Though I have not yet been accused of being an optimist with respect to Odyssey Marine (NASDAQ:OMEX), even I was shocked by the excessive level of cash burn and increase in share count in this most recent 10-Q. It appears that without a rapid injection of capital, OMEX would be unable to make payroll: potentially as soon as this coming month.
The Directors' Dilemma
While I obviously disagree with the business practices and CEO's conduct at Odyssey Marine, I did have the pleasure to meet with the OMEX Chairman Brad Baker and Lead Director Max Cohen at a recent NYSE event. I say (truly without sarcasm) that they are as reasonable, pleasant, and mature as any directors I've met and I have sincere sympathy for their situation.
The CEO and his management team runs a company, not the Directors: whose primary job is to hire and monitor the CEO. I would not be surprised if the Directors were as stunned as I with the disappointingly high cash burn this last quarter. I have myself been in similar difficult situations that they appear to facing at the moment. So while I will leave it to the large shareholders to file 13D's and am short the stock, I would say a careful examination of the CEO position is warranted in the board room.
While CEO Greg Stemm's PR background may give him a certain competitive edge in the business of fertilizer production; if OMEX is to transform itself into a phosphate miner, new leadership appears necessary with a stronger focus on cost controls.
With that, here are some questions that I would like to be able to ask on the coming conference call at 11am est today, if only they were open to more than just the Craig Hallum and Lake Street bankers eager for underwriting fees!
How Does OMEX Intend to Address their Rapid Cash Burn and Negative Working Capital?
How Did the Share Count increase after March 31, 2014?
Despite "non-dilutive" financings such as Mako/Oceanica, Share-count is rapidly increasing including at least 828,958 shares SINCE MARCH 31, 2014 and 5.9mm shares (7.5% dilution) in the last 12 months.
May 2, 2014: 84,786,098
February 26, 2014: 83,882,577
October 25, 2013: 83,587,243
April 18, 2013: 78,870,929
The date listed in the 10-Q for share count is May 2, 2014. Was the full $2,347,826 principal remaining on the "Additional Note" (that was indicated to have been paid off in full in this PR) converted into shares rather than paid in cash (as indicated previously)? What was the end result for this note in terms of cash and stock conversion?
Do the Fifth Third $10mm Credit Line Collateral Requirements apply before or after your 45% share of SS Central America potential recovery?
According to the loan agreement, you require collateral gold to be recovered before a draw down, are these numbers pro-rata for your 45% share or gross?
2.6. Loan Disbursements. The Loan proceeds shall be reserved by Lender and disbursed to Borrower under the following procedures:
(NYSE:A) Interest Reserve Account. At closing, the sum of $500,000.00 of the Loan proceeds shall be disbursed by Lender to an interest reserve account #7420836376 with Lender (the "Interest Reserve Account"). All accrued interest payments payable under the terms of the Note shall automatically be debited from the Interest Reserve Account. The Interest Reserve Account is hereby pledged as additional security for the Loan.
(NYSE:B) Loan Advances. Under the terms of the AON Insurance Policy, as the Valuable Cargo is salvaged from the wreck, Borrower is obligated to deliver to the Odyssey Cargo Insurer a detailed inventory of the Valuable Cargo (the "Cargo Reports"). Copies of the Cargo Reports shall be delivered to Lender. Lender will make Advances of Loan funds to Borrower upon verification of the Valuable Cargo based on the Cargo Reports at the following Advance Rates:
(NYSE:I) $2,000.00 per coin for any $20 Double Eagle (for years 1850 through 1857), for the first $5,000,000.00 in Advances under the Loan. After the first $5,000,000.00 is advanced on the Loan, the Advance Rate shall be $1,000.00 per coin for any $20 Double Eagle (for years 1850 through 1857) until the remaining $5,000,000.00 is advanced.
(ii) for each gold bar, 50% of appraised market value (verified by a 3rd party appraiser reasonably acceptable to Lender) for the first $5,000,000.00 in Advances under the Loan. After the first $5,000,000.00 is advanced on the Loan, the Advance Rate for each gold bar shall be 25% of the appraised market value.
How long will the SS Central America archaeological preservation phase and site mapping take? Will OMEX's apparent short term cash needs allow a proper preservation?
Given that the Fifth Third $10mm credit line only can be tapped against artifacts recovered, how will the balance of preservation and rapid recovery given the cash burn be balanced to preserve the site?
OMEX converted the Neptune $500k note from Q3 2013 - How did it determine a fair conversion ratio?
The 10Q mentions that during April 2014, OMEX converted to Class A voting shares at $12.00/share which is higher than the $10.00 per share (+150% liquidity preference) that Neptune was attempting to raise capital at around the same time. Why did OMEX appear to get a much worse deal than smaller, arms-length investors?
Why has OMEX not filed a NI 43-101 Report as Other Mining Companies Do?
It is well known that the gross tonnage of resources, particularly for something as low value as phosphate (~$105/tonne) is a very small piece of the economic value. The level of impurities that need to be removed; infrastructure; processing costs, environmental impact, etc. all need to be considered whether something has a positive economic value at current commodity prices. Why has OMEX chosen not to file this information for shareholders at this time and when does it intend to do so?
When will you provide more details on the "Commodity Wreck Program"?
Language from the previous 10-Q has been changed substantially indicating further delays. When will shareholders receive more information?
10-Q Filed Nov 2013 (when the SS Central America was already in the works according to the current press release):
If the testing of the new ROV is successful in the fourth quarter of 2013, we expect to perform reconnaissance and salvage planning trips to one or more commodity shipwrecks in the first half of 2014.
Depending on the availability of recovery ships, expert off-shore project managers, and equipment, we plan on pursuing further commodity shipwrecks in the near and medium term.
Disclosure: I am short OMEX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.