Business Context and Reporting Period
Odyssey Marine Exploration, Inc. is a deep-ocean exploration company focused on seabed mineral exploration and development, shipwreck cargo recovery, and marine survey and offshore services. Its principal mineral asset is a phosphate deposit offshore Mexico, which requires environmental approval before commercial extraction. The company also owns interests in other mineral projects, including a 79.9% interest in Bismarck Mining Corporation, acquired in July 2019 for 249,584 common shares.
This Form 10-K covers the fiscal year ended December 31, 2019. The filing also provides unaudited quarterly data for the quarter ended December 31, 2019.
Financial Performance and Condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $3.073 million | $3.276 million | Down 6% |
| Operating loss | $10.347 million | $6.067 million | Loss increased $4.280 million |
| Net loss | $10.440 million | $5.172 million | Loss increased $5.268 million |
| Basic and diluted loss per share | $1.12 | $0.60 | Loss increased |
| Cash used in operating activities | $5.444 million | $6.452 million | Use decreased $1.008 million |
| Ending cash and cash equivalents | $0.203 million | $2.787 million | Down $2.584 million |
| Loans payable | $34.403 million | $29.449 million | Up $4.955 million |
| Total assets | $5.330 million | $5.473 million | Down $0.143 million |
| Total stockholders’ deficit | $53.297 million | $41.197 million | Deficit increased $12.101 million |
Revenue consisted of $1.984 million of marine services and $1.089 million of other services. Operating expenses were $13.420 million, including $7.928 million of operations and research expenses and $5.492 million of marketing, general and administrative expenses. The implied operating margin was approximately negative 337%, and the implied net margin was approximately negative 340%.
Total other expense was $5.153 million, including $5.360 million of interest expense, a $0.290 million debt extinguishment loss, and a $0.322 million fair-value loss on derivative liabilities, partly offset by $0.820 million of other income. No income tax benefit was recorded.
Investing activities used $0.015 million. Financing activities provided $2.876 million, primarily from litigation financing and new debt. At year-end, current liabilities were $51.230 million versus current assets of $1.225 million, producing a working-capital deficit of approximately $50.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined 6%, primarily because Magellan-related offshore marine services decreased by approximately $0.5 million, partly offset by higher CIC mineral support services and other marine services.
- Operations and research expense more than doubled to $7.9 million, mainly due to approximately $3.7 million of legal support related to the NAFTA arbitration concerning the Mexican phosphate project and the absence of a 2018 gain on marine equipment sales.
- Marketing, general and administrative expense decreased modestly to $5.5 million, with lower personnel and legal costs partly offset by higher director compensation.
- Net loss approximately doubled, driven by higher operating expenses, interest expense, debt modification costs, warrant inducement expense, and derivative valuation losses.
- Cash declined to $0.2 million despite $2.9 million of financing cash inflows. Financial debt, excluding derivative and beneficial-conversion components, increased from approximately $30.4 million to $33.9 million.
- In July 2019, Odyssey acquired its Bismarck interest and recorded an exploration license of approximately $1.8 million, funded through issuance of common stock rather than cash.
- The HMS Sussex, or Cambridge, project was cancelled by the British Government. Odyssey reclassified approximately $0.825 million of related deferred revenue participation rights to other income.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management stated that its 2020 plan requires new cash inflows from monetizing receivables and mineral interests, obtaining financings, syndications, partnerships, and generating exploration-charter revenue. If these sources are insufficient, management expects to implement a contingency plan involving curtailed expenses and fewer projects.
Odyssey and its Mexican subsidiary continue to pursue an environmental permit for the phosphate project. After SEMARNAT again refused approval in October 2018, Odyssey initiated NAFTA arbitration in 2019. The arbitration tribunal was constituted, and management expected to file its first memorial in the second quarter of 2020. Litigation financing provided approximately $3.0 million of debt during 2019, with availability of up to $6.5 million under the original agreement and up to $10.0 million after the January 2020 amendment. The financing gives the funder significant rights to claim proceeds and may convert to senior secured debt with a 50% annualized return, and potentially a 100% penalty rate, under specified circumstances.
The auditors identified substantial doubt about the company’s ability to continue as a going concern. Management acknowledged that $0.2 million of unrestricted cash was insufficient to fund operations for the following 12 months, that most remaining assets were pledged, and that the planned MINOSA/Penelope equity financing was not currently obligated to close.
- Major risks include continued operating losses, limited liquidity, debt maturities and defaults, potential enforcement against pledged assets, and dependence on additional financing.
- The Mexican phosphate project depends on environmental permitting and remains subject to legal, political, regulatory, and execution risks.
- Mineral projects remain exploratory and may not contain economically recoverable resources or achieve commercial production.
- Shipwreck projects depend on discovery, legal title, recovery economics, market prices, client funding, and the ability to monetize recovered cargo.
- Two customers represented 91% of 2019 revenue, creating significant customer concentration risk.
- Common-stock dilution may result from convertible debt, warrants, equity compensation, and other potential share issuances.
Most Important Facts for Investors to Verify
- Whether Odyssey can secure sufficient near-term financing to address its approximately $50.0 million working-capital deficit and continue as a going concern.
- The status, expected timing, and probable economic outcome of the Mexican environmental permit and NAFTA arbitration.
- Current balances, maturity terms, accrued interest, collateral, and demand rights for the MINOSA, Monaco, SMOM, Epsilon, litigation-financing, and 37North obligations.
- The actual amount and terms of post-year-end litigation financing, including the funder’s recovery rights, security interests, and warrant coverage.
- Whether the Bismarck exploration license and other mineral interests can produce a commercially viable resource and attract additional funding.
- Potential dilution from the 2019 and post-year-end equity awards, convertible notes, warrants, and director compensation settled in equity.
- Related-party transactions with CIC and entities controlled by current or former directors, including receivables, equity consideration, deposits, and proposed asset sales.