Business Context and Reporting Period
Odyssey Marine Exploration, Inc. is a smaller reporting company focused on deep-sea mineral exploration, marine services, exploration projects and related litigation. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. The company reported 14,292,028 common shares outstanding as of November 1, 2021.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $197,051 | $211,538 | $671,061 | $1,737,019 |
| Operating loss | $(3,171,194) | $(4,680,331) | $(10,915,208) | $(11,575,856) |
| Net loss attributable to Odyssey | $(4,085,297) | $(5,448,046) | $(10,033,014) | $(12,444,644) |
| Basic and diluted loss per share | $(0.31) | $(0.51) | $(0.77) | $(1.26) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(4,136,549) | $(5,520,730) |
- Q3 revenue was essentially flat year over year. Nine-month revenue declined 61%, primarily because prior-year expedition and marine search engagements did not recur.
- Q3 operating expenses fell to $3.4 million from $4.9 million, mainly because litigation-related operating costs declined by approximately $3.2 million. Nine-month operating expenses declined to $11.6 million from $13.3 million, despite a $2.0 million increase in marketing, general and administrative expense.
- Interest expense increased to $7.9 million for the nine months from $4.8 million, principally because of NAFTA litigation financing.
- Cash and cash equivalents were $3.54 million at September 30, 2021, down from $6.16 million at December 31, 2020. Total assets were $9.40 million, while total liabilities were $77.35 million.
- Working capital deficit was $57.2 million. Current liabilities included $29.4 million of accrued expenses and $28.9 million of current loans payable.
- Total loans payable were $44.7 million at September 30, 2021, compared with $42.6 million at December 31, 2020. Accrued interest associated with financings was $25.2 million.
- Total stockholders’ deficit was $67.9 million, compared with $57.9 million at year-end 2020.
- Cash flow from financing activities was $1.53 million, including $1.28 million of note proceeds and $0.71 million from the sale of subsidiary equity, partially offset by debt and lease payments.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue decreased by $1.07 million, or approximately 61%, due to the completion or absence of several prior-year marine and expedition projects.
- Nine-month net loss attributable to Odyssey improved by $2.41 million, although the company remained substantially unprofitable.
- Marketing, general and administrative expense increased by $2.02 million for the nine months, including higher compensation and $0.94 million of share-based compensation versus $0.32 million in the prior-year period.
- Operations and research expense declined by $3.75 million, primarily due to lower NAFTA litigation costs and reduced marine-services labor.
- The company recognized $374,835 of gain on debt extinguishment in 2021, compared with a $777,484 loss in 2020. The 2021 gain primarily reflected forgiveness of the $370,400 Paycheck Protection Program loan, which was forgiven in full effective July 1, 2021.
- Deferred revenue participation liabilities of $3.82 million were removed from the balance sheet after the related projects were abandoned or terminated, producing other income.
- Convertible debt totaling $1.33 million, including accrued interest, was converted into 283,850 common shares in July 2021. Earlier in 2021, Epsilon converted approximately $1.45 million of debt into 411,562 shares.
Outlook, Risks, Contingencies and Unusual Items
- Going concern: Management stated that recurring losses, negative operating cash flow, the large working capital deficit, limited unpledged assets and dependence on financing, asset monetization, project proceeds and litigation recoveries raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no going-concern adjustment.
- Liquidity outlook: Management indicated that prior financing proceeds and anticipated cash inflows were expected to fund operations through early 2022, but additional cash inflows remain necessary. The contingency plan would involve reduced expenses and fewer projects.
- NAFTA arbitration: Odyssey is pursuing a claim against Mexico relating to the ExO phosphate project and seeks more than $2 billion in damages. The hearing was scheduled for January 2022 unless settled earlier. Litigation financing availability was increased to as much as $25 million, but the financing carries significant repayment and proceeds-sharing obligations if the claim is discontinued, an environmental permit is granted, or proceeds are received.
- Potential litigation settlement proceeds: The company expected net proceeds exceeding $3.0 million from settlement of a previously completed shipwreck matter, but no gain was recorded because the contingency had not been resolved as of September 30.
- Subsequent Monaco settlement: On October 4, 2021, Odyssey agreed with Monaco and related parties to cancel approximately $14.5 million of debt, including accrued interest, in exchange for 984,848 shares valued at $6.5 million and $3.0 million of cash, of which $0.5 million was paid at signing. Monaco could elect to receive the remaining $2.5 million in stock. The company was still determining the accounting treatment as of the filing.
- Project development: The Lihir Gold Project received a Papua New Guinea permit extension, with offshore exploration planned for late 2021 subject to COVID-19 and other constraints. The CIC project and a proposed Antigua and Barbuda seabed-mineral program remain dependent on future development, agreements, permits and financing.
- Concentration and related parties: Revenue included $671,061 of services invoiced to CIC during the first nine months. CIC is controlled by Odyssey’s former chairman, and the related-party receivable was $252,688 at September 30.
- Tax position: The company generated an estimated $11.6 million federal net operating loss during the first nine months and had approximately $208 million of federal and $66.8 million of foreign NOL carryforwards. A full valuation allowance resulted in a zero net deferred tax asset and a 0% effective tax rate.
- Dilution risk: Numerous options, warrants, convertible instruments and settlement obligations could result in additional common shares. Potential shares were excluded from diluted EPS because they were antidilutive.
Most Important Facts for Investors to Verify
- Confirm the final accounting, cash impact and share issuance associated with the October 2021 Monaco settlement and the resulting reduction in debt.
- Monitor cash balances, operating cash burn, accrued expenses, debt maturities, creditor demands and the availability of additional financing after early 2022.
- Track the status, funding requirements, hearing schedule and potential proceeds-sharing obligations of the NAFTA arbitration.
- Assess the likelihood and timing of the anticipated shipwreck settlement proceeds; no amount was recognized at September 30, 2021.
- Review the terms and potential dilution from outstanding warrants, convertible debt, preferred-stock commitments and settlement shares.
- Evaluate related-party service revenue and receivables from CIC, including the company’s ability to collect cash or accept equity in payment.
- Verify regulatory, environmental and permitting milestones for the ExO phosphate, Lihir Gold, CIC and Antigua and Barbuda projects.