Odyssey Marine Exploration, Inc. — Form 10-Q Summary
Business context and reporting period
Odyssey Marine Exploration, Inc. is a subsea exploration and marine services company with interests in deep-sea mineral projects, including the ExO phosphate project in Mexico, the Lihir Gold Project in Papua New Guinea, and the CIC project. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, filed August 13, 2021. The company reported 13,307,180 common shares outstanding as of August 1, 2021.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $182,334 | $519,969 | $474,010 | $1,525,481 |
| Operating expenses | $5,128,974 | $4,567,458 | $8,218,024 | $8,421,006 |
| Loss from operations | $(4,946,640) | $(4,047,489) | $(7,744,014) | $(6,895,525) |
| Net loss attributable to Odyssey | $(2,227,499) | $(4,098,623) | $(5,947,717) | $(6,996,598) |
| Net loss per share | $(0.17) | $(0.43) | $(0.46) | $(0.73) |
| Net cash used in operating activities | — | — | $(2,838,329) | $(2,595,341) |
Revenue consisted primarily of service revenue and other fees; expedition revenue was zero in the second quarter and $35,354 year to date. The filing does not provide a separately reported gross margin, EBITDA, or adjusted earnings measure. Interest expense was $2.6 million in the second quarter and $5.0 million year to date, compared with $1.6 million and $2.9 million, respectively, in the prior-year periods.
Other income was $3.8 million in the second quarter and $3.9 million year to date, primarily reflecting the write-off of deferred revenue participation liabilities associated with the terminated Galt and Seattle arrangements. These items contributed to total other income of $1.2 million for the quarter, but total other expense of $1.1 million year to date.
At June 30, 2021, cash and cash equivalents were $4.8 million, down from $6.2 million at December 31, 2020. Total assets were $10.6 million. Current liabilities were $60.1 million, including $29.9 million of current loans payable and $27.3 million of accrued expenses. Long-term loans payable were $14.0 million. Total debt carrying value was approximately $43.9 million, while management separately described financial debt excluding certain accounting components as approximately $45.0 million. Accrued interest on financing was $22.6 million.
Working capital was negative $54.8 million, and total stockholders’ deficit was $63.9 million. The company generated $1.5 million of financing cash flow, including $1.2 million of litigation-funder payments or reimbursements and $0.7 million from the sale of subsidiary equity, partially offset by debt and lease payments. Investing cash outflow was $13,930.
Material changes versus the prior comparable period
- Second-quarter revenue fell 65% to $182,334; six-month revenue fell 69% to $474,010. Management attributed the decline primarily to the end of a CIC project and the absence of a prior-year marine search engagement.
- Second-quarter operating expenses increased 12% to $5.1 million, driven mainly by higher marketing, general and administrative costs, including share-based compensation. Six-month operating expenses declined 2% because lower marine-services labor costs offset higher litigation-related spending.
- Second-quarter net loss improved to $2.2 million from $4.1 million, and year-to-date net loss improved to $5.9 million from $7.0 million. The improvement was substantially affected by the $3.8 million deferred-income write-off recorded as other income.
- Interest expense increased materially, particularly from NAFTA litigation financing. Litigation-financing interest expense was $1.8 million in the quarter and $3.3 million year to date, compared with $0.8 million and $1.3 million, respectively, in 2020.
- In March 2021, Epsilon converted approximately $1.45 million of debt and accrued interest into 411,562 common shares.
- On June 14, 2021, the NAFTA litigation-funding agreement was amended to increase the maximum investment amount from $20 million to $25 million; $80,000 of related fees was treated as an additional advance.
- The company’s litigation-financing obligation increased to a $13.5 million carrying value at June 30, 2021 from $11.0 million at year-end 2020.
Guidance, outlook, risks, contingencies, and unusual items
Management provided no conventional revenue or earnings guidance. It stated that planned operations require new cash inflows from financings, monetization of receivables and equity interests, exploration charters, partnerships, or other transactions. If funding is insufficient, management expects to curtail expenses and reduce planned activities.
The filing includes an explicit going-concern warning. Management stated that the company’s ability to generate positive cash flow over the following twelve months depends on additional financing, project monetization, collections, operating income, or completion of the proposed MINOSA/Penelope equity financing. MINOSA and Penelope are not currently obligated to complete the planned preferred-stock investment. The company stated that its 2020 equity proceeds were expected to fund operations through early 2022, but the filing also emphasizes substantial uncertainty.
Most assets are pledged to MINOSA, its affiliates, or Monaco Financial, limiting the company’s ability to raise additional secured funding. Several debt obligations are matured or payable upon demand, including the $14.75 million MINOSA loan and certain Monaco obligations. The company also has significant accrued interest and a large working-capital deficit.
The company is pursuing a NAFTA arbitration claim against Mexico relating to denial of an environmental permit for the ExO phosphate project. The claim seeks compensation of more than $2 billion. Mexico filed its counter-memorial in February 2021, Odyssey filed its reply on June 29, 2021, and the hearing was scheduled for January 2022 unless settled earlier. Litigation-funding terms can convert funded amounts into senior secured obligations bearing a 50% annualized return in specified circumstances, rising to 100% after a stated payment period. Recoveries are also subject to substantial priority distributions to the funder.
Management expects a settlement payment from a prior shipwreck-related legal case to exceed $3.0 million for Odyssey, but no gain was recorded because the payment had not been realized and timing and amount were uncertain.
The company expects late-2021 exploration work for the Lihir Gold Project, subject to COVID-19 constraints, and reported receiving a multi-year license renewal from Papua New Guinea in early August 2021. Project advancement remains dependent on exploration results, environmental permitting, regulatory approvals, financing, and other execution risks.
Related-party exposure is significant: the company provides services to CIC, which is controlled by its former chairman, and recorded $474,010 of year-to-date service revenue from CIC. CIC owed the company $257,721 at June 30, 2021. The company also reports an approximately $2.8 million investment in CIC, accounted for under the cost method.
Subsequent events included confirmation in July 2021 that the $370,400 Paycheck Protection Program loan was fully forgiven, conversion in July 2021 of approximately $1.33 million of promissory-note principal and interest into 283,850 common shares, and a July 15, 2021 transfer of approximately $563,715 of MINOSA debt and accumulated interest to a company director.
Important facts for investors to verify
- Verify the company’s near-term liquidity, including the $4.8 million cash balance, $54.8 million working-capital deficit, accrued interest, and required payments on matured or demand debt.
- Review the going-concern disclosure and determine whether expected financing, project monetizations, litigation funding, or operating cash inflows are sufficient to fund the business plan.
- Assess the terms and potential economic impact of the NAFTA litigation financing, including the $25 million maximum funding amount, senior security interest, high conversion returns, and recovery-sharing provisions.
- Evaluate the likelihood, timing, and collectability of the expected shipwreck settlement proceeds and any potential NAFTA recovery; neither amount was recognized as an asset at June 30, 2021.
- Review dilution risks from outstanding warrants, convertible debt, restricted stock awards, and subsequent debt-to-equity conversions.
- Consider the dependence on regulatory approvals, including the Mexican environmental permit and Papua New Guinea exploration and environmental approvals.
- Examine related-party service revenue, receivables, and CIC investment terms, which management states may not reflect terms available from independent parties.
- Confirm the effect of the July 2021 PPP forgiveness and subsequent debt conversions in later-period financial statements.