Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company pursues deep-sea shipwreck recovery, artifact sales, marine services, vessel operations and seabed mineral exploration. The principal 2014 operating focus was recovery of cargo from the SS Central America shipwreck and development of Oceanica’s phosphate project.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $348,264 | $253,745 | $914,350 | $1,116,817 |
| Operating loss | $(4,851,651) | $(12,281,021) | $(14,515,378) | $(20,088,204) |
| Net loss | $(4,015,881) | $(10,895,976) | $(13,814,639) | $(20,561,356) |
| Loss per share | $(0.05) | $(0.14) | $(0.16) | $(0.26) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(16,457,493) | $(26,506,081) |
Approximate operating margins were negative 1,393% for the second quarter and negative 1,587% for the first six months. Approximate net margins were negative 1,152% and negative 1,511%, respectively, reflecting a very small revenue base relative to operating costs.
- Cash and cash equivalents were $5.7 million at June 30, 2014, down from $21.3 million at December 31, 2013. Restricted cash was $0.8 million.
- Total assets were $29.4 million, compared with $51.5 million at year-end 2013. Total liabilities were $27.2 million, and total stockholders’ equity was $2.2 million.
- Total debt was $13.7 million at June 30, 2014, compared with $22.0 million at December 31, 2013. Debt consisted primarily of a $4.5 million term loan, $7.4 million of project term loans and approximately $1.7 million of mortgages.
- Accounts receivable increased to $3.8 million from $0.2 million at year-end, including amounts associated with SS Central America project-cost recoupment. The receivable balance included a $4.6 million reserve related to Dorado Ocean Resources.
- Inventory totaled $5.8 million, including approximately $5.2 million classified as non-current.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 37% year over year to $0.35 million, primarily from Gairsoppa licensing and coin sales. Six-month revenue declined 18% because of lower exhibit and artifact sales, partly offset by second-quarter licensing revenue.
- Second-quarter operating expenses decreased 59% to $5.2 million. Operations and research expense declined primarily because the company did not charter the Seabed Worker vessel and recorded a $3.5 million credit for SS Central America priority cost recoupment.
- The second-quarter net loss improved by $6.9 million, or 63%, compared with 2013. The improvement was driven mainly by lower project and vessel expenses, although the comparison benefited from the 2013 Seabed Worker costs and nonrecurring items.
- Operating cash burn improved by $10.0 million year over year for the first six months but remained substantial at $16.5 million.
- The company repaid or converted all outstanding senior convertible notes during the first half of 2014. It issued 1.29 million common shares as payment for principal and interest, and common shares outstanding increased to 85.2 million at July 21, 2014.
- In May 2014, the company entered into a new $10.0 million project credit facility and had drawn $7.4 million by June 30. The facility is secured by expected recovery proceeds and matures in May 2015.
Outlook, Risks, Contingencies and Unusual Items
- The company recovered more than 13,500 silver and gold coins, gold material and jewelry from SS Central America. No revenue was recognized because the recovered cargo had not yet been monetized and the company’s share of proceeds could not be reliably measured. Management stated that the appraised value of recovered cargo substantially exceeded project costs.
- Priority cost recoupment of $3.5 million was recorded as a reduction of operations and research expense, rather than revenue. Future proceeds beyond recoupment depend on monetization and valuation of the recovered cargo.
- Management stated that the $5.7 million cash balance was sufficient to support approximately two months of operations. The 2014 business plan depends on new cash inflows from cargo monetization, mineral-interest monetization, financings, syndications or partnerships.
- If planned cash inflows are not realized, the company may curtail operations, execute its contingency plan or seek additional equity or convertible-debt financing. Management stated that positive cash flow and continued operations over the following twelve months depend on successful project recovery, monetization or financing activities.
- The Dorado Discovery vessel generated no charter revenue during the first half of 2014. The original charter expired in the second quarter, and the company was operating month to month while considering alternatives, including returning the vessel.
- The company held approximately 6.2 million Neptune Minerals shares and reported approximately $19.8 million of unrecognized cumulative losses from that investment. The investment had a zero carrying value, and a $0.5 million loan to Neptune was converted into preferred stock and written down.
- Derivative liabilities declined to $0.6 million from $1.0 million at year-end. Fair-value changes generated $0.4 million of expense for the first six months and $0.6 million of income in the second quarter, making reported earnings sensitive to share-price and volatility assumptions.
- The company received IRS approval for a five-year carryback election related to its 2008 federal net operating loss. The change reversed a $0.5 million alternative minimum tax accrual, but management stated that no cash tax benefit was expected from the carryback.
- Variable-rate debt exposes the company to LIBOR and prime-rate increases. The company also maintains most cash at one financial institution and reported approximately $6.5 million of uninsured cash at June 30, 2014.
- The company reported no pending litigation other than disclosed admiralty-related matters and stated that its disclosure controls were effective. Management expected a transition in which Mark Gordon would become CEO and Greg Stemm would become Chairman before year-end.
Investor Verification Priorities
- Verify the timing, valuation and cash proceeds from monetization of SS Central America cargo, including the company’s 45% participation after priority recoupment.
- Reconcile the company’s stated approximately two-month liquidity runway with operating cash burn, restricted cash, debt maturities and required project spending.
- Review repayment terms, collateral requirements and maturity risks for the $7.4 million project loan due in May 2015 and other secured borrowings.
- Assess whether monetization of mineral interests, project financing or partnership transactions can provide sufficient cash to avoid additional equity or convertible-debt issuance.
- Evaluate dilution from shares issued for debt repayment and from the remaining 1.56 million warrants exercisable at $3.60 per share.
- Confirm the collectability of accounts receivable and the adequacy of reserves, particularly the $4.6 million reserve associated with Dorado Ocean Resources.
- Distinguish recurring operating performance from unusual items, including the $3.5 million SS Central America expense credit, derivative fair-value gains and the $0.5 million tax benefit.