Business Context and Reporting Period
Odyssey Marine Exploration, Inc. is engaged in shipwreck exploration and recovery, marine archaeological services, exhibits and artifact sales, and deep-sea mineral exploration services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $5.94 million, versus $9.83 million | $14.78 million, versus $17.09 million |
| Operating income (loss) | $(3.97) million, versus $1.02 million | $(8.68) million, versus $(5.09) million |
| Net loss | $(5.14) million, versus $(1.31) million | $(12.24) million, versus $(7.92) million |
| Net loss per share | $(0.07), versus $(0.02) | $(0.22), versus $(0.12) |
| Operating cash flow | Not separately provided | $(9.24) million, versus $(7.48) million |
Expedition revenue was $5.69 million in the third quarter and $14.00 million for the first nine months. Third-quarter revenue from subsea mineral mining services was approximately $5.3 million; nine-month revenue from two Neptune Minerals charters was approximately $10.8 million.
Calculated operating margins were approximately negative 66.9% for the third quarter and negative 58.8% for the first nine months. Calculated net margins were approximately negative 86.5% and negative 82.8%, respectively.
- Cash and cash equivalents were $10.05 million at September 30, 2011, compared with $0.24 million at December 31, 2010. Total current assets were $12.04 million and current liabilities were $16.13 million.
- Total debt consisting of the term loan and mortgages was $5.41 million, compared with $7.95 million at year-end 2010. The term loan had $3.0 million outstanding and was scheduled to mature in April 2012; the mortgage balance was $2.41 million.
- Total liabilities were $26.52 million, including $8.40 million of deferred income from revenue participation rights and $6.10 million of derivative liabilities. Stockholders’ deficit was $5.93 million.
- Financing activities provided $19.61 million during the first nine months, primarily from $15.63 million of common-stock proceeds and $7.51 million received under the Galt project syndication. These proceeds funded operating losses, debt repayments and other cash needs.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 40%, primarily because expedition charter revenue fell $4.1 million. The decline reflected lower Robert Fraser and other government/commercial charter revenue, partly offset by Neptune mineral-services revenue and higher artifact sales.
- Nine-month revenue declined 14%, despite a $5.6 million increase in subsea mineral-mining charter revenue, because Robert Fraser and other charter revenue declined by a combined amount exceeding that increase.
- Operating expenses increased 13% in the third quarter and 6% year to date. Operations and research expenses increased to $7.52 million for the quarter and $16.24 million year to date, driven largely by vessel, marine-operation and project research costs.
- The Ocean Alert was written down by approximately $594,000 to salvage value before its October 2011 sale. Management expects the sale to eliminate approximately $0.4 million of standby operating costs per quarter.
- Other expense improved in the third quarter because of a $1.75 million favorable change in derivative fair value, but the company recorded a $2.89 million loss from its unconsolidated mining investment. For the nine months, derivative fair-value income was $1.17 million, while the mining investment loss was $4.49 million.
- Shares outstanding increased to 72.79 million at September 30, 2011, from 67.08 million at December 31, 2010, primarily reflecting the June public offering and warrant conversions.
Guidance, Outlook, Risks and Unusual Items
- Management expected cash on hand and anticipated receipts to fund operating cash flows through the remainder of 2011, but stated that additional capital would be required if operating cash flow, project financing or other financing opportunities were insufficient.
- Future results depend substantially on successfully recovering and monetizing high-value shipwreck cargo and securing additional marine-services or deep-ocean mining projects. Management indicated that SS Gairsoppa recovery operations were expected to begin in spring 2012 and that SS Mantola recovery was planned in conjunction with Gairsoppa.
- The company’s Black Swan litigation remained unresolved. The Eleventh Circuit upheld transfer of the recovered property to Spain, and Odyssey was pursuing rehearing and potentially Supreme Court review. The company cannot monetize the recovered Black Swan cargo unless it obtains title, a salvage award or a settlement.
- Odyssey reported approximately $114 million of federal tax-loss carryforwards, but maintained a full valuation allowance against its deferred tax assets because realization was not considered more likely than not.
- The company held approximately 6.15 million Neptune shares, representing approximately 33% ownership before further dilution. Its equity-method investment had a zero carrying basis, and approximately $1.2 million of cumulative Neptune/Dorado losses remained unrecognized because they exceeded the investment basis.
- Variable-rate debt exposed the company to interest-rate risk. A 100-basis-point increase would raise monthly interest expense by approximately $2,500 on the term loan and $1,300 on the primary mortgage, according to the filing.
- In November 2011, after quarter-end, the company issued a $10.0 million senior convertible note bearing 8% interest and warrants for up to 1.30 million common shares. It also obtained the right, subject to conditions, to require issuance of an additional note of up to $5.0 million. The notes may require cash or equity amortization and could create future dilution.
- After quarter-end, the company redeemed $5.0 million of Series G Convertible Preferred Stock plus accrued dividends. Approximately $0.3 million of Series G preferred stock remained outstanding, plus accrued dividends.
Facts Investors Should Verify
- Whether Gairsoppa and Mantola recovery operations commenced as planned and generated recoverable, monetizable cargo.
- The status and likely economic value of the Black Swan ownership and salvage litigation.
- Liquidity after the October preferred-stock redemption, the November convertible-note financing, required debt payments and continuing negative operating cash flow.
- The accounting treatment, conversion terms and potential dilution from the November 2011 senior convertible notes and warrants.
- Whether Neptune Minerals can obtain financing and advance its mining projects, and how that may affect Odyssey’s 33% interest and future charter revenue.
- The company’s ability to replace declining Robert Fraser and other charter revenue with recurring or successfully monetized projects.