Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the period ended June 30, 2017. Odyssey provides marine survey, exploration, recovery and related offshore services and owns interests in seabed mineral exploration projects, including the Don Diego phosphate project in Mexico. The company’s primary near-term operating activity was expedition and marine services revenue, while future value remains heavily dependent on permitting and financing for its mineral projects.
Financial results and key metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $0.6 million | $1.2 million | $1.2 million | $1.8 million |
| Operating loss | $(2.1) million | $(2.0) million | $(4.3) million | $(6.0) million |
| Net loss attributable to Odyssey | $(1.9) million | $(1.9) million | $(4.1) million | $(1.8) million |
| Basic and diluted loss per share | $(0.23) | $(0.25) | $(0.51) | $(0.24) |
| Net cash used in operating activities | — | — | $(3.0) million | $(5.3) million |
Revenue declined 52% in the second quarter and 31% for the first six months, primarily because the comparable 2016 marine services contract covered a longer period. All reported second-quarter revenue was expedition revenue from services to Magellan, which the company considers a related party.
Calculated operating margin was approximately negative 351% in the second quarter and negative 351% for the first six months. Net margin was approximately negative 327% and negative 333%, respectively. Operating expenses declined to $2.7 million in the quarter and $5.6 million year to date, reflecting lower personnel, vessel, marine-service, depreciation and insurance costs following the sale of the Odyssey Explorer.
At June 30, 2017, cash and cash equivalents were $1.5 million, plus $10,000 of restricted cash. Total current assets were $2.0 million versus current liabilities of $28.8 million, producing a working capital deficit of approximately $26.8 million. Total assets were $3.5 million, total liabilities were $36.5 million, and stockholders’ deficit was $33.0 million.
Loans payable totaled $24.6 million, consisting primarily of $14.75 million owed to MINOSA, $3.0 million owed to Epsilon, $3.0 million owed to SMOM and amounts owed to Monaco. Revenue participation rights added $4.6 million of long-term liabilities. The company had no variable-rate debt obligations disclosed.
Material changes versus the prior comparable period
- First-half revenue decreased $0.6 million, while operating expenses decreased $2.2 million.
- First-half net loss increased by $2.3 million to $4.1 million attributable to Odyssey, largely because the 2016 period included $3.4 million of derivative fair-value income and other income that did not recur.
- Interest expense increased to $1.4 million year to date from $0.9 million, reflecting debt accretion, beneficial conversion features and higher debt balances.
- Operating cash burn improved by $2.3 million year to date, but remained $3.0 million negative.
- Epsilon converted $3.0 million of principal plus $302,274 of accrued interest into 670,455 common shares effective April 10, 2017.
- Odyssey borrowed $3.0 million from SMOM in May 2017 at 10% interest, secured by equity interests in Aldama Mining Company and related rights.
- A marine vessel was sold to a Monaco-related party for $650,000, with the consideration applied against amounts owed to Monaco.
- Outstanding common shares increased to 8,388,821 at June 30, 2017 from 7,718,366 at December 31, 2016, reflecting the Epsilon conversion and other equity activity.
Outlook, commentary, risks and unusual items
Management provided no quantified revenue or earnings guidance. The company stated that its 2017 plan requires new cash inflows from monetizing receivables and mineral-company equity interests, financings, syndications or partnerships. Management warned that if these sources are not realized, it may need to curtail projects and operate under a reduced-expense contingency plan.
The filing includes substantial doubt about the company’s ability to continue as a going concern. Management stated that unrestricted cash of approximately $1.5 million was insufficient to support operations for the following twelve months and that continued operations depend on additional financing, project monetization, collections, exploration-charter income and completion of the MINOSA/Penelope financing transaction.
The Don Diego environmental permit application was denied by Mexico’s SEMARNAT in April 2016. Odyssey and its partners were pursuing administrative, legal and political remedies, and the permitting outcome remains critical to development of the project and related financing arrangements. The planned Penelope preferred-stock investment remains subject to conditions and Penelope and MINOSA were not obligated to complete the investment as of the filing.
The MINOSA loan had a $14.75 million principal balance and had matured on March 18, 2017. The Epsilon debt was subject to written demand and other acceleration provisions, with $3.0 million remaining outstanding after the April conversion. Much of the company’s remaining assets were pledged to lenders and affiliates.
Odyssey received a NASDAQ notice concerning market capitalization below the $35.0 million requirement. The company stated that it regained compliance on August 3, 2017, after the quarter-end, but there is no assurance that compliance will be maintained. Other disclosed risks include possible dilution from convertible debt, cybersecurity threats and dependence on related-party arrangements.
No litigation was pending as of the filing. A contingent grant of 3.0 million Oceanica shares and a $200,000 consultant success fee remain dependent on approval of the Mexican environmental assessment. After quarter-end, the board adopted quota appreciation-rights plans and granted awards to directors and named executive officers based on potential appreciation in Oceanica interests.
Most important facts for investors to verify
- Whether Odyssey can raise sufficient cash to fund operations and avoid further curtailment or restructuring.
- The status and enforceability of the matured MINOSA obligation and the Epsilon debt’s demand and acceleration provisions.
- Whether the Don Diego environmental permit will be approved and whether the MINOSA/Penelope preferred-stock financing can actually close.
- The terms, collateral and potential equity or asset dilution associated with the Monaco, Epsilon and SMOM financings.
- The sustainability and concentration of marine-services revenue, including dependence on related parties and individual contracts.
- Whether NASDAQ market-capitalization compliance is maintained after August 3, 2017.
- The effect of future share issuances, conversions and quota appreciation rights on existing common shareholders.