Odyssey Marine Exploration, Inc. — 2017 Form 10-K Summary
Business context and reporting period
Odyssey is a deep-ocean exploration company focused on seabed mineral exploration, shipwreck cargo recovery, and marine survey and exploration services. Its principal mineral asset is the Don Diego phosphate deposit in Mexican waters, held through Oceanica Resources and Exploraciones Oceanicas. The filing covers the fiscal year ended December 31, 2017; fourth-quarter figures are included in the unaudited quarterly data.
Shipwreck services are primarily performed for Magellan Offshore Services under a cost-plus arrangement, with Odyssey also entitled to 21.25% of net proceeds from monetized recovered cargo. In 2017, a major multi-target shipwreck project completed its search and inspection phase and entered recovery operations.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1.25 million | $4.68 million | Down $3.43 million |
| Operating loss | $8.36 million | $10.55 million | Improved $2.19 million |
| Net loss | $7.76 million | $6.32 million | Worsened $1.44 million |
| Basic and diluted loss per share | $0.95 | $0.84 | Worsened |
| Operating cash flow | $(5.85) million | $(8.31) million | Improved $2.45 million |
| Cash and cash equivalents | $1.11 million | $1.66 million | Down $0.55 million |
| Total assets | $2.97 million | $5.08 million | Down $2.11 million |
| Total liabilities | $40.96 million | $36.19 million | Up $4.77 million |
| Stockholders’ deficit | $(37.98) million | $(31.10) million | Worsened $6.88 million |
Revenue consisted primarily of expedition and marine services revenue of $1.24 million; recovered cargo and other revenue was $11,854. One customer represented 99.0% of 2017 revenue. The filing does not present a meaningful gross margin because expedition costs are recorded in operations and research rather than cost of sales. Operating expenses declined 37% to $9.61 million, driven by lower marine operating costs and reduced personnel and corporate expenses.
Other expense was $2.66 million in 2017, principally interest expense of $2.73 million. The prior year included $3.40 million of derivative fair-value income, which did not recur. No income taxes were recorded. Non-controlling interests reduced consolidated losses by $3.26 million.
Financing activities provided $5.22 million, including $3.0 million borrowed from SMOM and approximately $2.7 million drawn under the MINOSA 2 facility, partially offset by debt repayments. Investing activities provided $80,000, primarily from marine asset sales.
At December 31, 2017, current liabilities were $33.31 million against current assets of $1.85 million, producing a working-capital deficit of approximately $31.5 million. Loans payable totaled $27.36 million, including $24.36 million classified as current. The company also had $4.64 million of deferred income and revenue participation rights.
Material changes versus the prior comparable period
- Revenue declined 73% because 2016 included a larger marine survey contract and shipwreck exploration activity, while 2017 primarily reflected Magellan shipwreck work.
- Operations and research expense fell from $8.27 million to $3.44 million, largely because the Odyssey Explorer had been sold in 2016 and related vessel costs did not recur.
- Marketing, general and administrative expense declined from $7.96 million to $6.17 million, mainly due to lower personnel and share-based compensation costs.
- The 2016 $0.99 million gain on marine asset sales did not recur in 2017; however, a marine vessel sold to a related party in 2017 generated $650,000 of debt reduction.
- Epsilon converted approximately $3.35 million of principal and accrued interest into 670,455 common shares in April 2017. Common shares outstanding increased to 8,466,909 at year-end from 7,718,366.
- Debt increased despite the Epsilon conversion. At year-end, MINOSA held $14.75 million of legacy debt, MINOSA 2 held $4.68 million, SMOM held $3.0 million, Epsilon held $1.0 million, and Monaco-related loans totaled approximately $3.94 million.
Guidance, outlook, risks and unusual items
Management states that 2018 operations require new cash inflows from monetizing receivables and mineral interests, obtaining financing, syndicating projects, or entering partnerships. If those inflows are insufficient, management expects to follow a contingency plan involving reduced expenses and fewer projects. The filing provides no quantitative revenue or earnings guidance.
The Don Diego project remains strategically important but requires an environmental permit before commercial phosphate extraction can begin. The permit application had previously been denied; subsequent to year-end, on March 21, 2018, a Mexican federal administrative court nullified that denial. The filing indicates that further permitting steps remain necessary.
The company’s auditors and management identified substantial doubt about its ability to continue as a going concern. Cash of $1.1 million was described as insufficient to fund the next 12 months, most assets were pledged as collateral, and the planned $101 million Penelope preferred-equity financing remained contingent; MINOSA and Penelope were not obligated to complete that investment.
Material risks include recurring losses, dependence on financing and a small number of customers, debt repayment and conversion demands, pledged assets, uncertain mineral economics, environmental permitting, legal and political challenges, operational hazards, uncertain recovery values, and potential dilution from convertible debt, warrants and other equity-linked instruments.
In the first quarter of 2018, the company sold marine assets to Magellan for approximately $1.6 million, consisting of $1.0 million in cash and approximately $0.6 million of assumed debt. Management expected an approximately $1.5 million gain in 2018. The company also regained NASDAQ market-capitalization compliance on March 7, 2018 after receiving a deficiency notice in November 2017.
Important facts for investors to verify
- Whether the Don Diego environmental permit ultimately becomes effective and enables commercial development.
- Whether MINOSA, Monaco, Epsilon and SMOM demand repayment, convert debt, or enforce collateral rights.
- Whether the Penelope preferred-equity financing closes and how its conditions, liquidation preference and conversion terms affect existing shareholders.
- Whether Magellan’s shipwreck recovery project generates material net proceeds beyond cost-plus service revenue.
- Whether the company can replace its 99%-concentrated 2017 customer revenue and generate positive operating cash flow.
- The amount and timing of any dilution from convertible notes, the 120,000-share warrant, restricted awards and other equity-linked arrangements.
- Whether the company maintains NASDAQ listing compliance and secures sufficient liquidity to address its approximately $31.5 million working-capital deficit.