Odyssey Marine Exploration, Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2013. Odyssey’s operations center on deep-ocean shipwreck salvage, artifact sales, marine services, and investments in subsea mineral exploration entities. The primary operating event was monetization of silver recovered from the SS Gairsoppa wreck, while Oceanica Resources became a consolidated majority-owned subsidiary during 2013.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $5.6 million, versus $0.9 million | $6.7 million, versus $5.3 million |
| Operating income (loss) | $(3.4) million, versus $0.9 million | $(23.5) million, versus $(14.4) million |
| Net income (loss) | $(0.9) million, versus $3.8 million | $(21.5) million, versus $(17.3) million |
| Basic and diluted EPS | $(0.01), versus $0.05 | $(0.27), versus $(0.24) |
| Net cash used in operating activities | Not provided for the quarter | $(34.8) million, versus $(24.8) million |
Reported operating margin was approximately (62%) in the third quarter and (353%) for the first nine months; net margin was approximately (17%) and (322%), respectively. These derived margins are distorted by project-cost recoupments, Oceanica consolidation, legal expenses, and non-cash derivative accounting.
- Third-quarter artifact sales and other revenue was $5.5 million, including approximately $5.2 million recognized from Gairsoppa silver after $9.2 million of project-cost recoupments were credited against operating expenses.
- During the quarter, Odyssey monetized 630,999 ounces of silver at an average price of $24.55 per ounce, generating approximately $15.5 million of gross proceeds. A further $5.8 million was recorded as a receivable at September 30 and was collected in October.
- Cash and cash equivalents were $11.2 million at September 30, 2013, compared with $10.1 million at December 31, 2012. Restricted cash was $0.6 million.
- Total assets were $35.5 million, compared with $26.9 million at year-end 2012. Total liabilities were $40.0 million, compared with $47.7 million.
- Stockholders’ deficit improved to $(4.5) million from $(20.8) million, primarily reflecting equity transactions and the sale of a partial interest in Oceanica, but the company remained in a deficit position.
- Debt, including mortgage and loans payable, was $22.5 million at September 30, 2013, compared with $18.8 million at December 31, 2012. The balance included a $10.0 million Gairsoppa project loan maturing in July 2014, a $5.0 million term loan, convertible notes, and mortgage debt.
- Derivative liabilities declined to $3.1 million from $5.4 million. Fair-value changes produced $2.2 million of other income for the first nine months and $0.9 million in the third quarter.
Material changes versus the prior comparable periods
- Revenue increased 487% in the third quarter and 27% for the first nine months, principally because of Gairsoppa silver monetization and higher artifact sales.
- Profitability deteriorated: the third quarter shifted from $3.8 million of net income to a $0.9 million loss, while the nine-month loss increased by $4.2 million.
- Operating expenses increased to $9.0 million in the third quarter from an immaterial amount in the prior-year quarter because 2012 included substantial Gairsoppa cost-recovery credits. Nine-month operating expenses increased 53% to $30.2 million.
- Marketing, general and administrative expense increased partly because of $1.1 million of additional legal expense related to the Black Swan litigation and higher employee-related costs.
- Expedition charter revenue fell to zero from $4.2 million for the nine-month comparison, reflecting the absence of comparable 2012 mineral exploration charter work.
- Financing activities generated $40.4 million of cash, including $25.0 million from the sale of Oceanica shares, $10.0 million of project-loan proceeds, and $6.0 million from common-stock issuances and warrant exercises. Debt repayments were $0.7 million.
- Common shares outstanding increased to 81.5 million at September 30, 2013 from 75.4 million at December 31, 2012. The company also issued 2.98 million shares for $7.8 million of convertible-note principal repayments during the first nine months.
Outlook, commentary, risks, and unusual items
- Management expected to monetize at least $30 million from the 2013 Gairsoppa project and stated that the remaining 2013 silver was expected to be monetized in the fourth quarter, with related gold potentially monetized in early 2014.
- Management stated that cash was expected to fund operating cash flows through the rest of 2013 and 2014, assuming projected recoveries, financing, syndication, and other project revenues occur. The filing cautions that insufficient cash flow would require additional capital or expense reductions.
- Management expected to conduct reconnaissance and salvage-planning trips for commodity shipwrecks in the first half of 2014 and at least one recovery expedition in the second half of 2014, subject to vessel, equipment, weather, and operational availability.
- Odyssey entered into fixed-price silver swaps covering 250,000 ounces for October at $24.40 per ounce and 250,000 ounces for November at $23.10 per ounce. Gains or losses were expected to be recognized in the fourth quarter.
- The company incurred a $1.07 million judgment payable to Spain in connection with the Black Swan case; payment was made in October 2013. Approximately $0.94 million above the amount previously reserved was expensed in the third quarter.
- Liquidity is dependent on successful recovery and monetization of shipwreck cargoes, asset or subsidiary sales, project financing, and other capital raises. The company reported several years of losses and a stockholders’ deficit.
- Significant risks include silver-price volatility, variable-rate debt, project execution and recovery risk, legal and title disputes, dependence on financing, dilution from convertible notes and warrants, and the early-stage nature of Oceanica and other mineral investments.
- Approximately $117 million of federal and $11 million of foreign tax-loss carryforwards were reported, but the company maintained a full valuation allowance against deferred tax assets.
- The filing states that disclosure controls and procedures were effective as of September 30, 2013, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the remaining Gairsoppa silver and related gold were monetized as projected and the realized proceeds, costs, hedge results, and amounts payable to the United Kingdom and processing contractor.
- Repayment or refinancing of the $10.0 million project loan due July 2014 and compliance with all debt covenants and collateral requirements.
- Actual cash burn, operating cash flow, and the need for additional equity, debt, or asset-sale financing.
- The status and economic value of Oceanica’s mineral concessions, technical report, permits, ownership percentages, and Mako’s remaining option to purchase seven million Oceanica shares for $17.5 million before December 31, 2013.
- Potential dilution from convertible notes, warrants, stock-based compensation, and share-based debt repayments.
- Resolution of remaining admiralty, title, and other legal claims, including any further consequences from the Black Swan proceedings.
- Whether future commodity-shipwreck projects generate recoveries on the timing and economics assumed in management’s business plan.