Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the three and nine months ended September 30, 2017. Odyssey provides marine survey, exploration and recovery services and develops seabed mineral projects, principally the Don Diego phosphate project in Mexico. The company also reports consolidated results for Oceanica and its subsidiaries, including non-controlling interests.
Financial performance and position
| Metric | Three months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2017 | Comparable 2016 period |
|---|---|---|---|
| Revenue | $11,854 | $1,248,477 | $2,883,240 and $4,683,035, respectively |
| Operating loss | $(2,469,935) | $(6,816,183) | $(2,197,351) and $(8,209,190), respectively |
| Net loss attributable to Odyssey | $(2,251,097) | $(6,367,245) | $(2,132,303) and $(3,906,437), respectively |
| Loss per share, basic and diluted | $(0.27) | $(0.78) | $(0.28) and $(0.52), respectively |
| Net cash used in operating activities | Not separately disclosed | $(4,543,715) | $(6,524,891) |
Revenue consisted primarily of recovered cargo sales and other revenue; no expedition revenue was recorded in the third quarter. Gross margin is not separately disclosed. Operating expenses were $2.5 million in the quarter and $8.1 million year to date, producing negative operating margins.
Cash and cash equivalents were $1.34 million at September 30, 2017, plus $10,010 of restricted cash. Total assets were $3.14 million, compared with $5.08 million at December 31, 2016. Current liabilities were $31.33 million against current assets of $1.86 million, implying a working-capital deficit of approximately $29.5 million. Total liabilities were $38.97 million, and total stockholders’ deficit was $35.83 million.
Loans payable totaled $26.15 million, including $23.15 million classified as current and $3.0 million as long term. The company also reported $4.64 million of revenue participation rights. Interest expense was $2.02 million for the first nine months. The filing states that the company has no variable-rate debt obligations.
Material changes versus the prior comparable period
- Third-quarter revenue fell from $2.88 million to $11,854 because the prior-year quarter included $2.88 million of Magellan shipwreck exploration revenue.
- Nine-month revenue declined 73%, from $4.68 million to $1.25 million.
- Operating expenses declined 51% in the quarter and 37% year to date, primarily due to lower marine services, personnel, vessel, equipment, fuel and overhead costs.
- The nine-month net loss attributable to Odyssey increased to $6.37 million from $3.91 million, despite lower operating expenses, primarily because 2016 included $3.40 million of derivative fair-value income and other nonrecurring income.
- Operating cash burn improved to $4.54 million from $6.52 million, but financing provided $4.14 million, substantially offsetting operating cash use. Cash decreased by $320,437 during the first nine months.
- Epsilon converted $3.05 million of principal and accrued interest into 670,455 common shares effective April 10, 2017. The company also sold a marine vessel to a Monaco-related party for $650,000, with the proceeds applied against debt.
- New financing included $3.0 million from SMOM and financing from MINOSA. The filing contains inconsistent descriptions of the September 30 MINOSA 2 balance; investors should reconcile the notes and MD&A.
Guidance, outlook, risks and unusual items
Management did not provide quantitative revenue or earnings guidance. Management expects recovery-project activity to begin in late fourth quarter 2017 or early first quarter 2018, following delivery and testing of specialized technology. The company expects to fund operations and projects through monetization of receivables and mineral-company interests, financings, syndications and partnership opportunities.
- Going concern: Management states that $1.3 million of unrestricted cash is insufficient to fund operations for the next twelve months and that the company’s financial condition raises substantial doubt about its ability to continue as a going concern. The financial statements contain no going-concern adjustments.
- Funding dependence: Continued operations depend on additional financing, project revenues, collections, asset monetization and the proposed MINOSA/Penelope preferred-stock financing. MINOSA and Penelope are not currently obligated to complete the preferred-stock investment.
- Don Diego permitting: The Mexican environmental permit application was denied in April 2016. The company is pursuing administrative, legal and political remedies, and approval remains necessary for commercial development and related financing plans.
- Debt and collateral: Most remaining assets and Oceanica interests are pledged to lenders, including MINOSA, its affiliates and Monaco. Several obligations are payable upon demand or contain events-of-default provisions and conversion rights.
- Equity dilution: Convertible debt may be exchanged for common shares at fixed prices, potentially below the market price at conversion. Warrants and other outstanding awards may also dilute shareholders.
- NASDAQ compliance: The company received a market-capitalization deficiency notice but regained compliance on August 3, 2017. Continued compliance is not assured.
- Related parties: Monaco is a related party, provides office space and financing, and purchased the marine vessel used to reduce debt.
- Contingent obligations: The company may issue 3.0 million Oceanica shares to attorneys and pay a $200,000 consultant success fee if the Mexican EIA is approved.
- Unusual accounting items: The year-to-date 2016 comparison benefited from $3.4 million of derivative fair-value income; no comparable derivative income was recognized in 2017. The company also recorded share-based compensation of $625,489 year to date.
Most important facts for investors to verify
- Reconcile the conflicting MINOSA 2 debt amounts: $3.50 million in the balance-sheet debt table, approximately $3.6 million in Note H, and $1.5 million in the MD&A discussion.
- Confirm the maturity, demand rights, defaults, collateral and conversion terms for the $14.75 million MINOSA loan and other current debt.
- Assess the probability and timing of additional financing, the MINOSA/Penelope preferred-stock transaction and project monetizations.
- Track the Mexican environmental-permit proceedings and their effect on the Don Diego project and financing commitments.
- Evaluate dilution from convertible debt, the 670,455 shares issued to Epsilon, warrants and potential future conversions.
- Verify whether planned recovery operations commence as expected and whether they generate sufficient cash to reduce the company’s operating deficit.