Odyssey Marine Exploration, Inc. — Fiscal 2013 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2013, filed March 17, 2014. Odyssey conducts deep-ocean shipwreck exploration, archaeological recovery, commodity salvage, and seabed mineral exploration. The company’s 2013 results were dominated by monetization of silver recovered from the SS Gairsoppa.
- Recovered approximately 61 tons, or 1.8 million troy ounces, of silver during the 2013 Gairsoppa season.
- Gairsoppa accounted for approximately 87% of 2013 revenue.
- Odyssey acquired and consolidated a majority interest in Oceanica Resources, a seabed mineral exploration company, during 2013.
Financial Results and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $23.9 million | $13.2 million | Up 81% |
| Operating loss | $17.0 million | $15.6 million | Loss increased |
| Net loss | $10.7 million | $18.2 million | Loss reduced |
| Basic and diluted loss per share | $0.13 | $0.25 | Improved |
| Net cash used in operating activities | $20.1 million | $6.7 million | Use increased |
| Net cash used in investing activities | $4.5 million | $0.9 million | Use increased |
| Net cash provided by financing activities | $35.8 million | $9.8 million | Increased |
| Year-end cash and cash equivalents | $21.3 million | $10.1 million | Up $11.2 million |
| Total debt | $22.0 million | $18.8 million | Up $3.2 million |
| Shareholders’ equity | $13.2 million | $(20.8) million | Improved |
Revenue consisted principally of $23.7 million from artifact and other sales, including $20.8 million recognized from Gairsoppa, $0.1 million from the exhibit, and $0.1 million from expedition services. The approximate operating margin was negative 71% and the net margin was negative 45%.
Gairsoppa silver sold in 2013 generated approximately $35 million before the contractual split with the United Kingdom government. Of the 2013 proceeds, approximately $5.2 million was paid to the UK government, $9.2 million was credited against recoverable operating expenses, and $20.8 million was recognized as revenue.
Operating expenses totaled $40.9 million, including $26.0 million of operations and research expense and $14.2 million of marketing, general and administrative expense. Other income was $2.6 million, including a $4.4 million favorable change in derivative liabilities and a $1.2 million gain on silver price swaps. The company recorded a $0.5 million income tax provision.
At December 31, 2013, current assets were $33.6 million, including $21.3 million of cash and $10.7 million of restricted cash. The $10 million project loan was secured by Gairsoppa-related silver and $10 million of restricted cash. Approximately $31.7 million of cash was uninsured.
Material Changes Versus the Prior Comparable Period
- Revenue increased 81%, primarily because Gairsoppa revenue rose from $3.9 million to $20.8 million. Expedition charter revenue declined from $4.9 million to $0.1 million.
- The company remained loss-making, but the net loss narrowed by $7.4 million. The improvement reflected Gairsoppa proceeds, lower interest expense, and favorable derivative fair-value changes, partly offset by higher operating and administrative expenses.
- Operations and research expense increased $8.1 million, largely because Gairsoppa cost recoveries credited against expenses declined to $9.2 million from $17.8 million.
- Marketing, general and administrative expense increased $3.6 million, including approximately $1.1 million related to the Black Swan legal matter, higher personnel and share-based compensation costs, and a higher doubtful-accounts provision.
- Operating cash usage worsened substantially despite higher reported revenue. Financing provided $35.8 million, including $27.5 million from selling a minority stake in Oceanica and $10.4 million from issuing common stock.
- Debt increased, while outstanding convertible debt declined from $11.9 million to $5.2 million. The company issued 3.55 million shares to settle approximately $8.6 million of convertible-note principal and interest.
- Stockholders’ equity improved from a $20.8 million deficit to $13.2 million of equity, substantially due to Oceanica-related transactions and equity financing.
Guidance, Outlook, Risks and Unusual Items
Management stated that the 2014 business plan requires new cash inflows. Planned sources include monetization of shipwreck cargo, sales of interests in seabed mineral companies, financings, syndications, and partnerships. Management warned that failure to obtain such inflows could require a curtailed business plan and reduced expenses; no specific revenue or earnings guidance was provided.
- Odyssey planned to begin recovery operations on the SS Central America in April 2014. Its compensation includes day-rate and mobilization payments plus 45% of recovery proceeds above specified thresholds.
- The Gairsoppa salvage contract was extended through 2015, but most insured silver had already been recovered by year-end 2013.
- The $10 million project loan matures July 24, 2014. The $5 million term loan and certain mortgages were extended to 2016, with required principal payments beginning in 2014.
- The Dorado Discovery charter was scheduled to expire April 30, 2014; the vessel owner agreed to a possible four-year extension at approximately $14,000 per day for the first two years.
- Oceanica remains exploratory and lacks all permits required for commercial operations. Neptune Minerals, in which Odyssey owns approximately 30%, remains in the exploration phase; Odyssey fully reserved its $0.5 million 2013 convertible loan to Neptune.
- The company has incurred net losses in every fiscal year since inception except 2004. Management anticipated that losses could continue in 2014 pending monetizable recoveries.
- Major risks include uncertain discovery and recovery outcomes, ownership and title disputes, permitting and political restrictions, weather and equipment risks, volatile precious-metals and mineral prices, uncertain marketability of recovered assets, and dependence on external financing.
- The Black Swan litigation was closed after Odyssey paid Spain approximately $1.1 million in October 2013. The company reported no current material litigation.
- A $51.6 million valuation allowance offset deferred tax assets, and the company was seeking an IRS private letter ruling that could reverse the 2013 tax provision; approval was not assured.
Most Important Facts for Investors to Verify
- Whether Odyssey can generate sufficient 2014 cash inflows without additional uncommitted debt or equity financing.
- The maturity, collateral, covenants, and refinancing requirements of the $10 million project loan due in July 2014.
- The timing, legal rights, permits, expected economics, and actual recovery results of the SS Central America project.
- The sustainability of revenue after the largely completed Gairsoppa recovery and the absence of 2013 charter-service revenue.
- The valuation and liquidity of Oceanica, Neptune Minerals, Chatham Rock Phosphate, and other mineral-related holdings.
- The collectability of receivables and the adequacy of reserves, including approximately $5.1 million of accounts-receivable reserves.
- Potential dilution from convertible notes, warrants, options, and equity-based debt settlements; 83.9 million common shares were outstanding as of February 26, 2014.
- The company’s ability to convert artifact inventory and mineral interests into cash at or above carrying values.