ITEM 7. 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
financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto. A description of our business is discussed in Item 1 of this report which contains an
overview of our business as well as the status of our ongoing project operations.
Results of Operations
The dollar values discussed in the following tables, except as otherwise indicated, are approximations to the nearest $1,000,000 and therefore
do not necessarily sum in columns or rows. For more detail refer to the Financial Statements and Supplementary Data in Item 8. The tables identify years 2020, 2019 and 2018, all of which included a twelve-month period ended December 31.
2020 Compared to 2019
Marketing, general and administrative 3.6 5.5 (1.7 ) 32 %
Total operating expenses $ 14.7 $ 13.4 $ 1.3 9 %
Total other income (expense) $ (8.5 ) $ (5.2 ) $ 3.3 64 %
Income tax benefit (provision) $ 0.0 $ 0.0 $ 0.0 0 %
Non-controlling interest $ 6.3 $ 5.1 $ 1.2 24 %
Revenue
The revenue generated in each period was a result of performing oceanic research, project administration and search and recovery operations for
our customers and related parties. Total revenue decreased by $1.0 million in 2020 as compared to 2019. The $1.0 million decrease is comprised of a $1.4 million reduction resulting from the long-term project we were engaged on since
2018 having reached its life expectancy during this period offset in part by an increase of $0.4 million increase in marine exploration services.
Cost and 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.
Marketing, general and administrative expense decreased $1.7 million to $3.6 million in 2020 compared to $5.5 million in 2019. The key items contributing to this $1.7 million decrease was
a non-cash decrease of share-based compensation of $0.2 million and a net reduction of $1.2 in employee incentives and employee and director related compensation. The $1.2 million reduction
was primarily due to the reduction of the discretionary incentive reserve resulting from management’s decision to not pay discretionary incentives until appropriate. We also had a $0.4 million reduction in professional corporate services
which includes a reduction of approximately $0.3 million in maritime legal services associated with the HMS Victory as well as fees related to legal and in our annual audit function. These decreases were offset in part by a
$0.1 million increase split between governmental fees and our corporate liability insurance.
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Operations and research expenses are primarily focused
around deep-sea mineral exploration which includes minerals research, scientific services, marine operations and project management. Operations and research expenses increased by $3.0 million
from 2019 to 2020 primarily as a result of the following items: (i) a $4.3 million increase in financed professional fees, legal fees, and other expenses directly associated with our NAFTA litigation pursuit, (ii) a $1.3 million
decrease in marine services operating technical labor costs, (iii) a $0.4 million increase in our concession permit fees for our Mexican subsidiary and (iv) a $0.4 million decrease in our general operational overhead which
includes items such as travel related, insurances, depreciation and rent.
Other Income or Expense
Other income and expense was $8.5 and $5.2 million in net expenses for 2020 and 2019, respectively, resulting in a net expense increase of
$3.3 million. This variance was primarily attributable to an increase in interest expense of $3.5 million primarily from our litigation financing agreement (NOTE H), a reduction in debt discount accretion in the amount of
$1.0 million, a $0.4 million incremental expense due to the fair value accounting of our hybrid debt instrument (NOTE H), the prior year included an expense of $0.9 million related to the fair value accounting for a warrant inducement
related to debt refinancing, a $0.5 million current year expense related to debt extinguishment accounting related to a loan extension, and $0.8 million of other income in 2019 attributable to the extinguishment of deferred revenue that
was caused by the 2019 cancelation of the HMS Sussex contract.
Income Taxes and
Non-Controlling Interest
We did not incur any taxes in 2020, 2019 or 2018.
Starting in 2013, we became the controlling shareholder of Oceanica. Our financial statements thus include the financial results of Oceanica
and its subsidiary. Except for intercompany transactions that are eliminated upon consolidation, Oceanica’s revenues and expenses, in their entirety, are shown in our 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 consolidated statements of operations. The
non-controlling interest adjustment for 2020 was $6.3 million as compared to $5.1 million for 2019. The administrative support has been ongoing in support of the legal process in obtaining the
environmental application for our Mexican subsidiary. This increase was mainly attributable to the compounding debt interest on our Mexican subsidiary’s balance sheet.
Liquidity and Capital Resources
Summary of Cash Flows:
Net cash (used) by operating activities $ (9,287 ) $ (5,444 )
Net cash provided by investing activities — (16 )
Net cash provided by financing activities 15,237 2,876
Net increase (decrease) in cash and cash equivalents $ 5,950 $ (2,584 )
Beginning cash and cash equivalents 213 2,797
Ending cash and cash equivalents $ 6,163 $ 213
Discussion of Cash Flows
Net cash used by operating activities for 2020 was $9.3 million. This represents a $3.8 million increase in use of funds when
compared to the use of $5.4 million in the same period of 2019. The net cash used by operating activities reflected a net loss before non-controlling interest of $21.1 million offset in
part by non-cash items of $1.0 million which primarily includes loss on debt extinguishment of $0.8 million, investment in unconsolidated entity of $0.9 million, the fair-value of
hybrid-debt accounting of $0.7 million and other which includes items such as depreciation and debt discount accretion for $0.4 million. Other operating activities resulted in an increase in working capital of $2.4 million compared to
2019. Changes to accrued expenses, accounts receivable, accounts payable and other assets in 2020 comprised the $2.4 million. The December 31, 2020 accounts payable balance of $4.1 million is comprised of: 1) $3.3 million which
pertains to four accounts. These accounts are not related to current operations and are not expected to be settled with cash, 2) $0.5 million for our NAFTA litigation and will be funded from our litigation financing facility and 3)
$0.3 million of standard operating payables that will be settled in the normal course of business.
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Net cash used by operating activities for 2019 was $5.4 million, an increase of
$1.0 million compared to the same period in 2018. Net cash used by operating activities reflected a net loss before non-controlling interest of $(15.5) million offset in part by non-cash items of $1.7 million which primarily included depreciation and amortization of $0.1 million, note payable interest accretion of $0.8 million, equity based compensation of $0.8 million
and deferred income amortization of $(0.8) million as well as a noncash use of $(0.7) million for an investment in an unconsolidated entity, loss on debt extinguishment of $0.3 million, a loss of $0.3 million on the debt fair value option
and a $0.9 million loss due to a debt modification inducement. Other operating activities resulted in an increase in working capital of $8.4 million. Changes to accrued expenses, accounts receivable, accounts payable and other assets in
2019 comprised the $8.4 million.
There were no cash flows from investing activities in 2020.
Cash flows used by investing activities for 2019 were $0.01 million compared to $1.0 million provided by for in 2018. The same
period during 2018 includes a payment of $1.0 million from Magellan for the purchase of certain marine assets, see NOTE E.
Cash
flows provided by financing activities for 2020 were $15.2 million, which represented a $12.3 million increase over the same period in 2019 of $2.9 million. The current period $15. 2 million was comprised of funds received from
our NAFTA litigation financing and funds received from the 37 North agreement (NOTE H). We also participated and received funds from the Small Business Administration (SBA) programs for the Payroll Protection Program (PPP) and the Emergency Injury
Disaster Loan (EIDL) (NOTE H). These debt proceeds of $3.6 million were offset by $0.2 million of repayments of financed obligations. In August 2020 we sold 2.5 million of our common shares
for net-proceeds of $11.3 million (see NOTE L). During December 2020, we sold $800,000 of new equity in one of our controlled subsidiaries to an existing shareholder of that subsidiary.
Cash flows provided by financing activities for 2019 were $2.9 million which represented $2.8 million of funds received from our
NAFTA litigation financing, and $0.5 million debt financing offset by $0.3 million of repayments of financed obligations. For the same period in 2018, we borrowed the final tranche of $0.4 million from MINOSA, increased our note
payable to SMOM by $0.5 and received $0.8 million toward our last promissory note. We also received a net advance of $1.0 million from Monaco in January 2018 which was eventually converted to a promissory note. This cash inflow was
partially offset by repayment of debt obligations of $0.2 million. During the fourth quarter of 2018, we issued new equity in an equity offering netting the Company $4.6 million.
General Discussion 2020
At
December 31, 2020, we had cash and cash equivalents of $6.2 million, an increase of $5.9 million from the December 31, 2019 balance of $0.2 million. The operating cash used of $9.3 million was supported by debt proceeds
from 37North, the NAFTA litigation financing and the SBA’s programs for the PPP and EIDL as well as the August 2020 capital raise of $11.3 million noted below. The $9.3 million of cash used from operations was partially offset by non-cash items totaling $1.0 million which include share-based compensation, loss on debt extinguishment accounting and the results of the hybrid-debt agreement fair value accounting.
Financial debt of the company, excluding any derivative, hybrid-debt fair value accounting or beneficial conversion feature components of
such, was $43.2 million at December 31, 2020 and $33.9 million at December 31, 2019.
On August 21, 2020, we sold
an aggregate of 2,553,314 shares of our common stock and warrants to purchase up to 1,901,989 shares of our common stock. The net proceeds received from sale, after offering expenses of $0.3 million, were $11.3 million (See NOTE L).
Since SEMARNAT initially 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 initial 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 North American Free Trade Agreement (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.
We continue to work diligently and in good faith with Mexico’s current administration to achieve an equitable resolution of this dispute, but we are prepared to proceed with the full NAFTA arbitration process if necessary, see ITEM 1. BUSINESS
OVERVIEW for further detail.
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2019 Compared to 2018
Total revenue $ 3.1 $ 3.3 $ (0.2 ) 6 %
Marketing, general and administrative 5.5 5.7 (0.2 ) 3 %
Total operating expenses $ 13.4 $ 9.3 $ 4.1 44 %
Total other income (expense) $ (5.2 ) $ (3.0 ) $ (2.1 ) 70 %
Income tax benefit (provision) $ 0.0 $ 0.0 $ 0.0 0 %
Non-controlling interest $ 5.1 $ 3.9 $ 1.1 29 %
Net income (loss) $ (10.4 ) $ (5.2 ) $ (5.3 ) 102 %
Revenue
Total revenue decreased by $0.2 million in 2019 as compared to 2018. The $0.2 million decrease is comprised of a $0.3 million
increase in increased marine mineral support services for CIC and an increase in other marine services offset by a $0.5 million reduction related to Magellan’s offshore marine services. See NOTE J for further CIC related party information.
Cost and Expenses
Marketing,
general and administrative expenses decreased $0.2 million from $5.7 million in 2018 to $5.5 million in 2019. This net decrease of $0.2 million was primarily due to (i) a net decrease of $0.8 million in personnel
expenses attributable to regular, incentive and share-based compensation, (ii) an increase of $0.9 million of director compensation at the corporate and subsidiary level (the corporate directors did not receive any cash compensation in
2018), (iii) a $0.1 million decrease in corporate legal support and professional services and (iv) a $0.2 million allocated reduction of corporate overhead support.
For 2019, Operations and research expenses were $7.9 million compared to $3.7 million for the same period in 2018. The variance of
$4.2 million was primarily due to (i) a $3.7 million increase in legal related support of our NAFTA arbitration with the government of Mexico to assure the fair treatment of our foreign investment, see ITEM 1: BUSINESS for more
information, (ii) reductions of $0.1 million and $0.3 million in operational support services and depreciation, respectively, and (iii) a $0.9 million gain on sale of marine equipment that occurred in 2018, but not in 2019.
Other Income or Expense
Total other
income and expense was $5.2 and $3.0 million in net expenses for 2019 and 2018, respectively, resulting in a net expense increase of $2.1 million. This variance was primarily attributable to an increase in interest expense of
$0.8 million from the beneficial conversion feature tied to a promissory note, a warrant inducement of $0.9 million, a debt extinguishment loss of $0.3 million from a debt modification, new 2019 interest of $0.6 million, a fair
valuation loss of $0.3 million on new debt assumed during the three months ended December 31, 2019, and an increase of other income of $0.8 million, which related to the reclassification of our Revenue Participation Rights for our
Cambridge project, see NOTE K for further information. See NOTE H for other debt information.
Income Taxes and
Non-Controlling Interest
We did not incur any taxes in 2019, 2018 or 2017.
Starting in 2013, we became the controlling shareholder of Oceanica. Our financial statements thus include the financial results of Oceanica
and its subsidiary. Except for intercompany transactions that are eliminated upon consolidation, Oceanica’s revenues and expenses, in their entirety, are shown in our consolidated financial statements. The share of
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Oceanica’s net losses corresponding to the equity of Oceanica not owned by us is subsequently shown as the “Non-Controlling Interest” in the
consolidated statements of operations. The non-controlling interest adjustment for 2019 was $5.1 million as compared to $3.9 million for 2018. The administrative support has been ongoing in support
of the legal process in obtaining the environmental application for our Mexican subsidiary. This increase was mainly attributable to the compounding debt interest on our Mexican subsidiary’s balance sheet.
Liquidity and Capital Resources
Summary of Cash Flows:
Net (used) by operating activities $ (5,444 ) $ (6,452 )
Net cash provided by investing activities (16 ) 994
Net cash provided by financing activities 2,876 7,137
Net increase (decrease) in cash and cash equivalents $ (2,584 ) $ 1,679
Beginning cash and cash equivalents 2,797 1,118
Ending cash and cash equivalents $ 213 $ 2,797
Discussion of Cash Flows
Net cash used by operating activities in 2019 was $5.4 million, an increase of $1.0 million compared to the same period in 2018. Net
cash used by operating activities reflected a net loss before non-controlling interest of $(15.5) million offset in part by non-cash items of $1.7 million, which
primarily included depreciation and amortization of $0.1 million, note payable interest accretion of $0.8 million, equity based compensation of $0.8 million and deferred income amortization of $(0.8) million as well as a noncash use
of $(0.7) million for an investment in an unconsolidated entity, loss on debt extinguishment of $0.3 million, a loss of $0.3 million on the debt fair value option and a $0.9 million loss due to a debt modification inducement. Other
operating activities resulted in an increase in working capital of $8.4 million. Changes to accrued expenses, accounts receivable, accounts payable and other assets in 2019 comprised the $8.4 million.
Cash flows used by investing activities for 2019 were $0.01 million compared to $1.0 million provided by for in 2018. The same
period during 2018 includes a payment of $1.0 million from Magellan for the purchase of certain marine assets.
Cash flows provided
by financing activities for 2019 were $2.9 million, which represented $2.8 million of funds received from our NAFTA litigation financing, and $0.5 million debt financing offset by $0.3 million of repayments of financed
obligations. For the same period in 2018, we borrowed the final tranche of $0.4 million from MINOSA, increased our note payable to SMOM by $0.5 and received $0.8 million toward our last promissory note. We also received a net advance of
$1.0 million from Monaco in January 2018 which was eventually converted to a promissory note. This cash inflow was partially offset by repayment of debt obligations of $0.2 million. During the fourth quarter of 2018, we issued new equity
in an equity offering netting the Company $4.6 million.
General Discussion 2019
At December 31, 2019, we had cash and cash equivalents of $0.2 million, a decrease of $2.6 million from the December 31,
2018 balance of $2.8 million. This decrease was mainly attributable to the $5.4 million used for operations offset in part by $3.3 million of financing attributable to the $2.8 million received for the NAFTA arbitration
litigation and $0.5 million received from new indebtedness.
Financial debt of the company, excluding the derivative or beneficial
conversion feature components of such debt, increased by $3.5 million in 2019, from a balance of $30.4 million at December 31, 2018 to a balance of $33.9 million at December 31, 2019. This increase was due to the NAFTA
litigation financing of $3.0 million and the first tranche of the 37North funding of $0.5 million, both of which are discussed above in the Discussion of Cash Flows (see NOTE H).
Since SEMARNAT initially 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 in Mexico nullified SEMARNAT’s initial 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.
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Financings
Stock Purchase Agreement
On March 11, 2015, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Penelope Mining LLC (the
“Investor”), and, solely with respect to certain provisions of the Purchase Agreement, Minera del Norte, S.A. de C.V. (“MINOSA”). The Purchase Agreement provides for us to issue and sell to the Investor shares of our preferred
stock in the amounts and at the prices set forth below (the numbers set forth below have been adjusted to reflect the 1-for-12 reverse stock split of February 19,
2016):
Series No. of Shares Price per Share
The closing of the sale and issuance of shares of the Company’s preferred stock to the Investor is
subject to certain conditions, including the Company’s receipt of required approvals from the Company’s stockholders (received on June 9, 2015), the receipt of regulatory approval, performance by the Company of its obligations under
the Purchase Agreement, receipt of certain third party consents, the listing of the underlying common stock on the NASDAQ Stock Market and the Investor’s satisfaction, in its sole discretion, with the viability of certain undersea mining
projects of the Company. Completion of the transaction requires amending the Company’s articles of incorporation to (a) effect a reverse stock split, which was done on February 19, 2016, (b) adjusting the Company’s
authorized capitalization, which was also done on February 19, 2016, and (c) establishing a classified board of directors (collectively, the “Amendments”). The Amendments have been or will be set forth in certificates of
amendment to the Company’s articles of incorporation filed or to be filed with the Nevada Secretary of State.
The purchase and sale
of 2,916,667 shares of Series AA-1 Preferred Stock at an initial closing and for the purchase and sale of the remaining 5,510,337 shares of Series AA-1
Preferred Stock according to the following schedule, is subject to the satisfaction or waiver of specified conditions set forth in the Purchase Agreement:
Date No. Series AA-1 Shares Total PurchasePrice
The Investor may elect to purchase all or a portion of the
Series AA-1 Preferred Stock before the other dates set forth above. The initial closing and the closing scheduled for March 1, 2016, have not yet occurred because certain conditions to closing have
not yet been satisfied or waived. After completing the purchase of all AA-1 Preferred Stock, the Investor has the right, but not the obligation, to purchase all or a portion the 7,223,145 shares of Series AA-2 Preferred Stock at any time after the closing price of the Common Stock on the NASDAQ Stock Market has been $15.12 or more for 20 consecutive trading days. The Investor’s right to purchase the shares
of Series AA-2 Preferred Stock will terminate on the fifth anniversary of the initial closing under the Purchase Agreement.
The Purchase Agreement contains certain restrictions, subject to certain exceptions described below, on the Company’s ability to
initiate, solicit or knowingly encourage or facilitate an alternative acquisition proposal, to participate in any discussions or negotiations regarding an alternative acquisition proposal, or to enter into any acquisition agreement, merger agreement
or similar definitive agreement, or any letter of intent, memorandum of understanding or agreement in principle, or any other agreement relating to an alternative acquisition proposal. These restrictions will continue until the earlier to occur of
the termination of the Purchase Agreement pursuant to its terms and the time at which the initial closing occurs.
The Purchase Agreement
also includes customary termination rights for both the Company and the Investor and provides that, in connection with the termination of the Purchase Agreement under specified circumstances, including in the event of a termination by the Company in
order to accept a Superior Proposal, the Company will be required to pay to the Investor a termination fee of $4.0 million.
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The Purchase Agreement contains representations, warranties and covenants of the parties
customary for a transaction of this type.
Subject to the terms set forth in the Purchase Agreement, the Lender provided the Company,
through a subsidiary of the Company, with loans of $14.75 million, the outstanding amount of which, plus accrued interest, will be repaid from the proceeds from the sale of the shares of Series AA-1
Preferred Stock at the initial closing. The outstanding principal balance of the loan at December 31, 2019 was $14.75 million.
The obligation to repay the loans is evidenced by a promissory note (the “Note”) in the amount of up to $14.75 million and
bears interest at the rate of 8.0% per annum, and, pursuant to a pledge agreement (the “Pledge Agreement”) between the Lender and Odyssey Marine Enterprises Ltd., an indirect, wholly owned subsidiary of the Company (“OME”),
is secured by a pledge of 54.0 million shares of Oceanica Resources S. de R.L., a Panamanian limitada (“Oceanica”), held by OME. In addition, OME and the Lender entered into a call option agreement (the “Oceanica Call”),
pursuant to which OME granted the Lender an option to purchase the 54.0 million shares of Oceanica held by OME for an exercise price of $40.0 million at any time during the one-year period after the
Oceanica Call was executed and delivered by the parties. The Oceanica Call option expired on March 11, 2016 without being executed or extended. On December 15, 2015, the Promissory Note was amended to provide that, unless otherwise
converted as provided in the Note, the adjusted principal balance shall be due and payable in full upon written demand by MINOSA; provided that MINOSA agrees that it shall not demand payment of the adjusted principal balance earlier than the first
to occur of: (i) 30 days after the date on which (x) SEMARNAT makes a determination with respect to the current application for the Manifestacion de Impacto Ambiental relating to our phosphate deposit project, which determination is other
than an approval or (y) Enterprises or any of its affiliates withdraws such application without MINOSA’s prior written consent; (ii) termination by Odyssey of the Stock Purchase Agreement, dated March 11, 2015 (the “Purchase
Agreement”), among Odyssey, MINOSA, and Penelope Mining, LLC (the “Investor”); (iii) the occurrence of an event of default under the Promissory Note; (iv) March 30, 2016; or (v) if and only if the Investor shall
have terminated the Purchase Agreement pursuant to Section 8.1(d)(iii) thereof, March 30, 2016. On March 18, 2016 the agreements with MINOSA and Penelope were further amended and extended the maturity date of the loan to
March 18, 2017(see NOTE H). The August 10, 2017 Minosa Purchase Agreement amended the due date of this note to a due date which may be no earlier than December 31, 2017, and that is at least 60 days subsequent to written notice that
Minosa intends to demand payment. We have not received any notice the creditor intends to demand payment. See the August 10, 2017 Minosa Purchase Agreement disclosure below. During December 2017 MINOSA transferred this debt to its parent
company.
On March 18, 2016, Odyssey entered into a $3.0 million Note Purchase Agreement with Epsilon Acquisitions LLC (see
below and NOTE H).
Epsilon is an investment vehicle of Mr. Alonso Ancira who is Chairman of the Board of AHMSA, an entity that
controls MINOSA.
Class AA Convertible Preferred Stock
Pursuant to a certificate of designation (the “Designation”) to be filed with the Nevada Secretary of State, each share of Series AA-1 Convertible Preferred Stock and Series AA-2 Convertible Preferred Stock (collectively, the “Class AA Preferred Stock”) will be convertible into
one share of Common Stock at any time and from time to time at the election of the holder. Each share of Class AA Preferred Stock will rank pari passu with all other shares of Class AA Preferred Stock and senior to shares of Common Stock
and all other classes and series of junior stock. If the Company declares a dividend or makes a distribution to the holders of Common Stock, the holders of the Class AA Preferred Stock will be entitled to participate in the dividend or
distribution on an as-converted basis. Each share of Class AA Preferred Stock shall entitle the holder thereof to vote, in person or by proxy, at any special or annual meeting of stockholders, on all
matters voted on by holders of Common Stock, voting together as a single class with other shares entitled to vote thereon. So long as a majority of the shares of the Class AA Preferred Stock are outstanding, the Company will be prohibited from
taking specified extraordinary actions without the approval of the holders of a majority of the outstanding shares of Class AA Preferred Stock. In the event of the liquidation of the Company, each holder of shares of Class AA Preferred
Stock then outstanding shall be entitled to be paid, out of the assets of the Corporation available for distribution to its stockholders, an amount in cash equal to the greater of (a) the amount paid to the Company for such holder’s shares
of Class AA Preferred Stock, plus an accretion thereon of 8.0% per annum, compounded annually, and (b) the amount such holder would be entitled to receive had such holder converted such shares of Class AA Preferred into Common
Stock immediately prior to such time at which payment will be made or any assets distributed.
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Stockholder Agreement
The Purchase Agreement provides that, at the initial closing, the Company and the Investor will enter into a stockholder agreement (the
“Stockholder Agreement”). The Stockholder Agreement will provide that (a) in connection with each meeting of the Company’s stockholders at which directors are to be elected, the Company will (i) nominate for election as
members of the Company’s board of directors a number of individuals designated by the Investor (“Investor Designees”) equivalent to the Investor’s proportionate ownership of the Company’s voting securities (rounded up to the
next highest integer) less the number of Investor Designees who are members of the board of directors and not subject to election at such meeting, and (ii) use its reasonable best efforts to cause such nominees to be elected to the board of
directors; (b) the Company will cause one of the Investor Designees to serve as a member of (or at such Investor Designee’s election, as an observer to) each committee of the Company’s board of directors; and (c) each Investor
Designee shall have the right to enter into an indemnification agreement with the Company (an “Indemnification Agreement”) pursuant to which such Investor Designee is indemnified by the Company to the fullest extent allowed by Nevada law
if, by reason of his or her serving as a director of the Company, such Investor Designee is a party or is threatened to be made a party to any proceeding or by reason of anything done or not done by such Investor Designee in his or her capacity as a
director of the Company.
The Stockholder Agreement will provide the Investor with pre-emptive
rights with respect to certain equity offerings of the Company and restricts the Company from selling equity securities until the Investor has purchased all the Class AA Preferred Stock or no longer has the right or obligation to purchase any
of the Class AA Preferred Stock. The Stockholder Agreement will also provide the Investor with certain “first look” rights with respect to certain mineral deposits discovered by the Company or its subsidiaries. Pursuant to the
Stockholder Agreement, the Company will grant the Investor certain demand and piggy-back registration rights, including for shelf registrations, with respect to the resale of the shares of Common Stock issuable upon conversion of the Class AA
Preferred Stock.
Other loans
Litigation Financing
On June 14,
2019, 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 International
Claims Enforcement Agreement (the “Agreement”), pursuant to which the Funder agreed to provide financial assistance 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 (“NAFTA”) for violations of the Claimholder’s rights under NAFTA related to the development of an undersea phosphate deposit off the coast of Baja Sur, Mexico (the
“Project”), on our own behalf and on behalf of ExO and United Mexican States (the “Subject Claim”). Pursuant to the Agreement, the Funder agreed to specified fees and expenses regarding the Subject Claim (the “Claims
Payments”) incrementally and at the Funder’s sole discretion.
Under the terms of the Agreement, the Funder agreed to make
Claims Payments in an aggregate amount not to exceed $6,500,000 (the “Maximum Investment Amount”). The Maximum Investment Amount will be made available to the Claimholder in two phases, as set forth below:
Upon exhaustion of the Phase I Investment Amount, the Claimholder will have the option to request Tranche A of the Phase II
Investment Amount, consisting of funding up to $3.5 million (“Tranche A Committed Amount”). Upon exhaustion of the Tranche A Committed Amount, the Claimholder will have the option to request Tranche B of the
Phase II Investment Amount, consisting of funding of up to $1.5 million (“Tranche B Committed Amount”). The Claimholder must exercise its option to receive the Tranche A Committed Amount in writing, no less than thirty
days before submitting a Funding Request to the Funder under Tranche A. The Claimholder must exercise its option to receive the Tranche B Committed Amount in writing within forty-five days after the exhaustion of the Tranche A
Committed Amount. Pursuant to the Agreement, the Claimholder agreed that, upon exercising the Claimholder’s option to receive funds under Phase I, Tranche A of Phase II, or Tranche B of Phase II, the Funder will be the
sole source of third-party funding for the specified fees and expenses of the Subject Claim under each respective phase and tranche covered by the option exercised, and the Claimholder will obtain funding for such fees and expenses only as set forth
in the Agreement. The Funder was due closing fee of $80,000 for the Phase I Investment Amount, and $80,000 for the Phase II Investment Amount to pay third parties in connection with due diligence and other administrative and transaction
costs incurred by the Funder prior to and in furtherance of execution of the Agreement.
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Upon the Funder making Claims Payments to the Claimholder or its designees in an aggregate
amount equal to the Maximum Investment Amount, the Funder has the option to continue funding the specified fees and expenses in relation to the Subject Claim on the same terms and conditions provided in the Agreement. The Funder must exercise its
option to continue funding in writing, within thirty days after the Funder has made Claims Payments in an aggregate amount equal to the Maximum Investment Amount. If the Funder exercises its option to continue funding, the parties agreed to attempt
in good faith to amend the Agreement to provide the Funder with the right to provide at the Funder’s discretion funding in excess of the Maximum Investment Amount, in an amount up to the greatest amount that may then be reasonably expected to
be committed for investment in Subject Claim. If the Funder declines to exercise its option, the Claimholder may negotiate and enter into agreements with one or more third parties to provide funding, which shall be subordinate to the Funder’s
rights under the Agreement.
The Agreement provides that the Claimholder may at any time without the consent of the Funder either settle
or refuse to settle the Subject Claim for any amount; provided, however, that if the Claimholder settles the Subject Claim without the Funder’s consent, which consent shall not be unreasonably withheld, conditioned, or delayed, the value of the
Recovery Percentage (as defined below) will be deemed to be the greater of (a) the Recovery Percentage (under Phase I or Phase II, as applicable), or (b) the total amount of all Claims Payments made in connection with such
Subject Claim multiplied by three (3).
If the Claimholder ceases the Subject Claim for any reason other than (a) a full and final
arbitral award against the Claimholder or (b) a full and final monetary settlement of the claims, including in particular, for a grant of an environmental permit to the Claimholder allowing it to proceed with the Project (with or without a
monetary component), all Claims Payments under Phase I and, if Claimholder has exercised the corresponding option, the Tranche A Committed Amount and Tranche B Committed Amount, shall immediately convert to a senior secured liability
of the Claimholder. This sum shall incur an annualized internal rate of return (IRR) of 50.0% retroactive to the date each Funding Request was paid by the Funder (under Phase I), or, to the conversion date for the Tranche A Committed
Amount and Tranche B Committed Amount of Phase II if the Claimholder has exercised the respective option (collectively, the “Conversion Amount”). Such Conversion Amount and any and all accrued IRR shall be payable in-full by the Claimholder within 24 months of the date of such conversion, after which time any outstanding Conversion Amounts, shall accrue an (IRR) of 100.0%, retroactive to the conversion date
(the “Penalty Interest Amount”). The Claimholder will execute such documents and take other actions as necessary to grant the Funder a senior security interest on and over all sums due and owing by the Claimholder in order to secure its
obligation to pay the Conversion Amount to the Funder. If the Claimholder ceases the Subject Claim due to the grant of an environmental permit (with or without a monetary component), all Claims Payments under Phase 1 and, if the Claimholder has
exercised the corresponding option, the Tranche A Committed Amount and Tranche B Committed Amount shall immediately convert to a senior secured liability of the Claimholder and shall incur an annualized an IRR of 50.0% on the Conversion Amount,
noted above, from the conversion date. Management has estimated it is more likely than not the Subject Claim will result in the issuance of the environmental permit requiring us to record interest under Generally Accepted Accounting Principles.
Reliance should not be placed on this estimate in determining the likely outcome of the Subject Claim.
If, at any time after exercising
its option to receive funds under either Tranche A or Tranche B of Phase II, the Claimholder wishes to fund the Subject Claim with its own capital (“Self-Funding”) (which excludes any Claims Payments made, either directly or
indirectly, by any other third party), the Claimholder shall immediately pay to the Funder the Conversion Amount, provided that this requirement shall not apply if, after the Funder has made Claims Payments in an aggregate amount equal to the
Maximum Investment Amount, the Funder does not exercise its option to provide Follow-On Funding.
In the event of any receipt of proceeds resulting from the Subject Claim (“Proceeds”), the Funder shall be entitled to
any additional sums above the Conversion Amount to which the Funder is entitled as described below. Should the Claimholder cease the Subject Claim as described above after Self-Funding the Claim, accrued IRR and Penalty Interest shall be calculated
and paid to the Funder as set forth above. The Funder’s rights to the Recovery Percentage as defined below shall survive any decision by Claimholder to utilize Self-Funding. The parties acknowledge this Agreement constitutes a sale of the right
to a portion of the Proceeds (if any) arising from the Subject Claim as set forth in this Agreement. The Claimholder has relinquished its right to the portion of the proceeds, if any, that the Funder would have the right to as described below. This
sale of proceeds is being accounted for under the guidance of ASC 470-10-25Recognition (Sales of Future Revenues)
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On each Distribution Date, distributions of the Proceeds shall be made to the Claimholder
and the Funder in accordance with subparagraph (a) or (b) below (the “Recovery Percentage”), as applicable:
(iii) thereafter, 100.0% to the Claimholder.
(iv) thereafter, 100% to the Claimholder.
The Agreement provides that if no Proceeds are ever paid to or received by the Claimholder or its representatives and if the environmental
permit is not issued, the Funder shall have no right of recourse or right of action against the Claimholder or its representatives, or any of their respective property, assets, or undertakings, except as otherwise specifically contemplated by the
Agreement. If (a) Proceeds are paid to or received by the Claimholder or its representatives; (b) such Proceeds are promptly applied and/or distributed by the Claimholder or on behalf of the Claimholder in accordance with the terms of the
Agreement; and (c) the amount received by the Funder as a result thereof is not sufficient to pay all of the Recovery Percentage and all of the amounts due to the Funder under the Agreement, then (provided that all of the Proceeds which the
Funder will ever be entitled to have been paid to or received by the Funder), the Funder shall have no right of recourse or action against the Claimholder or its Representatives, or any of their property, assets, or undertakings, except as otherwise
specifically contemplated by the Agreement. Pursuant to the Agreement, the Claimholder acknowledged the Funder’s priority right, title, and interest in any Proceeds, including against any available collateral to secure its obligations under the
Agreement, which security interest shall be first in priority as against all other security interests in the Proceeds. The Claimholder also acknowledged and agreed to execute and authorize the filing of a financing statement or similar and to take
such other actions in such jurisdictions as the Funder, in its sole discretion, deems necessary and appropriate to perfect such security interest. The Agreement also includes representations and warranties, covenants, conditions, termination and
indemnification provisions, and other provisions customary for comparable arrangements.
Amendment and Restatement (January 31,
2020)
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:
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During 2020, the Funder provided us with $2.0 million of the Arbitration Support Funds, and we incurred $200,000
in related fees that were treated as an additional advance. Upon each funding, the 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
$1,063,811 which is being amortized over the expected remaining term of the agreement using the effective interest method which is charged to interest expense.
Although the warrants only become exercisable upon the occurrence of future events, they are considered issued for accounting purposes and
were valued using a binomial lattice model. The expected volatility assumption was based on the historical volatility of our common stock. The expected life assumption was primarily based on management’s expectations of when the Warrants will
become exercisable and the risk-free interest rate for the expected term of the warrant is based on the U.S. Treasury yield curve in effect at the time of measurement.
Second Amendment and Restatement (December 12, 2020)
On December 12, 2020, the Claimholder and the Funder entered into a Second Amended and Restated International Claims Enforcement Agreement
(the “Second Restated Agreement”) relating to the Subject Claim. Under the terms of the Second Restated Agreement, the Funder has made and agreed to make Claims Payments in an aggregate amount not to exceed $20,000,000 (the “Maximum
Investment Amount”). The Second Restated Agreement requires the Funder to make Claims Payments in an aggregate amount no greater than $10,000,000 for the purposes of pursuing the Subject Claim to a final award (“Phase III Investment
Amount”). We also incurred $200,000 in related fees, which were treated as an additional advance. The Second Restated Agreement includes the same representations and warranties, covenants, conditions, termination and indemnification provisions,
and other provisions as in the original agreement.
The December 31, 2020 carrying value of the note is $10,968,729 and is net of
unamortized debt fees of $347,786 as well as the net unamortized debt discount of $890,962 associated with the fair value of the warrants. For the year ended December 31, 2020, the expense related to debt discount and fee amortization was
$172,849 and $52,214, respectively. The total face value of this obligation at December 31, 2020 and 2019 was $12,207,477 and $2,957,097, respectively.
Promissory Note
On December 6,
2019, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with 37North Capital SPV 11, LLC (the “Investor”) pursuant to which the Investor agreed to lend, in one or more transactions (each, a “Loan”),
up to an aggregate of $2.0 million to us, subject to the terms and conditions of the Purchase Agreement. On December 10, 2019, the Investor made a Loan to us in the amount of $539,000 pursuant to the Purchase Agreement. An additional Loan
of $490,000 was made in the first quarter of 2020. Each Loan is evidenced by a separate convertible promissory note (each, a “Note”). Unless otherwise converted as described below, the entire outstanding amount of all Loans was originally
due and payable on June 6, 2020. As described in additional detail below, the maturity date was subsequently extended to November 6, 2020, and on December 8, 2020, the Company waived the maturity date extension causing the maturity
date to revert back to June 6, 2020 (the “Maturity Date”).
At any time and from time to time until the three-month
anniversary of the Maturity Date, all or any portion of the outstanding amount of each Note may, at the Investor’s election, be converted into shares of our common stock, par value $0.0001 per share (“Conversion Shares”). The number
of Conversion Shares to be issued upon any conversion shall be equal
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to the quotient obtained by dividing the Applicable Conversion Amount (as defined below) by the Applicable Conversion Rate (as defined below). As defined in the Purchase Agreement, the
“Applicable Conversion Amount” means, on the date of determination and with respect to each Note, (a) for the period beginning on the date of issuance and ending on the day immediately preceding the Maturity Date, an amount equal to
100.0% of the amount of the Loan evidenced by such Note then outstanding; (b) on the Maturity Date, 136.0% of the amount of the Loan evidenced by such Note then outstanding (such amount, the “Enhanced Conversion Amount”); (c) for
the period beginning on the day immediately following the Maturity Date and for a period of three months thereafter (such three-month period, the “Accrual Period”), an amount equal to (i) the Enhanced Conversion Amount then
outstanding plus (ii) an additional amount equal to 3.0% per month (prorated for any period of less than a full month) accrued on the amount described in clause (i); and (d) on any date after the Accrual Period, the amount then outstanding
after giving effect to the accrual described in clause (c) during the Accrual Period (it being understood that no additional amount shall accrue after the expiration of the Accrual Period); and “Applicable Conversion Rate” means
(x) with respect to any conversion on or prior to the Maturity Date, $5.00, and (y) with respect to any conversion after the Maturity Date, the lower of (i) $5.00 and (ii) 80.0% of
the ten-day volume-weighted average price of Odyssey’s common stock. Notwithstanding anything in the Purchase Agreement to the contrary, we are prohibited from issuing any Conversion Shares, to
the extent such shares, after giving effect to such issuance after conversion and when added to the number of Conversion Shares previously issued upon conversion of any of the Notes sold pursuant to the Purchase Agreement, would represent in excess
of 19.9% of (A) the number of shares of our common stock outstanding immediately after giving effect to such issuances or (B) the total voting power of our securities outstanding immediately after giving effect to such issuances that are
entitled to vote on a matter being voted on by holders of our common stock.
On May 6, 2020, Odyssey and the Investor agreed to amend
the Purchase Agreement to additionally provide that, notwithstanding anything in the Purchase Agreement to the contrary, Odyssey is prohibited from issuing any Conversion Shares, to the extent such shares, after giving effect to such issuance after
conversion and when added to the number of Conversion Shares previously issued upon conversion of any of the Notes sold pursuant to the Purchase Agreement, would represent in excess of 19.9% of the number of shares of Common Stock outstanding as of
December 6, 2019. Due to a reference to the effective date of the amendment in the definition of the maturity date, the maturity date of the Note was inadvertently revised from June 6, 2020 to November 6, 2020. Thus, on
December 8, 2020 the Company amended the Notes to adjust the maturity date back to the original date of June 6, 2020 and to extend the option to convert to December 31, 2020. The modifications were evaluated under FASB ASC Topic 470-50-40, “Debt Modification and Extinguishments” but the instruments were determined not to be substantially different and extinguishment accounting did not apply.
During the year ended December 31, 2020, the Investor converted the entire loan balance into 329,498 shares of our common stock at
conversion rates ranging from $3.71 to $5.00 per share.
If, at any time prior to the Maturity Date, (a) we receive cash proceeds
(the “Shipwreck Proceeds”) arising out of our salvage agreement relating to cargo recovered from a specified shipwreck, and (ii) the amount of the Shipwreck Proceeds equals at least 155.0% of the then-unpaid amount of all Loans, then
we must repay in full the indebtedness outstanding under all the Notes by delivery of an amount equal to 155.0% of the then-unpaid amount of all Loans. In addition, at any time prior to the Maturity Date, we may repay all (but not less than all) of
the then-unpaid amount of all Loans by delivery of an amount equal to 155.0% of the then-unpaid amount of all Loans; provided, that we must provide the Investor at least ten days’ notice of our intention to repay the indebtedness.
The Purchase Agreement and the Notes issued by Odyssey on December 10, 2019 and January 29, 2020, include representations and
warranties and other covenants, conditions, and other provisions customary for comparable transactions.
We evaluated the Notes in
accordance with ASC Topic 815, Derivatives and Hedging, and determined that they contain certain embedded derivatives whose economic risks and characteristics were not clearly and closely related to the risks of the host contract. The material
embedded derivative features consisted of the embedded conversion option and contingent redemption provisions. We elected to initially and subsequently measure the Notes in their entirety at fair value, with changes in fair value recognized in
earnings. FASB ASC 825-10-25 allows us to elect the fair value option for recording financial instruments when they are initially recognized or if there is an
event that requires re-measurement of the instruments at fair value, such as a significant modification of the debt.
Because the Notes are carried in their entirety at fair value, the value of the compound embedded conversion feature is embodied in that fair
value. The Company estimates the fair value of the hybrid instrument based on a probability weighted analysis which considers the present value of the cash flows using a credit risk adjusted rate enhanced by the redemption feature and the value of
the conversion option valued using a Monte Carlo model. This method was considered by management to be the most appropriate method of encompassing the credit risk and exercise behavior that a market participant would consider when valuing the hybrid
financial instrument.
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Inputs used to value the hybrid instrument during the year ended December 31, 2020
included: (i) present value of future cash flows using a credit risk adjusted rate ranging from 18%-24% due solely to changes in benchmark interest rates, (ii) remaining term to maturity,
(iii) volatility ranging from 35%-87%, (iv) closing stock price on the valuation date, and (v) the conversion price based on the lesser of $5.00 or 80% of the
10-day VWAP. Material changes due to instrument-specific credit risk are recorded in Other Comprehensive Income with all other changes in value being recorded in net income.
The fair value of the hybrid instrument was $861,485 as of December 31, 2019. During the year ended December 31, 2020, we received
additional proceeds of $490,000, recorded a change in the fair value of the hybrid instrument of $732,958 and fully converted the Notes into 329,498 shares of our Common Stock.
Payroll protection program
We applied to
Fifth Third Bancorp (“Fifth Third”) under the Small Business Administration (the “SBA”) Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) for a loan of
$370,400 (the “Loan”), and the Loan was made on April 16, 2020. The proceeds of the Loan were used to cover payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.
The Loan, which is evidenced by promissory note issued by us (the “Promissory Note”), has
a two-year term, matures on April 16, 2022, and bears interest at a rate of 0.98% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed
below), will commence seven months from the month this Note is dated. We did not provide any collateral or guarantees for the Loan, nor did we pay any facility charge to obtain the Loan. The Promissory Note provides for customary events of default,
including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. Odyssey may prepay the principal of the Loan at any time without incurring any prepayment charges.
The Loan may be forgiven partially or fully if the Loan proceeds are used for covered payroll costs, rent and utilities, provided that such
amounts are incurred during the eight-week period that commenced on April 16, 2020, and at least 75% of any forgiven amount has been used for covered payroll costs. During June 2020, the 75% requirement was reduced to 60% and the eight-week
period was amended to a 24-week period. Any forgiveness of the Loan will be subject to approval by the SBA and Fifth Third and will require us to apply for such treatment in the future.
Emergency Injury Disaster Loan
On
June 26, 2020, we executed the standard loan documents required for securing an Economic Injury Disaster Loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”). The principal amount of the
EIDL Loan is $149,900, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest of $731, are due monthly beginning twelve
months from the date of the EIDL Loan. The balance of principal and interest is payable thirty years from the date of the promissory note. In connection with the EIDL Loan, the Company executed the EIDL Loan documents, which include
the SBA Secured Disaster Loan Note, dated May 16, 2020, the Loan Authorization and Agreement, dated May 16, 2020, and the Security Agreement, dated May 16, 2020, each between the SBA and the Company.
Going Concern Consideration
We have
experienced several years of net losses and may continue to do so. Our ability to generate net income or positive cash flows for the following twelve months is dependent upon financings, our success in developing and monetizing our interests in
mineral exploration entities, generating income from exploration charters, collecting on amounts owed to us, and completing the MINOSA/Penelope equity financing transaction approved by our stockholders on June 9, 2015.
Our 2020 business plan required 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 projected
business plan requirements, we would be required to follow a contingency business plan which is based on curtailed expenses and fewer cash requirements. On August 21, 2020, we sold an aggregate of 2,553,314 shares of our common stock and
warrants to purchase up to 1,901,989 shares of our common stock. The net proceeds received from this sale, after offering expenses of $0.3 million, were $11.2 million (See NOTE J). These proceeds, coupled with the anticipated cash inflows,
are expected to provide operating funds through early 2022.
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On March 11, 2015, we entered into a Stock Purchase Agreement with Minera del Norte
S.A. de c.v. (“MINOSA”) and Penelope Mining LLC (“Penelope”), an affiliate of MINOSA, pursuant to which (a) MINOSA agreed to extend short-term, debt financing to Odyssey of up to $14.75 million, and (b) Penelope
agreed to invest up to $101 million over three years in convertible preferred stock of Odyssey. The equity financing is subject to the satisfaction of certain conditions, including the approval of our stockholders which occurred on June 9,
2015, and MINOSA and Penelope are currently under no obligation to make the preferred share equity investments.
Our consolidated non-restricted cash balance at December 31, 2020 was $6.2 million. We have a working capital deficit at December 31, 2020 of $47.0 million. Our largest loan of $14.75 million from MINOSA had
a due date of December 31, 2017 which is now linked to other stipulations, see NOTE H for further detail. The majority of our remaining assets have been pledged to MINOSA, and its affiliates, and to Monaco Financial LLC, leaving us with few
opportunities to raise additional funds from our balance sheet. The total consolidated book value of our assets was approximately $11.8 million at December 31, 2020, which includes cash of $6.2 million, and the fair market value of
these assets may differ from their net carrying book value. Even though we executed the above noted financing arrangement with Penelope, Penelope must purchase the shares for us to be able to complete the equity component of the transaction. The
Penelope equity transaction is heavily dependent on the outcome of our subsidiary’s application approval process for an environmental permit (EIA) to commercially develop a mineralized phosphate deposit off the coast of Mexico. The factors
noted above raise doubt about our ability to continue as a going concern. These 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.
Indemnification Provisions
Under our
bylaws and certain consulting agreements, we have agreed to indemnify our officers and directors for certain events arising as a result of the officer’s or director’s serving in such capacity. Separate agreements may provide
indemnification after term of service. The term of the indemnification agreement is as long as the officer or director remains in the employment of the company. The maximum potential amount of future payments we could be required to make under these
indemnification agreements is unlimited. However, our director and officer liability insurance policy limits its exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the
estimated fair value of these indemnification agreements is minimal and no liabilities are recorded for these agreements as of December 31, 2020.
Critical Accounting Estimates
The
discussion and analysis of our financial position and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect our financial position and results of operations. See NOTE A to the Consolidated Financial Statements for a description of our significant accounting policies. Critical
accounting estimates are defined as those that are reflective of significant judgment and uncertainties, and potentially result in materially different results under different assumptions and conditions. We have identified the following critical
accounting estimates. We have discussed the development, selection and disclosure of these policies with our audit committee.
Long-Lived Assets
As of December 31, 2020, we had approximately $0.6 million of net property and equipment, right to use – operating lease and
related assets. Our policy is to recognize impairment losses relating to long-lived assets in accordance with the ASC topic for Property, Plant and Equipment. Impairment decisions are based on several factors, including, but not limited to,
management’s plans for future operations, recent operating results and projected cash flows.
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Realizability of Deferred Tax Assets
We have recorded a net deferred tax asset of $0 at December 31, 2020. As required by the ASC topic for Accounting for Income Taxes,we have evaluated whether it is more likely than not that the deferred tax assets will be realized. Based on the available evidence, we have concluded that it is more likely than not that those assets would not be realizable without the recovery
and rights of ownership or salvage rights of high value shipwrecks or the monetization of our mineral exploration stakes and thus a valuation allowance of $71.9 million has been recorded as of December 31, 2020.
Allowance for Doubtful Accounts
In determining the collectability of our accounts receivable, we need to make certain assumptions and estimates. Specifically, we may examine
accounts and assess the likelihood of collection of particular accounts. Management has elected to record bad debts using the direct write-off method. Generally accepted accounting principles state an estimate
is to be made for an allowance for doubtful accounts. The effect of using the direct write-off method, however, is not materially different from the results that would have been obtained had the allowance
method been followed. If we were to have a recorded allowance, the accounts receivable would be stated net the recorded allowance.
Derivative Financial Instruments
From time to time, we may enter into a financial instrument that may contain a derivative. In evaluating fair value of derivative financial
instruments, there are numerous assumptions which management must make that may influence the valuation of the derivatives that would be included in the financial statements.
Exploration License
The Company follows the guidance pursuant to ASU 350, “Intangibles-Goodwill and Other” in accounting for its Exploration
License. Management determined the rights to use the license to have an indefinite life. This assessment is based on the historical success of renewing the license since 2006, and the fact that management believes there are no legal, regulatory, or
contractual provisions that would limit the useful life of the asset. The exploration license is not dependent on another asset or group of assets that could potentially limit the useful life of the exploration license. In the future, the
recoverability of the license will be tested whenever circumstances indicate that its carrying amount may not be recoverable per the guidance of ASU 360, “Subsequent Measurement”.
Contractual Obligations
At
December 31, 2020, except as disclosed in NOTE O regarding our office lease, the Company did not have any other contractual obligations that extended beyond 12 months.
ITEM 7A. 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 or instruments that expose us to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears beginning on page 30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information we are required to disclose in
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reports that we file with or furnish to the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC. An evaluation was carried out under the supervision
and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that we are able to collect process and disclose the information we are
required to disclose in the reports we file with the SEC within required time periods.
Internal Controls over Financial Reporting
Management’s report on our internal controls over financial reporting can be found in the financial statement section of this report.
There have been no significant changes in the Company’s internal controls over financial reporting as of December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning Directors and Executive Officers is hereby incorporated by reference to the information under the headings
“Election of Directors” and “Executive Officers and Directors of the Company” in the Company’s Proxy Statement (the “Proxy Statement”) for the Annual Meeting of Stockholders to be held on June 14, 2021.
The Company has adopted a Code of Ethics that applies to all of its employees, including the principal executive officer, the principal
financial officer and the principal accounting officer. The Code of Ethics and all committee charters are posted on the Company’s website (www.odysseymarine.com). We will provide a copy of any of these documents to stockholders free of charge
upon request to the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by reference to the information under the heading “Executive Compensation and
Related Information” in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A portion of the information required by this Item pursuant to Item 403 of Regulation S-K
is hereby incorporated by reference to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement. The information required pursuant to Item 201(d) of Regulation S-K is hereby incorporated by reference to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is hereby incorporated by reference to the information under the heading “Certain Relationships and
Related Transactions” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is hereby incorporated by reference to the information under the heading “Independent Public
Accounting Firm’s Fees” in the Proxy Statement.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
2. Exhibits
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ODYSSEY MARINE EXPLORATION, INC.
PAGE
Management’s Annual Report on Internal Control over Financial Reporting 30
Report of Independent Registered Public Accounting Firm 31
Consolidated Financial Statements:
Consolidated Balance Sheets 35
Consolidated Statements of Income 36
Consolidated Statements of Changes in Stockholders’ Equity/(Deficit) 37
Consolidated Statements of Cash Flows 38
Notes to the Consolidated Financial Statements 40
Consolidated Financial Statement Schedules:
Schedule II – Valuation and Qualifying Accounts 74
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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed 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. This process includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of the internal control over financial reporting to future periods are subject to risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures
may deteriorate.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Odyssey Marine
Exploration, Inc and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Odyssey Marine Exploration, Inc and Subsidiaries (the Company) as of December 31, 2020 and
2019, and the related consolidated statements of income, changes stockholders’ equity, and cash flows for each of the years in the two-year periods ended December 31, 2020, and 2019 and the related
notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019,
and the results of its operations and its cash flows for each of the years in the two-year periods ended December 31, 2020, and 2019, in conformity with accounting principles generally accepted in the
United States of America.
Consideration of the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note O to the
consolidated financial statements, the Company has incurred significant losses and they may be unsuccessful in raising the necessary capital to fund operations and capital expenditures. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans regarding those matters are also described in Note O. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of Exploration License
As discussed in Notes A, and F to the consolidated financial statements, the Company recorded an indefinite life intangible exploration license for
approximately $1.8 million on the consolidated balance sheets at December 31, 2020 and 2019. The Company has determined that the exploration license has an indefinite useful life. This determination is reviewed annually by management, as
well as an annual review for impairment. We identified the assessment of the useful life and potential impairment of the exploration license as a critical audit matter due to the assessment involving judgment in determining whether the rights to the
license have an indefinite life, and judgment in determining if any triggering events have occurred that would cause the exploration license to be impaired.
The primary procedures we performed to address this critical audit matter included:
• We determined that the most recent license renewal had been filed.
Evaluation of convertible debt with an embedded derivative liability
As discussed in Notes A and H to the consolidated financial statements, the Company recorded in the consolidated statements of income a loss from “Change
in Derivative Liabilities Fair Value” of approximately $733,000 and $323,000 for the years ended December 31, 2020 and 2019. During the year ended December 31, 2020, convertible debt associated with the derivative liability converted
into common stock, and the Company recorded approximately $2.2 million in the consolidated statements of changes in stockholders’ equity (deficit) under the caption “common stock issued for conversion and settlement of convertible
debt and accounts payable” upon the extinguishment of the derivative liability. The Company utilized a Monte Carlo model to value the derivative liability, which estimates the fair value of the liability based upon certain assumptions utilizing
a probability weighted analysis, and considers the present value of cash flows using a credit risk adjusted rate or discount factor. Other inputs into the model include, volatility, closing stock prices at various valuation points, and conversion
prices as determined by the applicable agreements. We identified the fair value of the derivative liability as a critical audit matter, as the assumptions utilized in the model to value the derivative liability required judgement, and the model is
inherently complex. Additionally, the accounting for derivative liabilities is complex.
The primary procedures we performed to address this critical
audit matter included the following:
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Evaluation of convertible promissory notes with detachable warrants
As discussed in Note H to the consolidated financial statements, the Company had certain convertible promissory notes that were issued with detachable
warrants. The carrying value of the notes is included in “loans payable” on the consolidated balance sheet at December 31, 2020 and 2019. During the 2019 and 2020, the Company modified these convertible promissory notes, which
included an extension of the maturity date and a reduction of the conversion price, in addition, the Company issued common stock warrants as an inducement to extend the maturity date of the notes. As a result of these modifications, for the year
ended December 31, 2020 and 2019, the Company recorded in the consolidated statements of income a “loss on debt extinguishment” of approximately $777,000 and $290,000 and recorded in the consolidated statements of changes in
stockholders’ equity (deficit) under the caption “debt modification” the fair value of the warrants issued. The Company performed a present value cash flow analysis prior to the modification, and immediately after the modification to