Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The interim financial statements are unaudited. Odyssey conducts deep-ocean shipwreck salvage, marine exploration, artifact sales, and subsea mineral-exploration services and investments.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $253,745, down 82% from $1.43 million | $1.12 million, down 74% from $4.33 million |
| Operating loss | $12.28 million, compared with $10.70 million | $20.09 million, compared with $15.34 million |
| Net loss | $10.90 million, compared with $15.59 million | $20.56 million, compared with $21.07 million |
| Loss per share | $0.14 | $0.26 |
| Net cash used in operating activities | Not separately provided | $26.51 million, compared with $13.13 million |
- Second-quarter revenue consisted primarily of $227,574 of artifact sales and other revenue; exhibit revenue was $20,691 and expedition revenue was $5,480. The prior-year quarter included $1.22 million of expedition revenue.
- Six-month operating expenses were $21.21 million, up 8% year over year, including $5.72 million of marketing, general and administrative expense and $15.24 million of operations and research expense.
- The six-month loss was reduced by a $1.34 million favorable change in derivative liabilities fair value, compared with a $3.09 million unfavorable change in the prior-year period. Interest expense was $1.99 million.
- Cash and cash equivalents were $10.34 million at June 30, 2013, compared with $10.10 million at December 31, 2012. Restricted cash was $185,217 and was not available for operations.
- Financing activities generated $29.38 million, primarily from the $25.0 million sale of a partial interest in Oceanica Resources and $4.89 million from common-stock warrant exercises. Investing activities used $2.63 million, primarily for marine and mineral-exploration equipment.
- Total assets were $29.20 million. Total liabilities were $34.82 million, resulting in stockholders’ deficit of $5.62 million.
- Reported mortgage and loan liabilities totaled $15.22 million at June 30, 2013, including a $5.0 million term loan, convertible notes, and mortgage debt. Derivative liabilities were $4.02 million.
- Common shares outstanding were 79,625,966 as of July 25, 2013, compared with 75,416,203 at December 31, 2012.
Material Changes and Business Developments
- Revenue declined substantially because the company did not repeat the 2012 subsea mineral-exploration charter revenue from Chatham Rock Phosphate. Artifact sales increased to $1.03 million for the first six months, compared with $187,407 in the prior-year period.
- Marketing, general and administrative expense increased 18% for the quarter and six months, principally because of higher professional fees, employee-related costs, incentive accruals, and share-based compensation.
- Odyssey sold 23 million Oceanica shares for $25.0 million during the first six months. In June, Mako Resources exercised an option for 8 million additional Oceanica shares for $10.0 million. Management stated that, assuming outstanding options are exercised, Odyssey would retain approximately 49.6% ownership and voting rights over approximately 52.6% of Oceanica.
- The company issued 1.73 million common shares to settle $4.70 million of senior-note principal and issued additional shares for note principal and interest. These transactions reduced debt but increased potential dilution.
- Operations and research spending included approximately $1.8 million for new mineral-exploration equipment for the Dorado Discovery and approximately $500,000 for Odyssey Explorer equipment and engine work.
- The Gairsoppa project recovered approximately 1.8 million troy ounces of silver in July 2013, in addition to the 2012 recovery. The company stated that the silver would be processed and monetized during 2013, with Odyssey retaining 80% of net salved value after charter-related expenses.
Guidance, Outlook, Risks, and Unusual Items
- Management’s 2013 plan assumes positive cash flow from operating and financing activities, supported by Gairsoppa recoveries, project syndications, other financings, and potential project revenues. Management stated that cash was expected to fund operations through the remainder of 2013, but acknowledged that failure to meet projections could require additional capital or expense reductions.
- In July 2013, the company renewed its $5.0 million term loan and corporate mortgage through July 2016. It also entered into a $10.0 million project term loan maturing July 24, 2014, secured by approximately $15.0 million of Gairsoppa silver and intended to fund recovery costs.
- The company has incurred recurring net losses and has a stockholders’ deficit. Future profitability depends heavily on successful recovery and monetization of shipwreck cargoes, mineral investments, charters, and other projects.
- Operating cash flow was significantly negative and depended on equity transactions, asset-interest sales, and debt financing. Approximately $10.7 million of cash was uninsured at June 30, 2013.
- Variable-rate debt exposes the company to LIBOR and prime-rate risk. Convertible notes and derivative instruments create fair-value volatility and potential equity dilution.
- Spain’s claim for legal fees and costs in the Black Swan matter remained unresolved. A recommendation indicated approximately $130,000 of potentially recoverable fees and costs, but the company could not predict the court’s ruling.
- The company reported approximately $129 million of federal net operating loss carryforwards, but maintained a full valuation allowance against its deferred tax assets.
- The filing states that disclosure controls and procedures were effective as of June 30, 2013, and that there were no material changes in internal control over financial reporting.
Investor Verification Priorities
- Verify the timing, amount, processing costs, and realized proceeds from the 2013 Gairsoppa silver recovery.
- Reconcile the company’s liquidity needs with its substantial operating cash burn, debt maturities, covenants, and reliance on additional financing or project proceeds.
- Assess dilution from convertible notes, warrants, stock-settled debt payments, and other instruments linked to approximately 6.8 million common shares at June 30, 2013.
- Review the ownership, valuation, financing needs, and options affecting Odyssey’s retained interest and voting control in Oceanica Resources.
- Evaluate the assumptions supporting the 2013 cash-flow plan, including recovery success, silver prices, project timing, charter costs, and potential syndications.
- Monitor the Black Swan legal-fee proceeding and any other claims affecting cash or ownership rights.