Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Odyssey conducts shipwreck recovery, marine research and charter services, artifact sales, and subsea mineral exploration activities. Key projects included HMS Victory, SS Gairsoppa, SS Mantola, and marine services for Chatham Rock Phosphate.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $2.900 million | $2.094 million | +38% |
| Operating expenses | $7.543 million | $5.876 million | +28% |
| Operating loss | $(4.643) million | $(3.782) million | Worsened $0.861 million |
| Net loss | $(5.482) million | $(5.174) million | Worsened $0.308 million |
| Basic and diluted loss per share | $(0.08) | $(0.09) | Improved $0.01 |
| Net cash used in operating activities | $(4.466) million | $0.062 million | Decrease of $4.529 million |
Revenue growth was driven by expedition charter revenue of $2.821 million, up from $1.702 million. Artifact sales and other revenue declined to $54,000 from $349,000. The operating margin was approximately (160%) versus (181%) in the prior-year quarter; the net margin was approximately (189%) versus (247%).
- Cash and cash equivalents were $5.076 million at March 31, 2012, down from $7.972 million at December 31, 2011. Restricted cash totaled $417,178, including the mortgage-related account.
- Total assets were $21.878 million, while total liabilities were $36.121 million and stockholders’ deficit was $14.493 million.
- Total mortgage and loan obligations were $13.088 million, including a $5.000 million term loan, $5.993 million carrying value of the senior convertible note, and $2.095 million of mortgage debt.
- Current liabilities of $22.507 million exceeded current assets of $8.579 million. Derivative liabilities were $7.210 million, and deferred revenue was $3.545 million.
- Interest expense increased to $985,000 from $98,000, primarily because of interest accretion and financing costs on the senior convertible note.
Material changes versus the prior comparable period
- Revenue increased $806,000, primarily from the Chatham Rock Phosphate charter, while artifact revenue fell because more than 500 fewer coins were sold.
- Operations and research expense increased $1.619 million to $5.152 million, driven by vessel utilization, off-hire costs, and equipment rentals related to Gairsoppa survey work.
- Operating loss increased despite higher revenue because operating expenses grew more rapidly than revenue.
- Operating cash flow declined sharply, reflecting the net loss and increased accounts receivable and other assets, partially offset by higher accounts payable and accrued expenses.
- Financing activities provided $1.907 million, principally from a $2.000 million increase in the Fifth Third Bank term loan. The prior-year period benefited from $5.963 million of revenue-participation financing.
- The fair value change in derivative liabilities produced $123,000 of other income, compared with $1.289 million of expense in Q1 2011, partially offsetting higher interest expense.
- Accounts receivable increased to $1.507 million from $501,000. The balance included $1.286 million for 18 days of a 21-day charter that was subsequently paid at $1.5 million.
Guidance, outlook, risks and unusual items
- Management expects existing cash, projected sales, syndicated projects, charter revenues, and debt financing to fund operating cash flows through the remainder of 2012, but acknowledges that additional capital or expense reductions may be required if projected financing or partnerships are not completed.
- On April 25, 2012, the company exercised its right to seek an additional convertible note tranche, increased to $8 million. The note bears 9% interest; the related warrant capacity increased to 1,562,500 shares. The company had not completed the incremental fair-value calculation at filing.
- The $5 million Fifth Third term loan was extended to July 2013 and is secured primarily by approximately 27,000 numismatic coins. The senior convertible note begins monthly principal amortization in July 2012 and contains conversion, redemption, default, and potential equity-dilution provisions.
- Approximately $1 million of Chatham services revenue was not recognized at March 31 because collectability was not considered sufficiently assured. Management expected payment in cash or shares following a capital raise.
- The Black Swan artifacts were released to Spain in February 2012 following adverse court decisions. Spain subsequently sought attorney fees and costs; management believes an unfavorable award is unlikely. Approximately $2.6 million of related recovery and conservation costs remain fully reserved.
- The company owns approximately 33% of Neptune Minerals, but its investment was carried at zero. Unrecognized allocated losses totaled $959,000, and Neptune had not provided financial statements sufficient to quantify current-period losses.
- Future performance depends substantially on successful recovery and monetization of shipwreck assets, project financing, charter activity, and mineral-exploration opportunities. The filing warns that project financing or partnership opportunities may not be realized.
- Variable-rate debt exposes the company to interest-rate risk. A 100-basis-point increase would raise monthly interest expense by up to approximately $4,200 on the term loan and $1,300 on the primary mortgage.
Most important facts an investor should verify
- Whether Gairsoppa and Mantola recovery operations began as planned and generated recoverable cargo and cash proceeds.
- Completion, terms, fair-value accounting, and dilution implications of the additional $8 million convertible note financing.
- The company’s ability to meet senior note amortization beginning in July 2012 and other near-term obligations despite negative working capital.
- Collection or settlement of Chatham receivables and any revenue recognized in subsequent quarters.
- Resolution and potential cost of Spain’s attorney-fee claim in the Black Swan litigation.
- Neptune Minerals’ financial condition, valuation, and the company’s potential exposure to additional unrecognized losses.
- Cash burn, access to project financing, and the company’s ability to fund operations without further equity or debt issuance.