ODYSSEY MARINE EXPLORATION INC - Quarter Report: 2023 March (Form 10-Q)

The accompanying unaudited condensed consolidated financial statements of Odyssey Marine Exploration, Inc. and subsidiaries (the “Company,” “Odyssey,” “us,” “we” or “our”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position as of March 31, 2023 and the results of operations and cash flows for the interim periods presented. Operating results for the three months ended March 31, 2023, are not necessarily indicative of the results that may be expected for the full year.

Accounting standards adopted

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments in this update are effective for public business entities that meet the definition of a Securities and Exchange Commission (“SEC”) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year.

The amendments in ASU No. 2020-06 affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements in this update. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. The FASB simplified the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. Those amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this update affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. We adopted this ASU as of January 1, 2022. Adoption did not have a material impact on its consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not or are not believed by management to have a material effect, if any, on the Company’s financial statements.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding our condensed consolidated financial statements. The financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity and have prepared them in accordance with our customary accounting practices.

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NOTE 3 – ACCOUNTS RECEIVABLE AND OTHER RELATED PARTY, NET

NOTE 4 – SHORT-TERM NOTES RECEIVABLE RELATED PARTY, NET

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NOTE 5 – RELATED PARTY TRANSACTIONS

We currently provide services to a deep-sea mineral exploration company, CIC Limited (“CIC”), which was organized and is majority owned and controlled by Greg Stemm, Odyssey’s past Chairman of the Board. Mr. Stemm’s involvement with this company was disclosed to, and approved by, the Odyssey Board of Directors and legal counsel pursuant to the terms of Mr. Stemm’s consulting agreement in effect at that time. A current Odyssey director, Mark B. Justh, made an investment into CIC’s parent company and indirectly owns approximately 11.5% of CIC. Another current Odyssey director, Laura L. Barton, is also a director of CIC. We believe Mr. Justh’s indirect ownership in CIC and Ms. Barton's role as director of both entities do not impair their independence under applicable rules. We are providing these services to CIC pursuant to a Master Services Agreement that provides for back-office services in exchange for a recurring monthly fee as well as other deep-sea mineral related services on a cost-plus profit basis and will be compensated for these services with a combination of cash and equity in CIC. For the three months ended March 31, 2023 and 2022, we invoiced CIC a total of $288,739 and $299,606, respectively, which was for technical and support services. We have the option to accept equity in payment of the amounts due from CIC. See Note 3 Accounts Receivable and Other Related Party, Net for related accounts receivable and Note 4 Short-term Notes Receivable Related Party, Net for related short-term notes receivable at March 31, 2023 and December 31, 2022, and Note 6 Investment in Unconsolidated Entity for our investment in an unconsolidated entity.

In furtherance of the Master Services Agreement, we are financing the acquisition of certain equipment required for implementation of CIC’s Marine Operations Plan, which is the comprehensive workplan for offshore operations, including exploration, survey and sampling of potential mineral deposits. As of March 31, 2023 we have paid $243,242 toward the purchase of this equipment, and CIC has reimbursed $136,860 of that amount. The remaining balance CIC owes to us has been included in the Services Agreement Note Receivable balance described below.

On December 13, 2022, we entered into a Loan Agreement with CIC. Pursuant to the Loan Agreement, CIC issued to Odyssey a convertible promissory note in the amount of $1,350,000 that bore interest at a rate of 18% per annum. On the closing date of the Loan Agreement, Odyssey advanced CIC $1,000,000 (the "Advanced Amount") and recorded an original issue discount ("OID") of $350,000, which was accrued as interest income in our consolidated statements of operations. Unless otherwise converted or repaid as described below, the entire outstanding principal balance under the Loan agreement and all accrued interest was due and payable on March 31, 2023 (the "Maturity Date"). The Loan Agreement provided that CIC could repay the Advanced Amount plus accrued interest on or prior to the fifth business day after the Maturity Date (the “Maturity Cure Date”) in full satisfaction of the Loan Agreement. CIC repaid the Advanced Amount plus accrued interest prior to the Maturity Cure Date in accordance with the terms of the Loan Agreement. For the three months ended March 31, 2023, we recorded $288,991 of interest income from the accretion of the OID. The March 31, 2023 carrying value of the note receivable was $1,350,000, and the OID was fully amortized. The December 31, 2022 carrying value of the note receivable was $1,061,009, and the unamortized OID was $288,991. At March 31, 2023 and December 31, 2022 we recorded $111,716 and $12,649, respectively, in accrued interest receivable, which is included in the note receivable balance. On April 6, 2023, prior to the Maturity Cure Date, CIC repaid principal and interest in the aggregate amount of $1,068,000 in full satisfaction of the convertible promissory note and the Loan Agreement.

On December 13, 2022, CIC issued a Services Agreement Note to us. Pursuant to the Services Agreement Note, Odyssey agreed to extend the terms of its outstanding accounts receivables balance for past and future services performed under the Master Services Agreement for an amount not to exceed $600,000. The note bears interest at a rate of 1.5% per month and matures on April 30, 2023. Interest is due and payable on the first day of each month for the previous month. The March 31, 2023 and December 31, 2022 carrying values of the note receivable were $572,028 and $503,059, respectively. Odyssey is in discussions with CIC regarding a short extension of the maturity date of the Services Agreement Note. The terms of the Services Agreement Note are not necessarily indicative of the terms that would have been provided had a comparable transaction been entered into with independent parties.

On July 15, 2021, MINOSA assigned $404,633 of its indebtedness with accumulated accrued interest of $159,082 to a director of the Company under the same terms as the original agreement, and that indebtedness continued to be convertible at a conversion price of $4.35. This transaction was reviewed and approved by the independent members of the Company’s board of directors. On March 6, 2023, this note was terminated and Odyssey issued a new note, see Note 9 Loans Payable– MINOSA 2 for detail.

NOTE 6 – INVESTMENT IN UNCONSOLIDATED ENTITY

At March 31, 2023 and December 31, 2022, our accumulated investment in CIC was $4,676,092 and $4,404,717, respectively, which is classified as an investment in unconsolidated entity in our condensed consolidated balance sheets.

NOTE 7 - INCOME TAXES

During the three months ended March 31, 2023, we generated a federal net operating loss (“NOL”) carryforward of $4.7 million and generated $2.4 million of foreign NOL carryforwards. As of March 31, 2023, we had consolidated income tax NOL carryforwards for federal tax purposes of approximately $234.6 million and net operating loss carryforwards for foreign income tax purposes of approximately $86 million. From 2025 through 2027, approximately $47 million of the NOL will expire, and from 2028 through 2037, approximately $128 million of the NOL will expire. The NOL generated in 2018 through 2023 of approximately $55 million will be carried forward indefinitely.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company may be subject to a variety of claims and suits that arise from time to time in the ordinary course of business. We are not a party to any litigation as a defendant where a loss contingency is required to be reflected in our condensed consolidated financial statements.

Contingency

We owe consultants contingent success fees of up to $700,000 upon the approval and issuance of the Environmental Impact Assessment (“EIA”) for our Mexican subsidiary. The EIA has not been approved as of the date of this report and the contingent success fees have not been accrued.

Going Concern Consideration

We have experienced several years of net losses and may continue to do so. Our ability to generate net income or positive cash flows for the following twelve months is dependent upon financings, our success in developing and monetizing our interests in mineral exploration entities, generating income from exploration charters or collecting on amounts owed to us.

Our 2023 business plan requires us to generate new cash inflows to effectively allow us to perform our planned projects. We continually plan to generate new cash inflows through the monetization of our receivables and equity stakes in seabed mineral companies, financings, syndications or other partnership opportunities. If cash inflow ever became insufficient to meet our desired projected business plan requirements, we would be required to follow a contingency business plan based on curtailed expenses and fewer cash requirements. During March 2023, we entered Note and Warrant Purchase Agreement pursuant to which we issued and sold to an institutional investor a promissory note (the “Note”) in the principal amount of $13.1 million. On April 4, 2023, Odyssey entered into a $3.0 million sale/leaseback arrangement for certain of its marine equipment. A portion of the proceeds of the transaction was used to repay the note outstanding to the seller of the marine equipment that we issued in December 2022. On April 6, 2023, CIC repaid principal and interest in the aggregate amount of $1,068,000 in full satisfaction of the convertible promissory note and the Loan Agreement. The balance of the proceeds from the Note, after payment of certain obligations, the sale/leaseback arrangement and the CIC loan repayment, coupled with other anticipated cash inflows, are expected to provide operating funds through the remainder of 2023.

Our consolidated non-restricted cash balance at March 31, 2023 was $674,428. We have a working capital deficit at March 31, 2023 of ($32.6) million. The total consolidated book value of our assets was approximately $13.2 million at March 31, 2023, which includes cash of $674,428. 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.

Lease commitment

At March 31, 2023, the right of usage (“ROU”) asset and lease obligation for our corporate office operating lease were $175,253 and $185,355, respectively.

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At March 31, 2023, the ROU asset and lease obligation for our marine operations operating lease were $67,450 and $71,162, respectively.

We recognized approximately $54,700 and $54,000 in rent expense associated with these leases for the three months ended March 31, 2023 and 2022, respectively.

Litigation Financing

Waiver and Consent

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On January 31, 2020, Odyssey and Exploraciones Oceánicas S. de R.L. de C.V., our Mexican subsidiary ("ExO" and, together with Odyssey, the "Claimholder"), and Poplar Falls LLC (the "Funder") entered into an Amended and Restated International Claims Enforcement Agreement (as amended, the "Agreement"), pursuant to which the Funder agreed to provide funding to the Claimholder to facilitate the prosecution and recovery of the claim by the Claimholder against the United Mexican States under Chapter Eleven of the North American Free Trade Agreement.

On March 6, 2023, the Claimholder and the Funder under the Agreement entered into a Waiver and Consent Agreement, pursuant to which, among other things, (a) the Funder consented to allow the Claimholder to fund certain costs and expenses arising from the Subject Claim from the Claimholder’s own capital in an aggregate amount not to exceed $5,000,000, and (b) Odyssey paid a $1,000,000 nonrefundable waiver fee to the Funder. The waiver fee was accounted for as a debt modification and recorded as an additional debt discount of $1,000,000, which is being amortized through December 31, 2025, using the effective interest method, which is charged to interest expense.

For the three months ended March 31, 2023 and 2022, we recorded $81,484 and $68,140, respectively, of interest expense from the amortization of the debt discount, $36,724 and $36,724 of legal expense from the fee amortization, respectively and $25,194 and $0 of interest expense from the amortization of the waiver discount, respectively. The March 31, 2023 and December 31, 2022 carrying value of the debt was $23,493,442 and $24,347,513, respectively, and was net of unamortized debt fees of $110,173 and $146,897, respectively, net of unamortized debt discount of $272,512 and $353,996, respectively, associated with the fair value of the warrant, and net of the unamortized waiver fee of $974,806 and $0, respectively. The total face value of this obligation at March 31, 2023 and December 31, 2022 was $24,850,933 and $24,848,406, respectively.

Galileo

On February 28, 2023, Odyssey issued a $300,000 11.0% Promissory Note to Galileo NCC Inc ("Galileo"). The Promissory Note was payable on April 1, 2023. On March 6, 2023, Odyssey repaid this note payable in full with proceeds from the issuance of the DP SPV Note (as defined below).

DP SPV I LLC

On March 6, 2023, Odyssey entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with an institutional investor pursuant to which Odyssey issued and sold to the investor (a) a promissory note (the “DP SPV Note”) in the principal amount of $13.1 million and (b) a warrant (the “Warrant” and, together with the DP SPV Note, the “Securities”) to purchase shares of Odyssey’s common stock.

The principal amount outstanding under the DP SPV Note bears interest at the rate of 11.0% per annum, and interest is payable in cash on a quarterly basis, except that, (a) at Odyssey’s option and upon notice to the holder of the DP SPV Note, any quarterly interest payment may be satisfied, in lieu of paying such cash interest, by adding an equivalent amount to the principal amount of the DP SPV Note (“PIK Interest”), and (b) the first quarterly interest payment due under the DP SPV Note will be satisfied with PIK Interest. The DP SPV Note provides Odyssey with the right, but not the obligation, upon notice to the holder of the DP SPV Note to redeem (x) at any time before the first anniversary of the issuance of the DP SPV Note, all or any portion of the indebtedness outstanding under the DP SPV Note (together with all accrued and unpaid interest, including PIK Interest) for an amount equal to one hundred twenty percent (120%) of the outstanding principal amount so being redeemed, and (y) at any time on or after the first anniversary of the issuance of the DP SPV Note, all or any portion of the indebtedness outstanding under the DP SPV Note (together with all accrued and unpaid interest, including PIK Interest). Unless the DP SPV Note is sooner redeemed at Odyssey’s option, all indebtedness under the DP SPV Note is due and payable on September 6, 2024. Under the terms of the Purchase Agreement, Odyssey agreed to use the proceeds of the sale of the Securities to fund Odyssey’s obligations under the Termination Agreement (as defined 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 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 Warrant, the holder has the right for a period of three years after issuance to purchase up to 3,465,778 shares of Odyssey’s common stock at an exercise price of $3.78 per share, which represents 120.0% of the official closing price of Odyssey’s common stock on the NASDAQ Capital Market immediately preceding the signing of the Purchase Agreement, upon delivery of a notice of exercise to Odyssey. Upon exercise of the Warrant, Odyssey has the option to either (a) deliver the shares of common stock issuable upon exercise or (b) pay to the holder an amount equal to the difference between (i) the aggregate exercise price payable under the notice of exercise and (ii) the product of (A) the number of shares of common stock indicated in the notice of exercise multiplied by (B) the arithmetic average of the daily volume-weighted average price of the common stock on the NASDAQ Capital Market for the five consecutive trading days ending on, and including, the trading day immediately prior to

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the date of the notice of exercise. The warrant provides for customary adjustments to the exercise price and the number of shares of common stock issuable upon exercise in the event of a stock split, recapitalization, reclassification, combination or exchange of shares, separation, reorganization, liquidation, or the like.

In connection with the execution and delivery of the Purchase Agreement, Odyssey entered into a registration rights agreement (the “Registration Rights Agreement”) pursuant to which Odyssey agreed to register the offer and sale of the shares (the “Exercise Shares”) of Odyssey common stock issuable upon exercise of the Warrant. Pursuant to the Registration Rights Agreement, Odyssey agreed to prepare and file with the Securities and Exchange Commission (the “SEC”) a registration statement covering the resale of the Exercise Shares and to use its reasonable best efforts to have the registration statement declared effective by the SEC as soon as practicable thereafter, subject to stated deadlines.

We incurred $98,504 in related fees which are being amortized over the term of the Purchase Agreement and charged to legal expense with-in marketing, general and administrative expense. The $13.1 million in proceeds 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 $3,416,594, which is being amortized over the remaining term of the Purchase Agreement using the effective interest method, which is charged to interest expense.

For the three months ended March 31, 2023, we recorded $208,685 of interest expense from the amortization of the debt discount and $4,648 interest from the fee amortization, respectively. The March 31, 2023 carrying value of the debt was $9,798,236 and was net of unamortized debt fees of $93,855, net of unamortized debt discount of $3,207,909 associated with the fair value of the warrant. The total face value of this obligation at March 31, 2023 was $13,100,000.

Accrued interest

Total accrued interest associated with our financings was $26,392,827 and $35,131,587 as of March 31, 2023 and December 31, 2022, respectively. Accrued interest is included in accrued expenses on the accompanying condensed consolidated balance sheets.

NOTE 10 – ACCRUED EXPENSES