Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2014. The company conducts shipwreck exploration and salvage, artifact and merchandise sales, marine services, and subsea mineral exploration through consolidated subsidiaries and investments.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 / Prior Period |
|---|---|---|
| Total revenue | $566,086 | $863,072 |
| Operating loss | $(9,663,727) | $(7,807,183) |
| Net loss | $(9,798,757) | $(9,665,379) |
| Basic and diluted loss per share | $(0.12) | $(0.12) |
| Net cash used in operating activities | $(10,183,732) | $(16,170,326) |
| Capital expenditures | $1,575,426 | $2,370,915 |
| Cash flow from financing activities | $(3,795,378) | $19,492,786 provided |
| Cash and cash equivalents at period end | $5,767,721 | $11,047,959 |
Revenue declined approximately 34%, primarily because of lower exhibit revenue and artifact sales. Operating expenses increased 18% to $10.2 million, including $7.1 million of operations and research expense and $3.0 million of marketing, general and administrative expense. The filing does not present a separate gross, operating, or net margin percentage; reported losses indicate substantially negative operating and net margins.
At March 31, 2014, total assets were $26.0 million, current assets were $8.4 million, and current liabilities were $12.5 million. Total stockholders’ equity was $3.7 million, including an accumulated deficit of $185.8 million and negative non-controlling interest of $4.7 million.
Debt declined to $8.6 million from $22.0 million at December 31, 2013. The company repaid the $10.0 million Gairsoppa project loan and paid the remaining $1.4 million principal balance of the initial senior convertible note in cash during the quarter. Restricted cash was $361,205 and was unavailable for operations.
Material Changes Versus the Prior Comparable Period
- Revenue decreased by $296,986, or approximately 34%.
- Operating loss increased by approximately $1.9 million, primarily due to higher operations and research costs.
- Net loss was broadly comparable year over year, increasing by approximately $133,000, partly because lower interest and derivative expense offset the larger operating loss.
- Operations and research expense increased by approximately $1.4 million. The Odyssey Explorer incurred higher repair and maintenance costs related to its five-year inspection and repositioning for the SS Central America project. Oceanica also contributed a full quarter of expenses.
- Cash declined by $15.6 million during the quarter, while debt declined by approximately $13.4 million.
- Unlike the prior-year quarter, financing activities did not provide significant new capital; the prior period included $15.0 million from the sale of a 15% interest in Oceanica and $4.7 million from warrant exercises.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that the 2014 business plan requires new cash inflows from monetizing shipwreck cargo, mineral-company equity interests, financings, syndications, or partnerships. If these inflows are insufficient, the company may curtail its planned activities under a contingency business plan.
- The company commenced SS Central America recovery operations in April 2014. Under its contract, Odyssey receives 80% of recovery proceeds until specified costs are paid and 45% thereafter. Recovery proceeds, legal rights, project timing, and cargo values remain uncertain.
- On May 7, 2014, after quarter-end, the company entered into a new $10.0 million Fifth Third Bank credit facility tied to future shipwreck cargo recovery. Advances depend on recovered cargo value and bear interest at one-month LIBOR plus 500 basis points.
- Odyssey reported approximately $116.9 million of federal and $10.7 million of foreign net operating loss carryforwards. A full valuation allowance was recorded against deferred tax assets, and no income tax benefit was recognized for the quarter.
- The company owns approximately 29.6% of Neptune Minerals, Inc., but its investment has a carrying value of zero after recognizing its share of prior losses. Approximately $19.7 million of additional unrecognized Neptune losses existed at March 31, 2014. A $500,000 convertible loan to Neptune was fully reserved and was converted into preferred stock in April 2014.
- Derivative liabilities totaled $1.15 million and generated a $182,713 expense from fair-value changes during the quarter. These valuations are sensitive to the company’s share price, volatility, interest rates, and other assumptions.
- The company had no pending litigation reported in the filing, but shipwreck salvage rights and related court proceedings remain important operational and legal considerations.
- Variable-rate debt exposes the company to interest-rate risk. Management estimated that a 100-basis-point increase would raise monthly interest expense by approximately $2,800 on the term loan and approximately $900 on the primary mortgage.
Investor Verification Checklist
- Verify the company’s ability to generate sufficient cash from SS Central America recovery activities and other planned monetizations.
- Confirm the availability, borrowing conditions, collateral requirements, and repayment terms of the May 2014 $10.0 million credit facility.
- Review near-term liquidity, including cash of $5.8 million, restricted cash, current liabilities of $12.5 million, and continuing operating cash burn.
- Assess the probability, timing, and economic value of recoverable cargo from SS Central America and other shipwreck projects.
- Evaluate the carrying value and monetization prospects of the company’s mineral exploration interests, particularly Neptune and Oceanica.
- Review dilution exposure from convertible notes, warrants, options, preferred stock, and other securities linked to approximately 2.8 million common shares at March 31, 2014.
- Confirm whether recurring operations can become profitable without substantial project recoveries, asset monetizations, new financing, or expense reductions.