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, 2014, filed November 10, 2014. Odyssey conducts shipwreck salvage, artifact sales, marine services, and subsea mineral exploration through consolidated subsidiaries and investments. The company had 85,321,008 common shares outstanding as of November 5, 2014.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $0.1 million | $5.6 million | $1.0 million | $6.7 million |
| Operating loss | $(7.8) million | $(3.4) million | $(22.3) million | $(23.5) million |
| Net loss | $(7.4) million | $(0.9) million | $(21.2) million | $(21.5) million |
| Net loss per share | $(0.09) | $(0.01) | $(0.25) | $(0.27) |
| Operating cash flow | Not separately provided | Not separately provided | $(23.0) million | $(34.8) million |
- Q3 total revenue fell 98%, primarily because Q3 2013 included Gairsoppa silver sales. No SS Central America revenue was recognized because recovered cargo had not been monetized.
- Q3 operating expenses were $7.9 million, including $2.8 million of marketing, general and administrative expense and $5.1 million of operations and research expense.
- The company recorded a $2.8 million SS Central America priority-cost recoupment credit against operations and research expense in Q3, and $6.3 million for the nine-month period. This was not recognized as revenue.
- Cash and cash equivalents were $3.7 million at September 30, 2014, compared with $21.3 million at December 31, 2013. Restricted cash was $0.7 million.
- Total assets declined to $27.3 million from $51.5 million at year-end 2013. Total liabilities were $32.0 million, producing negative stockholders’ equity of $4.7 million.
- Accounts receivable increased to $6.4 million, largely reflecting the SS Central America priority recoupment receivable; a $4.6 million reserve primarily related to Neptune Minerals remained in place.
- Total debt was $17.3 million at September 30, 2014, down from $22.0 million at December 31, 2013. Debt included a $4.0 million term loan, $11.6 million of project term loans, and $1.7 million of mortgages and other secured borrowings.
- Net cash used in investing activities was $2.8 million, primarily for equipment. Net cash provided by financing activities was $8.2 million, including project-loan advances and the initial $5.0 million tranche of a strategic marketing-partner loan.
Material changes versus the prior comparable period
- Revenue decreased by $5.4 million in Q3 and $5.6 million for the nine months, mainly due to the absence of Gairsoppa silver monetization revenue.
- Q3 net loss increased by $6.5 million, although the nine-month net loss improved modestly by $0.3 million.
- Q3 marketing, general and administrative expense decreased $1.9 million, partly because 2013 included one-time Black Swan judgment, silver-hedging, and accelerated stock-vesting costs.
- Q3 operations and research expense increased $1.0 million because of SS Central America and company-owned vessel costs, partly offset by the absence of 2013 Seabed Worker charter expense.
- The company terminated its long-term Dorado Discovery charter effective August 31, 2014; $1.7 million of accelerated depreciation was recorded in the quarter.
- The $18.0 million of senior convertible notes issued in 2011 and 2012 were fully retired during the first half of 2014, including $2.3 million settled through common-stock issuance.
- On August 14, 2014, the company borrowed $5.0 million from a strategic marketing partner, with potential additional tranches totaling $5.0 million. A further $2.5 million tranche was received on October 1, 2014, after the reporting period.
Outlook, commentary, risks, and unusual items
- Odyssey recovered more than 15,500 silver and gold coins, gold ingots, dust, nuggets, jewelry, and other artifacts from SS Central America during the 2014 season. The company stated that the cargo could be worth tens of millions of dollars, but the value remains undetermined until monetization.
- Future SS Central America monetization depends partly on judicial proceedings and a final federal court ruling. The first monetization proceeds are expected to repay the May 2014 Fifth Third Bank credit facility.
- The company reported that unrestricted cash of $3.7 million was insufficient to support operations through year-end 2014. Management expects to rely on cargo monetization, asset or equity-stake sales, financings, syndications, or partnerships.
- If anticipated cash inflows are not obtained, management may curtail the business plan and pursue additional equity or convertible-debt financing. The filing states that the company’s ability to continue operations over the following twelve months depends on these activities.
- Oceanica’s Mexican subsidiary filed an Environmental Impact Assessment for the Don Diego phosphate project; a governmental response was expected in approximately 60 business days. The project remains subject to permitting and environmental risks.
- Derivative liabilities were $1.1 million at September 30, 2014. Fair-value changes generated $0.7 million of income for the nine months and may create earnings volatility.
- The company had approximately $127.4 million of federal and $11.9 million of foreign net operating loss carryforwards, but recorded a full valuation allowance against deferred tax assets.
- Variable-rate debt exposes the company to LIBOR and prime-rate increases. The filing also identifies potential NASDAQ delisting if the stock remains below the $1.00 minimum bid requirement for the applicable periods.
- No material pending litigation was reported, although admiralty proceedings concerning Recovery Limited Partnership’s title and salvage rights to SS Central America remain relevant to monetization timing.
Important facts for investors to verify
- Whether SS Central America cargo receives a final judicial determination permitting monetization, and the timing and amount of cash proceeds.
- Whether the company can generate sufficient cash from cargo sales, mineral-project interests, financings, or partnerships to avoid further operating curtailments or dilutive financing.
- The terms, collateral, conversion rights, and potential dilution associated with the strategic marketing-partner loan and the October 1, 2014 additional tranche.
- The collectability and timing of the $6.4 million accounts receivable balance, including the SS Central America priority recoupment.
- The carrying value and realizability of artifact inventories and the company’s mineral-exploration interests, including the zero carrying value assigned to the Neptune Minerals investment.
- Debt maturities, covenant compliance, restricted cash requirements, and the company’s ability to fund scheduled principal and interest payments.
- NASDAQ listing status, stock-price volatility, derivative liabilities, outstanding warrants, and potential future equity dilution.