Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business context and reporting period
Odyssey Marine Exploration, Inc. is a marine exploration and services company pursuing shipwreck recovery, offshore mineral exploration, and related technical, scientific, and project-management services. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company reported 9,542,449 common shares outstanding as of April 30, 2020.
Key strategic assets include the Mexican phosphate project, the Bismarck exploration license in Papua New Guinea, services provided to CIC LLC and Magellan Limited, and the NAFTA arbitration related to the Mexican phosphate project.
Financial condition and key metrics
| Metric | Q1 2020 | Q1 2019 or prior period |
|---|---|---|
| Total revenue | $1.006 million | $0.795 million |
| Operating expenses | $3.854 million | $3.031 million |
| Loss from operations | $(2.848) million | $(2.236) million |
| Net loss attributable to Odyssey | $(2.898) million | $(1.168) million |
| Basic and diluted loss per share | $(0.30) | $(0.13) |
| Net cash used in operating activities | $(1.507) million | $(1.462) million |
| Net cash provided by financing activities | $1.731 million | $(0.105) million |
| Cash and cash equivalents | $0.437 million | $0.213 million at December 31, 2019 |
| Total assets | $5.673 million | $5.330 million at December 31, 2019 |
| Total liabilities | $62.135 million | $58.627 million at December 31, 2019 |
| Loans payable | $36.692 million | $34.403 million at December 31, 2019 |
| Total stockholders’ deficit | $(56.462) million | $(53.297) million at December 31, 2019 |
Recovered cargo sales and other revenue increased to $294,391 from $282,178, while expedition revenue increased to $711,120 from $512,749. Based on reported figures, the operating margin was approximately negative 283% and the net margin attributable to Odyssey was approximately negative 288% for Q1 2020.
The company had a working capital deficit of approximately $51.5 million. Current liabilities were $53.1 million versus current assets of $1.6 million. Accounts payable and accrued expenses totaled approximately $20.9 million, and current loans payable totaled approximately $32.1 million.
Material changes versus the prior comparable period
- Revenue increased 26% to $1.006 million, primarily from higher expedition revenue.
- Operating expenses increased 27% to $3.854 million. Operations and research expense rose 43%, primarily because of higher financed professional, legal, and NAFTA litigation costs.
- Interest expense increased to $1.336 million from $0.959 million. Q1 2020 also included a $203,115 loss from the fair-value remeasurement of the 37North hybrid debt instrument.
- Q1 2019 included $828,644 of other income associated with the write-down of deferred revenue following cancellation of the HMS Sussex contract; Q1 2020 included only $42,049 of other income.
- Net loss attributable to Odyssey increased to $2.898 million from $1.168 million, while loss per share increased to $0.30 from $0.13.
- Financing activities provided $1.731 million in Q1 2020, including approximately $1.870 million of note proceeds. The company also received $899,277 of non-cash litigation financing in which the lender settled litigation payables directly with a vendor.
- Common shares outstanding increased during the quarter, and additional paid-in capital increased by approximately $1.181 million, including share-based compensation and the fair value of warrants.
Guidance, outlook, risks, contingencies, and unusual items
- Going concern: Management stated that the company’s cash balance is insufficient to support operations for the following 12 months and that its recurring losses, working capital deficit, and financing needs raise substantial doubt about its ability to continue as a going concern. The financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
- Financing dependence: Future operations depend on monetizing receivables and mineral-company interests, generating charter income, obtaining additional financing or partnerships, and potentially completing the long-delayed MINOSA/Penelope preferred-stock transaction. MINOSA and Penelope are currently under no obligation to complete the preferred-stock investment.
- Debt and maturities: Most debt is secured or subject to conversion, demand, or other acceleration provisions. Several obligations are past maturity, including Monaco-related loans and the Monaco 2018 loan. The 37North notes were scheduled to mature June 6, 2020, and the promissory notes held by two individuals were scheduled to mature July 12, 2020.
- 37North financing: The company borrowed an additional $490,000 in Q1 2020. The notes had a March 31 carrying value of $1.555 million and may become more expensive upon maturity through enhanced conversion and monthly accrual provisions. A May 6, 2020 amendment, after quarter-end, imposed an additional 19.9% limitation on conversion shares.
- Litigation financing: The January 2020 amended agreement increased potential funding availability for the NAFTA claim to $10.0 million, including up to $2.2 million of arbitration support funds. The company recorded $591,871 of related interest expense in Q1 2020, including $575,155 based on management’s estimate that the claim is more likely than not to result in an environmental permit. The filing cautions that this accounting estimate should not be interpreted as an indication of the likely outcome of the claim.
- NAFTA arbitration and Mexican permit: The company continues to seek an environmental permit for the Mexican phosphate project and planned to file its arbitration Memorial in the first half of Q3 2020. The permit remains unapproved, and the project’s development and potential financing are highly dependent on the outcome of the administrative and arbitration proceedings.
- Operating execution: Planned 2020 operations in Papua New Guinea were contingent on the company’s ability to operate safely amid worldwide travel and operational issues, including conditions affecting logistics and travel in 2020.
- Related parties: CIC LLC is controlled by Odyssey’s former chairman. The company invoiced CIC $230,871 during Q1 2020 and had related-party receivables of approximately $373,770 at March 31, 2020.
- Contingent obligations: Consultants may receive up to 3.0 million Oceanica shares in total and success fees of up to $700,000 if the Mexican environmental impact assessment is approved and issued. The approval had not occurred as of the filing date.
- Tax position: The company generated additional federal and foreign net operating loss carryforwards during the quarter. It reported approximately $182.4 million of federal and $61.2 million of foreign NOL carryforwards, but recorded a full valuation allowance against deferred tax assets.
Most important facts for investors to verify
- Whether the company can secure sufficient near-term cash to fund operations and address its $51.5 million working capital deficit.
- The status, enforceability, and potential acceleration of matured or near-term debt obligations, particularly the MINOSA, Monaco, 37North, and July 2020 promissory notes.
- The actual amount and timing of further litigation financing, the economic sharing rights granted to the funder, and the potential 50% or 100% internal rates of return if the claim is discontinued or converted to a liability.
- The status and probability of obtaining the Mexican environmental permit and the potential outcome and timing of the NAFTA arbitration.
- The terms and feasibility of the uncompleted MINOSA/Penelope preferred-stock financing, which management identifies as a potential source of liquidity but which is not currently required to close.
- Potential dilution from convertible debt, warrants, restricted stock, and other equity-linked instruments, including the 37North and litigation-financing arrangements.
- The collectability of related-party receivables and the valuation of mineral interests, exploration licenses, and investments in unconsolidated entities.