Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The company provides marine exploration, shipwreck search and recovery, expedition charter, research, and related services, while pursuing subsea mineral exploration projects. Its principal strategic mineral project involves a phosphate deposit offshore Mexico; it also provides services to third parties and related parties, including CIC, LLC, which is controlled by the chairman of the board.
There were 9,222,199 common shares outstanding as of May 3, 2019. The company is a smaller reporting company listed on the Nasdaq Capital Market under OMEX.
Financial Highlights
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $794,927 | $511,735 | Up 55% |
| Operating expenses | $3,030,693 | $2,468,975 | Up 23% |
| Loss from operations | $(2,235,766) | $(1,957,240) | Loss increased 14% |
| Net loss before non-controlling interest | $(2,366,407) | $(2,641,384) | Loss improved 10% |
| Net loss attributable to the company | $(1,167,886) | $(1,744,762) | Loss improved 33% |
| Basic and diluted loss per share | $(0.13) | $(0.21) | Improved |
| Net cash used in operating activities | $(1,461,613) | $(2,009,636) | Use decreased |
| Cash and cash equivalents at period end | $1,218,116 | $1,363,063 | Down 11% |
Recovered cargo sales and other revenue increased to $282,178 from $15,738, while expedition revenue was $512,749 versus $495,997. Operations and research expense increased by $700,575, primarily from marine labor and approximately $600,000 of legal fees related to the Mexican environmental-permitting effort. Marketing, general and administrative expense declined by $138,857.
The operating margin was approximately negative 281% in Q1 2019, compared with negative 383% in Q1 2018. Net margin attributable to the company was approximately negative 147%, compared with negative 341% in the prior-year quarter. These margins are not directly comparable to a conventional operating business because the company recognizes substantial project-related costs while revenue is intermittent.
Other income and expense was a net expense of $130,641, compared with a net expense of $684,144 in Q1 2018. The improvement included $828,644 of other income arising from the cancellation of the Cambridge project and the related reclassification of revenue participation rights. Interest expense increased to $959,285 from $710,490.
Financial Condition, Cash Flow, Debt and Liquidity
- Total assets were $3.6 million at March 31, 2019, down from $5.5 million at December 31, 2018. Cash and unrestricted cash totaled approximately $1.2 million; restricted cash was $10,135.
- Total liabilities were $47.1 million, including $29.6 million of current loans payable, $10.6 million of accrued expenses, and $3.1 million of accounts payable.
- Stockholders’ deficit was $43.5 million, compared with $41.2 million at year-end 2018. The company reported a working capital deficit of approximately $40.7 million.
- Cash declined by $1.6 million during the quarter. Operating cash use was $1.5 million, investing cash use was $2,500, and financing cash use was $104,603.
- Financial debt, excluding derivative and beneficial-conversion-feature components, was approximately $30.4 million. Major balances included $14.75 million owed to MINOSA, $5.05 million owed under the MINOSA 2 arrangement, $3.5 million owed to SMOM, and $3.98 million owed under the two Monaco notes.
- Several debt obligations were matured or payable upon demand, including the Monaco notes, the MINOSA debt, the Epsilon balance, and the $1.1 million Monaco 2018 note due April 20, 2019. The $3.5 million SMOM loan matured May 3, 2019, and the $1.05 million secured convertible notes were due July 12, 2019.
- The majority of the company’s remaining assets were pledged to lenders, limiting its ability to raise funds through additional secured borrowing. Approximately $989,135 of cash was uninsured at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased $283,192, primarily from higher recovered cargo sales and other revenue and continued expedition activity.
- Operating expenses increased $561,718, with operations and research costs more than offsetting lower administrative costs.
- Net loss attributable to Odyssey improved by $576,876, principally because of the $828,644 other-income benefit related to cancellation of the Cambridge project, despite higher interest expense and operating costs.
- Operating cash use improved by $548,023, but cash still fell materially because the quarter did not include the prior-year $1.0 million marine-asset sale proceeds or the prior-year debt proceeds.
- The company invested $220,492 in CIC, LLC-related equity consideration and reported a $973,159 carrying value for its unconsolidated CIC investment at quarter-end. CIC is controlled by the chairman, creating related-party exposure.
- The company’s Cambridge project was unilaterally cancelled by the British Government during the quarter, eliminating $825,000 of related deferred revenue participation rights and producing the reported other income.
Guidance, Outlook, Risks and Unusual Items
The filing provides no quantitative revenue or earnings guidance. Management stated that future liquidity depends on monetizing mineral-exploration interests and receivables, generating expedition and marine-services revenue, obtaining financing or strategic partnerships, and potentially completing the long-standing MINOSA/Penelope preferred-equity transaction. MINOSA and Penelope were not obligated to complete the proposed preferred-stock investment at the filing date.
Management explicitly stated that unrestricted cash of approximately $1.2 million was insufficient to support operations for the following twelve months and that the circumstances raised substantial doubt about the company’s ability to continue as a going concern. The company expects to curtail expenses and reduce planned activities if new cash inflows are insufficient. The financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
The Mexican phosphate project remains dependent on obtaining an environmental permit. SEMARNAT had again refused approval in October 2018 despite a 2018 court ruling favorable to the company. Odyssey filed a notice of intent under NAFTA in January 2019 and a notice of arbitration on April 5, 2019. In April 2019, a Mexican administrative court indicated that the company’s current application would need to be resubmitted in a different form. The permit, litigation, arbitration, and related legal expenses remain significant uncertainties.
On April 9, 2019, the company entered into an agreement to acquire an 80% interest in a South Pacific subsea mineral company from Seabed Capital, LLC in exchange for up to 250,000 Odyssey shares and a potential 2.5% net smelter royalty. The filing does not provide a completed valuation or closing status for this transaction.
Other material risks include substantial accumulated deficits, demand or acceleration risk under matured debt, lender security interests over key assets and subsidiaries, dependence on related-party customers and lenders, potential dilution from convertible debt and warrants, collectability of related-party receivables, and the contingent liability associated with a vendor debt assumed by Magellan for which Odyssey remains a guarantor.
The company reported no current litigation, no off-balance-sheet financing arrangements, and no debt obligations with variable interest rates. Management concluded that disclosure controls and procedures were effective as of March 31, 2019.
Investor Verification Checklist
- Verify the company’s near-term funding plan, including actual collections, new financing, asset monetizations, and the status of the MINOSA/Penelope preferred-equity transaction.
- Confirm the post-quarter status and payment or restructuring terms of the matured and near-term debt obligations.
- Track the Mexican environmental-permitting proceedings, NAFTA arbitration, and the potential financial effect of delays or an adverse outcome.
- Assess the collectability and concentration of related-party receivables, particularly the approximately $614,123 owed by Monaco and amounts owed by CIC.
- Evaluate the economics, closing conditions, share dilution, and royalty obligations associated with the April 9, 2019 Seabed transaction.
- Reconcile the reported other income from the cancelled Cambridge project and determine whether any future project revenue participation obligations remain.
- Review potential dilution from convertible debt, warrants, and other equity-linked instruments relative to the 9.2 million common shares outstanding.