The inventory sheet from the latest month of Odyssey Marine Exploration (NASDAQ:OMEX) salvage has just been posted on the SS Central America court website. The total recovery is approximately 400oz of gold coins, dust and nuggets with no ingots. The items that can be borrowed on the Fifth Third $10mm credit line (Double Eagles and Ingots) include ~275 double eagles with a face value of $5,500, a decline of 89% vs the May 19-June 12 recovery period where $51,799 face value of double eagles and ingots were recovered.
This recovery should allow OMEX to borrow an additional $275,000 ($1,000 per double eagle) against the existing Fifth Third credit line which should be enough to fund an additional 3 days of cash burn based on losses to date ($3mm/month = $100k/day approx.). In total there should be a max credit availability of ~$7.25mm on this $10mm credit line (net of $500k restricted cash).
Table of all monthly SS Centra America recovery reports so far, source Meson / court docs
"First of all, we have secured or negotiated a new loan agreement, the first $5 million of that loan agreement we expect to come in, in the coming days or week, but probably this month in the month of August.
Secondly, we've drawn down an additional amount on the bank loan facility that we secured in the month of May, based on our cargo recovery results in recent weeks." - CFO Philip Devine Q2 Conf Call Aug 11
On the conference call, the CFO was highly evasive of answering the question of how much extra they were able to draw on the credit line, only saying they "drew an additional amount." As it turns out, this amount must be only $275k or so, enough to finance a mere few days of operational losses. Given you know the facts now about the second statement, are you optimistic about the vague language of the first?
How does the fact of this new recovery square with recent statements by management on the conference call?
OMEX Q2 Conference Call [Facts inserted by author]:
"The SS Central America project has gone through phases of high rates of valuable cargo recovery and phases of lower recovery rates depending on which parts of the ships we're working on….
The recovery rate in May and the first half of June was very significant. [FACT: ~$52,000 face value of gold recovered that month] The rate of recovery of valuable cargo items slowed down in the period between June 15th and July 15th [FACT: ~$3,500 face value of gold recovered this period] as we spent time moving large deposits of debris from an area of the shipwreck believed to hold important artifacts effect and valuable cargo. This was a planned and necessary step in carrying out a thorough archeological recovery.
These past weeks have again seen an uptick in recovery results coming from newly explored areas of the shipwreck site. It was this renewed rate of cargo recovery that allowed us today to draw down a further cash advance from our bank on our $10 million credit facility." - CFO Philip Devine
"For the past week, we've had a substantial recovery success" - COO, Mark Gordon
"With a steady stream of gold coming up from the SS Central America, the Oceanica project moving forward rapidly…" - CEO Greg Stemm, Q2 PR
Shareholders might be tempted to think that this "uptick in recovery results" in "newly explored areas" might be comparable to the early results, right? FACT: Total gold recovery declined over 80% from the May-June period to the most recent "uptick" month, and declined 89% if only counting the gold eligible for collateral on the credit line, which is the only gold that can produce immediate cash inflows to fund operations.
"the Oceanica phosphate project is progressing beyond our original expectations" - COO, Mark Gordon
FACT: Oceanica EIA still isn't filed despite CEO Greg Stemm claiming "finished and will be filed shortly" 10 weeks ago at June 4 AGM, locals are protesting including a Member of the Senate
"we have just entered into a loan and long term exclusive marketing agreement which provides up to $10 million in new funding" - COO, Mark Gordon
FACT: A Letter of Intent (LOI) is NOT an Agreement and the deal has not closed
"I am asking you to give your management team a chance to allow actual results to influence your judgment as to whether OMEX is an investment you should buy, hold or sell. I urge you to make this decision for yourselves based on real facts" - COO, Mark Gordon
OMEX Now Almost Certainly Officially Insolvent
OMEX's Stockholders' Equity is now almost certainly negative: it was only $2.158mm at the end of Q2 and losses have almost certainly exceeded this now given the $3mm/month loss rate. Even using wildly optimistic accrual accounting, assuming a receivable (netting expenses) booked at $2mm/month for work done at the SS Central America, a $1mm/month loss (far better than has been achieved so far this year) leads to shareholder equity being negative at the start of September.
Graph of table above - source court docs / Meson estimates
Business Strategy Now seems Aimed towards Spiting Short Sellers Rather than Shareholder (and Creditor) Value
Since last October 2013, we have said we want OMEX to increase its transparency with shareholders. The harsh reality, we believe, is that once shareholders realize the full truth about OMEX, they will realize that it has no prospect to be a viable business and the stock will become worthless. Indeed, management appears aware of the issue, describing themselves as an "easy target" for short seller commentary on the most recent conference call. Had current shareholders invested their money instead in any of the OMEX-related private entities (Neptune, Mako, Seagrass, etc.) their money would have been already lost and no liquidity available to cash out. The fact that the stock still trades, allowing people to exit at an astoundingly high $100mm market capitalization is an unusual opportunity provided by public markets.
Unfortunately, it seems management has gone the other direction - rather than addressing their "easy target" status by improving the business model, they are trying to sweep the facts even further under the rug by changing their business strategy towards actions that appear designed to spite short sellers (in the short term at least) while destroying shareholder value - and we believe further impairing creditors in bankruptcy coming shortly. In fact, OMEX even dedicated a solid paragraph in its most recent legal 10Q document complaining about short sellers.
For example, why did OMEX need to draw down the additional ~$2.5mm on their Fifth Third credit line to post a $5.7mm cash balance for the end of Q2? This creates additional interest expenses that shareholders will pay for the purpose of inflating the closing cash (and debt) balances for the reported quarter end. The continued efforts at the SS Central America also appear to be incrementally unprofitable given the small recovery over the last 2 months. However, management relishes in "proving shorts wrong" that said there was no economic reason to continue recovery. We hope management puts their fiduciary duty for all stakeholders ahead of their ego and starts providing the transparency that shareholders deserve after tolerating so many unfulfilled promise over the years.
Disclosure: The author is short OMEX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Ryan Morris, President, Meson Capital, has pledged to donate his personal profits from OMEX short sales to charity. Full disclaimer at omextruth.com