Odyssey Marine Exploration, Inc. — 2020 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Odyssey provides marine exploration, research, project management and search-and-recovery services and is pursuing subsea mineral projects, including phosphate development in Mexico and exploration in Papua New Guinea.
The company remains dependent on financing, monetization of mineral interests, project revenue, collections and potential environmental-permit progress. Management disclosed substantial doubt about the company’s ability to continue as a going concern.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $0.2 million | $0.8 million | $1.7 million | $2.3 million |
| Operating loss | $4.7 million | $3.5 million | $11.6 million | $8.2 million |
| Net loss attributable to Odyssey | $5.4 million | $4.2 million | $12.4 million | $8.2 million |
| Loss per share | $0.51 | $0.45 | $1.26 | $0.88 |
| Cash used in operating activities | Not separately presented | Not separately presented | $5.5 million | $3.7 million |
| Cash at period end | Not separately presented | Not separately presented | $9.1 million | $0.3 million |
Operating margins were deeply negative: approximately negative 2,213% in Q3 and negative 667% for the first nine months, based on reported revenue and operating loss. Revenue declined primarily because a long-term project reached the end of its expected life. Operations and research costs increased substantially due to NAFTA litigation spending.
At September 30, 2020, total assets were $14.0 million, including $9.1 million of cash. Total liabilities were $70.7 million, and total stockholders’ deficit was $56.6 million. Working capital deficit was $48.8 million.
Reported loans payable totaled $40.2 million, including $32.1 million classified as current and $8.1 million as long-term. Management separately reported financial debt, excluding certain derivative, hybrid-debt and beneficial-conversion-feature components, of approximately $39.0 million.
Material changes versus the prior comparable period
- Revenue decreased 72% in Q3 and 25% for the first nine months.
- Q3 operations and research expense increased 129%, while nine-month expense increased 92%, primarily from litigation-related professional fees and other costs.
- Marketing, general and administrative expense declined 99% in Q3 and 46% year to date, mainly because discretionary incentives were not paid and share-based compensation declined.
- Net loss increased 29% in Q3 and 52% year to date.
- Interest and other expense increased, including litigation-financing interest, a $0.7 million nine-month fair-value loss on a hybrid debt instrument and approximately $0.8 million of debt-extinguishment loss.
- Cash increased by $8.9 million during the first nine months, primarily from $11.3 million of net equity proceeds, litigation financing, other debt proceeds and SBA loans, partially offset by operating cash burn.
- On August 21, 2020, Odyssey issued 2,553,314 common shares and warrants for up to 1,901,989 additional shares, generating $11.3 million of net proceeds. Shares outstanding increased to 12,208,101 as of October 31, 2020.
Guidance, outlook, risks and unusual items
- Management expected the August equity financing and anticipated cash inflows to fund operations through early 2022, but stated that this outlook depends on additional financing, asset monetization and operating success.
- The company’s contingency plan would require curtailed spending and fewer projects if cash inflows become insufficient.
- The Mexican phosphate project requires environmental approval. ExO’s case challenging SEMARNAT’s denial remained pending before Mexico’s federal administrative court. Odyssey also filed its first NAFTA arbitration memorial on September 4, 2020.
- Litigation financing carried significant economic costs. As of September 30, 2020, the funder had provided $2.0 million of arbitration support funds, with a $9.1 million face-value obligation reported for the financing arrangement. If specified conditions occur, funding may convert into senior secured debt bearing a 50% annualized return, increasing to 100% after certain periods.
- Several loans were matured, payable on demand or dependent on lender waivers or renegotiation, including the $14.75 million MINOSA loan and Monaco borrowings. Most remaining assets were pledged to lenders, limiting additional secured borrowing capacity.
- Bismarck planned offshore exploration in Papua New Guinea during 2021, subject to safe and practical operating conditions. Its exploration-license renewal was expected in the first quarter of 2021.
- The company had approximately $185.0 million of federal and $53.2 million of foreign tax-loss carryforwards, but reported a zero net deferred tax asset because of a full valuation allowance.
- COVID-related financing included a $0.4 million PPP loan and a $0.1 million SBA EIDL loan. PPP forgiveness remained subject to application and approval.
- Related-party activity included services provided to CIC, a company controlled by Odyssey’s former chairman. Odyssey invoiced CIC $0.5 million during the first nine months and held a $2.2 million investment in CIC at September 30, 2020.
Most important facts for investors to verify
- Whether the company can fund operations beyond the stated early-2022 expectation without additional dilution or high-cost debt.
- The status and likely timing of the Mexican environmental permit, court proceedings and NAFTA arbitration, including potential proceeds and litigation-financing obligations.
- Current maturity, demand and default status of the MINOSA, Monaco, litigation-financing, 37North and other debt instruments.
- The full dilution potential from outstanding convertible debt, warrants and the August 2020 equity offering.
- Whether Bismarck’s exploration-license renewal and planned 2021 operations occur as expected.
- The collectability and valuation of related-party receivables, investments and mineral-project interests, including the company’s disclosed unrecognized share of approximately $21.3 million of Neptune Minerals equity-method losses.
- The going-concern disclosure, working capital deficit, pledged assets and any subsequent financing or lender actions after September 30, 2020.