Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed its Form 10-K for the fiscal year ended December 31, 2012, filed March 12, 2013. The filing includes unaudited quarterly data for the quarter ended December 31, 2012. Odyssey conducts deep-ocean shipwreck exploration, salvage, archaeological recovery, marine charter services, and seabed mineral exploration.
Key 2012 activities included recovery and monetization of silver from the SS Gairsoppa, continued work on the SS Mantola and HMS Victory projects, marine services for mineral-exploration customers, and development of mineral interests in Neptune Minerals, Chatham Rock Phosphates, and Oceanica.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $13.2 million | $15.7 million | Down 16% |
| Loss from operations | $15.6 million | $15.4 million | Higher by $0.2 million |
| Net loss | $18.2 million | $16.2 million | Higher by $2.0 million |
| Basic and diluted loss per share | $0.25 | $0.28 | Improved on higher share count |
| Operating cash flow | $(6.7) million | $(15.2) million | Improved by $8.5 million |
| Cash and cash equivalents | $10.1 million | $8.0 million | Up $2.1 million |
| Total assets | $26.9 million | $23.4 million | Up $3.5 million |
| Stockholders’ deficit | $(20.8) million | $(9.8) million | Deficit widened |
Artifact sales and other revenue increased to $8.0 million from $0.9 million, primarily because of $7.0 million of fourth-quarter Gairsoppa-related revenue, including silver sales and recognition of Galt Resources revenue participation rights. Expedition revenue declined to $4.9 million from $14.7 million as Neptune-related and other charter work decreased.
Total operating expenses were $28.8 million, down from $31.1 million. Operations and research expense declined to $17.9 million, partly because $17.8 million of Gairsoppa search and recovery costs were recouped through project proceeds. Marketing, general and administrative expense increased to $10.6 million from $9.4 million.
Interest expense increased substantially to $6.3 million from $1.2 million, primarily because of interest accretion and costs associated with senior convertible notes. A $3.6 million gain from changes in derivative liabilities partially offset the interest expense. No income tax provision or benefit was recorded; the company maintained a full valuation allowance against its deferred tax assets.
For the fourth quarter of 2012, revenue was $7.9 million and net loss was $0.9 million. The quarter included substantial Gairsoppa-related revenue and was materially stronger than the first three quarters of 2012.
Liquidity, Debt and Capital Resources
- Operating activities used $6.7 million of cash; investing activities used $0.9 million; financing activities provided $9.8 million.
- Debt and loans payable totaled approximately $18.8 million at December 31, 2012, including a $5.0 million term loan, $8.2 million face-value 8% senior convertible note, $3.6 million carrying value of the 9% additional convertible note, and approximately $2.0 million of mortgages.
- Approximately $14.8 million of mortgage and loan obligations were classified as current. Total contractual obligations were approximately $22.1 million, including $16.0 million of principal, $5.1 million of interest, and $0.9 million of operating lease commitments.
- The $5.0 million Fifth Third term loan and mortgage obligations were scheduled to mature in 2013, and management expected to seek renewal.
- The company had a $12.1 million approximate commitment for a 90-day Norwegian vessel charter beginning around May or June 2013, plus a $1.7 million marine-equipment purchase commitment.
- Cash generation in 2012 depended heavily on Gairsoppa recovery proceeds and financing. The company stated that cash would be sufficient through the remainder of 2013 based on expected recoveries, project revenue, financing, and partnership opportunities, but acknowledged that additional capital or expense reductions could be required.
Material Changes and Unusual Items
- Odyssey recovered approximately 1,218 silver ingots weighing about 1.4 million troy ounces from SS Gairsoppa in 2012. More than $41 million of silver-sale proceeds had been received through early 2013, plus more than $600,000 of gold by-product value.
- The Gairsoppa contract provides Odyssey 80% of net salved value after recovery costs, with 20% retained by the UK government. Galt Resources also had participation rights and received approximately $2.5 million during 2012; an additional $12.5 million was payable in February 2013.
- Odyssey planned to resume Gairsoppa recovery in the second quarter of 2013 and then continue work on SS Mantola.
- Chatham Rock Phosphates paid $3.0 million in cash for 2012 charter services and issued Odyssey 9.3 million shares valued at approximately $1.7 million; the filing states that the stake was later diluted to approximately 7.3%.
- Odyssey issued common stock during 2012 to settle approximately $4.3 million of debt and interest, contributing to dilution. At December 31, 2012, approximately 75.4 million common shares were outstanding; 77.5 million were outstanding as of February 26, 2013.
- All Series G preferred stock was redeemed or converted by year-end 2012. Derivative liabilities declined to $5.4 million from $7.3 million, but their fair-value changes remained a material source of earnings volatility.
- The company acquired a majority interest in Oceanica in February 2013. In a subsequent transaction, an affiliate sold 15 million Oceanica quotas for $15 million and granted an option for up to 15 million additional quotas at $2.50 per quota.
Guidance, Outlook and Risks
Management’s 2013 plan projected positive operating cash flow and anticipated significant monetization of the Gairsoppa and Mantola projects. The plan depended on successful recoveries, financing, syndications, partnership opportunities, renewal of bank debt, and execution of the planned vessel charter.
- The business has recorded net losses in every fiscal year since inception except 2004; management warned that losses could continue in 2013.
- Revenue is concentrated among a small number of customers and projects. Three customers represented 88% of 2012 revenue.
- Shipwreck projects may fail to locate valuable cargo, incur recovery costs exceeding proceeds, face competing ownership claims, or be delayed by weather, permits, political action, litigation, or archaeological requirements.
- Commodity prices, especially silver and gold prices, affect the value and timing of recovered cargo sales.
- Convertible debt creates refinancing, mandatory amortization, interest, conversion, dilution, and potential default risks. The company deferred approximately $2.4 million of scheduled note payments in early 2013, and the additional note’s conversion price was amended from $3.74 to $3.17.
- Mineral investments, including Neptune Minerals and Chatham Rock Phosphates, remain development-stage exposures. Neptune had no operating revenue and had not provided financial statements after December 31, 2011, limiting Odyssey’s ability to quantify its share of subsequent losses.
- The Black Swan litigation resulted in transfer of recovered artifacts to Spain. Spain sought approximately $3.2 million of total legal fees and costs, while the magistrate recommended consideration of approximately $95,000; the matter remained unresolved at filing.
Most Important Facts to Verify
- Actual 2013 cash receipts and net proceeds from Gairsoppa and Mantola recoveries after UK government, Galt, financing, and recovery-cost distributions.
- Renewal or repayment of the Fifth Third term loan and mortgages, and the company’s ability to fund the approximately $12.1 million vessel charter commitment.
- Current terms, outstanding principal, conversion activity, and dilution from the senior convertible notes and related warrants.
- Status and financial impact of the Black Swan fee-and-cost proceedings and other ownership or salvage claims.
- Whether projected positive operating cash flow was achieved without additional equity issuance, debt, or asset sales.
- Current carrying values, ownership percentages, liquidity, and financial condition of Neptune Minerals, Chatham Rock Phosphates, and Oceanica.