Business Context and Reporting Period
Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: The Company is engaged in the archaeologically sensitive exploration and recovery of deep-water shipwrecks and the marketing of shipwreck-related items. Operations are divided into two segments: Shipwreck Exploration and Themed Attractions.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Revenue | $2,149,197 | $865,179 |
| Net Loss | $(3,810,159) | $(3,928,687) |
| Operating Loss | $(3,754,418) | $(3,914,567) |
| Cash and Equivalents (End of Period) | $4,241,782 | $8,088,341 |
| Net Cash Used in Operating Activities | $(4,408,509) | $(4,021,708) |
| Net Cash Provided by Financing Activities | $6,502,460 | $9,037,885 |
| Total Assets | $29,592,038 | $34,123,000 (approx) |
| Total Liabilities | $8,958,768 | $9,842,133 |
| Stockholders' Equity | $20,633,270 | $17,365,720 |
Inventory: Total inventory was $9,254,727, consisting primarily of artifacts ($8,093,958) from the SS Republic shipwreck. $6,340,469 is classified as non-current.
Debt: Total mortgage and loans payable were $6,382,049, including a $3,000,000 revolving credit facility and a $2,454,049 mortgage payable.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 148% to $2.15 million, driven by the sale of approximately 1,280 gold and silver coins compared to 180 coins in the prior year. The mix shifted to 65% silver coins in 2007 versus 41% in 2006.
- Cost of Sales: Increased 325% to $486,030. The cost of sales as a percentage of revenue rose to 23% from 13%, attributed to the higher volume of silver coin sales which have a higher cost basis relative to gold.
- Operating Expenses: Total operating expenses increased 23% to $5.9 million. Marketing, general, and administrative expenses rose 11%, largely due to increased share-based compensation ($270,813 vs $41,508) following the adoption of FAS 123(R). Operations and research expenses increased 21% due to vessel operating costs for a new search vessel, partially offset by lower themed attraction expenses.
- Liquidity: Cash and cash equivalents increased by $1.8 million to $4.24 million, primarily due to a $6.6 million proceeds from the issuance of Series D Convertible Preferred Stock in January 2007.
Outlook, Risks, and Management Commentary
- Capital Resources: Management believes current cash, cash equivalents, and proceeds from recent equity offerings will satisfy working capital requirements for 2007. However, the Company anticipates continuing to incur net losses through 2007.
- Operational Updates:
- Sussex Project: The Company has an exclusive agreement with the UK government to excavate HMS Sussex. Operations are paused pending the selection of archaeological staff.
- Themed Attractions: The New Orleans attraction closed in September 2006. The exhibit is being relocated to the Museum of Science and Industry (MOSI) in Tampa, Florida, with a scheduled opening in June 2007.
- New Sites: Admiralty arrests were filed in April 2007 for two new sites (Atlantic and Western Mediterranean) pending further ROV surveys.
- Legal Proceedings: A lawsuit filed in 2004 by Republic & Eagle Associates, Inc. and Sea Miners, Inc. regarding the discovery of the SS Republic remains active. The South Carolina court denied the Company's motion to dismiss in February 2007. The Company is considering an appeal and believes the claims are without merit.
- Risks: Future profitability is dependent on the successful recovery and monetization of high-value shipwrecks. If cash flow is insufficient, the Company may need to reduce exploration and development efforts.
Key Facts for Investor Verification
- Revenue Mix Dependency: Verify the sustainability of revenue given the shift to silver coin sales, which carry a higher cost of sales percentage (23%) compared to gold.
- Legal Contingency: Monitor the status of the South Carolina lawsuit regarding the SS Republic discovery, as a loss could result in unspecified damages and recognition claims.
- Capital Burn Rate: Confirm the Company's ability to fund operations through 2007 without additional equity dilution, given the continued net loss of approximately $3.8 million for the quarter.
- Asset Valuation: Review the valuation of the $8.1 million artifact inventory, which is recorded at recovery and conservation costs and subject to net realizable value assessments.
- Debt Covenants: Verify compliance with the $3 million revolving credit facility covenants, which include a first lien on corporate assets and restrictions on pledging vessels.