Odyssey Marine Exploration, Inc. — 2016 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The interim financial statements are unaudited. The company provides marine survey, exploration, recovery and related services and holds interests in subsea mineral exploration projects, including the Don Diego phosphate project in Mexico.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $2.883 million | $1.459 million | $4.683 million | $2.017 million |
| Operating income (loss) | $(2.197) million | $(4.351) million | $(8.209) million | $(19.311) million |
| Net income (loss) | $(2.132) million | $(4.580) million | $(3.906) million | $(20.421) million |
| Loss per share | $(0.28) | $(0.60) | $(0.52) | $(2.76) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(6.525) million | $(15.380) million |
- Revenue mix: Q3 revenue was primarily a $2.9 million related-party marine shipwreck search and recovery charter. Prior-year Q3 revenue was primarily recovered-cargo sales.
- Margins: Q3 operating margin was approximately negative 76%; nine-month operating margin was approximately negative 175%. Q3 net margin was approximately negative 74%; nine-month net margin was approximately negative 83%.
- Expenses: Q3 operating expenses were $5.081 million, including $2.194 million of marketing, general and administrative expense and $2.887 million of operations and research expense. No cost of sales was recorded because substantially all inventory had been sold in 2015.
- Unusual items: Nine-month other income included a $3.402 million favorable change in derivative-liability fair value and $386,567 of other income. Q3 operations and research expense included a material non-cash gain from selling a marine operations asset.
- Cash and liquidity: Cash and cash equivalents were $529,487 at September 30, 2016, compared with $2.241 million at December 31, 2015. Restricted cash was $10,000. Working capital deficit was approximately $22.3 million.
- Debt: Total loans payable were $22.036 million, consisting of $17.755 million current and $4.281 million long term, versus $18.200 million at December 31, 2015. Debt included $14.750 million owed to MINOSA, approximately $3.005 million to Epsilon and approximately $4.281 million to Monaco.
- Equity: Stockholders’ equity was a deficit of $28.720 million at September 30, 2016. The company had 7,599,894 common shares outstanding as of October 20, 2016.
- Tax position: No income tax expense or benefit was recorded. Federal tax NOL carryforwards were approximately $146 million, but deferred tax assets were fully offset by a valuation allowance.
Material changes versus prior comparable period
- Q3 revenue increased 98% year over year, while nine-month revenue increased 132%, primarily because of marine-services contracts with a related party.
- Q3 net loss improved by $2.448 million year over year; the nine-month net loss improved by $16.515 million. The improvement reflects higher service revenue, lower operating costs, reduced interest expense and favorable derivative remeasurement.
- Nine-month operating expenses declined 40% to $12.892 million. The 2015 period included $2.520 million of common stock issued for a subsidiary stock-option settlement, which did not recur in 2016.
- Operating cash burn improved by $8.855 million year over year, but remained substantial at $6.525 million for the first nine months.
- Cash declined by $1.712 million during the first nine months despite $4.738 million of financing cash inflows, including $3.0 million from Epsilon and approximately $1.8 million from Monaco.
- The company sold the vessel Odyssey Explorer in May 2016 for $200,000 in cash and a smaller vessel valued by management at $350,000.
- The 1-for-12 reverse stock split became effective February 19, 2016; all share and per-share information was retrospectively adjusted.
Outlook, risks and contingencies
- Going concern: Management stated that the company’s cash balance was insufficient to support operations through the end of 2016 and that the circumstances raise substantial doubt about its ability to continue as a going concern. The financial statements contain no going-concern adjustments.
- Funding dependence: Future liquidity depends on chartering equipment and services, collecting receivables, monetizing mineral interests, obtaining project financing and completing the MINOSA/Penelope preferred-equity transaction. MINOSA and Penelope were not obligated to make the contemplated preferred-stock investments as of the filing.
- Don Diego project: SEMARNAT denied the environmental permit application on April 8, 2016. The company requested review and continued to pursue alternatives, but the denial delayed expected project-related cash inflows.
- NASDAQ listing: The company’s market capitalization fell below NASDAQ’s $35 million requirement on April 11, 2016. Failure to regain compliance could result in delisting and impair access to capital.
- Subsequent financing: On October 1, 2016, Epsilon amended the note arrangement to provide up to $6.0 million in aggregate financing; $4.0 million had been received by the filing date. The arrangement includes potential conversion into common stock and warrants for up to 120,000 shares.
- Collateral and maturity risk: Most remaining assets and Oceanica-related interests were pledged to lenders. The MINOSA and Epsilon obligations were scheduled to mature in March 2017, while certain Monaco debt matured in April 2018.
- Related-party concentration: A significant portion of Q3 revenue came from a related party, and the company had $943,621 of receivables from Monaco and affiliates at September 30, 2016.
- Other exposures: The company reported no current litigation, but noted risks from environmental permitting, potential dilution from convertible debt, debt acceleration, asset values differing from book values, cybersecurity threats and possible inability to realize receivables or investments.
Investor verification priorities
- Verify the sustainability, pricing and collectability of the related-party marine-services revenue.
- Review near-term debt maturities, defaults, collateral pledges, conversion terms and the availability of remaining Epsilon funding.
- Confirm whether the MINOSA/Penelope preferred-equity transaction remains viable after the Don Diego permit denial.
- Assess the company’s ability to fund operations given $0.5 million of unrestricted cash, a $22.3 million working capital deficit and continuing operating cash burn.
- Check the company’s subsequent NASDAQ listing status and any resulting effect on financing capacity.
- Evaluate the recoverability of the $1.280 million net accounts receivable balance, including the $943,621 related-party receivable and the fully reserved Neptune Minerals receivable.
- Review the accounting impact of the October 2016 Epsilon restatement, including potential common-stock dilution and warrants.