Odyssey Marine Exploration, Inc. — 2018 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2018. Odyssey provides marine research, search, recovery, survey, remotely operated vehicle and related technical services, while pursuing shipwreck recovery and seabed mineral exploration projects, including a phosphate project in Mexico.
The company is a smaller reporting company with 8,466,909 common shares outstanding at October 31, 2018. Results include consolidated operations of Oceanica, with losses attributable to other Oceanica owners reported as non-controlling interest.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 |
|---|---|---|
| Revenue | $886,327 | $2,471,559 |
| Operating loss | $1,544,487 | $4,370,301 |
| Net loss attributable to Odyssey | $1,309,275 | $3,695,592 |
| Net loss per share, basic and diluted | $0.15 | $0.44 |
| Interest expense | $816,732 | $2,258,149 |
| Operating cash flow | Not separately provided for the quarter | $(4,371,867) |
- Revenue consisted of recovered cargo sales and other revenue of $260,763 for the quarter and $569,083 year to date, plus marine services revenue of $625,564 for the quarter and $1,902,476 year to date.
- Approximate operating margin was negative 174% for the quarter and negative 177% year to date; approximate net margin attributable to Odyssey was negative 148% and negative 150%, respectively.
- Cash and cash equivalents were $130,364 at September 30, 2018, compared with $1.1 million at December 31, 2017. Restricted cash was $10,135.
- Total assets were $2.4 million and total liabilities were $45.8 million at September 30, 2018. Stockholders’ equity was a deficit of $43.4 million, including a $18.3 million non-controlling-interest deficit.
- Loans payable totaled $29.4 million, including $25.9 million current and $3.5 million long term. Revenue participation rights were an additional $4.6 million long-term liability.
- Investing activities provided $994,038, principally from the sale of marine equipment. Financing activities provided $2.4 million, including new borrowings and contractual-obligation settlement activity.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased to $886,327 from $11,854, primarily from marine services and recovered cargo sales. Nine-month revenue increased 98% to $2.5 million from $1.2 million.
- Operating expenses declined 2% in the quarter and 15% year to date, reflecting lower marketing, general and administrative costs, partly offset by higher marine labor and operations costs.
- Quarterly net loss attributable to Odyssey improved to $1.3 million from $2.3 million; the nine-month loss improved to $3.7 million from $6.4 million. Interest expense increased year to date to $2.3 million from $2.0 million.
- Operating cash usage remained substantial at $4.4 million year to date, while ending cash declined by approximately $978,000 from year-end 2017.
- Financial debt, excluding derivative or beneficial-conversion-feature components as described by management, increased approximately $2.8 million to $30.2 million during the first nine months.
- The company recognized a $897,664 gain on equipment sales in operating cash-flow adjustments and reported a $1.0 million equipment sale and related cash proceeds during the year.
- Related-party activity increased materially. The company recognized approximately $1.6 million of 2018 revenue from Monaco and invoiced $280,021 during the third quarter to a mineral exploration company controlled by the chairman.
Guidance, Outlook, Risks and Unusual Items
- Management provided no quantitative revenue or earnings guidance. It stated that future liquidity depends on monetizing mineral interests and receivables, marine-service and exploration-charter income, additional financings or partnerships, and the proposed MINOSA/Penelope equity transaction.
- Management expressly raised substantial doubt about the company’s ability to continue as a going concern. Non-restricted cash of $130,364 was insufficient to fund the next twelve months, and working capital deficit was approximately $37.0 million.
- Several significant obligations were matured, payable on demand, or dependent on lender negotiations, including Monaco debt. The company has pledged substantial assets and interests to lenders, limiting additional secured financing capacity.
- The Mexican phosphate project remains dependent on environmental approval. Although a Mexican court nullified the prior permit denial, SEMARNAT again refused approval in October 2018; the subsidiary sought court sanctions and enforcement.
- On November 2, 2018, after the reporting date, the company completed a registered direct offering of 700,000 shares and warrants, with expected net proceeds of approximately $4.6 million.
- Outstanding convertible debt and warrants may result in substantial future equity dilution. The company also identified Nasdaq minimum bid and market-capitalization compliance risks.
- Other risks include dependence on related parties and customers, collection of related-party receivables, contingent obligations, project and permitting uncertainty, cybersecurity exposure, and potential short-selling-related stock volatility.
Most Important Facts for Investors to Verify
- Whether post-quarter financing proceeds are sufficient to address the going-concern uncertainty and near-term maturities.
- The status, enforceability and demand rights of Monaco, MINOSA, Epsilon, SMOM and other secured or convertible debt.
- Whether SEMARNAT will issue the environmental permit and whether the Mexican court will enforce its ruling.
- Collectability of the $584,937 related-party receivable and the economics and governance of the chairman-controlled mineral exploration venture.
- The potential dilution from convertible notes, preferred-stock commitments, warrants and related registration rights.
- The company’s continuing compliance with Nasdaq listing requirements and the effect of the November 2018 equity offering on capitalization.