ODYSSEY MARINE EXPLORATION INC annual report, FY2021

Business Context and Reporting Period

Odyssey Marine Exploration, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The company develops subsea mineral resources and provides marine exploration, project development, research and project-management services. Its portfolio includes the Mexican Don Diego/ExO phosphate project, the Papua New Guinea Lihir gold project, the Cook Islands CIC project, and early-stage projects in Antigua and Barbuda and Brazil.

Odyssey remains primarily in the exploration, validation and permitting phase rather than commercial mineral production. It had 13 full-time employees at year-end and its common stock trades on the NASDAQ Capital Market under OMEX.

Financial Results and Key Metrics

Metric	2021	2020	Change
Total revenue	$0.9 million	$2.0 million	Down $1.1 million, or 54.8%
Operating expenses	$15.9 million	$14.7 million	Up $1.2 million, or 8.2%
Loss from operations	$15.0 million	$12.6 million	Loss increased $2.3 million
Net loss	$10.0 million	$14.8 million	Improved by $4.9 million
Basic and diluted loss per share	$0.75	$1.41	Improved
Net cash used in operating activities	$5.3 million	$9.3 million	Use of cash decreased $4.0 million
Cash and cash equivalents at year-end	$2.3 million	$6.2 million	Down $3.9 million
Financial debt, excluding specified accounting adjustments	$42.2 million	$43.2 million	Down $1.0 million

Marine services generated $883,790 and other services generated $37,448 in 2021. CIC Limited, a related party controlled by Odyssey’s former chairman, accounted for 100% of 2021 revenue. The filing does not report a conventional gross margin because service costs are included primarily in operations and research expense. Based on reported revenue and operating loss, the approximate operating margin was negative 1,623%; the approximate net margin was negative 1,081%.

Interest expense was $10.8 million, compared with $6.9 million in 2020, largely reflecting NAFTA litigation financing. The company also recorded a $5.2 million gain on debt settlement, a $0.4 million gain on debt extinguishment, and $4.1 million of other income, including the write-off of deferred income and revenue participation liabilities.

At December 31, 2021, total assets were $8.9 million, total liabilities were $71.4 million, and total stockholders’ deficit was $62.5 million. Current liabilities were $52.6 million versus current assets of $3.3 million, producing a working-capital deficit of approximately $49.3 million. Accrued expenses included $21.9 million of accrued interest.

Material Changes Versus Prior Comparable Period

Revenue declined 54.8% as a prior project ended and 2020 marine search engagements did not recur.
Marketing, general and administrative expense increased to $6.3 million from $3.7 million, partly because 2020 included reduced discretionary incentive costs and because 2021 included higher compensation, legal costs and share-based compensation.
Operations and research expense decreased to $9.6 million from $10.9 million because of lower litigation-financed costs, lower contracted marine labor and a gain on equipment sales.
Net loss improved despite higher operating losses because of the $5.2 million debt-settlement gain, the $0.4 million PPP loan forgiveness gain, the write-off of $3.8 million of deferred income and the absence of 2020 derivative fair-value expense.
In October 2021, Odyssey issued 984,848 common shares, paid $0.5 million in cash and agreed to pay an additional $2.5 million to settle approximately $14.5 million of debt and accrued interest owed to Monaco and related parties.
Debt conversions during 2021 resulted in the issuance of 695,412 common shares, and the Monaco settlement resulted in an additional 984,848 shares, increasing shares outstanding to 14,309,315 at year-end.
Operating cash use improved, but cash declined materially because operating outflows exceeded financing and investing inflows.

Projects, Outlook, Risks and Unusual Items

Project development

The Don Diego phosphate project remains dependent on Mexican environmental permitting. The company’s permit applications were rejected by SEMARNAT, and Odyssey continues legal and arbitration proceedings against Mexico. The NAFTA tribunal hearing occurred January 24–29, 2022; the company could not predict when a decision would be issued.
Odyssey reported approximately 588.3 million tonnes of Don Diego phosphorite resources as of December 31, 2021, including 114.9 million measured tonnes, 243.6 million indicated tonnes and 229.9 million inferred tonnes. These are resources, not disclosed mineral reserves, and the Sur concession had not been assayed.
Offshore survey and mapping work began in the Lihir license area in Papua New Guinea in December 2021. Further exploration depends on resource characterization, environmental work and required licenses.
The CIC Consortium was awarded a five-year Cook Islands exploration license in February 2022. Odyssey held approximately 13.4% of CIC and could earn up to approximately 16% based on currently outstanding equity.
After year-end, Odyssey announced an intended Brazilian phosphate joint venture in which it expects to own 75%, subject to definitive documentation.

Funding and going concern

Management stated that continued operations depend on new financing, monetization of receivables and equity interests, service revenue, partnerships, or other cash inflows. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments that might result if Odyssey cannot continue as a going concern.

The litigation financing obligation had a carrying value of $18.3 million and face value of $19.3 million at year-end. The financing agreement can allocate substantial future recoveries to the funder and may convert funded amounts into senior secured obligations bearing a 50% annualized internal rate of return in specified circumstances, increasing to 100% after nonpayment following conversion.

Principal risks

Failure to obtain or maintain environmental, exploration or mining permits.
Uncertain resource quality, economic feasibility, commodity prices and extraction technology.
Political, legal and regulatory changes in Mexico, Papua New Guinea, the Cook Islands and other jurisdictions.
Limited cash, significant accrued liabilities, pledged assets and dependence on external financing.
Concentration of revenue in one related-party customer.
Potential dilution from debt conversions, warrants and equity-based compensation.
Natural hazards, equipment failures, cybersecurity incidents, insurance limitations and possible NASDAQ listing noncompliance.

There was no formal financial guidance reported. Management’s outlook is centered on advancing exploration and permitting programs, pursuing the NAFTA claim, developing new project partnerships and obtaining sufficient cash inflows to execute the 2022 plan.

Most Important Facts to Verify

Current cash balance, monthly cash burn and the availability and terms of new financing.
Status, remaining funding capacity and economic priority of the NAFTA litigation financing.
Any decision or settlement in the NAFTA arbitration and the status of Mexican environmental permitting.
Payment, conversion or refinancing requirements for the $14.75 million MINOSA loan, the $5.05 million MINOSA 2 obligation, the $18.3 million litigation-financing liability and the $2.5 million Monaco settlement obligation.
Whether the reported Don Diego resources can be converted into economically recoverable reserves after updated drilling, metallurgical, environmental and permitting work.
Execution of the proposed Brazilian phosphate joint venture and the actual ownership, funding and governance terms.
Revenue sustainability and collectability from CIC, which represented all 2021 revenue and had a $268,867 receivable at year-end.
The dilution impact of 3.5 million outstanding warrants, convertible debt, restricted stock and potential future equity issuance.