Odyssey Marine Exploration, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also provides unaudited fourth-quarter 2020 data. Odyssey develops subsea mineral resources and provides marine exploration, project administration, research, and related services. Key projects include the Mexican ExO phosphate project, the Lihir Gold project in Papua New Guinea, and the CIC project.
Financial highlights
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $2.04 million | $3.07 million | Down 34% |
| Operating expenses | $14.67 million | $13.42 million | Up 9% |
| Loss from operations | $12.64 million | $10.35 million | Worsened $2.29 million |
| Net loss | $14.81 million | $10.44 million | Worsened $4.37 million |
| Basic and diluted loss per share | $1.41 | $1.12 | Worsened |
| Net cash used in operating activities | $9.29 million | $5.44 million | Higher use of $3.84 million |
| Cash and cash equivalents at year-end | $6.16 million | $0.21 million | Increased $5.95 million |
| Financial debt, excluding specified fair-value and derivative components | $43.2 million | $33.9 million | Increased $9.3 million |
| Working capital | Deficit of $47.0 million | Not clearly provided in the filing text | Not clearly provided |
Marine services revenue was $1.09 million, down from $1.98 million, while other services revenue was $0.95 million, down from $1.09 million. Two customers represented 71% of 2020 revenue, compared with 91% in 2019.
Operations and research expense increased to $10.92 million from $7.93 million, primarily because of a $4.3 million increase in professional, legal, and other costs associated with the NAFTA arbitration. Marketing, general, and administrative expense declined to $3.75 million from $5.49 million.
Net other expense increased to $8.46 million from $5.15 million, mainly because of higher interest expense, debt extinguishment costs, and fair-value losses on derivative liabilities. No income tax benefit or provision was recorded.
Fourth-quarter 2020
| Metric | Q4 2020 | Q4 2019 |
|---|---|---|
| Revenue | $0.30 million | $0.74 million |
| Gross profit | $0.30 million | $0.74 million |
| Net loss | $2.37 million | $2.27 million |
| Basic and diluted loss per share | $0.17 | $0.24 |
Liquidity, financing, and capital structure
- Operating activities consumed $9.29 million of cash, while financing activities provided $15.24 million; investing activities had no net cash flow.
- In August 2020, Odyssey sold approximately 2.55 million common shares and warrants for net proceeds of approximately $11.3 million. Shares outstanding increased to 12,591,084 at March 8, 2021, from 9,478,009 at December 31, 2019.
- Litigation financing provided substantial funding for the NAFTA claim. The December 31, 2020 carrying value of the litigation-financing note was $10.97 million, with face value of $12.21 million. The amended agreement permits total claims payments of up to $20 million, including up to $10 million for Phase III.
- The company received a $370,400 Paycheck Protection Program loan and a $149,900 SBA Economic Injury Disaster Loan.
- Total liabilities were $69.67 million versus total assets of $11.76 million, producing a total stockholders’ deficit of $57.91 million. Current liabilities were $53.88 million, including $30.62 million of current loans payable and $18.97 million of accrued expenses.
- Several material obligations are past maturity or payable upon demand, including the $14.75 million MINOSA obligation and certain Monaco and other notes. Substantial company assets are pledged as collateral.
Material changes and unusual items
- Revenue declined as a long-term project that began in 2018 reached the end of its expected life; the decline was partially offset by higher marine exploration services.
- NAFTA-related legal and professional costs materially increased operating expenses and interest expense.
- The 37North convertible notes were fully converted into 329,498 common shares during 2020. The company recorded a $0.73 million change in derivative liabilities fair value.
- Debt extinguishment expense was $0.78 million, and litigation-financing debt discounts and fees generated additional interest expense.
- Odyssey issued warrants covering approximately 3.48 million potential common shares at year-end 2020. These instruments, together with restricted stock and options, could materially dilute existing holders if exercised or vested.
- The company invested $0.87 million in the unconsolidated CIC entity during 2020. Its investment in Neptune Minerals had a zero carrying value, with approximately $21.3 million of unrecognized equity-method losses.
Outlook, contingencies, and risks
The central strategic opportunity is the ExO phosphate project offshore Mexico. Mexico’s environmental authority rejected the project’s permit application twice. Odyssey is challenging the rejection in Mexican court and pursuing a NAFTA arbitration claim seeking compensation of more than $2 billion. The first memorial was filed in September 2020, and the hearing was scheduled for January 2022 unless settled earlier. Recovery is uncertain, and the litigation financing agreement can impose significant economic claims or high return obligations if the claim is discontinued or resolved under specified circumstances.
Management stated that the August 2020 equity financing, anticipated cash inflows, and other financing sources were expected to provide operating funds through early 2022. Nevertheless, management and the independent auditor identified substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on additional financing, monetization of mineral interests and receivables, exploration-service income, project partnerships, and potentially the uncompleted MINOSA/Penelope preferred-equity transaction. The financial statements contain no adjustments for a possible failure to continue as a going concern.
- Lihir Gold offshore validation work was planned for 2021, subject to exploration results, environmental studies, and permitting.
- The company has no operating mining revenue and remains principally in the exploration, validation, and project-development stage.
- Key risks include permitting and regulatory uncertainty, environmental and political opposition, uncertain mineral economics and resource data, reliance on financing, customer concentration, dangerous marine operations, asset pledges, potential dilution, and possible Nasdaq delisting if listing requirements are not maintained.
- No dividends are anticipated in the foreseeable future.
Investor verification checklist
- Verify the company’s near-term cash needs, financing availability, and the status of the going-concern uncertainty.
- Review maturity, default, collateral, and demand provisions for the MINOSA, Monaco, SMOM, litigation-financing, and other debt obligations.
- Assess the economic terms, recovery waterfall, and potential contingent liabilities under the NAFTA litigation-financing agreement.
- Track the Mexican environmental-permit litigation, NAFTA arbitration, hearing status, settlement discussions, and any potential recovery.
- Evaluate dilution from outstanding warrants, options, restricted stock, and convertible or demand debt instruments.
- Confirm the status and economics of the Lihir, CIC, ExO, and other mineral projects, including required permits and funding commitments.
- Reconcile related-party services, receivables, investments, and the unconsummated potential CIC transaction.
- Monitor customer concentration and whether marine-service contracts can generate sufficient recurring cash flow.