair-value changes.
- Operating cash use increased to $16.2 million from $4.5 million. The increase included a $12.5 million payment to Galt Resources related to SS Gairsoppa project proceeds.
- Investing cash use increased to $2.4 million, including approximately $1.8 million for mineral exploration equipment for the Dorado Discovery and approximately $0.5 million for Odyssey Explorer equipment and engine work.
- Financing cash inflows increased to $19.5 million, including $15.0 million from selling a 15% interest in Oceanica Resources and approximately $4.6 million from warrant exercises.
- Debt decreased by approximately $2.5 million, including $3.1 million of senior convertible note principal paid with common shares. The company also issued 2,010,500 shares upon warrant exercises.
- Accrued expenses declined from $14.1 million at December 31, 2012 to $3.1 million at March 31, 2013, principally reflecting the Gairsoppa-related payment.
Guidance, outlook, risks and unusual items
- Management’s 2013 business plan assumes positive operating cash flow, successful project recoveries, additional financing or partnerships, and continued monetization of the Gairsoppa and Mantola projects. Management stated that cash was expected to fund operations through the remainder of 2013 based on these assumptions.
- Management cautioned that project recoveries, financing, or partnership opportunities may not occur. If cash flow is insufficient, Odyssey may need to raise additional capital or curtail expenses.
- Odyssey expected to renew its $5 million term loan and building mortgage with Fifth Third Bank on or before their July 2013 maturities. Failure to renew or refinance these facilities would create a material liquidity concern.
- Gairsoppa recovery operations were scheduled to resume May 22, 2013, and Mantola recovery was planned to follow. Management reported more than $41 million of Gairsoppa silver proceeds received to date, but future proceeds depend on successful recovery, refining and sales.
- The company has experienced several years of losses and had a stockholders’ deficit. Its ability to generate future income depends substantially on shipwreck recoveries, mineral project monetization, charters, and additional financing.
- Derivative liabilities totaled $6.0 million at March 31, 2013 and are sensitive to the company’s share price, volatility, interest rates and other valuation assumptions.
- The company held approximately $11.2 million of uninsured cash at one financial institution and had $231,028 of restricted cash unavailable for operations.
- Spain continued to seek legal fees and costs in the Black Swan litigation. The filing states that the court had recommended approximately $95,000 for a limited period, while Spain also asserted approximately $3.2 million of total fees and costs; the outcome was unresolved.
- The company had approximately $126 million of federal net operating loss carryforwards, but recorded a full valuation allowance against deferred tax assets. A $150,742 current federal alternative minimum tax expense was recorded in Q1 2013.
- Potential dilution includes convertible notes, warrants, options and restricted stock awards. The filing specifically warns that note conversions or amortization payments made in shares at prices below market could adversely affect the common stock price.
Most important facts for investors to verify
- Whether the Fifth Third Bank term loan and mortgage were renewed or refinanced by the July 2013 maturities.
- Actual 2013 recovery volumes, proceeds and margins from Gairsoppa and Mantola, including the timing and cost of the planned charter operations.
- Whether operating cash flow turned positive as projected, given Q1 operating cash use of $16.2 million.
- The remaining principal, conversion terms, share settlements and potential dilution from the senior convertible notes and warrants.
- The outcome and ultimate cost of Spain’s Black Swan fee and cost claims.
- The realizable value and ownership dilution of Oceanica, Neptune Minerals and Chatham Rock Phosphate interests.
- Whether future financing or asset monetization is required to support operations and debt obligations.