ODYSSEY MARINE EXPLORATION INC quarterly report, Q1 FY2017

Business Context and Reporting Period

Odyssey Marine Exploration, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company provides marine survey, exploration and recovery services and is developing seabed mineral interests, including the Don Diego phosphate project in Mexico. Revenue during the quarter was primarily from marine services performed for Magellan Offshore Services, a related party.

Financial Highlights

Metric	Q1 2017	Q1 2016
Total revenue	$649,353	$582,477
Operating expenses	$2,932,471	$4,580,308
Loss from operations	$(2,283,118)	$(3,997,831)
Net income (loss)	$(2,199,263)	$84,644
Basic and diluted loss per share	$(0.28)	$0.01
Cash flow from operations	$(1,218,117)	$(2,673,092)
Cash flow from financing	$621,164	$3,248,211
Cash and cash equivalents at period end	$1,065,690	$2,765,215

Revenue increased 11% year over year, while operating expenses declined 36%.
Operating margin was approximately negative 352%; net margin was approximately negative 339%.
Interest expense was $714,896, compared with $334,060 in the prior-year quarter. Q1 2016 included a $3.3 million derivative fair-value gain that did not recur.
At March 31, 2017, total assets were $3.98 million, total liabilities were $37.83 million, and stockholders’ deficit was $33.85 million.
Debt, including current and long-term loans payable, totaled approximately $25.94 million, excluding any separate derivative component.
Working capital deficit was approximately $26.2 million. Non-restricted cash of approximately $1.1 million was insufficient to fund operations for the following 12 months, according to management.

Material Changes Versus the Prior Comparable Period

Marine services revenue rose by approximately $71,000; recovered cargo sales declined to zero from $4,667.
Marketing, general and administrative expense decreased by approximately $750,000, primarily from lower personnel, legal, professional-services and corporate-overhead costs.
Operations and research expense decreased by approximately $897,000, mainly because the company no longer operated the Odyssey Explorer, which was sold in 2016.
The company moved from net income of $84,644 to a net loss of $2.20 million. The principal driver was the absence of the $3.34 million derivative fair-value gain recognized in Q1 2016, together with higher interest expense.
Operating cash burn improved by approximately $1.46 million, but financing inflows also fell sharply from $3.25 million to $621,000.
Debt increased from approximately $25.07 million at December 31, 2016 to $25.94 million at March 31, 2017, principally because of new borrowing and interest accretion.

Guidance, Outlook, Risks and Unusual Items

Management expressed 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.
Liquidity depends on monetizing receivables and equity interests, obtaining additional financings or partnerships, generating marine-services income, and completing the proposed MINOSA/Penelope equity financing. Management stated that the company may need to curtail its business plan if these sources are not realized.
The $14.75 million MINOSA loan had a stated maturity of March 18, 2017. The company also had approximately $6.05 million of Epsilon debt classified as short-term after a March 21, 2017 amendment, under which the debt may become payable upon demand or certain other events.
Epsilon gave notice to convert $3.0 million of principal plus accrued interest; the conversion became effective April 10, 2017 for 670,455 shares. This creates potential dilution and reduces outstanding debt.
The company disclosed a financing arrangement with SMOM for up to $3.0 million. It received $750,000 in February 2017 and another $750,000 in April 2017; the filing text contains timing inconsistencies regarding the agreement date and should be reviewed against the executed documents.
The proposed preferred-stock investment by Penelope remains subject to conditions, including regulatory approvals, project viability and completion of other transaction requirements. MINOSA and Penelope were not obligated to complete the equity investment as of the filing.
The Don Diego environmental permit application was denied by Mexico’s SEMARNAT in April 2016. Management was pursuing administrative, legal and political avenues, and stated that permit approval is necessary for the next phase of development.
On March 24, 2017, Nasdaq notified the company that its market capitalization had been below the $35 million requirement for 30 consecutive days. The company had until September 30, 2017 to regain compliance for ten consecutive business days or risk delisting.
The company held approximately $156.5 million of federal and $26.7 million of foreign tax-loss carryforwards, but recorded a full valuation allowance against deferred tax assets.
The company reported no current litigation and no variable-rate debt obligations. It identified cybersecurity exposure and potential dilution from convertible debt as additional risks.

Important Facts for Investors to Verify

Confirm the status, maturity, default provisions and collateral supporting the MINOSA, Epsilon, Monaco and SMOM obligations, particularly the matured or demand-payable amounts.
Verify the April 10, 2017 Epsilon conversion, resulting share count, and its effect on ownership and future dilution.
Review subsequent financing activity and whether the SMOM arrangement was ultimately completed on the terms described.
Track the company’s cash runway, working capital deficit, debt repayments and ability to raise additional capital.
Confirm the status of the Don Diego environmental permit and the proposed MINOSA/Penelope preferred-stock transaction.
Monitor Nasdaq market-capitalization compliance and any subsequent delisting or compliance notices.
Assess the concentration of Q1 revenue in related-party marine-services activity and the collectability of related-party receivables.