Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company focuses on deep-ocean mineral exploration and development, shipwreck cargo recovery, and marine survey and exploration services. Its principal mineral project is a phosphate deposit offshore Mexico held through controlled subsidiaries. Revenue is primarily generated from marine equipment, vessel, and exploration services.
The filing also provides unaudited fourth-quarter 2018 results. The company had 17 full-time employees at year-end and its common stock traded on the NASDAQ Capital Market under OMEX.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Revenue | $3.276 million | $1.248 million |
| Operating loss | $6.067 million | $8.357 million |
| Net loss | $5.172 million | $7.759 million |
| Basic and diluted loss per share | $0.60 | $0.95 |
| Cash flow from operations | $(6.452) million | $(5.851) million |
| Cash flow from investing | $0.994 million | $0.080 million |
| Cash flow from financing | $7.137 million | $5.216 million |
| Year-end cash and equivalents | $2.787 million | $1.108 million |
| Total assets | $5.473 million | $2.972 million |
| Loans payable | $29.449 million current | $24.363 million current |
| Total stockholders' deficit | $(41.197) million | $(37.983) million |
Fiscal 2018 revenue increased 162% year over year, while operating expenses declined approximately 3% to $9.343 million. Based on reported figures, the operating margin was approximately negative 185% and the net margin was approximately negative 158%. Interest expense was $3.142 million, compared with $2.727 million in 2017. No income tax expense or benefit was recorded.
Fourth-quarter 2018 revenue was $804,212 and the net loss was $1.477 million, or $0.16 per basic and diluted share. Fourth-quarter 2017 revenue was zero and the net loss was $1.392 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $2.027 million, primarily from $1.0 million of additional Magellan marine recovery work and $1.0 million of new mineral-services revenue from CIC, LLC.
- Marketing, general, and administrative expense declined by $0.513 million, mainly because of lower personnel and admiralty legal costs.
- Operations and research expense increased by $0.250 million as higher marine-service and mineral-support costs offset a $0.898 million gain on the sale of marine equipment.
- Net loss improved by $2.587 million, although the company remained significantly unprofitable and continued to consume cash from operations.
- Cash increased by $1.679 million, but this resulted primarily from financing and asset-sale proceeds rather than operating cash generation.
- Financial debt, excluding derivative or beneficial-conversion components as described by management, increased from approximately $27.4 million to $30.4 million. The balance sheet reported $29.449 million of current loans payable and no long-term loans payable at year-end.
- In October 2018, the company issued 700,000 common shares and warrants for approximately $4.6 million of net proceeds. Common shares outstanding increased from 8.467 million at year-end 2017 to 9.222 million at year-end 2018.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal revenue or earnings guidance. Management stated that the 2019 business plan requires new cash inflows from monetizing receivables and mineral-company interests, financings, syndications, or partnership opportunities. If those sources are insufficient, management expects to implement a contingency plan involving curtailed expenses and fewer planned projects.
The company disclosed substantial doubt about its ability to continue as a going concern. Unrestricted cash of $2.8 million was described as insufficient to fund operations for the following twelve months, and working capital was in deficit by approximately $37.4 million. The audited financial statements were prepared assuming continued operations and contain no adjustments for the possible effects of failure to continue as a going concern.
- The Mexican environmental permit for the phosphate project remains a central dependency. Although a Mexican court nullified SEMARNAT's 2016 denial, SEMARNAT again refused approval in October 2018. ExO sought sanctions and enforcement of the court order.
- The $14.75 million MINOSA obligation and other debt are secured by substantial company assets, including interests in Oceanica and subsidiaries. Several loans were matured, callable on demand, or subject to default interest provisions.
- Monaco-related loans totaling approximately $3.975 million were past maturity and carried an 18% default interest rate pending negotiations for new maturity dates. The company also had a $1.1 million Monaco 2018 loan due April 20, 2019, a $3.5 million SMOM loan maturing May 3, 2019, and $1.05 million of secured convertible notes due July 12, 2019.
- The company depends heavily on a limited customer base: two customers represented 97% of 2018 revenue, compared with one customer representing 99% in 2017. Monaco and related affiliates accounted for approximately $2.2 million of 2018 revenue and owed the company $612,498 at year-end.
- Related-party arrangements include services to CIC, LLC, a company controlled by the chairman, with $954,764 invoiced during 2018, partly settled or expected to be settled through equity.
- The company recognized a $52.7 million valuation allowance against deferred tax assets and had approximately $167.4 million of federal net operating loss carryforwards.
- In January 2019, the United Kingdom Ministry of Defense finalized cancellation of the HMS Sussex agreement due to force majeure. The filing also describes revenue participation rights totaling $4.644 million that could reduce future project proceeds.
- The company guaranteed a vendor obligation of approximately $0.6 million after the vendor debt was assumed by Magellan; the filing identifies a potential contingent liability of approximately $0.5 million if Magellan defaults and specified equipment is foreclosed upon.
- There was no pending litigation reported at the filing date. The company identified environmental, permitting, political, maritime, equipment, commodity-market, financing, customer-concentration, dilution, and NASDAQ-listing risks.
Investor Verification Points
- Verify the status and enforceability of the Mexican phosphate environmental permit and related court proceedings.
- Confirm current balances, maturity dates, default rates, collateral, conversion rights, and any payment demands for MINOSA, Monaco, SMOM, Epsilon, and other debt.
- Assess whether available cash and expected financing or asset-sale proceeds are sufficient to address the disclosed going-concern uncertainty.
- Review the concentration and collectability of revenue and receivables from Magellan, Monaco-related entities, and CIC.
- Evaluate dilution from the 2018 share-and-warrant issuance, convertible debt, outstanding warrants, and any future equity financing.
- Reconcile the reported debt figures in the balance sheet with management's $30.4 million financial-debt measure and the contractual principal amounts.
- Determine the economic value and realizability of the Oceanica, phosphate, shipwreck, and other mineral interests, which are subject to permitting, legal, technical, and market uncertainties.