Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company provides marine research, survey, search, recovery and expedition services and pursues subsea mineral exploration, including a phosphate project in Mexico. The company is a smaller reporting company; 8,466,909 common shares were outstanding as of July 31, 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $1.07 million, versus $0.59 million in 2017 | $1.59 million, versus $1.24 million in 2017 |
| Operating loss | $0.87 million, versus $2.06 million in 2017 | $2.83 million, versus $4.35 million in 2017 |
| Net loss attributable to Odyssey | $0.64 million, or $0.08 per share | $2.39 million, or $0.28 per share |
| Net loss before non-controlling interest | $1.61 million | $4.25 million |
| Interest expense | $0.73 million | $1.44 million |
| Operating cash flow | Not separately provided for the quarter | $(3.21) million |
Revenue included $292,582 of recovered cargo sales and other revenue and $780,915 of expedition revenue in the second quarter. Six-month revenue included $308,320 of recovered cargo sales and other revenue and $1.28 million of expedition revenue.
Operating expenses were $1.94 million in the second quarter and $4.41 million for the six months, compared with $2.65 million and $5.58 million, respectively, in the comparable 2017 periods. The filing does not present a conventional gross margin because operating costs are classified primarily as marketing, general and administrative and operations and research.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $565,842 at June 30, 2018, down from $1.11 million at December 31, 2017; restricted cash was $10,010.
- Total assets were $2.73 million, compared with $2.97 million at year-end 2017.
- Total liabilities were $44.76 million, including $29.37 million of loans payable and $4.64 million of revenue participation rights.
- Total stockholders’ deficit was $42.03 million, compared with $37.98 million at December 31, 2017.
- Working capital deficit was approximately $35.0 million. Management states that unrestricted cash of approximately $0.6 million is insufficient to support operations for the following 12 months.
- Six-month financing cash flow was $1.67 million, including advances from Monaco, SMOM and MINOSA, partially offset by debt repayments.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased approximately 83% to $1.07 million, while the net loss attributable to Odyssey narrowed from $1.92 million to $0.64 million.
- Six-month revenue increased approximately 28% to $1.59 million, and the six-month net loss narrowed from $4.12 million to $2.39 million.
- Operating expenses declined by approximately $0.7 million for the quarter and $1.2 million year to date, reflecting lower personnel, director fee, legal, depreciation and equipment-related costs.
- Interest expense increased year to date to $1.44 million from $1.38 million, despite the improvement in the operating loss.
- Debt increased approximately $2.0 million from $27.4 million at December 31, 2017 to $29.4 million at June 30, 2018. The increase primarily reflected additional Monaco, SMOM and MINOSA borrowings.
- The company recorded approximately $0.9 million of gain from the sale of marine equipment to Magellan, which contributed to investing cash flow of approximately $1.0 million.
- The company began providing services to a deep-sea mineral exploration company controlled by its Chairman. It invoiced approximately $0.4 million during the quarter, including $0.3 million potentially payable in equity.
Guidance, Outlook, Risks and Unusual Items
Management provided no quantitative revenue or earnings guidance. Its stated cash plan depends on monetizing receivables and equity interests, obtaining financing or syndication opportunities, generating expedition and marine-services income, collecting amounts owed, and potentially completing the long-pending MINOSA and Penelope preferred-stock financing. Management states that failure to obtain sufficient cash could require curtailment of planned projects and expenses.
The filing includes a going-concern disclosure. Several years of losses, negative operating cash flow, a substantial working capital deficit, limited unrestricted cash and significant debt raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments that might be required if the company cannot continue operating.
- Several material debt obligations have matured or are payable upon demand. Monaco loans totaling approximately $4.0 million were past maturity and were under negotiation for new maturity dates. The $14.75 million MINOSA loan is also classified as short-term.
- Most significant assets and equity interests are pledged to lenders, limiting additional secured borrowing capacity. Convertible debt creates potential dilution.
- The company’s Mexican phosphate project requires an environmental permit. A Mexican court nullified the prior denial of the environmental license application in March 2018, and the statutory appeal period expired without an appeal, but the permit had not yet been issued as of the filing.
- Contingent obligations include up to $425,000 of consultant success fees and issuance of up to 3.0 million Oceanica shares if the Mexican environmental permit is approved.
- The company remains a guarantor of approximately $0.6 million of vendor debt assumed by Magellan in connection with the equipment sale; potential contingent exposure to Magellan was approximately $0.5 million for certain assets.
- Related-party activity is significant, including services and debt arrangements with Monaco and services provided to an entity controlled by the Chairman.
- On July 12, 2018, after quarter-end, the company borrowed $500,000 through secured convertible notes bearing 8% interest and issued warrants for 31,250 common shares. An additional $500,000 closing was possible through September 12, 2018. The company was still evaluating the accounting for potential beneficial conversion features and embedded derivatives.
- The company reported approximately 1.4 million shares of short interest, or about 16% of outstanding shares, as of June 29, 2018, and identified Nasdaq listing compliance, cybersecurity, dilution and short-selling activity as risks.
Important Facts for Investors to Verify
- Whether the company can obtain sufficient near-term financing or asset monetization proceeds to address its $35.0 million working capital deficit and ongoing operating cash burn.
- The status, enforceability and maturity terms of the Monaco, MINOSA, Epsilon and other secured or convertible debt, including any lender demands or defaults.
- Whether the Mexican environmental permit will ultimately be issued and whether the MINOSA and Penelope preferred-stock financing will close; the counterparties were not currently obligated to complete the equity investment.
- The collectability and timing of approximately $1.05 million of accounts receivable, including substantial related-party balances.
- The final accounting treatment and dilution implications of the July 2018 convertible notes, warrants and other convertible debt.
- The sustainability of revenue generated from related-party marine services, expedition activities and the Magellan project.
- The impact of the $0.9 million equipment-sale gain and other unusual items on the comparability of operating results.