Odyssey Marine Exploration, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
Odyssey is a deep-ocean exploration company focused on seabed mineral exploration, shipwreck cargo recovery, and marine survey and exploration services. The filing covers the fiscal year ended December 31, 2015; quarterly data show fourth-quarter results separately. All share and per-share amounts were retrospectively adjusted for the 1-for-12 reverse stock split effective in February 2016.
The Don Diego phosphate deposit in Mexico remained the company’s principal mineral project. Approval of the environmental impact assessment was pending, with a decision expected during 2016. Odyssey had 22 full-time employees at year-end.
Financial performance and condition
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $5.33 million | $1.32 million | Up 303% |
| Gross profit | $3.88 million | $1.08 million | Approximate |
| Gross margin | Approx. 72.9% | Approx. 81.3% | Down |
| Operating loss | $(21.52) million | $(28.19) million | Improved $6.67 million |
| Net loss | $(18.21) million | $(26.47) million | Improved $8.27 million |
| Basic and diluted loss per share | $(2.46) | $(3.74) | Improved |
| Net cash used in operating activities | $(17.16) million | $(28.55) million | Improved $11.39 million |
| Cash and cash equivalents | $2.24 million | $3.14 million | Down $0.90 million |
| Total assets | $6.91 million | $25.09 million | Down $18.18 million |
| Total liabilities | $32.46 million | $35.49 million | Down $3.03 million |
| Stockholders’ deficit | $(25.55) million | $(10.40) million | Worsened $15.14 million |
Revenue consisted primarily of $3.33 million from third-party expedition and marine services and $1.94 million from recovered cargo and other sales. The company recognized $3.0 million of revenue from a Mediterranean shipwreck recovery contract in the fourth quarter. Operating expenses were $26.85 million, including $11.43 million of operations and research expense, $11.46 million of marketing, general and administrative expense, and a $2.52 million noncash charge for common stock issued to settle a subsidiary stock option.
Other income included a one-time $5.61 million gain from the December 2015 asset sale and debt restructuring. This was substantially offset by $4.55 million of interest expense and a $1.18 million loss from changes in derivative liability fair values.
Financial debt, excluding derivative liabilities, declined from $21.16 million to $18.20 million. At year-end, current liabilities were $24.68 million versus current assets of $3.55 million, producing a reported working-capital deficit of approximately $21.1 million. The company had no inventory at December 31, 2015 because its inventory was sold in the December transaction.
Material changes versus the prior comparable period
- Revenue increased primarily because of third-party marine exploration services; 2014 had no expedition revenue.
- Operations and research expense declined by approximately $8.0 million, driven by lower vessel costs and the absence of the 2014 long-term Dorado Discovery lease. Excluding the 2014 SS Central America cost-reimbursement credit, the underlying reduction was approximately $14.3 million.
- Marketing, general and administrative expense increased by approximately $1.7 million because of higher legal and transaction costs, accelerated vesting, and additional compensation expense.
- On December 10, 2015, Odyssey sold substantial shipwreck-related assets to Monaco Financial and affiliates, including its shipwreck database, inventory, exhibits, headquarters building, certain receivables, 50% of its Neptune Minerals interest, and its financial interest in the SS Central America cargo.
- The transaction extinguished or restructured significant bank and Monaco debt, generated a $5.61 million gain, and left Odyssey primarily as a contractor for future shipwreck projects. Magellan agreed to hire Odyssey on a cost-plus basis for covered projects for five years and pay 21.25% of applicable net cargo monetization proceeds.
- Odyssey issued 333,333 post-split equivalent common shares, valued at $2.52 million, to terminate Mako Resources’ option to acquire Oceanica shares and preserve majority control of Oceanica.
- The SS Central America cargo remained unmonetized. Following the asset sale, Odyssey no longer held the related receivable or economic interest and expects no future proceeds from that cargo.
Guidance, outlook, risks and unusual items
Management did not provide numerical revenue or earnings guidance. Management stated that 2016 operations would require new cash inflows from monetizing receivables and mineral interests, marine exploration charters, financings, syndications, or strategic partnerships. The company stated that its $2.2 million of unrestricted cash was insufficient to support operations through the end of 2016 and that expenses could be curtailed under a contingency plan.
The filing and audit report raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depended materially on the Don Diego permitting process, additional financing, collection or monetization of assets, and completion of the proposed MINOSA/Penelope equity financing. Penelope was not obligated to purchase the proposed preferred shares unless specified conditions were satisfied.
- The $14.75 million MINOSA loan was secured by Odyssey’s 54% interest in Oceanica and, after subsequent amendments, had a maturity date of March 18, 2017.
- The proposed Penelope investment could total up to approximately $101 million in Series AA-1 preferred stock over three years, subject to conditions; no preferred shares had been issued as of December 31, 2015.
- Subsequent to year-end, Epsilon agreed to provide a $3.0 million bridge loan in two installments, bearing 10% interest and convertible into common stock at $5.00 per share, or $2.50 per share upon an event of default. The MINOSA loan maturity was also extended to December 31, 2016 under that arrangement.
- Don Diego remained subject to environmental permitting, political, technical, financing, and commodity-price risks. Failure to obtain the permit could affect both the mineral project and related financing arrangements.
- Shipwreck projects involve uncertain discovery, title, permitting, recovery costs, cargo valuation, monetization timing, weather, equipment, and legal risks. Future shipwreck work will generally provide lower upside because Odyssey will act primarily as a contractor.
- Two customers represented 54.4% and 30.1% of FY2015 revenue, indicating significant customer concentration.
- Odyssey received NASDAQ notices regarding minimum bid price and market capitalization requirements. The company stated that it regained compliance with both requirements in the first quarter of 2016 following the reverse stock split and market value recovery.
Most important facts for investors to verify
- Whether the Don Diego environmental permit was approved and whether the project can advance to commercial development.
- Whether Penelope completed any of the proposed preferred-stock purchases and the resulting ownership, dilution, and governance effects.
- The current balance, maturity, collateral, and covenant status of the MINOSA, Monaco, and Epsilon obligations.
- Whether operating cash flow improved sufficiently after year-end to eliminate the disclosed going-concern uncertainty.
- The status and profitability of new marine exploration contracts, including customer concentration and collection of receivables.
- The economic value of retained projects such as HMS Victory and HMS Sussex after the December 2015 asset sale and related revenue participation rights.
- The terms and potential dilution associated with convertible debt, preferred stock, options, warrants, and other equity-linked instruments.
- Whether NASDAQ listing compliance has been maintained and whether additional reverse splits or capital raises may be required.