Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2012. Odyssey conducts shipwreck salvage, artifact sales, marine exploration and charter services, and subsea mineral exploration activities. Key projects included the SS Gairsoppa, SS Mantola and HMS Victory.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Total revenue | $1.43 million | $4.33 million |
| Operating loss | $10.70 million | $15.34 million |
| Net loss | $15.59 million | $21.07 million |
| Net loss per share | $0.21 | $0.29 |
| Net margin | Approximately negative 1,092% | Approximately negative 487% |
| Net cash used in operating activities | Not separately provided | $13.13 million |
- Cash and cash equivalents were $3.54 million at June 30, 2012, compared with $7.97 million at December 31, 2011. Restricted cash totaled $370,024.
- Total assets were $22.37 million; total liabilities were $51.67 million; and stockholders’ deficit was $29.55 million.
- Debt obligations totaled $20.44 million, consisting of a $5.00 million term loan, $13.41 million of convertible senior notes, and $2.03 million of mortgage debt.
- Derivative liabilities increased to $12.08 million from $7.33 million at year-end 2011, producing a $3.09 million unfavorable fair-value adjustment in the first six months.
- Operations and research expense increased to $14.71 million from $8.72 million, principally due to Gairsoppa and Mantola recovery operations and vessel-related costs.
- Accounts payable increased to $5.47 million from $1.11 million, while other current assets increased to $4.25 million from $779,478.
Material changes versus the prior comparable period
- Quarterly revenue declined 79% to $1.43 million from $6.74 million, primarily because expedition charter revenue fell to $1.22 million from $6.61 million.
- Six-month revenue declined 51% to $4.33 million from $8.84 million. Expedition charter revenue decreased by approximately $4.27 million, and artifact and other sales decreased by approximately $267,000.
- Quarterly net loss increased from $1.93 million to $15.59 million; six-month net loss increased from $7.10 million to $21.07 million.
- Interest expense rose to $2.67 million for the six months from $204,000, primarily due to convertible-note interest accretion and related financing costs.
- Financing activities provided $9.29 million in the first six months, including proceeds from the $8.0 million additional convertible note and the increased bank term loan. This was substantially below the $21.90 million provided in the prior-year period.
- Common shares outstanding increased to 73.24 million weighted-average shares for the quarter from 67.87 million, increasing potential dilution risk.
Guidance, outlook, risks and unusual items
- Management expected cash resources, project revenues, syndicated projects and financing arrangements to fund operations through the remainder of 2012, but stated that additional capital or expense reductions would be required if cash flow was insufficient.
- On July 9, 2012, the company entered into a Fifth Third Bank project facility of up to $10.0 million, secured by recovered silver from the Gairsoppa or Mantola projects. The company drew the full $10.0 million on July 17, 2012. The facility matures January 31, 2013.
- Management expected cash from silver proceeds beginning in the third and fourth quarters of 2012. Recovery operations for Gairsoppa were underway after the quarter, with 1.4 million troy ounces reportedly delivered to a secure U.K. location by July 18, 2012.
- The company’s ability to continue operations depends heavily on successful recovery and monetization of shipwreck cargo, financing availability, project partnerships and charter activity.
- The Black Swan property was released to Spain following court orders. Spain filed a motion seeking unspecified attorney fees and costs, referenced by the company as approximately $4 million. Management believes an unfavorable outcome is unlikely, but the matter remained unresolved.
- Convertible notes and warrants contain reset provisions and may be settled through stock issuance, potentially causing substantial dilution and downward pressure on the common stock.
- The company reported approximately $138 million of federal net operating loss carryforwards, but recorded a full valuation allowance against deferred tax assets because realization was considered unlikely without successful high-value shipwreck recoveries or similar events.
- Variable-rate debt exposes the company to interest-rate risk. Management stated that a 100-basis-point increase would increase monthly interest expense by up to approximately $4,100 on the term loan and $1,100 on the primary mortgage.
Important facts for investors to verify
- Actual silver recovery volumes, sale proceeds, project costs and the timing of reimbursements under the Gairsoppa and Mantola projects.
- Compliance with covenants and repayment requirements for the $10.0 million project facility and convertible notes.
- Potential dilution from note conversions, stock-based amortization payments, warrants and derivative-linked shares; approximately 9.33 million common shares were linked to derivative liabilities at June 30, 2012.
- Status and potential financial exposure of the Black Swan attorney-fee and cost motion and other admiralty litigation.
- Liquidity after the June 30 cash balance, the July project-loan draw, continuing operating cash burn and required debt amortization.
- Whether management’s projected project monetizations and financing arrangements occur as expected; the filing does not provide a formal earnings or revenue forecast.