Odyssey Marine Exploration, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2024, compared with the three months ended March 31, 2023, as restated. Odyssey focuses on subsea mineral exploration and development, marine research and project-management services, and investments in related deep-sea mineral companies. Key projects include the ExO phosphate project in Mexico, CIC in the Cook Islands, Ocean Minerals, LLC, and the Lihir Gold Project in Papua New Guinea. The Company also has a pending NAFTA arbitration claim against Mexico.
Financial results and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $203,064 | $288,739 | Down 29.7% |
| Operating expenses | $4.92 million | $3.10 million | Up 58.7% |
| Loss from operations | $4.72 million | $2.81 million | Higher loss |
| Other income, net | $5.64 million | $22.88 million | Down $17.25 million |
| Net income | $920,968 | $20.07 million | Down 95.4% |
| Net income attributable to Odyssey | $3.50 million | $22.31 million | Down 84.3% |
| Basic EPS | $0.17 | $1.13 | Lower |
| Diluted EPS | $(0.18) | $1.12 | Lower |
- Revenue consisted primarily of marine services. All Q1 2024 revenue came from related parties, principally CIC and OML.
- The operating margin was approximately negative 2,323%, reflecting very low revenue relative to operating costs. No gross margin was separately presented.
- The Q1 2024 net result benefited from a $7.85 million favorable change in derivative liabilities, partly offset by $1.82 million of interest expense and a $213,946 loss from the equity-method investment in OML. The comparable 2023 period benefited from a $21.48 million debt-extinguishment gain.
- Cash and cash equivalents were $2.08 million at March 31, 2024, down from $4.02 million at December 31, 2023.
- Cash used in operating activities was $1.67 million; cash used in investing activities was $104,000; and cash used in financing activities was $171,000. Net cash decreased $1.94 million during the quarter.
- Total assets were $20.63 million, while total liabilities were $111.69 million. Stockholders’ deficit was $91.06 million.
- Loans payable, net, were $24.72 million, including $16.31 million classified as current. Total loans payable before discounts and fees were $27.74 million. Litigation financing and other liabilities were $53.03 million, and warrant liabilities were $16.73 million.
- Working capital deficit was approximately $30.1 million. The Company reported approximately $217.4 million of federal tax NOL carryforwards and $48.8 million of foreign NOL carryforwards.
Material changes versus the prior comparable period
- Revenue declined $86,000 as marine-services billings to CIC decreased and OML became a customer in 2024.
- Marketing, general and administrative expense increased $2.22 million, primarily due to a $1.3 million increase in share-based compensation and higher professional fees, including audit fees.
- Operations and research expense decreased $399,000, primarily due to lower professional services, litigation-financing costs and depreciation.
- Interest expense increased $1.11 million, reflecting debt-discount amortization, financing fees and accretion of debt-related liabilities.
- The March 2023 warrant was amended in January 2024 to add a cashless-exercise provision and was reclassified from equity to a derivative liability. Its March 31, 2024 fair value was $5.26 million.
- Share-based compensation expense increased to $1.46 million from $293,785. The Company granted options for an aggregate of 592,000 shares in January 2024.
- OML investment carrying value decreased to $4.41 million from $4.49 million, reflecting the Company’s proportionate share of OML’s loss. Odyssey owned approximately 6.6% of OML at March 31, 2024.
Guidance, outlook, risks and unusual items
- Going concern: Management stated that substantial doubt exists regarding the Company’s ability to continue as a going concern. Continued operations depend on financings, monetization of receivables and mineral-company interests, contracted-service income and other cash inflows.
- Near-term liquidity: On May 3, 2024, after quarter-end, the Company received approximately $9.4 million in net proceeds from a residual economic interest in a salvaged shipwreck. Management expects the December 2023 note proceeds, part of these proceeds and other anticipated inflows to fund operations through at least the third quarter of 2024. Holders of the March 2023 Notes have a security interest in the shipwreck proceeds.
- Debt maturities: The March 2023 Notes had a face value of approximately $15.27 million and mature September 6, 2024 unless redeemed earlier. The December 2023 Notes had a face value of approximately $6.04 million and mature June 1, 2025. Both bear 11% interest and permit payment-in-kind interest under specified conditions.
- NAFTA arbitration: ICSID advised on March 8, 2024 that the tribunal expected to render its award in the second quarter of 2024. Timing and outcome remain uncertain, and management’s derivative valuation depends heavily on subjective assumptions regarding the claim’s outcome, potential award and timing.
- Contingent obligation: Consultants may be owed success fees of up to $700,000 upon approval and issuance of the Mexican subsidiary’s environmental impact assessment; no amount was accrued because approval had not occurred.
- Customer concentration: CIC and OML accounted for 100% of Q1 2024 revenue. The Company’s uninsured cash balance was approximately $1.8 million at March 31, 2024.
- Internal controls: Management concluded that disclosure controls were not effective as of March 31, 2024 because material weaknesses continued in the review of significant accounting positions and financial-statement footnote disclosures. Remediation includes an interim controller, additional technical-accounting resources and enhanced monitoring.
- Valuation risk: Approximately $74.15 million of liabilities were measured using Level 3 fair-value inputs, including litigation financing, warrant liabilities, the OML put option and the 37N embedded derivative.
Important facts for investors to verify
- Whether the approximately $9.4 million shipwreck proceeds and other expected inflows are sufficient to meet debt maturities and operating needs through the third quarter of 2024.
- The September 6, 2024 repayment, refinancing or restructuring outcome for the March 2023 Notes.
- The timing and outcome of the NAFTA arbitration and the related effect on litigation-financing obligations and potential proceeds.
- The terms and economic effect of the OML purchase commitments, equity-exchange/put option, and possible future share issuance.
- The status and remediation progress of the material weaknesses in internal control over financial reporting.
- The accuracy of reported cash-flow amounts: the financial statements report $1.67 million of operating cash use, while the MD&A discussion presents approximately $1.58 million.
- The sustainability of revenue, given that all reported revenue is concentrated among two related-party customers and the Company continues to report a substantial working-capital deficit.