Odyssey Marine Exploration, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Odyssey Marine Exploration, Inc. is a smaller reporting company focused on marine exploration, shipwreck search and recovery, marine services, and subsea mineral exploration. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $774,436 | $1,073,497 | $1,569,363 | $1,585,233 |
| Operating loss | $(2,455,097) | $(868,574) | $(4,690,862) | $(2,825,813) |
| Net loss attributable to Odyssey | $(2,774,282) | $(641,557) | $(3,942,168) | $(2,386,318) |
| Net loss per share | $(0.30) | $(0.08) | $(0.43) | $(0.28) |
| Cash flow from operations | Not separately presented for the quarter | $(2,191,497) | $(3,208,617) | |
| Cash and cash equivalents at period end | Not applicable | $372,486 | $565,842 |
- Q2 operating margin was approximately negative 317%; six-month operating margin was approximately negative 299%.
- Q2 net margin was approximately negative 358%; six-month net margin was approximately negative 251%.
- At June 30, 2019, total assets were $2.5 million, total liabilities were $49.7 million, and stockholders’ deficit was $47.2 million.
- Current liabilities were $45.2 million versus current assets of $1.3 million, producing a working-capital deficit of approximately $44.0 million.
- Debt carrying value was approximately $30.1 million, consisting primarily of Monaco, MINOSA, SMOM, Epsilon, and promissory-note obligations. Management reported financial debt of approximately $30.4 million excluding certain accounting components.
Material changes versus the prior comparable period
- Q2 revenue declined $299,061, or approximately 28%, primarily because expedition revenue fell to $504,540 from $780,915. Six-month revenue was broadly unchanged.
- Q2 operating expenses increased 66% to $3.2 million. Operations and research expense increased approximately $1.2 million, including higher legal costs related to the Mexican environmental-permit dispute and the absence of a prior-period gain on marine-asset sales.
- Q2 net loss attributable to Odyssey increased to $2.8 million from $0.6 million. Six-month net loss increased to $3.9 million from $2.4 million.
- Interest expense increased to $2.3 million for the first six months, including approximately $0.7 million of beneficial-conversion-feature accretion. The Cambridge project’s cancellation generated approximately $825,000 of other income in the first quarter.
- Cash declined $2.4 million from December 31, 2018, while operating cash use improved by approximately $1.0 million compared with the first six months of 2018.
- The company’s investment in unconsolidated entities increased to $1.2 million, principally from services provided to CIC LLC that were treated as equity consideration. CIC is controlled by Greg Stemm, Odyssey’s former chairman.
Guidance, outlook, risks, contingencies, and unusual items
- No formal quantitative revenue or earnings guidance is provided. Management states that future liquidity depends on monetizing receivables and mineral interests, generating charter and service revenue, obtaining financing, and advancing the Mexican phosphate project.
- Management explicitly states that the company’s cash balance is insufficient to fund operations for the following 12 months and that substantial doubt exists about its ability to continue as a going concern. The financial statements contain no going-concern adjustments.
- The majority of remaining assets are pledged to MINOSA, its affiliates, and Monaco, limiting additional borrowing capacity. Several material loans are matured or payable upon demand, although certain lenders had not demanded payment as of the filing.
- Odyssey’s Mexican subsidiary continues to contest SEMARNAT’s refusal to issue an environmental permit for the phosphate project. Odyssey filed a NAFTA arbitration notice in April 2019. A June 2019 claims-enforcement agreement provides for up to $6.5 million of litigation funding, but no funding had been received by June 30. The agreement gives the funder priority over proceeds and may impose substantial return obligations if the claim is discontinued under specified circumstances.
- On July 8, 2019, after quarter-end, the company amended certain promissory notes: maturity was extended one year, conversion and warrant exercise prices were adjusted to approximately $5.76 per share, the notes became unsecured, and warrants increased to 196,135 shares.
- On July 9, 2019, after quarter-end, Odyssey acquired a 79.9% interest in Bismarck Mining Corporation (PNG) Ltd. for 249,584 Odyssey shares. Bismarck holds an exploration license in Papua New Guinea and is subject to a 2.496% net smelter royalty.
- Odyssey entered a five-year Tampa office lease beginning August 1, 2019, with total cash payments of approximately $751,099 and an estimated lease liability/right-of-use asset of approximately $590,612.
- Related-party exposure is significant: Monaco and affiliates owed Odyssey approximately $434,411 at June 30, 2019, while CIC owed $63,847. The company recognized approximately $1.0 million of year-to-date revenue from Monaco-related services and invoiced CIC $452,774, largely for equity consideration.
- The company reports no current defendant litigation requiring an accrual, but it remains exposed to contractual, environmental-permitting, financing, project, and contingent-liability risks, including a possible $0.5 million obligation related to a vendor debt assumed by Magellan.
Most important facts for investors to verify
- Whether Odyssey can secure sufficient near-term financing or other cash inflows to avoid a liquidity shortfall and address its $44.0 million working-capital deficit.
- The enforceability, maturity status, default provisions, collateral, and lender-demand rights associated with the approximately $30 million debt balance.
- The status and likely timing of the Mexican environmental permit, court proceedings, NAFTA arbitration, and litigation-funding availability and economics.
- The collectability of related-party receivables and the commercial substance and valuation of the CIC equity consideration and other unconsolidated investments.
- The accounting impact and potential dilution from the July 2019 note and warrant amendments, the Bismarck share issuance, and other convertible instruments and warrants.
- Whether the company’s marine-service and expedition revenue can become sufficient to offset operating expenses, interest expense, and project-related legal costs.