Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2012. Odyssey conducts deep-ocean shipwreck recovery, artifact sales, expedition and marine charter services, and subsea mineral exploration. The principal operational focus shifted toward the SS Gairsoppa, SS Mantola, HMS Victory, and other shipwreck projects.
As of October 18, 2012, 74,416,030 common shares were outstanding. Management stated that disclosure controls and procedures were effective.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 |
|---|---|---|---|---|
| Total revenue | $0.9 million | $5.9 million | $5.3 million | $14.8 million |
| Operating income (loss) | $0.9 million | $(4.0) million | $(14.4) million | $(8.7) million |
| Net income (loss) | $3.8 million | $(5.1) million | $(17.3) million | $(12.2) million |
| Basic and diluted EPS | $0.05 | $(0.07) | $(0.24) | $(0.22) |
| Net cash used by operating activities | Not separately provided | Not separately provided | $(24.8) million | $(9.2) million |
Third-quarter operating results were materially affected by a $17.8 million receivable recorded for reimbursement of previously expensed Gairsoppa search and recovery costs. This produced a $3.0 million credit to operations and substantially inflated the reported operating result. Third-quarter net income also included a $4.8 million favorable change in derivative-liability fair values.
At September 30, 2012, cash and cash equivalents were $2.1 million and restricted cash was $0.7 million. Accounts receivable increased to $15.8 million from $0.5 million at December 31, 2011, primarily due to expected Gairsoppa silver-sale proceeds; $15.3 million related to the Gairsoppa receivable. Total assets were $33.6 million, compared with $23.4 million at year-end 2011.
Total liabilities were $55.7 million, compared with $32.9 million at December 31, 2011. Stockholders’ deficit increased to $22.2 million from $9.8 million. Current liabilities were $45.7 million, including $24.0 million of current mortgage and loan obligations, $7.3 million of derivative liabilities, $6.7 million of deferred revenue, and $5.3 million of accrued expenses.
Debt totaled approximately $29.4 million at September 30, 2012, including a $5.0 million bank term loan, a $10.0 million Gairsoppa project term loan, convertible notes with carrying values of approximately $7.6 million and $4.8 million, and mortgage debt of approximately $2.0 million. The project term loan matured in January 2013 and was repaid in October 2012 from Gairsoppa proceeds.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 84% to $0.9 million, primarily because 2011 included $5.3 million of Neptune Minerals charter revenue; 2012 revenue was focused less on mineral charters and more on shipwreck recovery.
- Nine-month revenue declined 64% to $5.3 million, mainly because expedition charter revenue fell from $14.0 million to $4.2 million.
- Nine-month net loss increased to $17.3 million from $12.2 million, despite lower operating expenses, primarily because of substantially higher interest expense and note accretion.
- Marketing, general and administrative expense increased 13% for the nine-month period to $7.8 million, driven primarily by higher professional fees and employee-related costs.
- Operating cash burn increased materially to $24.8 million from $9.2 million, largely because of the $15.3 million Gairsoppa receivable and other working-capital requirements.
- Financing activities provided $19.8 million, including $10.0 million of Gairsoppa project debt, $8.0 million of additional convertible-note proceeds, and approximately $2.0 million from the increased bank term loan.
- Derivative liabilities remained significant at $7.3 million. Fair-value gains of $1.7 million for the nine-month period reduced the reported loss but were non-cash and subject to market-price and valuation-model changes.
- The remaining Series G preferred share was converted into 140,000 common shares in July 2012; no Series G preferred shares remained outstanding at September 30, 2012.
Guidance, Outlook, Risks, and Unusual Items
Management expected approximately $41 million of 2012 cash proceeds from Gairsoppa silver sales. Contractual allocations included approximately $5 million to the United Kingdom and approximately $15 million to Galt Resources; the $10 million Gairsoppa project loan was repaid in October 2012. Management estimated an approximately $25 million favorable 2012 income-statement impact from Gairsoppa, including approximately $18.4 million in the third quarter and approximately $7 million in the fourth quarter, although actual results depend on silver prices, refining, sales, recovery costs, and contractual allocations.
Odyssey recovered approximately 1,218 Gairsoppa silver ingots weighing approximately 1.4 million troy ounces during 2012 operations. The company planned to resume Gairsoppa recovery in 2013 and continue Mantola recovery after Gairsoppa operations. It also announced a multi-year commodity shipwreck program with potential recovery value exceeding $230 million, based on current commodity prices and assumptions, targeted to begin in 2013.
Management believed available cash and anticipated project proceeds would fund operations through the first quarter of 2013. It also stated that additional capital raising or expense reductions would be required if cash flow was insufficient, and that future results depend heavily on successfully recovering and monetizing shipwreck assets, mining investments, charters, and other projects.
Key risks include limited liquidity, recurring operating losses, substantial debt and near-term maturities, variable-rate interest exposure, dependence on successful salvage operations and commodity prices, possible dilution from convertible notes and warrants, and the possibility that expected Gairsoppa proceeds or financing will not be realized. Convertible-note amortization may be paid in common shares at potentially discounted prices, creating dilution and possible downward pressure on the stock.
Spain sought attorney fees and costs in the Black Swan litigation, with the filing describing the claim as roughly $4 million; the outcome was uncertain. A separate plaintiff appealed dismissal of the Bray case. The company also held approximately 6.2 million Neptune Minerals shares, but Neptune had not provided subsequent financial statements, preventing Odyssey from clearly quantifying its share of Neptune’s losses.
Most Important Facts for Investors to Verify
- Whether the approximately $41 million of projected 2012 Gairsoppa silver proceeds were ultimately received and how proceeds were allocated among Odyssey, the United Kingdom, Galt Resources, and lenders.
- Whether the company maintained sufficient liquidity after repaying the $10 million project loan and meeting near-term debt, operating, and contractual obligations.
- The collectability and timing of the $15.3 million Gairsoppa accounts receivable and the adequacy of related reserves.
- The actual recovery results, costs, commodity prices, and legal rights associated with Gairsoppa, Mantola, HMS Victory, and the new commodity wreck program.
- Potential dilution from the senior convertible notes, conversion-price provisions, warrants, and stock-based amortization payments.
- The outcome and potential financial exposure from Spain’s Black Swan attorney-fee and cost motion and the Bray appeal.
- Whether management’s projected financing, project syndication, mining-investment monetization, and future revenue assumptions were achieved.