Business Context and Reporting Period
Odyssey Marine Exploration, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016. The company focuses on deep-ocean mineral exploration, shipwreck cargo recovery, and marine survey and exploration services. Its principal mineral project is the Don Diego phosphate deposit offshore Mexico, held through Oceanica Resources and Exploraciones Oceanicas. The filing also reports fourth-quarter 2016 results, although the requested filing period is an annual fiscal-year filing.
Following the December 2015 asset sale, most future shipwreck work is performed for Magellan Offshore Services on a cost-plus basis, with Odyssey retaining a 21.25% share of net proceeds from monetized recovered cargo.
Financial Results and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $4.683 million | $5.330 million | Down 12% |
| Operating loss | $10.551 million | $21.524 million | Improved $10.973 million |
| Net loss | $6.316 million | $18.207 million | Improved $11.891 million |
| Basic and diluted loss per share | $0.84 | $2.46 | Improved |
| Net cash used in operating activities | $8.305 million | $17.164 million | Improved $8.859 million |
| Cash and cash equivalents | $1.663 million | $2.241 million | Down $0.579 million |
| Total assets | $5.084 million | $6.913 million | Down $1.829 million |
| Total liabilities | $36.187 million | $32.462 million | Up $3.725 million |
| Stockholders’ deficit | $31.103 million | $25.549 million | Deficit increased $5.554 million |
Revenue was generated principally from deep-sea surveying and shipwreck search and recovery services. The company had no inventory or cost of sales in 2016. Approximate operating margin was negative 225%, and approximate net margin was negative 135%.
Cash provided by financing activities was $7.656 million, primarily from $6.0 million of Epsilon borrowings and $1.8 million of Monaco borrowings. Investing activities provided $0.070 million, principally reflecting asset-sale proceeds offset by equipment purchases.
Debt and related obligations increased materially. At December 31, 2016, loans payable totaled approximately $25.067 million, including $14.750 million owed to MINOSA, $5.982 million owed to Epsilon, and $4.336 million classified as long-term loans payable. Current liabilities were $27.207 million versus current assets of $2.756 million, producing a working-capital deficit of approximately $24.5 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined $0.647 million, primarily because 2015 included substantial marine services and inventory sales; 2016 revenue was primarily expedition and surveying services.
- Operating expenses declined from $26.854 million to $15.234 million. Marketing, general and administrative expense fell to $7.959 million from $11.459 million, while operations and research expense fell to $8.267 million from $11.429 million.
- 2016 included a $0.993 million gain on the sale of marine assets, including a substantial non-cash component. The company sold the Odyssey Explorer and another marine asset.
- Other income increased to $1.473 million from $0.273 million, primarily because of a $3.402 million gain from changes in derivative fair value. This was partly offset by $2.397 million of interest expense.
- The company raised $7.825 million of new debt during 2016. Epsilon provided an additional $3.0 million in secured convertible debt in the fourth quarter, and Odyssey issued warrants for up to 120,000 common shares at $3.52 per share.
- SEMARNAT denied the Don Diego environmental license application on April 8, 2016. Odyssey and its partners pursued administrative, legal, and political remedies, with the process expected to conclude in 2017.
- Odyssey regained compliance with NASDAQ’s market-capitalization listing requirement on January 30, 2017. The company had previously completed a 1-for-12 reverse stock split in February 2016 to address the minimum bid-price requirement.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that 2017 cash needs depend on monetizing mineral interests and receivables, generating exploration-charter income, obtaining financing or partnership proceeds, and completing the contemplated MINOSA/Penelope preferred-equity transaction. The filing provides no conventional revenue or earnings guidance.
The financial statements include an explicit going-concern warning. Management reported that unrestricted cash of approximately $1.6 million was insufficient to support operations for the following 12 months, while the $14.75 million MINOSA loan was scheduled to mature on March 18, 2017. The company stated that most remaining assets had been pledged as collateral and that failure to obtain additional cash could require a substantially curtailed business plan. The independent auditor noted substantial doubt about the company’s ability to continue as a going concern.
In February 2017, the company entered into a non-binding financing letter of intent for up to $5.0 million, of which $0.75 million had been advanced. The proposed financing would be secured by subsidiary interests and contractual rights related to Magellan, and could be convertible into interests in a wholly owned subsidiary.
On January 25, 2017, Epsilon notified Odyssey that it would convert the original $3.0 million advanced, plus accrued interest, at $5.00 per share. The filing also identifies significant risks from debt maturities, potential dilution, collateral enforcement, dependence on related parties and major customers, permitting and political uncertainty, marine operating hazards, uncertain recovery or mineral economics, and continued operating losses.
Two customers represented approximately 61.4% and 38.5% of 2016 revenue, respectively. The company had 19 full-time employees at year-end.
Important Facts for Investors to Verify
- Whether the MINOSA loan was repaid, refinanced, converted, or otherwise amended after its March 18, 2017 maturity date.
- Whether the proposed Monaco-affiliated financing closed and the amount of additional funding actually received.
- Whether the Don Diego environmental-permit appeal succeeded and whether the project received authorization to proceed.
- The extent of Epsilon’s conversion of debt into common stock and the resulting dilution to existing shareholders.
- Whether Odyssey generated sufficient operating cash flow after year-end to avoid further asset pledges, forced sales, or a material reduction in operations.
- The collectability and monetization prospects of receivables, mineral-company interests, and future Magellan revenue participation rights.
- The terms and related-party implications of Monaco, Magellan, MINOSA, and Epsilon transactions.
- Whether NASDAQ listing compliance was maintained after January 2017 and whether subsequent market-value or bid-price deficiencies arose.