ODYSSEY MARINE EXPLORATION INC quarterly report, Q2 FY2020

Odyssey Marine Exploration, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2020. The unaudited consolidated statements include Odyssey and its subsidiaries. Odyssey provides marine research, exploration, project-management and shipwreck-related services, and is pursuing subsea mineral projects, including phosphate exploration in Mexico and exploration-license activities in Papua New Guinea.

Key Financial Metrics

Metric	Three months ended June 30, 2020	Three months ended June 30, 2019	Six months ended June 30, 2020	Six months ended June 30, 2019
Revenue	$0.52 million	$0.77 million	$1.53 million	$1.57 million
Operating loss	$(4.05) million	$(2.46) million	$(6.90) million	$(4.69) million
Net loss attributable to Odyssey	$(4.10) million	$(2.77) million	$(7.00) million	$(3.94) million
Net loss per share	$(0.43)	$(0.30)	$(0.73)	$(0.43)
Net cash used in operating activities	Not separately reported for the quarter	Not separately reported for the quarter	$(2.60) million	$(2.19) million

Six-month revenue declined approximately 3%, while operating expenses increased 35% to $8.42 million, primarily because of higher litigation-related professional fees and other operations and research costs.
Approximate operating margins were negative 778% for the quarter and negative 452% for the six-month period. Approximate net margins were negative 788% and negative 459%, respectively.
Interest expense was $1.56 million in the quarter and $2.90 million year to date. The company also recorded hybrid-instrument fair-value losses of $0.22 million in the quarter and $0.43 million year to date.
Cash and cash equivalents were $223,711 at June 30, 2020, compared with $213,389 at December 31, 2019. Current assets were $1.34 million versus current liabilities of $56.93 million, resulting in a working-capital deficit of approximately $55.6 million.
Total liabilities were $67.27 million, compared with total assets of $5.37 million. Stockholders’ equity was negative $61.90 million, including negative non-controlling interests of $27.17 million.
Loans payable totaled $38.56 million at June 30, 2020, compared with $34.40 million at December 31, 2019. Management separately described financial debt, excluding certain fair-value and accounting components, as approximately $39.0 million.
Financing cash inflows of $2.61 million included litigation financing, 37North proceeds, a $370,400 Paycheck Protection Program loan and a $149,900 Economic Injury Disaster Loan. Investing cash flow was zero.

Material Changes Versus the Prior Comparable Period

Second-quarter revenue decreased $254,467, or approximately 33%, to $519,969. Expedition revenue fell to $223,525 from $504,540, partly offset by higher recovered-cargo and other revenue.
Six-month revenue decreased $43,882 to $1.53 million. Operations and research expense increased $2.35 million, while marketing, general and administrative expense decreased $189,078.
Quarterly net loss increased $1.32 million, or approximately 48%, and year-to-date net loss increased $3.05 million, or approximately 77%.
Litigation-related financed professional fees were a principal driver of the increase in operations and research expense. Litigation-financing interest expense was $0.77 million in the quarter and $1.35 million year to date.
The fair value of the 37North hybrid debt instrument increased to $1.78 million from $0.86 million at December 31, 2019, producing a year-to-date fair-value loss of $425,215.
Accounts receivable increased to $790,979 from $421,593, including $610,463 owed by related party CIC at June 30, 2020. The company invoiced CIC $463,281 during the first six months of 2020.

Guidance, Outlook, Risks and Unusual Items

Management stated that existing cash is insufficient to support operations for the following 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern. The filing states that the financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
Future liquidity depends on monetizing receivables and mineral-company interests, obtaining financings or strategic partnerships, generating exploration-charter income, and potentially completing the long-pending MINOSA/Penelope preferred-stock financing. MINOSA and Penelope were not obligated to complete that financing as of the filing.
If adequate cash inflows are not obtained, management expects to implement a contingency plan involving reduced expenses and fewer planned activities.
The company’s Mexican phosphate project remains dependent on obtaining an environmental permit. Its NAFTA arbitration against Mexico is ongoing, with a principal memorial filing expected in the first half of the third quarter of 2020. The filing does not provide a clear estimate of any potential recovery.
Litigation financing provides funding for the NAFTA claim but gives the funder priority rights to claim proceeds and may convert funded amounts into senior secured obligations bearing a 50% annualized internal rate of return in specified circumstances, with potentially higher penalty interest after 24 months.
The Bismarck Papua New Guinea exploration license is considered indefinite-lived. Offshore operations planned for 2020 were contingent on the ability to operate safely amid worldwide travel and operational issues.
Several loans are matured, payable on demand, or subject to acceleration provisions. Most remaining assets have been pledged to lenders, limiting additional secured-financing capacity.
The company received a $370,400 PPP loan that may be partially or fully forgivable subject to SBA and lender approval. It also received the $149,900 EIDL loan, bearing 3.75% interest with a 30-year repayment term.
The company reported no material defendant litigation requiring a recorded loss contingency, but disclosed contingent success fees of up to $700,000 and potential equity awards tied to approval of the Mexican environmental impact assessment.
The filing identifies related-party transactions with CIC, which is controlled by Odyssey’s former chairman, and states that related-party terms may not be comparable to independent transactions.

Important Facts for Investors to Verify

Whether Odyssey can obtain sufficient financing or asset monetization proceeds to fund operations over the next 12 months.
The status, enforceability and demand rights of the MINOSA, Monaco, Epsilon, SMOM, litigation-financing and 37North obligations.
The amount and timing of any additional litigation financing, the NAFTA arbitration timetable, and the potential dilution or proceeds-sharing effects of associated warrants and recovery rights.
The status of the Mexican environmental permit and whether the NAFTA claim or related project can generate recoveries.
The collectability and timing of the $610,463 CIC related-party receivable and the value of Odyssey’s $1.5 million CIC investment.
The likelihood of PPP loan forgiveness and the effect of COVID-19-related operating and travel restrictions on planned exploration work.
Potential dilution from outstanding warrants, options, restricted stock and convertible debt, including 37North conversion provisions and litigation-financing warrants.