Business Context and Reporting Period
Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: The Company engages in the archaeologically sensitive exploration and recovery of deep-water shipwrecks and the marketing of related artifacts. Operations are divided into two segments: Shipwreck Exploration and Themed Attractions. The Company recently changed its fiscal year to a calendar year, making the prior comparable period the three and nine months ended November 30, 2004.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2005 |
|---|---|---|
| Revenue | $986,682 | $8,162,016 |
| Net Income (Loss) | $(3,121,083) | $(4,213,655) |
| Operating Loss | $(5,347,798) | $(7,100,131) |
| Cash and Cash Equivalents | $4,440,647 | $4,440,647 (Balance Sheet) |
| Working Capital | $6,312,280 | N/A |
| Total Assets | $37,371,795 | N/A |
| Total Liabilities | $5,564,684 | N/A |
| Stockholders' Equity | $31,807,111 | N/A |
Cash Flow (Nine Months Ended Sep 30, 2005):
- Net cash used in operating activities: $(6,143,103)
- Net cash used in investing activities: $(5,431,766)
- Net cash provided by financing activities: $12,964,795
- Net increase in cash: $1,389,926
Material Changes vs. Prior Period
- Revenue Decline: Revenue for the three months ended September 30, 2005, dropped 84% to $986,682 from $6.3 million in the prior period. For the nine months, revenue fell 49% to $8.2 million from $15.9 million. Management attributes this to lower availability of high-value gold coins and the closure of the New Orleans attraction due to Hurricane Katrina, which halted expected retail leads.
- Expense Increase: Operating expenses surged. For the three months, "Operations & research" expenses increased 441% to $3.8 million, and "Marketing, general & administrative" expenses rose 69% to $2.3 million. The nine-month operating loss widened significantly to $(7.1 million) compared to an operating income of $8.8 million in the prior period.
- Profitability: The Company reported a net loss of $(3.1 million) for the quarter and $(4.2 million) for the nine months, a reversal from net income of $2.4 million and $5.3 million, respectively, in the prior comparable periods.
- Capital Structure: Stockholders' equity increased from $22.4 million to $31.8 million, driven by the issuance of common stock via a private placement and the exercise of warrants.
Guidance, Outlook, and Risks
- Hurricane Katrina Impact: The Company's first themed attraction in New Orleans opened on August 27, 2005, but was closed immediately due to Hurricane Katrina. The building remains closed for repairs. The Company estimates a $91,000 deductible for damages and is evaluating business alternatives. All high-value artifacts were safely removed.
- Operational Shifts: The "Atlas" search project was suspended for winter weather. The vessel Odyssey Explorer was redeployed to the Western Mediterranean to begin operations on the HMS Sussex.
- Liquidity and Financing: The Company secured a $6 million revolving credit facility secured by gold and silver coins. Significant cash inflows were generated from a private placement ($6.4 million) and warrant exercises ($5.0 million in Q3, with an additional $3.6 million in October 2005). Management believes current resources will satisfy needs through year-end.
- Legal Contingency: A lawsuit filed in South Carolina by Republic & Eagle Associates, Inc. and Sea Miners, Inc. alleges breach of contract and fiduciary duty regarding the discovery of the S.S. Republic. The Company intends to vigorously defend the action, believing it is without merit.
- Accounting Changes: The Company accelerated the vesting of "underwater" stock options to reduce future compensation expense upon the adoption of SFAS No. 123(R) in 2006.
Investor Verification Checklist
- Revenue Sustainability: Verify the timeline for new indirect sales channels and the potential for the New Orleans attraction to reopen or be relocated.
- Legal Exposure: Monitor the status of the South Carolina lawsuit regarding the S.S. Republic discovery rights.
- Cash Burn Rate: Assess the sustainability of the current operating loss given the heavy investment in the "Atlas" and HMS Sussex projects.
- Debt Covenants: Confirm compliance with the $20 million minimum stockholders' equity covenant required by the Mercantile Bank credit facility.
- Inventory Valuation: Review the valuation of the $10.7 million inventory, primarily consisting of artifacts from the S.S. Republic, and the realization of deferred tax assets.