Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business context and reporting period
Odyssey Marine Exploration, Inc. is a smaller reporting company focused on subsea mineral exploration, marine services, project management and related investments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, filed August 15, 2022. The company’s principal projects include the Mexican ExO phosphate project, the Lihir Gold Project in Papua New Guinea, the CIC Cook Islands exploration project, prospective South American phosphate licenses and other developing seabed-mineral opportunities.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $0.39 million in 2022 versus $0.18 million in 2021 | $0.69 million versus $0.47 million |
| Operating loss | $3.13 million versus $4.95 million | $9.81 million versus $7.74 million |
| Net loss attributable to Odyssey | $4.68 million, or $0.30 per share, versus $2.23 million, or $0.17 per share | $12.91 million, or $0.86 per share, versus $5.95 million, or $0.46 per share |
| Operating cash flow | Not presented for the quarter | $(2.67) million versus $(2.84) million |
| Cash and equivalents | $10.53 million at June 30, 2022, versus $2.27 million at December 31, 2021 | |
| Total debt carrying value | $44.56 million at June 30, 2022, versus $41.26 million at December 31, 2021 | |
| Working capital | Deficit of approximately $45.9 million at June 30, 2022 |
Revenue was generated primarily from marine research, technical support and project administration services, substantially involving related party CIC Limited. Revenue represented a very small portion of operating expenses. The filing does not present a separate gross margin; operating margin was materially negative.
Six-month operating expenses increased to $10.50 million from $8.22 million. Marketing, general and administrative expense increased 48.5% to $4.21 million, while operations and research expense increased to $6.29 million. Net interest expense was $6.78 million for the six months, compared with $5.01 million in the prior-year period.
Financing activities provided $11.25 million during the first six months, including $16.51 million of common-stock proceeds and $2.20 million of loan proceeds, partially offset by $5.07 million of debt repayments, $1.79 million of offering costs and $0.52 million related to withheld stock-based awards. Investing activities used $0.31 million, primarily for property and equipment.
Material changes versus the prior comparable period
- Six-month revenue increased approximately 45.5% to $0.69 million, but the six-month net loss more than doubled to $12.91 million.
- Six-month operating expenses increased approximately $2.28 million, primarily due to higher administrative, legal, compensation, insurance, concession-permit and marine-service costs.
- Interest expense increased by approximately $1.77 million year over year, driven principally by litigation financing.
- The prior-year periods included approximately $3.8 million of other income from cancellation of revenue participation rights; no comparable benefit occurred in 2022.
- Cash increased by $8.26 million as a result of equity financing, despite operating and investing cash usage.
- Shares outstanding increased substantially; 19,464,950 shares were issued and outstanding at June 30, 2022, compared with 14,309,315 at December 31, 2021. The filing reports 19,486,906 shares outstanding as of July 31, 2022.
Guidance, outlook, risks and unusual items
Management provided no quantitative revenue or earnings guidance. It stated that the 2022 business plan requires additional cash inflows from financings, monetization of receivables and equity interests, exploration-charter income, partnerships or other transactions. Management expects the June 2022 financing proceeds, together with anticipated inflows, to fund operations through 2022, but stated that expenses may need to be curtailed if cash becomes insufficient.
The financial statements include a going-concern qualification. Management stated that continued operations depend on future financing, successful development or monetization of mineral interests, collection of receivables, exploration-charter income or completion of the MINOSA/Penelope transaction. Penelope is not currently obligated to make its proposed preferred-stock investment, and the transaction is dependent in part on approval of an environmental impact assessment for the Mexican phosphate project.
Odyssey is pursuing a NAFTA arbitration claim against Mexico seeking more than $2 billion related to the rejection of environmental approvals for the ExO project. The tribunal hearing occurred in January 2022, a final witness testified in May 2022, and written closing arguments were expected in late August 2022. The timing and outcome of the arbitration remain uncertain. Litigation funding is generally payable from specified recoveries or upon specified project outcomes, but it has increased the company’s reported debt and interest expense.
At June 30, 2022, accrued interest associated with financings was approximately $28.06 million, included in accrued expenses. Consultants may receive contingent success fees of up to $0.70 million upon approval and issuance of the Mexican EIA. The company reported no defendant litigation contingency requiring recognition and no material market-risk exposure or variable-rate debt.
The filing discloses a subsequent common-stock and warrant financing of 4,939,515 shares and warrants for the same number of shares, with net proceeds of approximately $14.7 million after $1.8 million of offering expenses. However, the filing contains inconsistent dates for this transaction, referring to June 10 in the going-concern and MD&A discussion and July 10 in Note I; the correct date should be verified.
Important facts for investors to verify
- Whether the approximately $10.5 million of cash and subsequent financing proceeds are sufficient to address the $45.9 million working-capital deficit and near-term obligations.
- The maturity, repayment terms, accrued interest and potential equity dilution associated with MINOSA debt, litigation financing, 37North and other borrowings.
- The status, funding terms and enforceability of the MINOSA/Penelope proposed equity financing, noting that Penelope has no current obligation to invest.
- The procedural status, remaining costs, funding structure and probability and timing of recovery in the NAFTA arbitration.
- The status of the Mexican EIA, the potential $0.70 million contingent success fee and the commercial viability of the ExO project.
- The related-party nature of CIC revenue and receivables, including the company’s equity interest and service arrangements.
- The date and terms of the 4,939,515-share financing and associated warrants, given the filing’s inconsistent June 10 and July 10 references.
- Potential dilution from outstanding warrants, options, restricted stock awards and future equity financings.