Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; filed May 12, 2016. The company is a marine exploration and services business with interests in shipwreck projects and subsea mineral exploration, including the Don Diego phosphate project in Mexico. Financial statements are unaudited and include a 1-for-12 reverse stock split retroactively.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 / Year-end 2015 |
|---|---|---|
| Total revenue | $582,477 | $115,292 |
| Marine services revenue | $577,810 | None reported |
| Operating loss | $(3,997,831) | $(8,995,036) |
| Net income (loss) | $84,644 | $(9,714,471) |
| Basic and diluted EPS | $0.01 | $(1.35) |
| Cash flow from operations | $(2,673,092) | $(4,314,079) |
| Cash and cash equivalents | $2,765,215 | $2,241,317 at December 31, 2015 |
| Total debt, excluding derivative liabilities | $20,386,332 | $18,199,632 at December 31, 2015 |
| Total assets | $7,244,351 | $6,913,016 at December 31, 2015 |
| Working capital | Deficit of approximately $19.0 million | Not clearly stated for Q1 2015 |
Operating expenses were $4.6 million, producing an operating margin of approximately negative 686%. The reported net margin was approximately 15%, but net income was primarily supported by a $3.3 million favorable change in the fair value of derivative liabilities and other non-operating items rather than recurring operating profitability.
Operating cash use improved by approximately $1.6 million year over year but remained substantial. Financing activities provided $3.25 million, principally from new or additional borrowings from Monaco and Epsilon. Investing activities used $51,221, primarily for marine exploration equipment.
At March 31, 2016, current liabilities were $23.1 million versus current assets of $4.2 million. Stockholders’ deficit was $24.7 million, including a $10.1 million non-controlling interest deficit.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 405%, driven principally by third-party marine survey and charter services; prior-year revenue was primarily from inventory and recovered-cargo sales.
- Marketing, general and administrative expense declined 21% to $2.4 million, and operations and research expense declined 35% to $2.2 million, reflecting cost reductions and lower vessel activity.
- No inventory or recovered-cargo sales were reported in Q1 2016, compared with $94,440 of recovered-cargo sales and $20,852 of exhibit revenue in Q1 2015.
- The company recorded no cost of sales in Q1 2016, compared with $212,876 in Q1 2015, which included an inventory markdown.
- The company recorded $3.34 million of derivative fair-value income in Q1 2016 versus $462,903 of derivative fair-value expense in Q1 2015. The 2016 benefit was mainly related to modification and repricing of Monaco-related instruments.
- Debt increased by approximately $2.2 million during the quarter, while cash increased by approximately $524,000.
- The company completed a 1-for-12 reverse stock split effective February 19, 2016; 7,541,111 common shares were outstanding at April 30, 2016.
Debt, Liquidity, Outlook, and Risks
- Major debt obligations included approximately $14.75 million owed to MINOSA, $2.8 million of Monaco notes, $1.38 million of additional Monaco borrowings, and approximately $1.46 million recorded for an Epsilon note at quarter-end. The filing also describes a $3.0 million Epsilon commitment, with the remaining installment funded after quarter-end.
- Debt is secured by substantial company assets and interests in Oceanica, including shares, intercompany receivables, and marine equipment. Certain instruments are convertible into Oceanica interests or Odyssey common stock.
- The company stated that its $2.8 million of unrestricted cash was insufficient to support operations through the end of 2016 and that it needed additional cash inflows from marine charters, asset or equity monetizations, project financing, collections, or new financings.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern. The company has sustained several years of losses, a significant working capital deficit, negative equity, and limited unpledged assets available for financing.
- The proposed Penelope investment of up to approximately $101 million in convertible preferred stock had not closed. The investor and MINOSA were not obligated to complete the equity investment unless specified conditions were satisfied.
- On April 8, 2016, after quarter-end, the Mexican government denied the environmental permit application for the Don Diego phosphate project. The company requested review of the decision on April 29 and continues to evaluate alternatives. The denial delayed anticipated cash inflows and materially increased financing and execution risk.
- The company has no current litigation reported and no variable-rate debt at March 31, 2016. It cautioned that failure to meet NASDAQ continued-listing requirements could result in delisting.
- Accounts receivable included a $2.3 million full reserve against a Neptune Minerals receivable. The company also reported related-party receivables and payables with Monaco.
- The company held an approximately 14% interest in Neptune Minerals with a zero carrying value and approximately $20.7 million of unrecognized equity-method losses. More recent financial statements of Neptune Minerals were unavailable to the company.
Most Important Facts to Verify
- Whether the Penelope preferred-stock financing will close, and whether its conditions remain achievable following the Don Diego environmental permit denial.
- The enforceability, maturity dates, conversion rights, collateral, and potential acceleration provisions of the MINOSA, Monaco, and Epsilon debt.
- Whether marine charter and survey activity can generate sufficient recurring cash flow to offset approximately $2.7 million of quarterly operating cash use.
- The status of the Mexican environmental permit review and its effect on the Don Diego project, Oceanica valuation, and related financing arrangements.
- The company’s ability to satisfy NASDAQ listing requirements and avoid dilution or adverse stock-price effects from convertible debt and preferred-stock instruments.
- The collectability of related-party and other receivables, including the fully reserved Neptune Minerals balance.