Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed its Form 10-K for the fiscal year ended December 31, 2011. The company explores and recovers deep-ocean shipwrecks and provides marine exploration services, including subsea mineral exploration. Revenue is primarily generated from expedition charters, with smaller contributions from artifact sales and exhibits.
The filing also provides unaudited fourth-quarter 2011 information. Fiscal 2011 included discoveries of the SS Gairsoppa and SS Mantola, whose cargoes were believed to include substantial silver, and continued development of the HMS Victory and subsea mineral exploration projects.
Financial Results and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $15.7 million | $21.0 million | Down 25% |
| Expedition charter revenue | $14.7 million | $20.5 million | Down 28% |
| Artifact sales and other | $0.9 million | $0.4 million | Up 118% |
| Gross profit | Approximately $15.3 million | Approximately $20.8 million | Down approximately $5.5 million |
| Approximate gross margin | 97.4% | 99.1% | Lower |
| Loss from operations | $(15.4) million | $(16.4) million | Improved $1.0 million |
| Net loss | $(16.2) million | $(23.3) million | Improved $7.1 million |
| Basic and diluted loss per share | $(0.28) | $(0.36) | Improved |
| Operating cash flow | $(15.2) million | $(12.2) million | More cash used |
| Cash and cash equivalents | $8.0 million | $0.2 million | Up $7.7 million |
Operations and research expense increased to $21.3 million from $19.6 million, primarily because the Dorado Discovery operated for the full year and the Odyssey Explorer incurred higher repairs and maintenance costs. Marketing, general and administrative expense was $9.4 million, compared with $9.2 million.
Reported 2011 net loss benefited from a $5.0 million gain related to changes in derivative liabilities, partially offset by $4.7 million of losses from the Neptune-related unconsolidated investment and $1.2 million of interest expense. The filing recorded no income tax benefit and maintained a full valuation allowance against deferred tax assets.
Fourth Quarter 2011
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Revenue | $0.9 million | $3.9 million |
| Gross profit | $0.9 million | $3.9 million |
| Net loss | $(4.0) million | $(15.4) million |
| Basic and diluted loss per share | $(0.05) | $(0.24) |
Liquidity, Debt and Capital Structure
- Cash increased to $8.0 million at year-end, but operating activities consumed $15.2 million during 2011.
- Financing activities provided $23.4 million, including $15.6 million of net common-stock proceeds, $7.5 million from the Galt project syndication and $10.0 million from convertible notes, partly offset by preferred-stock redemptions, debt repayments and financing fees.
- Total liabilities were $32.9 million and stockholders’ deficit was $9.8 million at December 31, 2011.
- Mortgage and loan obligations totaled approximately $10.5 million, including a $3.0 million bank term loan, a $5.3 million carrying value for the $10.0 million senior convertible note and approximately $2.2 million of mortgages.
- The senior convertible note bears 8% interest, includes a conversion-price reset feature and requires principal amortization beginning in July 2012. It was accompanied by warrants for up to 1.3 million shares and the company had an option to require an additional $5.0 million note, subject to conditions.
- The bank term loan was scheduled to mature in April 2012 and was secured primarily by approximately 27,000 SS Republic coins. In March 2012, the bank provided a term sheet for a $5.0 million replacement or expanded facility with an extended maturity; closing was not yet complete when the filing was prepared.
- Contractual obligations totaled $26.5 million in the principal obligations table, including $12.2 million of long-term obligations, $1.4 million of related interest and $13.0 million of operating leases. A later 90-day vessel charter for Gairsoppa and Mantola added an approximately $9.7 million commitment, including a $3.0 million advance payment.
Material Changes Versus the Prior Comparable Period
- Revenue declined $5.3 million because expedition charter revenue fell $5.8 million. The decrease reflected lower RFP-related revenue and the absence of certain 2010 projects, partly offset by $11.3 million of Neptune Minerals charters.
- Artifact sales increased by approximately $0.5 million due to a new distributor and Civil War-related marketing programs. The company held approximately 27,000 SS Republic silver coins at year-end.
- Operating expenses declined $6.3 million because 2010 included an $8.5 million receivable reserve; excluding that reserve, core operating expenses increased.
- Cash improved materially from $0.2 million to $8.0 million, primarily through equity and debt financing rather than internally generated cash.
- Common shares outstanding increased to approximately 73.1 million at February 23, 2012, from 67.1 million at December 31, 2010, reflecting the June 2011 public offering and other equity issuances.
- Odyssey exchanged and converted amounts owed by Dorado Ocean Resources into Neptune Minerals shares and held approximately 6.2 million Neptune Class B shares, or approximately 31% of Neptune before further dilution. The investment had a zero carrying value because accumulated losses exceeded the recorded investment.
Outlook, Risks and Unusual Items
- Management expected to begin Gairsoppa and Mantola recovery operations in approximately May or June 2012 and believed significant monetization could occur during 2012. The company’s 2012 plan projected positive operating cash flow, but depended on project financing, syndications, partnerships, charter revenue and successful recoveries.
- Management stated that cash was expected to fund operations through the remainder of 2012, but warned that failure to obtain projected financing or revenue could require additional capital or expense reductions.
- Under the Gairsoppa and Mantola contracts, Odyssey bears recovery costs and risk and retains 80% of net salved value after recovery and processing costs, with the United Kingdom retaining 20%.
- The HMS Victory title was transferred to the Maritime Heritage Foundation in January 2012. Odyssey retained a services agreement and could receive project-cost reimbursement and a percentage of recovered artifacts’ fair value, generally 80% for trade cargo and 50% for other artifacts.
- The Black Swan litigation ended adversely in the reported period and subsequent events. Following court orders, artifacts were released to Spain in February 2012, while Odyssey filed a petition with the U.S. Supreme Court. Approximately $2.6 million of capitalized Black Swan recovery costs had been fully reserved.
- Chatham Rock Phosphate’s $1.2 million charter was not recognized as revenue at year-end because the customer lacked sufficient liquidity. Management later expected a financing that could result in approximately $4.0 million of payment for completed and additional services, but collection was not assured.
- The business remains highly speculative. Principal risks include failure to locate or recover valuable cargo, title and jurisdiction disputes, permitting and political interference, dangerous operating conditions, volatile precious-metals and artifact markets, equipment failures, customer concentration and continued dependence on external financing.
Investor Verification Priorities
- Verify the timing, cost, financing and actual recovery results for the Gairsoppa and Mantola projects, including the approximately $9.7 million vessel-charter commitment.
- Review the senior convertible note’s reset provisions, scheduled amortization, potential additional $5.0 million borrowing and associated dilution from conversion and warrants.
- Assess whether the company generated positive operating cash flow in 2012 and whether additional equity, debt or project financing was required.
- Confirm the collectability and accounting treatment of Chatham Rock Phosphate receivables and other reserved or deferred amounts.
- Monitor the Black Swan Supreme Court proceedings and any remaining claims, costs or recoveries associated with the transferred artifacts.
- Reconcile the company’s stated cash resources with near-term debt maturities, vessel commitments, operating losses and its stockholders’ deficit.