Business Context and Reporting Period
Odyssey Marine Exploration, Inc. (NASDAQ: OMEX) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company develops subsea mineral exploration projects and provides marine research, technical, project-management and related services. Its principal projects include the Mexican ExO phosphate project, the Lihir Gold project in Papua New Guinea, the CIC Cook Islands project and a proposed South American phosphate joint venture.
Odyssey is a smaller reporting company. The filing was signed November 14, 2022, and reported 19,507,469 common shares outstanding as of October 25, 2022.
Financial Results and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $358,409, versus $197,051 in 2021 | $1,048,293, versus $671,061 in 2021 |
| Operating expenses | $4,078,398, versus $3,368,245 | $14,575,145, versus $11,586,269 |
| Loss from operations | $3,719,989 | $13,526,852 |
| Net loss attributable to Odyssey | $5,455,229, or $0.28 per share | $18,368,943, or $1.11 per share |
| Net cash used in operating activities | Not separately presented | $6,032,172, versus $4,136,549 used in 2021 |
| Cash and cash equivalents | $6,782,608 at September 30, 2022, versus $2,274,751 at December 31, 2021 | |
| Total debt carrying value | $44,638,614 at September 30, 2022, versus $41,257,007 at December 31, 2021 | |
| Working capital | Deficit of approximately $53.1 million at September 30, 2022 |
Revenue increased 82% year over year in the quarter and 56% for the nine-month period, but remained small relative to expenses. Approximate operating margins were negative 1,038% for the quarter and negative 1,291% for the nine-month period. Interest expense was $3.7 million in the quarter and $10.4 million for the nine months, compared with $2.9 million and $7.9 million, respectively, in the prior-year periods.
Marine services generated $893,058 of nine-month revenue, while operating and other revenue generated $155,235. The company reported no income tax benefit or provision. Non-controlling interests reduced the consolidated loss attributable to Odyssey by $1.9 million in the quarter and $5.7 million for the nine months.
Cash Flow, Liquidity and Capital Structure
- Operating cash use increased to $6.0 million for the nine months, primarily reflecting the net loss, investment in an unconsolidated entity and working-capital changes associated largely with NAFTA litigation.
- Investing cash use was $316,823, primarily for property and equipment.
- Financing activities provided $10.9 million, including $16.5 million from common-stock issuance and $2.2 million of loan proceeds, partly offset by $5.4 million of debt payments, $1.8 million of offering costs and $563,268 used to repurchase stock-based awards withheld for taxes.
- On July 10, 2022, the company sold 4,939,515 shares and warrants to purchase an additional 4,939,515 shares at an exercise price of $3.35 per share. Net proceeds were approximately $14.7 million after $1.8 million of offering costs. The warrants are exercisable from December 10, 2022 through June 10, 2027.
- Debt included $24.2 million of litigation financing, $14.75 million of MINOSA debt, $5.05 million of additional MINOSA debt, a $149,900 emergency disaster loan and a $484,009 vendor note. Monaco and 37North balances were repaid during 2022.
- Accrued interest included in accrued expenses was $31.6 million at September 30, 2022, versus $21.9 million at December 31, 2021. Total accrued expenses were $37.7 million, and total current liabilities were $60.7 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased by $161,358, while nine-month revenue increased by $377,232.
- Quarterly operating expenses increased 21.1%, and nine-month operating expenses increased 25.8%, reflecting higher compensation, professional and legal fees, insurance, permit fees and marine services.
- Quarterly net loss attributable to Odyssey increased 33.5%, and nine-month net loss increased 83.1%.
- Nine-month other expense increased by $6.8 million, primarily because of higher interest expense related to litigation financing, a $300,000 loan prepayment premium and the absence of the prior-year $3.8 million recognition of deferred income and $374,835 debt-extinguishment gain.
- Total stockholders’ deficit increased from $62.5 million at December 31, 2021 to $70.9 million at September 30, 2022. Common shares outstanding increased from 14.3 million at year-end 2021 to 19.5 million at September 30, 2022, before considering potential warrant dilution.
- All reported revenue was invoiced to CIC Limited, a related party. Odyssey had a $422,653 related-party receivable at September 30, 2022 and a $4.1 million investment in CIC.
Outlook, Management Commentary, Risks and Unusual Items
Management stated that operating results are not necessarily indicative of full-year results and provided no quantitative revenue or earnings guidance. Management expects the CIC project to continue offshore exploration and research, reported positive early sampling and equipment-testing results, and expects Odyssey’s current CIC equity position to be approximately 14.12%, with potential to earn additional equity through services.
The ExO project remains dependent on environmental approval in Mexico. Odyssey’s NAFTA arbitration claim seeks more than $2 billion from Mexico. The evidentiary phase closed after post-hearing briefs were filed in September 2022, but the timing and outcome of the Tribunal’s decision are uncertain. Litigation financing is largely contingent on receiving proceeds or obtaining the environmental permit.
Management expressly stated that conditions raise substantial doubt about the company’s ability to continue as a going concern. The company had $6.8 million of unrestricted cash, a $53.1 million working-capital deficit and $44.6 million of debt at September 30, 2022. Continued operations depend on additional financings, monetization of receivables and equity interests, exploration-charter income, collections, partnerships or completion of the MINOSA/Penelope equity transaction. MINOSA and Penelope are not currently obligated to make the proposed preferred-stock investment, and the transaction depends substantially on the Mexican EIA process.
If cash inflows are insufficient, management expects to curtail expenses and planned projects. The filing states that the financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
- Up to $700,000 of contingent consultant success fees may become payable upon approval and issuance of the Mexican subsidiary’s EIA; the EIA had not been approved as of the filing.
- The company reported no defendant litigation contingency requiring accrual, but the NAFTA arbitration remains a significant contingent asset and source of potential funding.
- The company adopted ASU 2020-06 effective January 1, 2022. Management reported no material changes in critical accounting estimates and no material market-risk exposure; its debt had no variable interest rates.
- Revenue concentration, related-party transactions, permitting and regulatory approvals, project execution, mineral-resource uncertainty, litigation outcomes, financing availability and substantial debt obligations are significant risks.
Investor Verification Checklist
- Verify the company’s near-term liquidity, debt maturities, accrued interest and ability to fund operations after 2022.
- Review the going-concern disclosure and determine whether additional equity or debt financing is available on acceptable terms.
- Track the NAFTA arbitration timetable, potential recovery, litigation-financing repayment terms and any related restrictions on proceeds.
- Confirm the status and probability of the Mexican EIA and the proposed MINOSA/Penelope equity financing.
- Assess the economic substance and collectability of CIC-related revenue, receivables and the $4.1 million investment in CIC.
- Evaluate dilution from the 4.94 million warrants issued in 2022, other outstanding warrants, options and restricted stock awards.
- Compare project claims and anticipated economics with independently verified resource, permitting, environmental, capital-expenditure and operating-cost information.