Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2019, compared with the corresponding 2018 periods. The filing is unaudited. Odyssey provides marine exploration, search and recovery, expedition, technical, and mineral exploration services.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $0.76 million | $0.89 million | $2.33 million | $2.47 million |
| Operating expenses | $4.23 million | $2.43 million | $10.49 million | $6.84 million |
| Loss from operations | $(3.47) million | $(1.54) million | $(8.16) million | $(4.37) million |
| Net loss attributable to Odyssey | $(4.23) million | $(1.31) million | $(8.17) million | $(3.70) million |
| Basic and diluted loss per share | $(0.45) | $(0.15) | $(0.88) | $(0.44) |
| Net cash used in operating activities | Not separately presented | $(3.65) million | $(4.37) million |
- Revenue consisted of recovered cargo sales and other revenue of $0.28 million in the quarter and $0.83 million year to date, plus expedition revenue of $0.48 million in the quarter and $1.50 million year to date.
- Q3 revenue declined approximately 14% year over year, while nine-month revenue declined approximately 6%. Operating expenses increased approximately 74% in Q3 and 53% year to date.
- Approximate operating margins were negative 455% in Q3 2019 and negative 350% for the first nine months, compared with negative 174% and negative 177%, respectively, in the prior-year periods.
- Interest expense was $2.05 million in Q3 and $4.31 million year to date. Q3 also included a $0.29 million debt-extinguishment loss. Interest expense included a $0.87 million warrant inducement expense related to a debt modification.
- Cash and cash equivalents were $0.30 million at September 30, 2019, compared with $2.79 million at December 31, 2018. Restricted cash was $0.01 million.
- Current liabilities were $48.83 million against current assets of $0.93 million, producing a working-capital deficit of approximately $48.0 million. Total liabilities were $54.54 million, and total stockholders’ deficit was $49.76 million.
- Loans payable totaled $32.07 million on the balance sheet, including $30.66 million classified as current and $1.41 million classified as long term. Management separately reported financial debt, excluding certain components, of approximately $31.9 million.
Material changes from the prior comparable periods
- Marketing, general and administrative expense increased to $2.11 million in Q3 from $1.36 million, primarily due to higher director compensation, including approximately $0.675 million of equity-based compensation issued by a subsidiary.
- Operations and research expense increased to $2.12 million from $1.07 million in Q3 and to $5.51 million from $2.54 million year to date, largely due to legal and professional costs associated with the Mexican environmental-permit dispute and NAFTA claim.
- Cash used in operations improved from $4.37 million to $3.65 million year to date, but financing and investing cash flows were insufficient to offset the operating burn. Net cash decreased $2.48 million during the first nine months.
- On July 9, 2019, Odyssey acquired a 79.9% interest in Bismarck Mining Corporation (PNG) Limited for 249,584 shares of common stock. The transaction added an exploration license in Papua New Guinea recorded at $1.82 million.
- On July 8, 2019, the maturity of $1.05 million of notes was extended to July 12, 2020; the conversion and warrant exercise price was modified to $5.756, and the warrants were increased to 196,135 shares exercisable through July 2024.
- In June 2019, Odyssey entered into litigation financing for its NAFTA claim and received $1.41 million during the quarter. The arrangement permits up to $6.5 million of aggregate funding, subject to its terms.
- The Cambridge project was cancelled during the first quarter of 2019, and the related $0.825 million revenue participation liability was recognized in other income.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal revenue, earnings, or cash-flow guidance. Management expects to pursue marine services, mineral exploration opportunities, monetization of receivables and equity interests, financings, syndications, and partnerships.
- Management states that the company’s $0.3 million of unrestricted cash is insufficient to fund operations for the following twelve months and that the company’s financial condition raises substantial doubt about its ability to continue as a going concern. The filing states that the financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
- Continuation depends on generating new cash inflows, collecting receivables, monetizing investments, obtaining project income, and potentially completing the long-pending MINOSA/Penelope preferred-stock financing. The counterparties are currently under no obligation to complete that equity financing.
- Most remaining assets are pledged to MINOSA, its affiliates, or Monaco Financial, limiting additional secured borrowing capacity. Several debt obligations are matured or payable upon demand, although certain lenders had not demanded repayment as of the filing.
- Odyssey’s Mexican subsidiary is pursuing an environmental permit for an undersea phosphate project and has filed a NAFTA arbitration claim against Mexico. The permit and litigation outcomes remain uncertain and are critical to the company’s strategy and liquidity plans.
- The litigation-funding agreement can require the funded amounts to become senior secured obligations with a 50% annualized return, and potentially a 100% penalty rate after specified defaults, if the claim is discontinued under circumstances described in the agreement. Management recorded $0.068 million of related interest expense in Q3.
- Related-party activity is material. Odyssey recognized approximately $1.5 million of 2019 year-to-date revenue from Monaco-related services and invoiced CIC LLC, controlled by a former chairman, $0.68 million for services, primarily in exchange for equity consideration.
- Odyssey acquired a new five-year headquarters lease in August 2019 and entered into an additional five-year marine-operations lease effective October 1, 2019. Aggregate disclosed obligations under the leases total approximately $1.0 million.
Investor verification points
- Verify the company’s near-term funding sources, cash burn, debt maturities, lender forbearance, and ability to avoid acceleration or default.
- Assess the likelihood, timing, and economics of the MINOSA/Penelope preferred-equity financing and any alternative financing or asset monetization.
- Review the status and legal merits of the Mexican environmental permit proceedings and NAFTA arbitration, including the litigation-funding agreement’s priority, return, and repayment provisions.
- Evaluate the collectability and concentration of related-party receivables and the sustainability of revenue from Monaco, Magellan, and CIC.
- Consider dilution from outstanding convertible debt, warrants, stock plans, and the 249,584 shares issued for the Bismarck acquisition.
- Confirm the carrying value and recoverability of the Bismarck exploration license, CIC investment, revenue participation rights, and other project-related assets.