Odyssey Marine Exploration Inc 10-Q for FY2024 Q1
Odyssey Marine Exploration Inc (OMEX)
About this 10-Q
Odyssey Marine Exploration Inc filed this 10-Q on May 20, 2024, covering the quarter ended March 31, 2024 (FY2024 Q1).
Headline figures
Quarter ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $203.06K
- down 29.7% from $288.74K a year earlier
- Net income
- $3.5M
- down 84.3% from net income of $22.31M a year earlier
- Diluted EPS
- -$0.18
- compared with $1.12 a year earlier
Table of Contents
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| Large accelerated filer: | ☐ | Accelerated filer: | ☐ | |||||
Non-accelerated filer |
☒ |
Smaller reporting company: | ||||||
| Emerging growth company: | ||||||||
Table of Contents
| Page No. | ||||||
| Part I: |
Financial Information |
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| Item 1. |
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| Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 |
3 | |||||
| Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023 |
4 | |||||
| 5 | ||||||
| Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 |
6 | |||||
| 7 – 32 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 – 43 | ||||
| Item 3. |
43 | |||||
| Item 4. |
43 | |||||
| Part II: |
Other Information |
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| Item 1. |
44 | |||||
| Item 1A. |
44 | |||||
| Item 2. |
44 | |||||
| Item 4. |
44 | |||||
| Item 5. |
44 | |||||
| Item 6. |
45 | |||||
| 46 | ||||||
2
Table of Contents
(unaudited) March 31, 2024 |
December 31, 2023 |
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| ASSETS |
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| CURRENT ASSETS |
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| Cash and cash equivalents |
$ | $ | ||||||
| Accounts and other related party receivables |
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| Other current assets |
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| Total current assets |
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| NON-CURRENT ASSETS |
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| Investment in unconsolidated entities |
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| Option to purchase equity securities in related party |
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| Bismarck exploration license |
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| Property and equipment, net |
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| Right of use - operating leases |
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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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| LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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| CURRENT LIABILITIES |
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| Accounts payable |
$ | $ | ||||||
| Accrued expenses |
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| Operating lease liability, current portion |
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| Forward contract liability |
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| Put option liability |
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| Loans payable, current portion |
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| Total current liabilities |
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| LONG-TERM LIABILITIES |
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| Loans payable |
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| Warrant liabilities |
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| Litigation financing and other |
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| Deferred contract liability |
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| Total long-term liabilities |
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| Total liabilities |
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| Commitments and contingencies ( NOTE 9 ) |
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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 |
( |
) | ( |
) | ||||
| Non-controlling interest |
( |
) | ( |
) | ||||
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| Total stockholders’ deficit |
( |
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| Total liabilities and stockholders’ deficit |
$ | $ | ||||||
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Three Months Ended |
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March 31, 2024 |
March 31, 2023 |
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(As restated) |
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| REVENUE |
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| Marine services |
$ | $ | ||||||
| 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 |
( |
) | ( |
) | ||||
| OTHER INCOME (EXPENSE) |
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| Interest income |
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| Interest expense |
( |
) | ( |
) | ||||
| Loss on equity method investment |
( |
) | ||||||
| Change in derivatives liabilities fair value |
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| Gain 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 |
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| NET INCOME / (LOSS) |
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| Net loss attributable to non-controlling interest |
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| NET INCOME / (LOSS) attributable to Odyssey Marine Exploration, Inc. |
$ | $ | ||||||
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| NET INCOME / (LOSS) PER SHARE |
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| Basic (See Note 2) |
$ | $ | ||||||
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| Diluted (See Note 2) |
$ | ( |
) | $ | ||||
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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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Three Months Ended March 31, 2024 |
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Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Non-controlling Interest |
Total |
||||||||||||||||
| Balance at December 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||
| Share-based compensation |
— | — | ||||||||||||||||||
| Cancellation of stock awards for payment of withholding tax requirements |
( |
) | ( |
) | ||||||||||||||||
| Director fees settled with stock options |
— | — | — | |||||||||||||||||
| Fair value of warrants classified as liabilities |
— | ( |
) | — | — | ( |
) | |||||||||||||
| Net income (loss) |
— | — | ( |
) | ||||||||||||||||
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| Balance at March 31, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||
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Three Months Ended March 31, 2023 |
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Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Non-controlling Interest |
Total |
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| Balance at December 31, 2022 (As restated) |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||
| Share-based compensation |
— | — | ||||||||||||||||||
| Common stock issued for debt extinguishment |
— | — | ||||||||||||||||||
| Fair value of warrants issued |
— | — | — | |||||||||||||||||
| Net income / (loss) |
— | — | ( |
) | ||||||||||||||||
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| Balance at March 31, 2023 (As restated) |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||
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Three Months Ended |
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March 31, 2024 |
March 31, 2023 |
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(As restated) |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net income / (loss) |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: |
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| Services provided to unconsolidated entities |
( |
) | ( |
) | ||||
| Depreciation |
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| Financing fees amortization |
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| Amortization of finance liability |
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| Amortization of deferred discount |
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| Note payable interest accretion |
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| Note payable interest paid in kind |
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| Note receivable interest accretion |
( |
) | ||||||
| Right of use asset amortization |
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| Share-based compensation |
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| Loss on equity method investment |
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| Gain on debt extinguishment |
( |
) | ||||||
| Change in derivatives fair value |
( |
) | ( |
) | ||||
| Director compensation paid with share-based instruments |
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| (Increase) decrease in: |
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| Accounts and other related party receivables |
( |
) | ||||||
| Short-term notes receivable related party |
( |
) | ||||||
| Change in operating lease liability |
( |
) | ( |
) | ||||
| Other assets |
( |
) | ||||||
| Accounts payable |
( |
) | ||||||
| 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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| Purchase of property and equipment |
( |
) | ( |
) | ||||
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| NET CASH 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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| Offering cost paid on financing |
( |
) | ||||||
| Payment of debt obligation |
( |
) | ( |
) | ||||
| Cancellation of stock awards for payment of withholding tax requirements |
( |
) | ||||||
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| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
( |
) | ||||||
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| NET (DECREASE) IN CASH AND CASH EQUIVALENTS |
( |
) | ( |
) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | $ | ||||||
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| SUPPLEMENTARY INFORMATION: |
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| Interest paid |
$ | $ | ||||||
| Income taxes paid |
$ | $ | ||||||
Three Months Ended |
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March 31, 2024 |
March 31, 2023 |
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(As restated) |
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| NON-CASH |
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| Conversion of debt to common stock |
$ | $ | ||||||
| Conversion of paid-in-kind |
$ | $ | ||||||
| Warrants issued |
$ | $ | ||||||
Three Months Ended |
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March 31, 2024 |
March 31, 2023 |
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(As restated) |
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| Average market price during the period |
$ | $ | ||||||
| Option awards |
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| Unvested restricted stock awards |
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| Convertible notes |
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| Common Stock Warrant related |
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Three Months Ended |
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March 31, 2024 |
March 31, 2023 |
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(As restated) |
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| Net income (loss) attributable to Odyssey Marine Exploration, Inc. |
$ | $ | ||||||
| |
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| Numerator: |
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| Basic net income (loss) available to stockholders |
$ | $ | ||||||
| Fair value change in debt instruments |
( |
) | ||||||
| Fair value change in warrants |
( |
) | ||||||
| Interest expense related to convertible debt |
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| Diluted net income (loss) available to stockholders |
$ | ( |
) | $ | ||||
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| Denominator: |
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| Weighted average common shares outstanding – Basic |
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| Dilutive effect of options |
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| Dilutive effect of restricted stock awards |
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| Dilutive effect of warrants |
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| Dilutive effect of convertible instruments |
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| Weighted average common shares outstanding – Diluted |
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| Net (loss) income per share – basic |
$ | $ | ||||||
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| Net (loss) income per share – diluted |
$ | ( |
) | $ | ||||
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March 31, 2024 |
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Level 1 |
Level 2 |
Level 3 |
Total Balance |
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| Liabilities: |
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| 37N Note embedded derivative |
$ | $ | $ | $ | ||||||||||||
| Put option liability |
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| Litigation financing |
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| Warrant liabilities issued with debt (December 2023 Warrants) |
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| Warrant liabilities issued with equity (2022 Warrants) |
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| March 2023 note warrants |
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| Total of fair valued liabilities |
$ | $ | $ | $ | ||||||||||||
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December 31, 2023 |
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Level 1 |
Level 2 |
Level 3 |
Total Balance |
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| Liabilities: |
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| 37N Note embedded derivative |
$ | $ | $ | $ | ||||||||||||
| Put option liability |
||||||||||||||||
| Litigation financing |
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| Warrant liabilities issued with debt (December 2023 Warrants) |
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| Warrant liabilities issued with equity (2022 Warrants) |
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| Total of fair valued liabilities |
$ | $ | $ | $ | ||||||||||||
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March 2023 note warrants |
37N Note embedded derivative |
Put option liability |
Litigation financing |
Warrant liabilities issued with debt (December 2023 warrants) |
Warrant liabilities issued with equity (2022 warrants) |
Total |
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| Year ended December 31, 2023 |
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| Change in fair value |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Classification of warrant as liability |
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| Three months ended March 31, 2024 |
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| Year ended December 31, 2022 As restated |
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| Change in fair value |
( |
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| Other |
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| Three months ended March 31, 2023 (As restated) |
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March 31, 2024 |
December 31, 2023 |
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| Related party (see Notes 5 and 6) |
$ | $ | ||||||
| Other |
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| Total accounts and other related party receivables |
$ | $ | ||||||
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March 31, 2024 |
December 31, 2023 |
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| Prepaid Assets |
$ | $ | ||||||
| Other prepaid assets |
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| Deposits |
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| Total other current assets |
$ | $ | ||||||
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| • | FourWorld purchased a portion of the March 2023 Note in the principal amount of $ |
| • | Two Seas purchased a portion of the March 2023 Note in the principal amount of $ |
| • | Greywolf purchased a portion of the March 2023 Note in the principal amount of $ |
| • | FourWorld purchased a December 2023 Note in the principal amount of $ |
| • | Two Seas funds purchased a December 2023 Note in the principal amount of $ |
March 31, 2024 |
December 31, 2023 |
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| CIC Limited |
$ | $ | ||||||
| Chatham Rock Phosphate, Limited |
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| Neptune Minerals, Inc. |
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| Ocean Minerals, LLC |
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| Investment in unconsolidated entities |
$ | $ | ||||||
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| • | We account for the investments we make in certain legal entities in which equity investors do not have (1) sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support, or (2) as a group, the holders of the equity investment at risk do not have either the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance, or (3) the obligation to absorb the expected losses of the legal entity or the right to receive expected residual returns of the legal entity. This type of legal entity is referred to as a VIE. |
| • | We would consolidate the results of any such entity in which we determined we had a controlling financial interest. We would have a “controlling financial interest” in such an entity if we had both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive benefits from, the VIE that could be potentially significant to the VIE. On a quarterly basis, we reassess whether we have a controlling financial interest in our investments in these legal entities. |
| • | We determine whether any of the entities in which we have made investments is a VIE at the start of each new venture and if a reconsideration event has occurred. At such times, we also consider whether we must consolidate a VIE and/or disclose information about our involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. A reporting entity must consider the rights and obligations conveyed by its variable interests and the relationship of its variable interests with variable interests held by other parties to determine whether its variable interests will absorb a majority of a VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. The reporting entity that consolidates a VIE is called the primary beneficiary of that VIE. |
| (1) | The Initial Closing – The Company purchased |
| (2) | The Second Closing – The Company agreed to purchase |
| (3) | The Third Closing – The Company agreed to purchase |
| (4) | Optional Units – The Company has the option to purchase up to additional million on March 31, 2024. The Optional Units are within the scope of ASC 321 and would therefore, be initially recognized at cost as part of the initial consideration transferred, and thereafter, will be accounted for under the measurement alternative at cost with adjustments related to impairment and observable market conditions. If the Company does not purchase all the Optional Units prior to the eighteen-month anniversary, the Company may purchase any of such unpurchased Optional Units at the higher price of (i) a discount of |
| Cash consideration |
$ | |||
| Fair value of Odyssey Retriever, Inc. |
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| Fair value of the Second Closing |
||||
| Fair value of the Third Closing |
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| Fair value of the Equity Exchange Agreement |
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| Transaction costs |
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| Initial closing consideration |
$ | |||
| |
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March 31, 2024 |
December 31, 2023 |
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| Computers and peripherals |
$ | $ | ||||||
| Furniture and office equipment |
||||||||
| Marine equipment |
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| |
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| Less: Accumulated depreciation |
( |
) | ( |
) | ||||
| |
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|||||
| Property and equipment, net |
$ | $ | ||||||
| |
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|||||
| Depreciation expense |
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| |
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| Year ending December 31, |
Annual payment obligation |
|||
| 2024 |
$ | |||
| |
|
|||
| $ | ||||
| |
|
|||
Loans Payable |
||||||||
March 31, 2024 |
December 31, 2023 |
|||||||
| March 2023 Note |
$ | $ | ||||||
| December 2023 Note |
||||||||
| Emergency Injury Disaster Loan |
||||||||
| Vendor note payable |
||||||||
| AFCO Insurance note payable |
||||||||
| Pignatelli note |
||||||||
| 37N Note |
||||||||
| Finance Liability (NOTE 15) |
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| |
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|||||
| Total Loans payable |
||||||||
| Less: Unamortized deferred lender fee |
( |
) | ( |
) | ||||
| Less: Unamortized deferred discount |
( |
) | ( |
) | ||||
| |
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|
|||||
| Total Loans payable, net |
||||||||
| Less: Current portion of loans payable |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Loans payable—long term |
$ | $ | ||||||
| |
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|
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| • | On January 31, 2020, the Claimholder and the Funder entered into an Amended and Restated International Claims Enforcement Agreement (the “Restated Agreement”). The material terms and provisions that were amended or otherwise modified are as follows: |
| • | The Funder agreed to provide up to $ |
| • | A closing fee of $ |
| • | A warrants to purchase our common stock were issued are exercisable for a period of five years beginning on the earlier of (a) the date on which the Claimholder ceases the Subject Claim for any reason other than a full and final arbitral award against the Claimholder or a full and final monetary settlement of the claims or (b) the date on which Proceeds are received and deposited into escrow. The exercise price per share is $ |
| • | All other terms in the Restated Agreement are substantially the same as in the original Agreement. |
March 31, 2024 |
December 31, 2023 |
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| Compensation and incentives |
$ | $ | ||||||
| Professional services |
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| Deposit |
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| Interest |
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| Exploration license fees |
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| |
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| Total accrued expenses |
$ | $ | ||||||
| |
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January 29, 2024 |
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| Risk free interest rate |
% | |||
| Expected life |
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| Expected volatility |
% | |||
| Expected dividend yield |
— | |||
| Grant-date fair value |
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| Year ending December 31, |
Annual payment obligation |
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| 2024 |
$ | |||
| 2025 |
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| 2026 |
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| 2027 |
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| |
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| $ | ||||
| |
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Table of Contents
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, 2023.
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, 2023. Only projects that are 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 regularly evaluate prospective resources to identify new projects. In addition to conducting geological assessments, we also analyze licensing regulations to assure rights can be secured, business development models, and commercial viability factors; all which factor into our decision making on if and how to pursue opportunities in the best interest of our shareholders.
Subsea Mineral Mining Exploration Projects
ExO Phosphate Project:
The “Exploraciones Oceánicas” 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 ore that can be extracted on a financially attractive basis (essentially a standard dredging operation). The product will be desirable 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 56.04% 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:
| • | No chemicals would be used in the dredging process or released into the sea. |
| • | A specialized return down pipe that exceeds international best practices to manage the return of dredged sands close to the seabed, limiting plume or impact to the water column and marine ecosystem (including primary production). |
| • | The seabed would be restored after dredging in such a way as to promote rapid regeneration of seabed organisms in dredged areas. |
| • | Ecotoxicology tests demonstrated that the dredging and return of sediment to the seabed would not have toxic effects on organisms. |
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| • | Sound propagation studies concluded that noise levels generated during dredging would be similar to whale-watching vessels, merchant ships and fisherman’s ships that already regularly transit this area, proving the system is not a threat to marine mammals. |
| • | Dredging is limited to less than one square kilometer each year, which means the project would operate in only a tiny proportion of the concession area each year. |
| • | Proven turtle protection measures were incorporated, even though the deposit and the dredging activity are much deeper and colder than where turtles feed and live, making material harm to the species highly remote. |
| • | There will be no material impact on local fisheries as fishermen have historically avoided the water column directly above the deposit due to the naturally low occurrence of fish there. |
| • | The project would not be visible from the shoreline and would not impact tourism or coastal activities. |
| • | Precautionary mitigation measures were incorporated into the development plan in line with best-practice global operational standards. |
| • | The technology proposed to recover the phosphate sands has been safely used in Mexican waters for over 20 years on more than 200 projects with approval by Mexico’s regulatory authorities. |
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. This action is on-going.
In addition, in April 2019, we filed a claim under the North American Free Trade Agreement (“NAFTA”) 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 and is in violation of the following provisions of NAFTA:
| • | Article 1102. National Treatment. |
| • | Article 1105. Minimum Standard of Treatment; and |
| • | Article 1110. Expropriation and Compensation. |
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:
| (1) | MERITS: Testimony from independent environmental experts that the environmental impact of ExO’s phosphate project is minimal and readily mitigated by the mitigation measures proposed by ExO. Witnesses also testified that Mexico’s denial of environmental approval by the prior administration was politically motivated and not justified on environmental grounds, and that Mexico granted environmental permits to similar dredging projects in areas that are considered more environmentally sensitive than ExO’s project location. |
| (2) | RESOURCE: An independent certified marine geologist testified as to the size and character of the resource. |
| (3) | OPERATIONAL VIABILITY: Engineering experts testified that the project uses established dredging and processing technology, and the project’s anticipated CAPEX and OPEX was reasonable. |
| (4) | VALUE: A phosphate market analyst testified that the project’s projected CAPEX and OPEX would make the project one of the lowest cost producing phosphate ore resources in the world, as experts testified the project would be commercially viable and profitable. |
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. Mexico filed its Rejoinder on October 19, 2021. The NAFTA Tribunal hearing took place in early 2022. In accordance with the procedural calendar, written post-hearing briefs were filed in September 2022. Odyssey’s filings can be found through our website at www.odysseymarine.com/nafta. The procedural calendar and case filings are available on the International Centre for Settlement of Investment Disputes (“ICSID”) website. The
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evidentiary phase of the case is now closed and the Tribunal has begun its deliberations. On October 6, 2023, Odyssey received a letter from ICSID advising that the Tribunal is well advanced in the drafting of the Award and expects to issue the Award in the first quarter of 2024. ICSID also advised that Odyssey would be duly notified of any change to the timing estimate provided. On March 8, 2024, Odyssey received a letter from ICSID advising that the Tribunal “has continued to make progress in finalizing its determinations” and that it “expects to render the Award in the second quarter of this year.” Odyssey cannot otherwise 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 to aid in our NAFTA case. On June 14, 2021, the funder agreed to fund up to an additional $5.0 million for arbitration costs. The funder will not have any right of recourse against us unless the environmental permit is awarded or proceeds are received (See NOTE 12 Fair Value Financial Instruments).
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 N.V.
In February 2022, the Cook Islands Seabed Minerals Authority (“SBMA”) awarded CIC a five-year exploration license. Offshore explorations and research commenced in the third quarter of 2022 with positive results in early sampling, which tested vessel and equipment functions and performance, which provided further information and data further defining the 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 and ongoing operations.
Through a wholly owned subsidiary, we have earned and now hold approximately 15.08% 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 1.5 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 OML 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 February 2022, the 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 validated vast polymetallic nodule resources in its 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 an approximately 13% interest in OML in exchange for a contribution by Odyssey of its interest in its then wholly owned subsidiary, ORI, whose sole asset was a 6,000-meter remotely operated vehicle (“ROV”), cash contributions of up to $10 million in a series of transactions over the following year, a Contribution Agreement and an Equity Exchange Agreement. On July 3, 2023, the parties consummated the initial closing of the purchase agreement, pursuant to which Odyssey’s wholly owned subsidiary obtained approximately 6.28% of OML’s outstanding equity interests. The purchase agreement allows Odyssey to acquire up to 40% of OML within the following 18 months from the initial closing date at Odyssey’s discretion.
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The 6,000-meter rated ROV contributed to OML by Odyssey provides 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. To date OML has utilized the ROV to conduct over 50 kilometers of video surveys of their nodule resource accruing to a better understanding of the geological and environmental setting of the license area. Over the next year, OML expects to advance its current Joint Ore Reserve Committee (“JORC”) compliant report, substantially increasing resources reporting to indicated and measured confidence levels and completing its preliminary Feasibility Study, among other important project milestones.
LIHIR Gold Project:
The exploration license for the Lihir Gold Project covers a subsea area that contains several 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 (the “Bismarck 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 November 2023, Papua New Guinea 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 has met with local regulatory authorities, specialists in local mining, environmental legal experts, and logistics support service companies in Papua New Guinea 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 is planned to focus on robust environmental surveys and studies that will accrue to environmental permitting in compliance with Papua New Guinea’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 would 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 resources during the exploration phase.
Critical Accounting Policies and Changes to Accounting Policies
Investment in Unconsolidated Entity
As discussed in Note 6 Investment in Unconsolidated Entities, the Company has a cost basis method investment and an equity method investment with related parties. The Company has entered into agreements with the related parties that required analysis of ASU 215-2 to determine that the Company was not the primary beneficiary. This analysis required judgment and review of the facts and circumstance to determine the proper accounting for the cost and equity method investments. We also review these investments for any potential impairment annually.
We account for our interests in entities in which we are able to exercise significant influence over operating and financial policies, generally 50% or less ownership interest, under the equity method of accounting. In such cases, our original investments are recorded at cost and adjusted for our share of earnings, losses and distributions. We account for our interests in entities where we have virtually no influence over operating and financial policies under the cost method of accounting. In such cases, our original investments are recorded at the cost to acquire the interest and any distributions received are recorded as income. All investments are subject to our impairment review policy.
As discussed in Related Party Transactions and Investment in Unconsolidated Entity Entities to the consolidated financial statements, the Company has a cost investment in a related party. The Company has entered into numerous agreements with the related party that required analysis of ASC 810-10 to determine that the Company was not the primary beneficiary. This analysis required judgment and review of the facts and circumstance to determine the proper accounting for this cost method investment. We also reviewed the impairment guidance to determine any potential impairment of the investment.
The current investment in unconsolidated entities accounted for under the equity method consists of a 6.28% in interest in OML, with an opportunity to purchase up to 40% of OML in the 18 months following the initial acquisition. We determined that the Company has a significant influence over OML’s operation due to the agreements to purchase additional interests in OML and the services we provide to OML which require our involvement in the decisions made over OML’s operations. The initial value of an investment in an unconsolidated affiliate accounted for under the equity method is recorded at the fair value of the consideration paid. As part of this acquisition, we entered into the OML Put Option to acquire additional interest in OML, which was determined to be an obligation to issue a variable number of shares that is predominantly based on variations in something other than the fair value of the company’s equity shares, within the scope of ASC 480. As such, the OML Put Option is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The OML Put Option valuation was based on the exercise period of the equity exchange agreement, share price and volatility.
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Fair Value of Financial Instruments
We evaluate all of our agreements to determine whether such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. In evaluating the fair value of derivative financial instruments, there are numerous assumptions that management must make that may influence the valuation of the derivatives that would be included in the financial statements. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
As discussed in NOTE 11 Loans Payable and Fair Value Financial Instruments to the consolidated financial statements, we have certain litigation financing with detachable warrants, warrant liabilities, the OML Put Option and an embedded derivative related to the 37N Note included in the consolidated balance sheets at December 31, 2023 and 2022 that are considered derivative financial instruments.
The Litigation Financing agreement involved numerous amendments, significant non-cash financing, issuance of warrants, and issuance costs. Determination of the fair value of the derivative required significant judgment of and assumptions and estimates regarding the facts and circumstances regarding the potential liability. The fair value of the derivative is an inherently uncertain estimate because almost none of the inputs used in calculating the estimate—other than amounts funded—is objectively quantifiable. The inputs are based on management’s good-faith but unavoidably subjective assumptions, judgments and estimates regarding the potential outcomes of the NAFTA arbitration case, the potential outcomes and award amounts conditional on Odyssey winning the arbitration, the potential repayment dates, the potential dates on which any proceeds from the arbitration might be received, and certain market inputs such as discount rates. The calculations based on these inputs resulted in a range of estimated fair values. The Company reported the midpoint of that range as the fair value at each relevant period. The estimate has changed each period based on management’s revised judgments and assumptions regarding timing and other inputs. The estimate reported as the fair value is sensitive to the methods, assumptions, judgments and estimates underlying the fair value calculations because the use of different probabilities regarding potential case outcomes, potential awards, repayment dates, discount rates, or other estimated assumptions, or another method of reporting the fair value from within the calculated range, could result in a significantly or materially different estimated fair value being reported.
The fair values of 2022 Warrant and the December 2023 Warrant, which are accounted for as derivative liabilities, were estimated using a Black-Scholes valuation model. The assumptions used in this model included the use of key inputs, including expected stock volatility, the risk-free interest rate, the expected life of the option and the expected dividend yield. Expected volatility is calculated based on the historical volatility of our Common Stock over the term of the warrant. Risk-free interest rates are calculated based on risk-free rates for the appropriate term. The expected life is estimated based on contractual terms as well as expected exercise dates. The dividend yield is based on the historical dividends issued by us. If the volatility rate or risk-free interest rate were to change, the value of the warrants would be impacted.
The fair value of the embedded derivative liability related to the share settled redemption feature recognized in connection with the 37N Note is determined using the with-and-without valuation method. As inputs into the valuation, we considered the type and probability of occurrence of certain events, the amount of the payments, the expected timing of certain events, and a risk-adjusted discount rate.
The OML put option was initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The OML Put Option valuation was based on the exercise period of the equity exchange agreement, share price and volatility.
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 March 31, 2024, compared to three months ended March 31, 2023 (as restated)
| Increase/(Decrease) (Dollars in thousands) |
2024 | 2023 | 2024 vs. 2023 | |||||||||||||
| Total revenues |
$ | 203 | $ | 289 | $ | (86 | ) | (29.7 | )% | |||||||
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| Marketing, general and administrative |
$ | 4,035 | $ | 1,816 | $ | 2,219 | 122.2 | % | ||||||||
| Operations and research |
$ | 886 | $ | 1,285 | $ | (399 | ) | (31.1 | )% | |||||||
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| Total operating expenses |
$ | 4,920 | $ | 3,101 | $ | 1,820 | 58.7 | % | ||||||||
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| Total other expense |
$ | 5,638 | $ | 22,884 | $ | (17,246 | ) | (75.4 | )% | |||||||
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| Income tax benefit |
$ | — | $ | — | $ | — | — | % | ||||||||
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| Net loss attributable to non-controlling interest |
$ | 2,557 | $ | 2,235 | $ | 342 | 15.3 | % | ||||||||
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| Net income / (loss) attributable to Odyssey Marine Exploration, Inc. |
$ | 3,498 | $ | 22,308 | $ | (18,810 | ) | (84,.3 | )% | |||||||
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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 March 31, 2024 decreased $86,000 to $203,000 compared to $289,000 from the three months ended March 31, 2023. 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 because our lead director has an interest in the company (see Note 5 Related Party Transactions). We also provided services to OML in 2024, also a related party as we account for OML investment under the equity method of accounting.
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 increased $2.2 million to approximately $4.0 million for the three months ended March 31, 2024, compared to $1.8 million from the three months ended March 31, 2023. The items contributing to the $2.2 million increase was an increase of $1.3 million in non-cash share-based compensation expense, and an increase of $878,000 in professional services primarily attributable to audit fees.
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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 decreased by $399,000 to $886,000 for three months ended March 31, 2024 compared to $1.3 million for the three months ended March 31, 2023 as a result of a $287,000 decrease in professional services which includes a $220,000 decrease in litigation financing costs directly associated with our NAFTA arbitration, and a $112,000 decrease in depreciation expense.
Total Other Income and Expense
Total other income and expense was $5.7 million and $22.9 million in net other income for three months ended March 31, 2024 and 2023, respectively, resulting in a net other income decrease of $17.2 million. This variance was attributable to a $1.1 million increase in interest expense which includes debt discount amortization, a reduction of interest income of $388,000, a reduction of debt extinguishment income of $21.5 million and an increase of $213,000 in loss from our equity investment offset by a $4.8 million benefit from change in the fair value of derivatives, a decrease of $142,000 in foreign exchange expense and reduction of expense due to a waiver of $1.0 million that was paid in the prior year.
Taxes and Non-Controlling Interest
Due to losses and our net operating loss carryforwards, we did not accrue any taxes in either period ending 2024 or 2023.
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 March 31, 2024 was $2.6 million as compared to $2.2 million for the three months ended March 31, 2023. The substance of these amounts is primarily due to the increase in permits and other standard operating costs.
Liquidity and Capital Resources
| Three Months Ended | ||||||||
| (In thousands) | March 31, 2024 |
March 31, 2023 |
||||||
| (As restated) | ||||||||
| Summary of Cash Flows: |
||||||||
| Net cash used in operating activities |
$ | (1,579 | ) | $ | (3,985 | ) | ||
| Net cash used in investing activities |
(104 | ) | (508 | ) | ||||
| Net cash (used in) provided by financing activities |
(261 | ) | 3,724 | |||||
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| Net increase (decrease) in cash and cash equivalents |
$ | (1,944 | ) | $ | (769 | ) | ||
| Beginning cash and cash equivalents |
4,022 | 1,443 | ||||||
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| Ending cash and cash equivalents |
$ | 2,078 | $ | 674 | ||||
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Discussion of Cash Flows
Net cash used in operating activities for the three months ended March 31, 2024 was $1.6 million. This represents an approximate $2.4 million decrease in use of funds when compared to the use of $3.0 million for the three months ended March 31, 2023. The net cash used in operating activities reflected a net income of $920,000 and is adjusted primarily by non-cash items of $5.0 million, which primarily includes share-based compensation of $1.5 million, note payable accretion of $0.9 million, amortization of finance liability of $66,000, loss on equity investment of $213,000, offset by $156,000 of directors compensation settled with share-based instruments, a gain on changes in our fair valued instruments of $7.8 million and investments in our unconsolidated entities of $214,000. Other operating activities resulted in an increase in working capital of $1.7 million. This $1.7 million increase includes increases of $0.55 million in accrued expenses and other, a $953,000 increase in accounts payable and an increase of $155,000 in other assets.
Cash flows used in investing activities for the three months ended March 31, 2024 and 2023 were minimal. During the three months ended March 31, 2024 the net cash used in investing activities for the purchase of $103,000 of property and equipment.
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Cash flows used by financing activities for the three months ended March 31, 2024 were $260,000. This $260,000 is comprised of $244,000 used for the payment of debt obligations and $16,000 used to repurchase stock-based awards for the payment of payroll withholding taxes.
Other Cash Flow and Equity Areas
General Discussion
At March 31, 2024, we had cash and cash equivalents of $2.1 million, a decrease of $1.9 million from the December 31, 2023 balance of $4.0 million. Financial debt of the company was $24.7 million at March 31, 2024 and $23.34 million at December 31, 2023.
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 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.
Financings
The Company’s consolidated notes payable consisted of the following carrying values at:
| Loans Payable | ||||||||
| March 31, 2024 |
December 31, 2023 |
|||||||
| March 2023 Note |
15,270,792 | 14,858,816 | ||||||
| December 2023 Note |
6,037,747 | 6,000,000 | ||||||
| Emergency Injury Disaster Loan |
150,000 | 150,000 | ||||||
| Vendor note payable |
484,009 | 484,009 | ||||||
| AFCO Insurance note payable |
314,621 | 468,751 | ||||||
| Pignatelli note |
500,000 | 500,000 | ||||||
| 37N Note |
804,997 | 804,997 | ||||||
| Finance Liability (NOTE 15) |
4.179.270 | 4,112,332 | ||||||
|
|
|
|
|
|||||
| Total Loans payable |
27,741,436 | 27,378,905 | ||||||
| Less: Unamortized deferred lender fee |
(79,343 | ) | (106,488 | |||||
| Less: Unamortized deferred discount |
(2,940,799 | ) | (3,955,449 | |||||
|
|
|
|
|
|||||
| Total Loans payable, net |
24,721,294 | 23,316,968 | ||||||
| Less: Current portion of loans payable |
(16,306,076 | ) | (15,413,894 | ) | ||||
|
|
|
|
|
|||||
| Loans payable - long term |
$ | 8,415,218 | $ | 7,903,074 | ||||
|
|
|
|
|
|||||
March 2023 Note and Warrant Purchase Agreement
On March 6, 2023, Odyssey entered into a Note and Warrant Purchase Agreement (the “March 2023 Note Purchase Agreement”) with an institutional investor pursuant to which Odyssey issued and sold to the investor (a) a promissory note (the “March 2023 Note”) in the principal amount of up to $14.0 million and (b) a warrant (the “March 2023 Warrant” and, together with the March 2023 Note, the “Securities”) to purchase shares of Odyssey’s common stock. The total proceeds of $14.0 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 $3,742,362, which is being amortized over the remaining term of the March 2023 Note Purchase Agreement using the effective interest method, which is charged to interest expense. We incurred $98,504 in related fees which are being amortized over the term of the March 2023 Note Purchase Agreement and charged to interest expense.
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The principal amount outstanding under the March 2023 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 March 2023 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 March 2023 Note (“PIK Interest”), and (b) the first quarterly interest payment due under the March 2023 Note will be satisfied with PIK Interest. The March 2023 Note provides Odyssey with the right, but not the obligation, upon notice to the holder of the March 2023 Note to redeem (x) at any time before the first anniversary of the issuance of the March 2023 Note, all or any portion of the indebtedness outstanding under the March 2023 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 March 2023 Note, all or any portion of the indebtedness outstanding under the March 2023 Note (together with all accrued and unpaid interest, including PIK Interest). Unless the March 2023 Note is sooner redeemed at Odyssey’s option, all indebtedness under the March 2023 Note is due and payable on September 6, 2024. Under the terms of the March 2023 Note 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 above), 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 March 2023 Note Purchase Agreement, and for working 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 March 2023 Warrant, the holder has the right for a period of three years after issuance to purchase up to 3,703,703 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 March 2023 Note 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.
On March 6, 2023, the Company recognized the fair value of warrants using the Black-Scholes valuation technique at $3,742,362 and classified the warrants as equity and debt discount of the March 2023 Note. On January 30, 2024, the March 2023 Warrant was amended to add a cashless exercise provision. Due to that amendment, the Company determined that the March 2023 Warrant meets the definition of a derivative and is not considered indexed to the Company’s own stock due to the settlement adjustment that provides that the share price input upon cashless exercise is always based on the highest of three prices. As such, the March 2023 Warrant is now recognized as a derivative liability and will be initially and subsequentially measured at fair value with the gain or loss due to changes in fair value recognized in the current period. The Company noted that when debt is issued with liability-classified stock purchase warrants, the residual method should be used so that the warrants are recognized at fair value at issuance and the residual proceeds are allocated to the debt. The amended March 2023 Warrant was measured using the Black-Scholes valuation method on January 30, 2024, and re-classified from equity to warrant liability. The difference between the warrant liability and initial equity balance through additional paid-in capital (“APIC”) was recognized as an additional discount to APIC. Subsequently, the warrants were re-measured on March 31, 2024, and recognized in earnings as favorable change in the fair value of the derivative liability. The fair value of the March 2023 Warrant at March 31, 2024 was $5,263,018.
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.
For the three months ended March 31, 2024, and 2023, we incurred $618,067 and $208,685, respectively, of interest expense from the amortization of the debt discount and $16,268 and $4,648, respectively, interest from the fee amortization which has been recorded in interest expense. The March 31, 2024 carrying value of the debt was $14,162,450, which includes interest Paid In Kind (“PIK”) of $1,270,792, and was net of unamortized debt fees of $28,425, net of unamortized debt discount of $1,079,917 associated with the fair value of the warrant. The total face value of this obligation on March 31, 2024, and December 31, 2023, was $15,270,792 and $14,858,816, respectively.
37North
On June 29, 2023 we entered into a Note Purchase Agreement (“Note Agreement”) with 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
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volume-weighted average principal (“VWAP”) market trading 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) such number of shares of Common Stock that would violate 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 were 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 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. As of March 31, 2024, we have not repaid this Note Agreement.
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 the remaining unpaid amount of the Loan in an amount equal to 130% of the remaining unpaid amount. On December 27, 2023, 37N delivered an exercise notice to us pursuant to which it exercised its right to convert $360,003 of the outstanding indebtedness under the Note Agreement into shares of our Common Stock. In accordance with the Note Agreement, based on the applicable conversation rate of $2.3226 under the agreement, we issued 155,000 shares of our common Stock to 37N on December 29, 2023.
We evaluated the indebtedness and, based on the criteria of ASC 480 Distinguishing Liabilities from Equity and 815 Derivatives and Hedging, the 37N convertible note is classified as a liability on the consolidated balance sheet with a share settled redemption feature that is recorded as an embedded derivative. As a result, the share settled redemption and conversion features were recorded at fair value at each reporting period outstanding with changes recognized through Interest expenses on the consolidated statement of operations. The Company analyzed the conversion feature of the note and determined that, because it includes a conditional obligation to issue a variable number of shares based on a fixed amount known at inception, the debt is properly classified as a liability in the balance sheet. The Company identified seven embedded features, all of which were of de minimis fair value other than the Share Settled Redemption Feature. As such, only that was bifurcated and accounted for separately from the debt host. 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.
At March 31, 2024, the debt instrument and embedded derivatives were recorded on the consolidated balance sheets at fair value of $804,997 and $336,857, respectively, under Loans payable – short term and Litigation financing and other – long term. At December 31, 2023, the debt instrument and embedded derivatives were recorded on the consolidated balance sheets at fair value of $804,997 and $702,291, respectively, under Loans payable – short term and Litigation financing and other – long term.
December 2023 Note and Warrant Purchase Agreement
On December 1, 2023, we entered into a Note and Warrant Purchase Agreement (the “December 2023 Note Purchase Agreement”) with institutional investors pursuant to which we issued and sold to the investors (a) a series of promissory notes (the “December 2023 Notes”) in the principal amount of up to $6.0 million and (b) two tranches of warrants (the “December 2023 Warrants” and, together with the December 2023 Notes, the “December 2023 Securities”) to purchase shares of our common stock. We issued December 2023 Notes in the aggregate amount of $3.75 million and related warrants on December 1, 2023, and December 2023 Notes in the aggregate amount of $2.25 million and related warrants on December 28, 2023.
The principal amount outstanding under the December 2023 Notes bears interest at the rate of 11.0% per annum, and interest is payable in cash on a quarterly basis, except that, (a) at our option and upon notice to the holder of the December 2023 Notes, 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 December 2023 Notes (“December 2023 PIK Interest”), and (b) the first quarterly interest payment due under the December 2023 Notes will be satisfied with December 2023 PIK Interest. The December 2023 Notes provide us with the right, but not the obligation, upon notice to the holders of the December 2023 Notes to redeem (x) at any time before the first anniversary of the issuance of the December 2023 Notes, all or any portion of the indebtedness outstanding under the December 2023 Notes (together with all accrued and unpaid interest, including December 2023 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 December 2023 Notes, all or any portion of the indebtedness outstanding under the December 2023 Notes (together with all accrued and unpaid interest, including December 2023 PIK Interest). Unless the December 2023 Notes are sooner redeemed at our option, all indebtedness under the December 2023 Notes is due and payable on June 1, 2025. Under the terms of the December 2023 Note Purchase Agreement, we agreed to use the proceeds of the sale of the December 2023
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Securities for working capital and other general corporate expenditures and to pay fees and expenses related to the transactions contemplated by the December 2023 Note Purchase Agreement. Our obligations under December 2023 Notes are secured by a pledge of and security interest in our equity interests in Odyssey Marine Cayman Limited (subject to limited stated exclusions)..
Under the terms of the first tranche of December 2023 Warrants, the holders have the right for a period of three years after issuance to purchase an aggregate of up to 1,411,765 shares of our common stock at an exercise price of $4.25 per share, which represents 120.0% of the official closing price of our common stock on the Nasdaq Capital Market immediately preceding the signing of the December 2023 Note Purchase Agreement, upon delivery of a notice of exercise to Odyssey. Under the terms of the second tranche of December 2023 Warrants, the holders have the right for a period of three years after issuance to purchase an aggregate of up to 211,565 shares of our common stock at an exercise price of $7.09 per share, which represents 200.0% of the official closing price of our common stock on the Nasdaq Capital Market immediately preceding the signing of the December 2023 Note Purchase Agreement, upon delivery of a notice of exercise to Odyssey. Upon exercise of the December 2023 Warrants, 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 December 2023 Warrants provide the holders with a cashless exercise option if we have announced payment of a dividend or distribution on account of our common stock. The December 2023 Warrants also include 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 December 2023 Note Purchase Agreement, we entered into a registration rights agreement (the “December 2023 Registration Rights Agreement”) pursuant to which we agreed to register the offer and sale of the shares (the “December 2023 Exercise Shares”) of our common stock issuable upon exercise of the December 2023 Warrants. Pursuant to the December 2023 Registration Rights Agreement, we agreed to prepare and file with the Securities and Exchange Commission (the “SEC”) a registration statement covering the resale of the December 2023 Exercise Shares and to use our reasonable best efforts to have the registration statement declared effective by the SEC as soon as practicable thereafter, subject to stated deadlines.
The Company determined that the December 2023 Warrants meet the definition of a derivative and are not considered indexed to the Company’s own stock due to the settlement adjustment that provides that the share price input upon cashless exercise is always based on the highest of three prices. As such, the December 2023 Warrants were recognized as derivative liabilities and will be initially and subsequentially measured at fair value with the gain or loss due to changes in fair value recognized in the current period. The Company noted that when debt is issued with liability-classified stock purchase warrants, the residual method should be used so that the warrants are recognized at fair value at issuance and the residual proceeds are allocated to the debt.
We incurred $65,500 in related expenses, which are being amortized over the term of the December 2023 Note Purchase Agreement and charged to interest expense. The total proceeds of $6.0 million were allocated between debt and warrant liability by recognizing the warrants at their full fair value and allocating the residual proceeds to the December 2023 Notes. The initial fair value of the December 2023 Warrants was $2,392,563, resulting in a corresponding discount on the December 2023 Notes which is being amortized over the remaining term of the December 2023 Note Purchase Agreement using the effective interest method, which is charged to interest expense.
For the three months ended March 31, 2024 and 2023, we recorded $396,582 and $0, respectively, of interest expense from the amortization of the debt discount and $10,877 and $0, respectively, of interest from the fee amortization. At March 31, 2024, the carrying value of the debt was $4,125,947 and was net of unamortized debt fees of $50,918, net of unamortized debt discount of $1,860,882 associated with the fair value of the warrant. The total face value of this obligation at March 31, 2024 was $6,037,747. The current interest rate of the December 2023 Notes was 11.0%.
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 contracted services, collecting on amounts owed to us.
Our 2024 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 becomes insufficient to meet our desired
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projected business plan requirements, we would be required to follow a contingency business plan based on curtailed expenses and fewer cash requirements. On December 1, 2023, we entered into the December 2023 Note Purchase Agreement with institutional investors pursuant to which we issued and sold to the investors the December 2023 Notes in the principal amount of up to $6.0 million and the December 2023 Warrants to purchase shares of our common stock. We issued December 2023 Notes in the aggregate amount of $3.75 million and related warrants on December 1, 2023, and December 2023 Notes in the aggregate amount of $2.25 million and related warrants on December 28, 2023. On May 3, 2024, we received a payment of approximately $9.4 million arising from a residual economic interest in a salvaged shipwreck. The balance of the proceeds from the December 2023 Notes and a portion of the proceeds received in May 2024, together with other anticipated cash inflows, are expected to provide operating funds through at least the third quarter of 2024.
Our consolidated non-restricted cash balance at March 31, 2024 was $2.1 million. We have a working capital deficit at March 31, 2024 of $30.1 million. The total consolidated book value of our assets was approximately $20.7 million at March 31, 2024, which includes cash of $2.1 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.
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 Comprehensive Form 10-K, 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, who is currently also acting as our CFO for this purpose, 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 disclosure controls and procedures were not effective as of March 31, 2024, 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 Comprehensive Form 10-K 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 US GAAP.
Material Weakness in Internal Control over Financial Reporting
In connection with our evaluation for the year ended December 31, 2023, we identified material weaknesses in our internal control over financial reporting for the years ended December 31, 2023, and 2022, that continued during the period ended March 31, 2024, 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.
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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 months ended March 31, 2024 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.
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, 2023. 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 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith electronically) | |
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Filed herewith electronically) | |
| 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.
| ODYSSEY MARINE EXPLORATION, INC. | ||||||
| Date: May 17, 2024 | By: | /s/ Mark D. Gordon | ||||
| Mark D. Gordon | ||||||
| Chief Executive Officer | ||||||
| Principal Executive Officer | ||||||
| Principal Financial and Accounting Officer | ||||||
46
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.
May 17, 2024
| /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 March 31, 2024:
(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.
| /s/ Mark D. Gordon |
| Mark D. Gordon |
| Chief Executive Officer, as Principal Executive Officer and Principal Financial Officer |
| May 17, 2024 |
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.