Odyssey Marine Exploration, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Odyssey Marine Exploration, Inc. is a subsea mineral exploration and marine services company. Its principal projects include the Mexican phosphate project, the Papua New Guinea Lihir Gold Project, and the CIC deep-sea minerals project. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
At March 31, 2021, the company had 13,023,330 common shares outstanding. It is a smaller reporting company listed on the Nasdaq Capital Market under OMEX.
Financial condition and key metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $291,676 | $1,005,511 |
| Operating expenses | $3,089,051 | $3,853,549 |
| Loss from operations | $2,797,375 | $2,848,038 |
| Interest expense | $2,380,476 | $1,335,618 |
| Net loss before non-controlling interest | $5,123,466 | $4,344,722 |
| Net loss attributable to the company | $3,720,218 | $2,897,976 |
| Basic and diluted loss per share | $0.29 | $0.30 |
| Net cash used in operating activities | $1,431,156 | $1,506,693 |
| Net cash provided by financing activities | $502,773 | $1,730,592 |
| Cash and cash equivalents at period end | $5,234,822 | $437,288 |
Revenue declined primarily because a long-term marine services project reached the end of its expected life in the second half of 2020. Marine services revenue fell to $35,354 from $711,120, while operating and other revenue declined to $256,322 from $294,391.
Operating expenses decreased 20% year over year, including lower operations and research costs. However, the benefit was more than offset by higher interest expense, particularly interest associated with NAFTA litigation financing. The company reported no income tax benefit or provision because its deferred tax assets remain fully reserved.
At March 31, 2021, total assets were $11.0 million, including $5.2 million of cash, while total liabilities were $71.5 million. Working capital was negative $49.2 million, and total stockholders’ deficit was $60.5 million. Loans payable totaled $42.2 million on the balance sheet, and management reported financial debt of approximately $43.2 million excluding certain accounting adjustments.
Material changes versus the prior comparable period
- Revenue decreased $713,835, or approximately 71%, to $291,676.
- Operating expenses decreased $764,498, or approximately 20%, primarily from lower contract labor, financed litigation costs, and operational overhead.
- Interest expense increased $1,044,858, or approximately 78%, largely because of increased NAFTA litigation funding costs.
- Net loss attributable to Odyssey increased $822,242, or approximately 28%, despite lower operating expenses.
- Cash decreased $928,383 during the quarter, from $6.2 million at December 31, 2020 to $5.2 million at March 31, 2021.
- Operating cash use improved modestly by approximately $0.1 million year over year, but remained negative.
- Epsilon converted $1,448,697 of indebtedness, including accrued interest, into 411,562 common shares at $3.52 per share. The conversion reduced Epsilon loans payable to zero.
- The company received $713,879 from the sale of equity in a subsidiary and received approximately $577,539 of non-cash litigation financing paid directly to vendors.
- Share-based compensation increased to $281,687 from $105,162.
Guidance, outlook, commentary, risks, and unusual items
No quantitative revenue or earnings guidance was provided. Management stated that the 2021 business plan requires new cash inflows from financings, monetization of receivables and equity interests in seabed mineral companies, exploration charters, syndications, or other partnerships. Management expected the proceeds from the August 2020 equity financing, together with anticipated cash inflows, to provide operating funds through early 2022.
The company disclosed substantial doubt about its ability to continue as a going concern. Continued operations and positive cash flow depend on additional financing, successful development or monetization of mineral interests, collection of receivables, exploration income, or completion of the proposed MINOSA/Penelope preferred-stock financing. MINOSA and its affiliates hold security interests over significant company assets, limiting the company’s ability to raise additional secured funds.
The Mexican phosphate project remains dependent on environmental permitting and related legal proceedings. The company is pursuing a NAFTA arbitration claim against Mexico seeking more than $2 billion; a hearing was scheduled for January 2022 unless settled earlier. Litigation financing had a carrying value of $11.6 million at March 31, 2021 and may convert to a senior secured liability with a 50% annualized return, or a 100% penalty rate after specified periods, if the claim is discontinued under the financing agreement. The funder also has rights to a substantial portion of potential recoveries.
The Lihir Gold Project is awaiting renewal of its exploration permit. Planned offshore exploration and further development depend on license approvals and resource characterization. The company also holds an approximately 14% interest in Neptune Minerals, Inc.; its carrying value is zero, and the company disclosed approximately $21.3 million of unrecognized accumulated equity-method losses.
Other notable contingencies include potential environmental approval-related attorney equity grants and consultant success fees of up to $700,000, as well as a potential approximately $0.5 million liability if a vendor forecloses on equipment associated with a guaranteed vendor obligation. The company stated that it was not a defendant in litigation requiring recognition of a loss contingency.
The company applied for forgiveness of the $370,400 Paycheck Protection Program loan during March 2021, but forgiveness remained subject to lender and SBA approval. The $149,900 EIDL loan remains outstanding.
Management stated that disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting. The company had not early adopted ASU 2020-06 or the SEC’s updated mining disclosure rules.
Important facts for investors to verify
- Whether the company can obtain sufficient financing or other cash inflows to address the $49.2 million working capital deficit and avoid a liquidity shortfall.
- The maturity, demand rights, default rates, collateral, and potential conversion terms of the company’s substantial debt, particularly the $14.75 million MINOSA loan and other matured obligations.
- The remaining funding available under the NAFTA litigation financing agreement and the potential repayment, return, and recovery-sharing obligations if the claim is discontinued or successful.
- The status and likely timing of the January 2022 NAFTA arbitration hearing, the Mexican environmental permit proceedings, and any settlement discussions.
- Whether the proposed MINOSA/Penelope preferred-stock financing will ever close; the filing states that the counterparties are not currently obligated to make the investment.
- The renewal status of the Lihir exploration license and the timing, cost, and funding of planned exploration activities.
- The collectability and related-party nature of CIC receivables and the valuation of the $2.6 million investment in CIC.
- The final resolution of the PPP loan forgiveness application and any associated accounting impact.
- The potential dilution from outstanding warrants, restricted awards, and other equity-linked instruments excluded from diluted EPS because they were anti-dilutive.