Odyssey Marine Exploration Inc 10-Q for FY2023 Q2
Odyssey Marine Exploration Inc (OMEX)
About this 10-Q
Odyssey Marine Exploration Inc filed this 10-Q on August 14, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $172.58K
- down 55.8% from $390.28K a year earlier
- Net loss
- $5.72M
- compared with a net loss of $4.68M a year earlier
- Diluted EPS
- -$0.29
- compared with -$0.30 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from |
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to |
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Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer: ☐ Accelerated filer: ☐
Emerging growth company:
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ☐ No
The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of August 08, 2023 was
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Page No.
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Part I: |
Financial Information |
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Item 1. |
Financial Statements (Unaudited): |
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Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 |
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Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022 |
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Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the three and six months ended June 30, 2023 and 2022 |
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Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 |
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8 – 21 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 – 33 |
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Item 3. |
33 |
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Item 4. |
33 |
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Part II: |
Other Information |
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Item 1. |
34 |
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Item 1A. |
35 |
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Item 2. |
35 |
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Item 4. |
35 |
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Item 5. |
35 |
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Item 6. |
36 |
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37 |
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2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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Unaudited June 30, 2023 |
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December 31, |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable and other, net |
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Deferred tax asset |
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— |
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Other current assets |
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Total current assets |
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PROPERTY AND EQUIPMENT |
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Equipment and office fixtures |
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Right of use - operating leases |
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Accumulated depreciation |
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Total property and equipment, net |
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NON-CURRENT ASSETS |
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Investment in unconsolidated entity |
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Exploration license |
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Other non-current assets |
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Total non-current assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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CURRENT LIABILITIES |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Operating lease liability |
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Loans payable |
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Total current liabilities |
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LONG-TERM LIABILITIES |
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Loans payable |
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Operating lease liability |
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Total long-term liabilities |
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Total liabilities |
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STOCKHOLDERS’ DEFICIT |
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Preferred stock - $ |
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Common stock – $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ deficit before non-controlling interest |
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Non-controlling interest |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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June 30, |
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June 30, |
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REVENUE |
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Marine services |
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$ |
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$ |
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$ |
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$ |
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Operating and other |
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Total revenue |
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OPERATING EXPENSES |
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Marketing, general and administrative |
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Operations and research |
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Total operating expenses |
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LOSS FROM OPERATIONS |
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OTHER INCOME (EXPENSE) |
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Interest Income |
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Interest expense |
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Gain (loss) on debt extinguishment |
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Other |
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Total other income (expense) |
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INCOME/(LOSS) BEFORE INCOME TAXES |
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Income tax benefit (provision) |
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NET INCOME(LOSS) BEFORE NON-CONTROLLING INTEREST |
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Non-controlling interest |
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NET INCOME (LOSS) |
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$ |
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$ |
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$ |
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NET INCOME (LOSS) PER SHARE |
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Basic (See Note 2) |
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$ |
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$ |
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$ |
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Diluted (See Note 2) |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of common shares outstanding |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER’S DEFICIT - Unaudited
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Three Months Ended June 30, 2023 |
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Common Stock |
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Additional Paid-in Capital |
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Accumulated Deficit |
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Non-controlling Interest |
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Total |
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Balance at March 31, 2023 |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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Fair value of warrants issued |
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— |
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— |
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— |
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Net (loss) |
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— |
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— |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Three Months Ended June 30, 2022 |
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Common Stock |
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Additional Paid-in Capital |
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Accumulated Deficit |
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Non-controlling Interest |
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Total |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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Common stock issued for cash, net |
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— |
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— |
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Fair value of warrants issued |
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— |
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— |
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— |
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Net (loss) |
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— |
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— |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Six Months Ended June 30, 2023 |
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Common Stock |
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Additional Paid-in Capital |
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Accumulated Deficit |
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Non-controlling Interest |
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Total |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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Common stock issued for debt extinguishment |
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— |
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— |
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Fair value of warrants issued |
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— |
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— |
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— |
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Net income (loss) |
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— |
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— |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Six Months Ended June 30, 2022 |
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Common Stock |
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Additional Paid-in Capital |
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Accumulated Deficit |
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Non-controlling Interest |
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Total |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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Common stock issued for cash, net |
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— |
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— |
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Fair value of warrants issued |
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— |
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— |
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— |
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Net (loss) |
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— |
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— |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
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Six Months Ended |
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June 30, |
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June 30, |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) before non-controlling interest |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to net cash used in operating activities: |
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Investment in unconsolidated entity |
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Depreciation |
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Financing fees amortization |
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Amortization of loan prepayment premium |
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Amortization of finance liability |
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Note payable interest accretion |
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Note receivable interest accretion |
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Non-cash operating lease expense |
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Share-based compensation |
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Gain on debt extinguishment, net of note receivable write-off |
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(Gain) on sale of fixed assets |
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Payment of operating lease liability |
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Non-cash interest |
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(Increase) decrease in: |
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Accounts receivable |
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Accrued interest receivable |
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Deferred tax asset |
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Other assets |
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Increase (decrease) in: |
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Accounts payable |
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Accrued expenses and other |
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NET CASH USED IN OPERATING ACTIVITIES |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from sale of equipment |
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Purchase of property and equipment |
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Proceeds from note receivable repayment |
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of loans payable |
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Waiver fee paid |
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Equity issuance costs |
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Offering cost paid on financing |
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Payment of debt obligation |
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Repurchase of stock-based awards withheld for payment of withholding tax requirements |
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Proceeds from failed sale leaseback, net |
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Proceeds from sale of common stock |
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Payment on failed sale leaseback |
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( |
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NET CASH PROVIDED BY FINANCING ACTIVITIES |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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|
|
|
|
||
|
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
|
|
$ |
|
||
SUPPLEMENTARY INFORMATION: |
|
|
|
|
|
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
Income taxes paid |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
NON-CASH INVESTING AND FINANCING TRANSACTIONS: |
|
|
|
|
|
|
||
Director compensation settled with equity |
|
$ |
|
|
$ |
|
||
Conversion of debt to common stock |
|
$ |
|
|
$ |
|
||
Warrants issued |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited - Continued
Non-Cash Disclosure:
During the six months ended June 30, 2023 and 2022, we received $
7
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Odyssey Marine Exploration, Inc. and subsidiaries (the “Company,” “Odyssey,” “us,” “we” or “our”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position as of June 30, 2023 and the results of operations and cash flows for the interim periods presented. Operating results for the three and six months ended June 30, 2023, are not necessarily indicative of the results that may be expected for the full year.
Accounting standards adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments in this update are effective for public business entities that meet the definition of a Securities and Exchange Commission (“SEC”) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year.
The amendments in ASU No. 2020-06 affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements in this update. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. The FASB simplified the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. Those amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this update affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. We
Other recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not or are not believed by management to have a material effect, if any, on the Company’s financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding our condensed consolidated financial statements. The financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity and have prepared them in accordance with our customary accounting practices.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, both domestic and international. Equity investments in which we exercise significant influence but do not control and of which we are not the primary beneficiary are accounted for using the equity method. All significant inter-company and intra-company transactions and balances have been eliminated. The results of operations attributable to the non-controlling interest are presented within equity and net income and are shown separately from the Company’s equity and net income attributable to the Company. Some of the existing inter-company balances, which are eliminated upon consolidation, include features allowing
8
the liability to be converted into equity of a subsidiary, which if exercised, could increase the direct or indirect interest of the Company in the non-wholly owned subsidiaries.
Use of Estimates
Management uses estimates and assumptions in preparing these condensed consolidated financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Reclassifications
Certain reclassifications have been made to the 2022 condensed consolidated financial statements in order to conform to the classifications used in 2023. The reclassifications had no impact to operations or working capital.
Revenue Recognition and Accounts Receivable
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of Accounting Standards Codification (“ASC”) Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
The Company currently generates revenues from service contracts with customers. Currently, there are two sources of revenue, marine services and other services. The contracts for these services provide research, scientific services, marine operations planning, management execution and project management. These services are billed generally on a monthly basis and recognized as revenue as the services are performed. Revenue is recognized at a point in time as services are provided, as the customers simultaneously receive and consume the benefits provided by the Company. The Company generally does not receive any upfront consideration for these services, and there is no variable consideration for the services. Costs associated with both services include all direct consulting labor, and minimal supplies, and are charged to operations as a component of Operations and Research.
Accounts receivable are based on amounts billed to customers. Generally accepted accounting principles state an estimate is to be made for current expected credit losses. We have determined no allowance is currently necessary. If we were to have a recorded allowance, the accounts receivable would be stated net of the recorded allowance.
We evaluate our accounts and notes receivable to estimate an allowance for credit losses over the remaining life of the financial instrument. The remaining life of our financial assets is determined by considering contractual terms among other factors. We estimate an allowance for credit losses based on ongoing evaluations of the accounts and notes receivable, the related credit risk characteristics, and the overall economic and environmental conditions affecting the financial assets. Credit losses are charged-off against the allowance when we believe the uncollectibility of the financial asset is confirmed. Subsequent recoveries, if any, are credited to the allowance once received. A credit loss expense, or benefit, is recorded as Other expense in the Statement of Operations in an amount necessary to adjust the allowance for credit losses to our estimate as of the end of each reporting period.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in banks. We also consider all highly liquid investments with a maturity of
Exploration License
The Company follows the guidance pursuant to ASU 350, “Intangibles-Goodwill and Other” ("ASC topic 350") in accounting for its Exploration License. Management determined the rights to use the license to have an indefinite life. This assessment is based on the historical success of renewing the license every two years since 2006, and the fact that management believes there are no legal, regulatory, or contractual provisions that would limit the useful life of the asset. The exploration license
9
is not dependent on another asset or group of assets that could potentially limit the useful life of the exploration license. The recoverability of the license will be tested whenever circumstances indicate that its carrying amount may not be recoverable per the guidance of the ASC topic 350. We did
Long-Lived Assets
Our policy is to recognize impairment losses relating to long-lived assets in accordance with the ASC 360 Property, Plant and Equipment. Decisions are based on several factors, including, but not limited to, management’s plans for future operations, recent operating results and projected cash flows. Impairment losses are included in depreciation at the time of impairment.
Property and Equipment and Depreciation
Property and equipment is stated at historical cost. Depreciation is calculated using the straight-line method at rates based on the assets’ estimated useful lives which are normally between and
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if dilutive securities and other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. We use the if-converted method to compute potential common shares from stock options, restricted stock units, warrants, preferred stock, convertible notes or other convertible securities. When a net loss occurs, potential common shares have an anti-dilutive effect on earnings per share and such shares are excluded from the diluted EPS calculation.
For the six months ended June 30, 2023 and 2022, the basic weighted average common shares outstanding year-to-date were
The potential common shares in the following tables represent potential common shares calculated using the if-converted method from outstanding options, stock awards and warrants that were excluded from the calculation of diluted EPS:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
||||
Average market price during the period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
In the money potential common shares from options excluded |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
In the money potential common shares from warrants excluded |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
10
Potential common shares from out of the money options and warrants were also excluded from the computation of diluted EPS because calculation of the associated potential common shares has an anti-dilutive effect on EPS. The following table lists options and warrants that were excluded from diluted EPS:
|
|
Three Months Ended |
|
Six Months Ended |
||||
Per share exercise price |
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
Out of the money options excluded: |
|
|
|
|
|
|
|
|
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
|
|
||||
$ |
|
|
|
|
||||
$ |
|
|
|
|
||||
Out-of-the-money warrants excluded: |
|
|
|
|
|
|
|
|
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
— |
|
|
— |
||
$ |
|
|
|
|
||||
$ |
|
|
|
|
||||
Total excluded |
|
|
|
|
||||
The equivalent common shares relating to our unvested restricted stock awards that were excluded from potential common shares in the earning per share calculation due to having an anti-dilutive effect are:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
||||
Excluded unvested restricted stock awards |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income per share:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
||||
Net income (loss) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Numerator, basic and diluted net loss available to stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Shares used in computation – basic: |
|
|
|
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|
|
|
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|
|
|
||||
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
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|
||||
Shares used in computation – diluted: |
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|
|
|
|
|
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|
||||
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income per share – basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Net (loss) income per share – diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
Stock-based Compensation
Our stock-based compensation is recorded in accordance with the guidance in the ASC topic for Stock-Based Compensation (See Note 11 Stockholders' Equity/(Deficit)).
11
Fair Value of Financial Instruments
Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and mortgage and loans payable. We carry cash and cash equivalents, accounts payable and accrued liabilities, and mortgage and loans payable at the approximate fair market value, and, accordingly, these estimates are not necessarily indicative of the amounts that we could realize in a current market exchange. We carry derivative financial instruments at fair value as is required under current accounting standards.
Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g., interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815 – Derivatives and Hedging, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements with changes in fair value reflected in our income.
We adopted ASC Topic 820 for certain financial instruments measured as fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
Level 3. Unobservable inputs to the valuation methodology are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
At June 30, 2023 and December 31, 2022, the Company did
NOTE 3 – ACCOUNTS RECEIVABLE AND OTHER RELATED PARTY, NET
Our accounts receivable consist of the following:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Related party (see Note 5) |
|
$ |
|
|
$ |
|
||
Other |
|
|
|
|
|
|
||
Total accounts receivable and other, net |
|
$ |
|
|
$ |
|
||
12
NOTE 4 – SHORT-TERM NOTES RECEIVABLE RELATED PARTY
Our short-term notes receivable consisted of the following:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Related party (see Note 5) |
|
$ |
|
|
$ |
|
||
Short-term notes receivable |
|
$ |
|
|
$ |
|
||
NOTE 5 – RELATED PARTY TRANSACTIONS
We currently provide services to a deep-sea mineral exploration company, CIC Limited (“CIC”), which was organized and is majority owned and controlled by Greg Stemm, Odyssey’s past Chairman of the Board. Mr. Stemm’s involvement with this company was disclosed to, and approved by, the Odyssey Board of Directors and legal counsel pursuant to the terms of Mr. Stemm’s consulting agreement in effect at that time. A current Odyssey director, Mark B. Justh, made an investment into CIC’s parent company and indirectly owns approximately
In furtherance of the Master Services Agreement, we are financing the acquisition of certain equipment required for implementation of CIC’s Marine Operations Plan, which is the comprehensive work plan for offshore operations, including exploration, survey and sampling of potential mineral deposits. As of June 30, 2023 we have paid $
We have the option to accept equity in payment of the amounts due from CIC. See NOTE 3 for related accounts receivable at June 30, 2023 and December 31, 2022 and NOTE 6 for our investment in an unconsolidated entity.
On December 13, 2022, we entered into a Loan Agreement with CIC. Pursuant to the Loan Agreement, CIC issued to Odyssey a convertible promissory note in the amount of $
On December 13, 2022, CIC issued a Services Agreement Note to us. Pursuant to the Services Agreement Note, as amended on June 30, 2023, and August 8, 2023, Odyssey agreed to extend the terms of its outstanding accounts receivables balance for past and future services performed under the Master for an amount not to exceed $
On July 15, 2021, MINOSA assigned $
13
at a conversion price of $
NOTE 6 – INVESTMENT IN UNCONSOLIDATED RELATED ENTITY
At June 30, 2023 and December 31, 2022, our accumulated investment in CIC was $
NOTE 7 - INCOME TAXES
During the three months ended June 30, 2023, we generated a federal net operating loss (“NOL”) carryforward of $
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company may be subject to a variety of claims and suits that arise from time to time in the ordinary course of business. We are not a party to any litigation as a defendant where a loss contingency is required to be reflected in our condensed consolidated financial statements.
Contingency
We owe consultants contingent success fees of up to $
Going Concern Consideration
We have experienced several years of net losses and may continue to do so. Our ability to generate net income or positive cash flows for the following twelve months is dependent upon financings, our success in developing and monetizing our interests in mineral exploration entities, generating income from exploration charters, collecting on amounts owed to us.
Our 2023 business plan requires us to generate new cash inflows to effectively allow us to perform our planned projects. We continually plan to generate new cash inflows through the monetization of our receivables and equity stakes in seabed mineral companies, financings, syndications or other partnership opportunities. If cash inflow ever became insufficient to meet our desired projected business plan requirements, we would be required to follow a contingency business plan based on curtailed expenses and fewer cash requirements. During March 2023, we entered Note and Warrant Purchase Agreement pursuant to which we issued and sold to an institutional investor a promissory note (the “Note”) in the principal amount of up to $
Our consolidated non-restricted cash balance at June 30, 2023 was $
14
Lease commitment
At June 30, 2023, the right of usage (“ROU”) asset and lease obligations for our two real property operating leases were $
The remaining lease payment obligations, which include an interest component of $
Year ending |
|
Annual payment obligation |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
|
|
$ |
|
|
We recognized approximately $
NOTE 9 –LOANS PAYABLE
The Company’s consolidated notes payable consisted of the following carrying values and related interest expense at:
|
|
Note payable |
|
|
Interest expense |
|
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Three Months Ended |
|
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Six Months Ended |
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June 30, |
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December 31, |
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|
June 30, |
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|
June 30, |
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|
June 30, |
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|
June 30, |
|
||||||
MINOSA 1 |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
MINOSA 2 |
|
|
— |
|
|
|
|
|
|
— |
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|
||||
Litigation financing |
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||||||
DP SPV I LLC note |
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|
|
— |
|
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|
|
— |
|
|
|
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|
|
— |
|
|||
Emergency Injury Disaster Loan |
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|
||||||
Vendor note payable |
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|
||||||
Seller note payable |
|
|
— |
|
|
|
|
|
|
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|
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— |
|
|
|
|
|
|
— |
|
|||
AFCO Insurance note payable |
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|
|
|
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|
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|
|
— |
|
|
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— |
|
||||
Monaco |
|
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— |
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|
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— |
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— |
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— |
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|
||
Pignatelli note |
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— |
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— |
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— |
|
|||
Galileo note |
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— |
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— |
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— |
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— |
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— |
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|
37North |
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— |
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|||||
Finance liability |
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|
|
— |
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|
|
|
|
|
— |
|
|
|
|
|
|
— |
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|||
|
|
$ |
|
|
$ |
|
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|
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|
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|
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|
||||||
MINOSA 1
On March 11, 2015, in connection with a Stock Purchase Agreement ("SPA"), Minera del Norte, S.A. de C.V. ("MINOSA") agreed to lend us up to $
MINOSA 2
On August 10, 2017, we entered into a Note Purchase Agreement (the "Minosa Purchase Agreement") with MINOSA. Pursuant to the Minosa Purchase Agreement, MINOSA agreed to loan our wholly owned subsidiary, Odyssey Marine Enterprises, Ltd., up to $
15
under the Minosa Note into shares of our common stock upon
Pursuant to second amended and restated pledge agreements (the "Pledge Agreements") entered into by us in favor of MINOSA on August 10, 2017, we pledged and granted security interests to MINOSA in (a) the
Settlement, Release and Termination Agreement of the MINOSA 1 and MINOSA 2
On March 3, 2023, Odyssey, Altos Hornos de México, S.A.B. de C.V. (“AHMSA”), MINOSA and Phosphate One LLC (f/k/a Penelope Mining LLC, “Phosphate One” and together with AHMSA and MINOSA, the “AHMSA Parties”) entered into a Settlement, Release and Termination Agreement (the “Termination Agreement”).
Pursuant to the Termination Agreement:
The transactions contemplated by the Termination Agreement were completed on
On March 6, 2023, Odyssey entered into a Release and Termination Agreement with a director of the Company, James S. Pignatelli, to terminate and release a portion of the MINOSA 2 Note assigned to Mr. Pignatelli in 2021, the related Note Purchase Agreement (“NPA”) and the Pledge Agreement.
As a result of these transactions, Odyssey has recorded a Gain on debt extinguishment of $
Pignatelli
On March 6, 2023, Odyssey issued a new Unsecured Convertible Promissory Note in the principal amount of $
16
issued by Odyssey Marine Exploration, Inc., to Mr. Pignatelli in the principal amount of $
Litigation Financing
Waiver and Consent
On January 31, 2020, Odyssey and Exploraciones Oceánicas S. de R.L. de C.V., our Mexican subsidiary ("ExO" and, together with Odyssey, the "Claimholder"), and Poplar Falls LLC (the "Funder") entered into an Amended and Restated International Claims Enforcement Agreement (as amended, the "Agreement"), pursuant to which the Funder agreed to provide funding to the Claimholder to facilitate the prosecution and recovery of the claim by the Claimholder against the United Mexican States under Chapter Eleven of the North American Free Trade Agreement.
On March 6, 2023, the Claimholder and the Funder under the Agreement entered into a Waiver and Consent Agreement, pursuant to which, among other things, (a) the Funder consented to allow the Claimholder to fund certain costs and expenses arising from the Subject Claim from the Claimholder’s own capital in an aggregate amount not to exceed $
For the three months ended June 30, 2023 and 2022, we recorded $
Galileo
On February 28, 2023, Odyssey issued a $
DP SPV I LLC
On March 6, 2023, Odyssey entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with an institutional investor pursuant to which Odyssey issued and sold to the investor (a) a promissory note (the “DP SPV Note”) in the principal amount of up to $
The principal amount outstanding under the DP SPV Note bears interest at the rate of
17
capital and other general corporate expenditures. Odyssey’s obligations under Note are secured by a security interest in substantially all of Odyssey’s assets (subject to limited stated exclusions).
Under the terms of the Warrant, the holder has the right for a period of three years after issuance to purchase up to
In connection with the execution and delivery of the Purchase Agreement, Odyssey entered into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which Odyssey registered the offer and sale of the shares (the “Exercise Shares”) of Odyssey common stock issuable upon exercise of the Warrant in a Prospectus filed with the Securities and Exchange Commission (the “SEC”) and declared effective as of June 1, 2023.
We incurred $
For the three months ended June 30, 2023, we recorded $
37North
On June 29, 2023 we entered into a Note Purchase Agreement (“Note Agreement”) with 37North SPV 11, LLC (“37N”) pursuant to which 37N agreed to loan us $
Any time prior to maturity, we had the option to prepay the indebtedness at an amount of
If 37N delivers an exercise notice and the number of shares issuable is limited by the
18
Accounting considerations
We evaluated the indebtedness and determined that the embedded conversion option is not considered clearly and closely related to the host contract and requires bifurcation. The optional prepayment option provides the right to accelerate the settlement of debt; however, the prepayment options can only be exercised by the Company. As such, they are considered clearly and closely related to the debt host instrument and bifurcation was not necessary. Although the indebtedness did not bear interest, it was required to be repaid at amounts greater than the face value. According to ASC 470-10-35-2, if a debt instrument has a contractual maturity date that can be extended at the issuer’s option, at an increasing rate, the debt discounts and issuance costs must be amortized over the period in which the debt is estimated to be outstanding, even if that period extends beyond the debt’s original contractual maturity date. The difference between the proceeds received and the repayment amount are generally amortized over the expected life of the indebtedness using the effective interest method. Management estimated the expected life to be very limited, so the expected repayment amount of $
Certain default put provisions were not considered to be clearly and closely related to the debt host, but management concluded that the value of these default put provisions was de minimis.
Seller Note Payable
On December 2, 2022, we executed an Amended and Restated Purchase and Sale Agreement ("Purchase and Sale Agreement") with the seller of certain marine equipment ("Seller"). Pursuant to the Purchase and Sale Agreement, Seller agreed to sell us the marine equipment, related tooling items and spares for $
Accrued interest
Total accrued interest associated with our financings was $
NOTE 10 – ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
June 30, |
|
|
December 31, |
|
||
Compensation and incentives |
|
$ |
|
|
$ |
|
||
Professional services |
|
|
|
|
|
|
||
Deposit |
|
|
|
|
|
|
||
Interest |
|
|
|
|
|
|
||
Accrued exploration license fees |
|
|
|
|
|
|
||
Total accrued expenses |
|
$ |
|
|
$ |
|
||
Deposits primarily consist of an earnest money deposit of $
NOTE 11 – STOCKHOLDERS' EQUITY/(DEFICIT)
Common Stock
As noted above, on March 3, 2023, Odyssey, AHMSA, MINOSA and Phosphate One entered into the Termination Agreement whereby the parties agreed that, concurrently with the payment of the Termination Payment, a portion of the MINOSA Notes would be deemed automatically converted into
19
Warrant
In conjunction with the Purchase Agreement on March 6, 2023, as described above, we issued the Warrant to purchase up to
Stock-Based Compensation
The share-based compensation charged against income, related to our options and restricted stock units, for the three months ended June 30, 2023 and 2022, was $
We granted to purchase an aggregate of
|
May 24, 2023 |
|
|
June 9, 2023 |
|
||
Risk free interest rate |
|
% |
|
|
% |
||
Expected life |
|
|
|
||||
Expected volatility |
|
% |
|
|
% |
||
Expected dividend yield |
— |
|
|
— |
|
||
Grant-date fair value |
|
|
|
||||
NOTE 12 – CONCENTRATION OF CREDIT RISK
We do
For the six months ended June 30, 2023 and 2022, we had
NOTE 13 – SALE-LEASEBACK FINANCING OBLIGATIONS
On
The Company accounted for the sale-leaseback transactions as financing transactions with the purchasers of the property in accordance with Accounting Standards Codification ("ASC") Topic 842 as the lease agreements were determined to be finance leases. The Company concluded the lease agreements both met the qualifications to be classified as finance leases due to the obligation to repurchase the equipment.
The presence of a finance lease indicates that control of the equipment has not transferred to the buyer/lessor and, as such, the transactions were each deemed a "failed sale-leaseback" and must be accounted for as a financing arrangement. As a result of this determination, the Company is viewed as having received the sales proceeds from the buyer/lessor in the form of a hypothetical loan collateralized by its leased equipment. The hypothetical loan is payable as principal and interest in the form of “lease payments”
20
to the buyer/lessor. As such, the Company will not derecognize the property from its books for accounting purposes until the lease ends.
As of June 30, 2023, the carrying value of the financing liabilities were $
Under the April 4, 2023 and June 30, 2023 sale-leasebacks, the Company recorded third party payments of $
Remaining future cash payments related to the financing liability, for the fiscal years ending December 31 are as follows:
Year ending |
|
Annual payment obligation |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
|
|
$ |
|
|
NOTE 14 – SUBSEQUENT EVENTS
We have evaluated subsequent events for recognition or disclosure through the date that this Form 10-Q is filed with the SEC.
Ocean Minerals, LLC Acquisition
On June 4, 2023, Odyssey, Odyssey Minerals Cayman Limited, a wholly owned subsidiary of Odyssey (the “Purchaser”), and Ocean Minerals, LLC (“OML”) entered into a Unit Purchase Agreement (the “OML Purchase Agreement”) pursuant to which the Purchaser agreed to purchase, and OML agreed to issue and sell to the Purchaser, an aggregate of
The initial closing with respect to the Purchased Units occurred on July 3, 2023, on which date OML issued
The Purchase Agreement also provides the Purchaser the right, but not the obligation, at any time and from time to time prior to the 18-month anniversary of the initial closing, to purchase up to an additional
The Purchase Agreement sets forth customary representations, warranties, and covenants of the parties and customary conditions to closing and termination provisions.
21
Equity Exchange Agreement
In connection with the transactions contemplated by the Purchase Agreement, Odyssey and the existing members of OML entered into an Equity Exchange Agreement (the “Exchange Agreement”) pursuant to which such members of OML have the right, but not the obligation, to exchange membership interest units of OML held by them for shares of Odyssey’s common stock, exercisable at any time and from time to time during the period beginning on the six-month anniversary of the date of the Exchange Agreement and ending on the date that is the earliest of (a) the date on which a dissolution event occurs with respect to OML, (b) the date on which a material adverse effect occurs with respect to OML, and (c) the date that is 18 months after the date of the Exchange Agreement. If a member of OML elects to exchange membership interest units of OML for shares of Odyssey’s common stock, the number of shares of Odyssey’s common stock such member will receive will equal the product of (x) the number of membership interest units such member desires to exchange, multiplied by (y) a fraction, the numerator of which is the per unit value of the membership interest units and the denominator of which is the per share value of the shares of Odyssey’s common stock, in each case determined pursuant to the Exchange Agreement. Under the terms of the Exchange Agreement, the per unit value of the membership interest units means the greater of $
Notwithstanding anything in the Exchange Agreement to the contrary, the aggregate maximum number of shares of Odyssey’s common stock that may be issued under the Exchange Agreement will not (a) exceed
Contribution Agreement
In connection with the transactions contemplated by the Purchase Agreement, Odyssey, the Purchaser, and OML also entered into a Contribution Agreement pursuant to which additional membership interest units of OML may be issued to the Purchaser in consideration of the contribution to OML by Odyssey from time to time of certain property or other assets and services with an aggregate value of up to $
CIC Services Agreement
On August 8, 2023, the CIC Services Agreement Note was amended to extend the maturity date of the Note to August 15, 2023.
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a narrative of our financial results and an evaluation of our results of operation and financial condition. The discussion should be read in conjunction with our consolidated financial statements, the related notes to the financial statements and our Annual Report on Form 10-K for the year ended December 31, 2022.
In addition to historical information, this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 regarding the Company’s expectations concerning its future operations, earnings and prospects. On the date the forward-looking statements are made, the statements represent the Company’s expectations, but the expectations concerning its future operations, earnings and prospects may change. The Company’s expectations involve risks and uncertainties and are based on many assumptions that the Company believes to be reasonable, but such assumptions may ultimately prove to be inaccurate or incomplete, in whole or in part. Accordingly, there can be no assurances that the Company’s expectations and the forward-looking statements will be correct. Please refer to the Company’s most recent Annual Report on Form 10-K for a description of risk factors that could cause actual results to differ from the expectations stated in this discussion. Odyssey disclaims any obligation to update any of these forward-looking statements except as required by law.
Operational Update
Additional information regarding our announced projects can be found in our Annual Report on Form 10-K for the year ended December 31, 2022. Only projects material in nature or with material status updates are discussed below. We may have other projects in various stages of planning or execution that may not be disclosed for security or legal reasons until considered appropriate by management or required by law.
Our subsea project portfolio contains multiple projects in various stages of development throughout the world and across different mineral resources. We are regularly evaluating new projects through the development of new deposits, acquisition of mineral rights/deposits and through a leveraged contracting model, which allows the company to earn equity in deep-sea mineral projects.
With respect to mineral deposits, Subpart 1300 of Regulations S-K outlines the SEC’s basic mining disclosure policy and what information may be disclosed in public filings.
Subsea Mineral Mining Exploration Projects
ExO Phosphate Project:
The “Exploraciones Oceánicas” ("ExO") Phosphate Project is a rich deposit of phosphate sands located 70-90 meters deep within Mexico’s Exclusive Economic Zone ("EEZ"). This deposit contains a large amount of high-grade phosphate rock that can be extracted on a financially attractive basis (essentially a standard dredging operation). The product will be attractive to Mexican and other world producers of fertilizers and can provide important benefits to Mexico’s agricultural development.
The deposit lies within an exclusive mining concession licensed to the Mexican company Exploraciones Oceánicas S. de R.L. de CV (“ExO”). Oceanica Resources, S. de R.L., a Panamanian company (“Oceanica”) owns 99.99% of ExO, and Odyssey owns 56.29% of Oceanica through Odyssey Marine Enterprises, Ltd., a wholly owned Bahamian company (“Enterprises”).
In 2012, ExO was granted a 50-year mining license by Mexico (extendable for another 50 years at ExO’s option) for the deposit that lies 25-40 km offshore in Baja California Sur.
We spent more than three years preparing an environmentally sustainable development plan with the assistance of experts in marine dredging and leading environmental scientists from around the world. Key features of the environmental plan included:
23
Notwithstanding the factors stated above, in April 2016 the Mexican Ministry of the Environment and Natural Resources (“SEMARNAT”) unlawfully rejected the permit to move forward with the project.
ExO challenged the decision in Mexican Federal court and in March 2018, the Tribunal Federal de Justicia Administrativa (“TFJA”), an 11-judge panel, ruled unanimously that SEMARNAT denied the application in violation of Mexican law and ordered the agency to re-take its decision. Just prior to the change in administration later in 2018, SEMARNAT denied the permit a second time in defiance of the court. ExO is once again challenging the unlawful decision of the Peña Nieto administration before the TFJA. In addition, in April 2019, we filed a North American Free Trade Agreement (“NAFTA”) Claim against Mexico to protect our shareholders’ interests and significant investment in the project.
Our claim seeks compensation of over $2 billion on the basis that SEMARNAT’s wrongful repeated denial of authorization has destroyed the value of our investment in the country and is in violation of the following provisions of NAFTA:
We filed our First Memorial in the NAFTA case in September 2020. It is supported by documentary evidence and 20 expert reports and witness statements. In summary, this evidence includes:
Odyssey filed its First Memorial in the case on September 4, 2020. Mexico filed its Counter-Memorial on February 23, 2021. On June 29, 2021, we filed our reply to Mexico’s Counter-Memorial. Odyssey’s filings are available at www.odysseymarine.com/nafta. Mexico filed its Rejoinder on October 19, 2021. The procedural calendar and case filings are available on the ICSID website. The NAFTA Tribunal hearing took place in early 2022. In accordance with the procedural calendar, written post-hearing briefs were filed in September 2022. The evidentiary phase of the case is now closed, and the Tribunal has begun its deliberations. Odyssey cannot predict the length of these deliberations or when a ruling will be issued, but we remain confident in the merits of our case.
On June 14, 2019, Odyssey and ExO executed an agreement that provided up to $6.5 million in funding for prior, current and future costs of the NAFTA action. On January 31, 2020, this agreement was amended and restated, as a result of which the availability increased to $10.0 million. In December 2020, Odyssey announced it secured an additional $10 million from the funder
24
to aid in our NAFTA case. On June 14, 2021, the funder agreed to fund up to an additional $5.0 million for litigation costs. The funder will not have any right of recourse against us unless the environmental permit is awarded or if proceeds are received (See NOTE 9 Loans Payable – Litigation Financing).
CIC Project:
CIC Limited ("CIC") is a deep-sea mineral exploration company. CIC is supported by a consortium of companies providing expertise and financial contributions in support of development of the project. Odyssey is a member of the consortium, which also includes Royal Boskalis Westminster.
On February 23, 2022, the Cook Islands Seabed Minerals Authority ("SBMA") awarded CIC a five-year exploration license beginning June 2022. Offshore explorations and research commenced in the third quarter of 2022 with positive results in early sampling and testing of vessels and equipment, which informed requirements for viable operational functions as the basis for a longer term operation over the license period. The early operations also resulted in preliminary resource sampling, which will ultimately accrue to the resource evaluation and regional environmental assessment when primary operations commence in 2023.
Through a wholly owned subsidiary, we have earned and now hold approximately 14.67% of the current outstanding equity units of CIC issued in exchange for provision of services by the Company.
We have the ability to earn up to an aggregate of 20.0 million equity units over the next several calendar years, which represents an approximate 16.0% interest in CIC, based upon the currently outstanding equity units. This means we can earn approximately 1.7 million additional equity units in CIC under our current services agreement. We achieved our current equity position through the provision of services rendered to CIC (see Note 6 Investment in Unconsolidated Entity).
Ocean Minerals, LLC Project:
Ocean Minerals LLC (“OML”) is a deepwater critical metals exploration and development company incorporated in the Cayman Islands. Moana Minerals Limited ("Moana Minerals") is a wholly owned subsidiary of Ocean Minerals LLC and is a deepwater critical metals exploration and development company incorporated in the Cook Islands with offices and operations based in Rarotonga, Cook Islands. In 2022, the Cook Island's Seabed Mineral Authority ("SBMA") awarded Moana Minerals a five-year exploration license ("EL3") for a 23,630 square kilometer area in the Cook Islands’ EEZ.
Moana Minerals has discovered polymetallic nodules in their exploration license area and, pursuant to the SBMA's standards and guidelines, it is conducting further exploration activities to increase confidence in the reported mineral resource and size of the reported mineral resources and to secure environmental approvals to perform commercial operations. OML and its project partners are also advancing work to develop recovery systems to harvest and process these high-quality seafloor polymetallic nodules commercially.
On June 4, 2023, Odyssey entered into a purchase agreement to acquire a 13% interest in OML in exchange for a contribution by Odyssey of its interest in a 6,000-meter remotely operated vehicle ("ROV") and cash contributions of up to $10 million in a series of transactions over the next year. The purchase agreement allows Odyssey to acquire up to 40% of OML over the next 18 months at Odyssey’s discretion.
The 6,000-meter rated ROV contributed to OML by Odyssey will provide OML with an additional tool to advance the project toward eventual applications for an environmental permit and harvesting license when exploration and feasibility studies are completed and demonstrate how harvesting can be done without serious environmental harm. Over the next year, OML expects to advance its current JORC-compliant report, substantially increasing resources reporting to indicated and measured confidence levels and completing its preliminary Feasibility Study, among other important project milestones.
South American Projects:
Odyssey reached an exclusive agreement in early 2022 with BlueSea Minerals, Ltd. and BlueSea Minerals Brasil Ltda, (collectively, “BlueSea Group”) to create a new joint venture company (the “JV”) in which Odyssey will own a 75% interest. The JV would have exclusive rights to 19 highly prospective phosphate areas in the Exclusive Economic Zone ("EEZ") of a South American country. Odyssey has determined that it will not actively pursue this project at this time, but it will continue to explore this and other potential opportunities in South America.
25
LIHIR Gold Project:
The exploration license for the Lihir Gold Project covers a subsea area that contains at least five prospective gold exploration targets in two different mineralization types: seamount-related epithermal and modern placer gold. Two subaqueous debris fields within the area are adjacent to the terrestrial Ladolam Gold Mine and are believed to have originated from the same volcanogenic source. The resource lies 500-2,000 meters deep in the Papua New Guinea Exclusive Economic Zone off the coast of Lihir Island, adjacent to the location of one of the world’s largest know terrestrial gold deposits. We have an 85.6% interest in Bismarck Mining Corporation, Ltd, the Papua New Guinea company that holds the exploration license for the project.
Previous exploration expeditions in the license area, including research conducted by Odyssey, indicate it is highly prospective for commercially viable gold content.
In August 2021, Papua New Guinea (“PNG”) issued a permit extension allowing Odyssey to continue with our exploration program. We have developed an exploration program for the Lihir Gold Project to validate and quantify the precious and base metal content of the prospective resource. The Company met with local regulatory authorities, specialists in local mining, environmental legal experts, and logistics support service companies in PNG to establish baseline business functions essential for a successful program to support upcoming marine exploration operations in the license area. This offshore work began in late 2021 and is ongoing. Bismarck and Odyssey value the environment and respect the interests and people of Papua New Guinea and Lihir and are committed to transparent sharing of all environmental data collected during the exploration program.
Offshore survey and mapping operations commenced in December 2021 in the Papua New Guinea, Lihir license area and was completed in 2022. This work produced a high-resolution acoustic terrain model of the seafloor in the area, as well as acquiring acoustic images of subseafloor sediments and lithology. This allowed characterization of the geologic setting of the area and essentially created a “snapshot” of the environment. These activities will help us to further characterize the value of this project and allow informed decision making on how to proceed with environmentally sensitive direct geologic sampling. In the first half of 2023, a comprehensive project plan was designed identifying specific target areas for geological and environmental samples to be collected in future offshore operations. No timetable has been set for operations to commence, as operational plans are currently being developed.
Odyssey’s multi-year exploration program will focus on robust environmental surveys and studies that will accrue to environmental permitting in compliance with PNG’s requirements as well as the development of an Environmental Impact Assessment (“EIA”). During the exploration phase, steps to validate and quantify the precious and base metal content of the prospective resource will also be carried out. Once completed, if the data shows extraction can be carried out responsibly, Odyssey will apply for a Mining License.
Further development of this project is dependent on the characterization of any present resources during exploration and license approvals.
Critical Accounting Policies and Changes to Accounting Policies
There have been no material changes in our critical accounting estimates since December 31, 2022.
26
Results of Operations
The dollar values discussed in the following tables, except as otherwise indicated, are approximations to the nearest thousands and therefore do not necessarily sum in columns or rows. For more detail refer to the Financial Statements in Part I, Item 1.
Three months ended June 30, 2023, compared to three months ended June 30, 2022
Increase/(Decrease) |
|
|
|
|
|
|
|
2023 vs. 2022 |
|
|||||||
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
Total revenues |
|
$ |
173 |
|
|
$ |
390 |
|
|
$ |
(217 |
) |
|
|
(55.6 |
)% |
Marketing, general and administrative |
|
|
1,821 |
|
|
|
2,292 |
|
|
$ |
(471 |
) |
|
|
(20.5 |
)% |
Operations and research |
|
|
1,499 |
|
|
|
1,230 |
|
|
$ |
269 |
|
|
|
21.9 |
% |
Total operating expenses |
|
$ |
3,320 |
|
|
$ |
3,522 |
|
|
$ |
(202 |
) |
|
|
(5.7 |
)% |
Total other income (expense) |
|
$ |
(4,895 |
) |
|
$ |
(3,410 |
) |
|
$ |
(1,485 |
) |
|
|
43.5 |
% |
Income tax benefit (provision) |
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
3 |
|
|
|
100.0 |
% |
Non-controlling interest |
|
$ |
2,315 |
|
|
$ |
1,858 |
|
|
$ |
457 |
|
|
|
24.6 |
% |
Net income (loss) |
|
$ |
(5,724 |
) |
|
$ |
(4,683 |
) |
|
$ |
(1,041 |
) |
|
|
22.2 |
% |
Revenue
The revenue generated in each period was a result of performing marine research and project administration for our customers and related parties. Total revenue for the three months ended June 30, 2023 decreased $217,000 to $173,000 compared to $390,000 from the three months ended June 30, 2022. One company to which we provided these services in both years is a deep-sea mineral exploration company, CIC, which we consider to be a related party since it is owned and controlled by our past Chairman of the Board (see NOTE 5 Related Party Transactions).
Operating Expenses
Marketing, general and administrative expenses primarily include all costs within the following departments: Executive, Finance & Accounting, Legal, Information Technology, Human Resources, Marketing & Communications, Sales and Business Development. Expenses decreased $471,000 to $1.8 million for the three months ended June 30, 2023, compared to $2.3 million from the three months ended June 30, 2022. The items contributing to this $471,000 decrease were a decrease of $86,000 in employee benefits and compensation related expenses, a decrease of $170,000 in legal and other professional expenses, and a decrease in share-based compensation of $168,000.
Operations and research expenses are primarily focused around deep-sea mineral exploration, which include minerals research, scientific services, marine operations and project management. Operations and research expenses increased by $269,000 from three months ended June 30, 2023 to the three months ended June 30, 2022 a result of a $530,000 increase in expenses for marine equipment preparing for sea testing and a $168,000 increase in employee benefits and compensation related expenses, offset by a $361,000 decrease in litigation financing costs directly associated with our NAFTA arbitration.
Total Other Income and Expense
Total other income and expense was $4.9 million and $3.4 million in net expenses for three months ended June 30, 2023 and 2022, respectively, resulting in a net expense increase of $1.5 million. This variance was attributable to a $771,000 increase in interest expense in connection with our NAFTA litigation funding. Additionally, during the three months ended June 30, 2023, we recorded a $301,000 loss on the extinguishment of debt as a result of the write off of the CIC note receivable original issue discount.
Taxes and Non-Controlling Interest
Due to losses, we did not accrue any taxes in either period ending 2023 or 2022.
Starting in 2013, we became the controlling shareholder of Oceanica. Our financial statements thus include the financial results of Oceanica and its subsidiary, ExO. Except for intercompany transactions that are fully eliminated upon consolidation, Oceanica’s revenues and expenses, in their entirety, are shown in our condensed consolidated financial statements. The share of Oceanica’s net losses corresponding to the equity of Oceanica not owned by us is subsequently shown as the “Non-Controlling Interest” in the condensed consolidated statements of operations. The non-controlling interest adjustment in the three months ended
27
June 30, 2023 was $2.3 million as compared to $1.9 million for the three months ended June 30, 2022. The substance of these amounts is primarily due to the increase in permits and other standard operating costs.
Six months ended June 30, 2023, compared to six months ended June 30, 2022
Increase/(Decrease) |
|
|
|
|
|
|
|
2023 vs. 2022 |
|
|||||||
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
||||
Total revenues |
|
$ |
461 |
|
|
$ |
690 |
|
|
$ |
(229 |
) |
|
|
(33 |
)% |
Marketing, general and administrative |
|
|
3,699 |
|
|
|
4,211 |
|
|
$ |
(512 |
) |
|
|
(12.2 |
)% |
Operations and research |
|
|
3,286 |
|
|
|
6,286 |
|
|
$ |
(3,000 |
) |
|
|
(47.7 |
)% |
Total operating expenses |
|
$ |
6,985 |
|
|
$ |
10,497 |
|
|
$ |
(3,511 |
) |
|
|
(33.5 |
)% |
Total other income (expense) |
|
$ |
12,841 |
|
|
$ |
(6,826 |
) |
|
$ |
19,667 |
|
|
|
(288.1 |
)% |
Income tax benefit (provision) |
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
9 |
|
|
|
100 |
% |
Non-controlling interest |
|
$ |
4,551 |
|
|
$ |
3,719 |
|
|
$ |
832 |
|
|
|
22.4 |
% |
Net income (loss) |
|
$ |
10,877 |
|
|
$ |
(12,914 |
) |
|
$ |
23,791 |
|
|
|
(184.2 |
)% |
Revenue
Total revenue for the six months ended June 30, 2023 decreased $229,000 to $461,000 as compared to $690,000 from the six months ended June 30, 2022, which is consistent as compared to the same period a year ago.
Operating Expenses
Marketing, general and administrative expenses decreased $512,000 to $3.7 million for the six months ended June 30, 2023 as compared to $4.2 million for the six months ended June 30, 2022. The items contributing to this $512,000 decrease were a $359,000 decrease in share-based compensation expense, a $52,000 decrease in employee benefits and compensation related expenses, a $296,000 decrease in legal expenses. The decrease was offset by a $248,000 increase in other professional services.
Operations and research expenses decreased by $3.0 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 as a result of a $4.6 million decrease in litigation finance costs, offset by a $1.2 million increase in expenses for marine equipment preparing for sea testing, a $273,000 increase in depreciation expense, and a $105,000 increase in employee benefits and compensation related expenses.
Total Other Income and Expense
Total other income and expense was $12.8 million in net income and $6.8 million in net expense for 2023 and 2022, respectively, resulting in a net income increase of $19.7 million. This variance was attributable to a $21.2 million gain on debt extinguishment, a $1.4 million increase in interest expense and a $548,000 increase in foreign exchange rates expense.
Taxes and Non-Controlling Interest
The non-controlling interest adjustment for the six months ended June 30, 2023 was $4.6 million as compared to $3.7 million for the six months ended June 30, 2022. The substance of these amounts is primarily due to the increase in permits and other standard operating costs.
Liquidity and Capital Resources
|
|
Six Months Ended |
|
|||||
(In thousands) |
|
June 30, |
|
|
June 30, |
|
||
Summary of Cash Flows: |
|
|
|
|
|
|
||
Net cash used in operating activities |
|
$ |
(7,369 |
) |
|
$ |
(2,751 |
) |
Net cash used in investing activities |
|
|
943 |
|
|
|
(312 |
) |
Net cash provided by financing activities |
|
|
6,815 |
|
|
|
11,323 |
|
Net decrease in cash and cash equivalents |
|
$ |
389 |
|
|
$ |
8,260 |
|
Beginning cash and cash equivalents |
|
|
1,443 |
|
|
|
2,275 |
|
Ending cash and cash equivalents |
|
$ |
1,832 |
|
|
$ |
10,535 |
|
28
Discussion of Cash Flows
Net cash used in operating activities for the six months ended June 30, 2023 was $7.4 million. This represents an approximate $4.6 million increase in use of funds when compared to the use of $2.8 million for the six months ended June 30, 2022. The net cash used in operating activities reflected a net loss before non-controlling interest of $8.0 million and is adjusted primarily by non-cash items of $20.0 million, which primarily includes share-based compensation of 373,000, note payable accretion of $858,000, offset by an investment in unconsolidated entity of $438,000. Other operating activities resulted in an increase in working capital of $6.3 million. This $6.3 million increase includes a $8.6 million increase to accrued expenses and an increase of $1.1 million to accounts payable in 2023. The increase in accrued expenses and accounts payable is predominantly related to our NAFTA financed litigation.
Cash flows used in investing activities for the six months ended June 30, 2023 and 2022 were minimal. During the six months ended June 30, 2023 the net cash used in investing activities was for the purchase of $943,000 of property and equipment.
Cash flows provided by financing activities for the six months ended June 30, 2023 were $6.8 million. The $6.8 million comprises $15.1 million received from the issuance of loans payable offset by the $11.1 million of debt obligation payments and $1.0 million attributable to a waiver fee payment. Cash flows provided by financing activities for the six months ended June 30, 2022 were $11.3 million. The $11.3 million comprises $2.2 million received from issuance of loans payable, $16.5 million the sale of common stock, $1.8 million due to offering cost paid on the sale of said common stock, $524,000 for the repurchase of stock based awards, and $5.1 million of debt obligation payments.
Other Cash Flow and Equity Areas
General Discussion
At June 30, 2023, we had cash and cash equivalents of $1.8 million, an increase of $0.4 million from the December 31, 2022 balance of $1.4 million. Financial debt of the company was $36.8 million at June 30, 2023 and $46.7 million at December 31, 2022. During March 2023, we entered Note and Warrant Purchase Agreement, pursuant to which we issued and sold to an institutional investor (a) a promissory note (the “DP SPV Note”) in the principal amount of up to $14,0 million, of which $13.1 million was advanced in March 2023 and an additional $450,000 was advanced during the three months ended June 30, 2023 and (b) a warrant (the “Warrant” and, together with the Note, the “Securities”) to purchase up to 3,465,778 shares of Odyssey’s common stock. We also paid AHMSA $9.0 million in cash to terminate the Minosa Notes in cash and converted a portion of the MINOSA Notes into 304,879 shares of Odyssey’s common stock. During April 2023, Odyssey entered into a $3.5 million sale-leaseback arrangement for marine equipment and CIC repaid principal and interest in the aggregate amount of $1,068,000 in full satisfaction of the convertible promissory note and the Loan Agreement. A portion of the proceeds of the April sale-leaseback transaction was used to repay the note outstanding to the seller of the marine equipment that we issued in December 2022. During June 2023, Odyssey entered into note purchase agreement with 37North SPV 11, LLC for $1.0 million and entered into a $1.0 million sale-leaseback arrangement for marine equipment.
Since SEMARNAT declined to approve the environmental permit application of our Mexican subsidiary in April 2016 and again in October 2018, notwithstanding that the Superior Court of the Federal Court of Administrative Justice (“TFJA”) in Mexico nullified SEMARNAT’s 2016 denial, we continue to support the efforts of our subsidiaries and partners to work through the administrative, legal and political process necessary to have the decision reviewed and overturned in the court of the TFJA. On January 4, 2019, we initiated the process to submit a claim against Mexico to arbitration under the investment protection chapter of the NAFTA. On September 4, 2020, we filed our First Memorial with the Tribunal. The First Memorial is the filing that fully lays out our case, witnesses and evidence for the Tribunal. Mexico filed its counter-memorial, which is available on the International Centre for Settlement of Investment Disputes (“ICSID”) website, on February 23, 2021. On June 29, 2021, we filed our reply to Mexico’s counter-memorial. Odyssey’s filings are available at www.odysseymarine.com/nafta. The NAFTA Tribunal hearing took place in early 2022. In accordance with the procedural calendar, written post hearing briefs were filed in September 2022. The evidentiary phase of the case is now closed.
29
Financings
The Company’s consolidated notes payable consisted of the following carrying values and related interest expense at:
|
|
Note payable |
|
|
Interest expense |
|
||||||||||||||||||
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||||
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
||||||
MINOSA 1 |
|
$ |
— |
|
|
$ |
14,750,001 |
|
|
$ |
— |
|
|
$ |
294,191 |
|
|
$ |
210,137 |
|
|
$ |
585,150 |
|
MINOSA 2 |
|
|
— |
|
|
|
5,050,000 |
|
|
|
— |
|
|
|
125,904 |
|
|
|
89,932 |
|
|
|
250,424 |
|
Litigation financing |
|
|
23,706,579 |
|
|
|
24,347,513 |
|
|
|
3,253,645 |
|
|
|
2,977,352 |
|
|
|
6,355,709 |
|
|
|
5,458,020 |
|
DP SPV I LLC note |
|
|
10,789,776 |
|
|
|
— |
|
|
|
924,676 |
|
|
|
— |
|
|
|
1,240,656 |
|
|
|
— |
|
Emergency Injury Disaster Loan |
|
|
150,000 |
|
|
|
149,900 |
|
|
|
1,402 |
|
|
|
1,461 |
|
|
|
2,789 |
|
|
|
2,922 |
|
Vendor note payable |
|
|
484,009 |
|
|
|
484,009 |
|
|
|
14,480 |
|
|
|
14,481 |
|
|
|
28,802 |
|
|
|
28,803 |
|
Seller note payable |
|
|
— |
|
|
|
1,400,000 |
|
|
|
1,962 |
|
|
|
— |
|
|
|
64,696 |
|
|
|
— |
|
AFCO Insurance note payable |
|
|
188,037 |
|
|
|
562,280 |
|
|
|
2,849 |
|
|
|
— |
|
|
|
10,595 |
|
|
|
— |
|
Monaco |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
37,000 |
|
|
|
— |
|
|
|
148,000 |
|
Pignatelli note |
|
|
500,000 |
|
|
|
— |
|
|
|
12,466 |
|
|
|
— |
|
|
|
16,027 |
|
|
|
— |
|
Galileo note |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
723 |
|
|
|
— |
|
37North |
|
|
1,004,918 |
|
|
|
— |
|
|
|
4,918 |
|
|
|
100,000 |
|
|
|
4,918 |
|
|
|
300,000 |
|
Finance liability |
|
|
4,101,826 |
|
|
|
— |
|
|
|
116,826 |
|
|
|
— |
|
|
|
116,826 |
|
|
|
— |
|
|
|
$ |
40,925,145 |
|
|
$ |
46,743,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Litigation Financing
Waiver and Consent
On January 31, 2020, Odyssey and ExO (together with Odyssey, the "Claimholder") and Poplar Falls LLC (the "Funder") entered into an Amended and Restated International Claims Enforcement Agreement (as amended, the "Agreement"), pursuant to which the Funder agreed to provide funding to the Claimholder to facilitate the prosecution and recovery of the claim by the Claimholder against the United Mexican States under Chapter Eleven of the North American Free Trade Agreement.
On March 6, 2023, the Claimholder and the Funder under the Agreement entered into a Waiver and Consent Agreement, pursuant to which, among other things, (a) the Funder consented to allow the Claimholder to fund certain costs and expenses arising from the Subject Claim from the Claimholder’s own capital in an aggregate amount not to exceed $5,000,000, and (b) Odyssey paid a $1,000,000 nonrefundable waiver fee to the Funder. The waiver fee was accounted for as a debt modification and recorded as an additional debt discount of $1,000,000, which is being amortized through December 31, 2025, using the effective interest method, which is charged to interest expense.
For the three months ended June 30, 2023 and 2022, we recorded $86,130 and $72,013, respectively, of interest expense from the amortization of the debt discount and $36,724 and $36,724 of interest from the fee amortization, respectively. For the six months ended June 30, 2023 and 2022, we recorded $167,614 and $140,153, respectively of interest expense from the amortization of the debt discount and $73,448 and $73,448 of interest from the fee amortization, respectively. The June 30, 2023 and December 31, 2022 carrying value of the debt was $23,706,579 and $24,347,513, respectively, and were net of unamortized debt fees of $73,449 and $146,897, respectively, as well as the net unamortized debt discount of $186,382 and $353,996, respectively, associated with the fair value of the warrant. The total face value of this obligation at June 30, 2023 and December 31, 2022 was $24,853,038 and $24,848,406, respectively.
DP SPV I LLC
On March 6, 2023, Odyssey entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with an institutional investor pursuant to which Odyssey issued and sold to the investor (a) a promissory note (the “ DP SPV Note”) in the principal amount of up to $14,0 million, of which $13.1 million was advanced in March 2023 and an additional $450,000 was advanced during the three months ended June 30, 2023 and (b) a warrant (the “Warrant” and, together with the DP SPV Note, the “Securities”) to purchase shares of Odyssey’s common stock.
The principal amount outstanding under the Note bears interest at the rate of 11.0% per annum, and interest is payable in cash on a quarterly basis, except that, (a) at Odyssey’s option and upon notice to the holder of the DP SPV Note, any quarterly interest payment may be satisfied, in lieu of paying such cash interest, by adding an equivalent amount to the principal amount of the DP SPV Note (“PIK Interest”), and (b) the first quarterly interest payment due under the DP SPV Note will be satisfied with PIK Interest. The DP SPV Note provides Odyssey with the right, but not the obligation, upon notice to the holder of the DP SPV Note
30
to redeem (x) at any time before the first anniversary of the issuance of the DP SPV Note, all or any portion of the indebtedness outstanding under the Note (together with all accrued and unpaid interest, including PIK Interest) for an amount equal to one hundred twenty percent (120%) of the outstanding principal amount so being redeemed, and (y) at any time on or after the first anniversary of the issuance of the DP SPV Note, all or any portion of the indebtedness outstanding under the DP SPV Note (together with all accrued and unpaid interest, including PIK Interest). Unless the DP SPV Note is sooner redeemed at Odyssey’s option, all indebtedness under the DP SPV Note is due and payable on September 6, 2024. Under the terms of the Purchase Agreement, Odyssey agreed to use the proceeds of the sale of the Securities to fund Odyssey’s obligations under the Termination Agreement (as defined below), to pay legal fees and costs related to Odyssey’s NAFTA arbitration against the United Mexican States, to pay fees and expenses related to the transactions contemplated by the Purchase Agreement, and for working capital and other general corporate expenditures. Odyssey’s obligations under DP SPV Note are secured by a security interest in substantially all of Odyssey’s assets (subject to limited stated exclusions).
Under the terms of the Warrant, the holder has the right for a period of three years after issuance to purchase up to 3,465,778 shares of Odyssey’s common stock at an exercise price of $3.78 per share, which represents 120.0% of the official closing price of Odyssey’s common stock on the NASDAQ Capital Market immediately preceding the signing of the Purchase Agreement, upon delivery of a notice of exercise to Odyssey. Upon exercise of the Warrant, Odyssey has the option to either (a) deliver the shares of common stock issuable upon exercise or (b) pay to the holder an amount equal to the difference between (i) the aggregate exercise price payable under the notice of exercise and (ii) the product of (A) the number of shares of common stock indicated in the notice of exercise multiplied by (B) the arithmetic average of the daily volume-weighted average price of the common stock on the NASDAQ Capital Market for the five consecutive trading days ending on, and including, the trading day immediately prior to the date of the notice of exercise. The warrant provides for customary adjustments to the exercise price and the number of shares of common stock issuable upon exercise in the event of a stock split, recapitalization, reclassification, combination or exchange of shares, separation, reorganization, liquidation, or the like.
In connection with the execution and delivery of the Purchase Agreement, Odyssey entered into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which Odyssey agreed to register the offer and sale of the shares (the “Exercise Shares”) of Odyssey common stock issuable upon exercise of the Warrant. Pursuant to the Registration Rights Agreement, Odyssey agreed to prepare and file with the Securities and Exchange Commission (the “SEC”) a registration statement covering the resale of the Exercise Shares and to use its reasonable best efforts to have the registration statement declared effective by the SEC as soon as practicable thereafter, subject to stated deadlines.
We incurred $98,504 in related fees which are being amortized over the term of the Purchase Agreement and charged to legal expense with-in marketing, general and administrative expense. The total proceeds of $13.6 million were allocated between debt and equity for the warrants based on the relative fair value of the two instruments. As a result, there was a debt discount of $3,536.154, which is being amortized over the remaining term of the Purchase Agreement using the effective interest method, which is charged to interest expense.
For the six months ended June 30, 2023, we recorded $750,871 of interest expense from the amortization of the debt discount and interest from the fee amortization, respectively. The June 30, 2023 carrying value of the debt was $10,789,776 and was net of unamortized debt fees of $77,587, net of unamortized debt discount of $2,785,283 associated with the fair value of the warrant. The total face value of this obligation at June 30, 2023 was $13,652,646.
37North
On June 29, 2023 we entered into a Note Purchase Agreement (“Note Agreement”) with 37North SPV 11, LLC (“37N”) pursuant to which 37N agreed to loan us $1,000,000. The proceeds from this transaction were received in full on June 29, 2023. Pursuant to the Note Agreement, the indebtedness was non-interest bearing and matured on July 30, 2023. At any time from 31 days after the maturity date, 37N has the option to convert all or a portion of the outstanding amount of the indebtedness into conversion shares equal to the quotient obtained by dividing (A) 120% of the amount of the indebtedness, by (B) the lower of $3.66 or 70% of the 10-day volume-weighted average price of Common Stock. The aggregate maximum number of shares of Common Stock to be issued in connection with conversion of the indebtedness is not to exceed (i) 19.9% of the outstanding shares of Common Stock prior to the date of the Agreement, (ii) 19.9% of the combined voting power of the outstanding voting securities, or (iii) exceed the applicable listing rules of the Principal Market if the stockholders did not approve the issuance of Common Stock upon conversion of the indebtedness.
Any time prior to maturity, we had the option to prepay the indebtedness at an amount of 108% of the unpaid principal. From the maturity date to 29 days after the maturity date (August 27, 2023), we are permitted to repay all (but not less than) of an amount equal to 112.5% of the unpaid amount of the indebtedness. At any time after the 30th day after the maturity date (August 28, 2023), we are permitted to repay all (but not less than) of an amount equal to 115% of the unpaid amount of the indebtedness
31
after 10 days' notice. If 37N delivers an exercise notice during this 10-day period, the Note would be converted to shares of Common Stock, instead of being repaid.
If 37N delivers an exercise notice and the number of shares issuable is limited by the 19.9% limitation outlined above, then we are permitted to repay all of the remaining unpaid amount of the Loan in an amount equal to 130% of the remaining unpaid amount.
Accounting considerations
We evaluated the indebtedness and determined that the embedded conversion option is not considered clearly and closely related to the host contract and requires bifurcation. The optional prepayment option provides the right to accelerate the settlement of debt; however, the prepayment options can only be exercised by the Company. As such, they are considered clearly and closely related to the debt host instrument and bifurcation was not necessary. Although the indebtedness did not bear interest, it was required to be repaid at amounts greater than the face value. According to ASC 470-10-35-2, if a debt instrument has a contractual maturity date that can be extended at the issuer’s option, at an increasing rate, the debt discounts and issuance costs must be amortized over the period in which the debt is estimated to be outstanding, even if that period extends beyond the debt’s original contractual maturity date. The difference between the proceeds received and the repayment amount are generally amortized over the expected life of the indebtedness using the effective interest method. Management estimated the expected life to be very limited, so the expected repayment amount of $1.2 million, representing 120% of the indebtedness, was recorded upon issuance of the Note Agreement.
Certain default put provisions were not considered to be clearly and closely related to the debt host, but management concluded that the value of these default put provisions was de minimis.
Going Concern Consideration
We have experienced several years of net losses and may continue to do so. Our ability to generate net income or positive cash flows for the following twelve months is dependent upon financings, our success in developing and monetizing our interests in mineral exploration entities, generating income from exploration charters, collecting on amounts owed to us.
Our 2023 business plan requires us to generate new cash inflows to effectively allow us to perform our planned projects. We continually plan to generate new cash inflows through the monetization of our receivables and equity stakes in seabed mineral companies, financings, syndications or other partnership opportunities. If cash inflow ever became insufficient to meet our desired projected business plan requirements, we would be required to follow a contingency business plan based on curtailed expenses and fewer cash requirements. During March 2023, we entered Note and Warrant Purchase Agreement pursuant to which we issued and sold to an institutional investor a promissory note (the “Note”) in the principal amount of up to $14.0 million, of which $13.1 million was advanced in March 2023 and an additional $450,000 was advanced during the three months ended June 30, 2023. On April 4, 2023, and June 30, Odyssey entered into a $3.5 million and $1.0 million sale-leaseback arrangements, respectively, for marine equipment. A portion of the proceeds of the April sale-leaseback transaction was used to repay the note outstanding to the seller of the marine equipment that we issued in December 2022. On April 6, 2023, CIC repaid principal and interest in the aggregate amount of $1,068,000 in full satisfaction of the convertible promissory note and the Loan Agreement. On June 26, 2023, Odyssey entered into note purchase agreement with 37North SPV 11, LLC for $1.0 million. The balance of the proceeds from the Note, after payment of certain obligations, the sale-leaseback arrangements and the CIC loan and note repayment, together with other anticipated cash inflows, are expected to provide operating funds through 2024.
Our consolidated non-restricted cash balance at June 30, 2023 was $1.8 million. We have a working capital deficit at June 30, 2023 of $35.7 million. The total consolidated book value of our assets was approximately $14.0 million at June 30, 2023, which includes cash of $1.8 million. The fair market value of these assets may differ from their net carrying book value. The factors noted above raise substantial doubt about our ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
New Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments in this update are effective for public business entities that meet the definition of a Securities and Exchange Commission (“SEC”) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities,
32
the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year.
The amendments in ASU No. 2020-06 affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements in this update. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. The FASB simplified the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. Those amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this update affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. We adopted this ASU as of January 1, 2022. Adoption did not have a material impact on its consolidated financial.
Other recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not or are not believed by management to have a material effect, if any, on the Company’s financial statements.
Off-Balance Sheet Arrangements
We do not engage in off-balance sheet financing arrangements. In particular, we do not have any interest in so-called limited purpose entities, which include special purpose entities (“SPEs”) and structured finance entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. We do not believe we have material market risk exposure and have not entered into any market risk sensitive instruments to mitigate these risks or for trading or speculative purposes.
We currently do not have any debt obligations with variable interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedure
Disclosure controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and principal financial officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our CEO and CFO, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our management, including our CEO and CFO, concluded that our
33
disclosure controls and procedures were not effective as of June 30, 2023, as the result of the material weakness in our internal control over financial reporting discussed below, which is currently being remediated.
Notwithstanding the material weakness, management believes the consolidated financial statements included in this report present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows for each of the periods presented in this report in conformity with accounting principles generally accepted in the United States.
Material Weakness in Internal Control over Financial Reporting
In connection with our evaluation for the period ended June 30, 2023, we identified a material weakness in our internal control over financial reporting for the period ended June 30, 2023, relating to the appropriate review of accounting positions for certain significant transactions. Specifically, (a) the Company does not have sufficient resources with the adequate technical skills to identify and evaluate specific accounting positions and conclusions, and (b) the Company has inadequate processes and controls to ensure appropriate level of precision of review related to our financial statement footnote disclosures.
The material weakness did not result in any material misstatement in our interim financial statements or disclosures as set forth in this report, and there were no changes required to any of our previously released interim or audited consolidated financial statements.
Remediation Efforts to Address Material Weakness
Management is committed to maintaining a strong internal control environment. In response to the identified material weakness, management, with the oversight of the Audit Committee of the Board of Directors, has taken actions to remediate the material weakness in internal control over financial reporting by (a) engaging an Interim Controller with responsibility for monitoring the performance of controls by control owners, (b) commencing an evaluation of the skills and experience of our existing personnel with respect to public company experience and appropriate level of expertise in the respective areas of accounting, SEC financial reporting and associated internal controls commensurate with the type, volume and complexity of our accounting operations, transactions and reporting requirements, and (c) identifying accounting advisory consultants to engage to provide additional depth and breadth in our technical accounting, and will continue to utilize such consultants as appropriate until we have ensured that our personnel have the appropriate expertise and experience. In addition, we have reinforced the importance of adherence to Company policies regarding control performance and related documentation with control owners, identified training and resource needs for control owners, and developed monitoring activities to validate the performance of controls by control owners.
The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company’s processes, procedures and controls related to management’s review of accounting positions for our transactions and will address the related material weakness. However, the material weakness cannot be considered remediated until the applicable control has operated for a sufficient period of time, and management has concluded, through testing, that the control is operating effectively.
Changes in Internal Control over Financial Reporting
Other than the material weakness described above and the ongoing remediation of such material weakness, there were no changes during the three and six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company may be subject to a variety of claims or suits that arise from time to time in the ordinary course of business. We are not a party to any litigation as a defendant where a loss contingency is required to be reflected in our condensed consolidated financial statements.
34
ITEM 1A. Risk Factors
For information regarding risk factors, please refer to Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Investors should consider such risk factors prior to making an investment decision with respect to the Company’s securities.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 4. Mine Safety Disclosures
Not applicable
ITEM 5. Other Information
Not applicable
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ITEM 6. Exhibits
31.1 |
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32.1 |
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101 |
Interactive Data File |
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ODYSSEY MARINE EXPLORATION, INC. |
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Date: August 14, 2023 |
By: |
/s/ Mark D. Gordon |
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Mark D. Gordon |
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Chief Executive Officer |
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Principal Executive Officer |
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Principal Financial and Accounting Officer |
37
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark D. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Odyssey Marine Exploration, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 14, 2023
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/s/ Mark D. Gordon |
Mark D. Gordon |
Chief Executive Officer, as Principal Executive Officer and Principal Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
ODYSSEY MARINE EXPLORATION, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I hereby certify that, to the best of my knowledge, the quarterly report on Form 10-Q of Odyssey Marine Exploration, Inc. for the period ending June 30, 2023:
(1) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of Odyssey Marine Exploration, Inc.
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/s/ Mark D. Gordon |
Mark D. Gordon |
Chief Executive Officer, as Principal Executive Officer and Principal Financial Officer |
August 14, 2023 |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Odyssey Marine Exploration, Inc. and will be retained by Odyssey Marine Exploration, Inc. and furnished to the Securities and Exchange Commission upon request.