Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide a narrative of our financial results and an evaluation of our results of operation and financial condition. The discussion should be read in conjunction with our consolidated financial statements, the related notes to the financial statements and our Annual Report on Form 10-K
for the year ended December 31, 2021.
In addition to historical information, this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 regarding the Company’s expectations concerning its future operations, earnings and prospects. On the date the forward-looking statements are made, the statements represent the Company’s expectations, but the expectations concerning its future operations, earnings and prospects may change. The Company’s expectations involve risks and uncertainties and are based on many assumptions that the Company believes to be reasonable, but such assumptions may ultimately prove to be inaccurate or incomplete, in whole or in part. Accordingly, there can be no assurances that the Company’s expectations and the forward-looking statements will be correct. Please refer to the Company’s most recent Annual Report on Form 10-K
for a description of risk factors that could cause actual results to differ from the expectations stated in this discussion. Odyssey disclaims any obligation to update any of these forward-looking statements except as required by law.
Operational Update
Additional information regarding our announced projects can be found in our Annual Report on Form 10-K
for the year ended December 31, 2021. Only projects material in nature or with material status updates are discussed below. We may have other projects in various stages of planning or execution that may not be disclosed for security or legal reasons until considered appropriate by management or required by law.
Our subsea project portfolio contains multiple projects in various stages of development throughout the world and across different mineral resources. We are regularly adding new projects through the development of new deposits, acquisition of mineral rights/deposits and through a leveraged contracting model, which allows the company to earn equity in deep-sea
mineral projects.
With respect to mineral deposits, Subpart 1300 of Regulations S-K
outlines the SEC’s basic mining disclosure policy and what information may be disclosed in public filings.
Subsea Mineral Mining Exploration Projects
ExO Phosphate Project:
The “Exploraciones Oceanicas” Phosphate Project is a rich deposit of phosphate sands located 70-90
meters deep within Mexico’s Exclusive Economic Zone. This deposit contains a large amount of high-grade phosphate rock that can be extracted on a financially attractive basis (essentially a standard dredging operation). The product will be attractive to Mexican and other world producers of fertilizers and can provide important benefits to Mexico’s agricultural development.
The deposit lies within an exclusive mining concession licensed to the Mexican company Exploraciones Oceánicas S. de R.L. de CV (“ExO”). Oceanica Resources, S. de R.L., a Panamanian company (“Oceanica”) owns 99.99% of ExO, and Odyssey owns 56.29% of Oceanica through Odyssey Marine Enterprises, Ltd., a wholly owned Bahamian company (“Enterprises”).
In 2012, ExO was granted a 50-year
mining license by Mexico (extendable for another 50 years at ExO’s option) for the deposit that lies 25-40
km offshore in Baja California Sur. An NI 43-101 compliant
report was completed on the deposit in 2014 and has been periodically updated.
We spent more than three years preparing an environmentally sustainable development plan with the assistance of experts in marine dredging and leading environmental scientists from around the world. Key features of the environmental plan included:
•
No chemicals would be used in the dredging process or released into the sea.
•
A specialized return down pipe that exceeds international best practices to manage the return of dredged sands close to the seabed, limiting plume or impact to the water column and marine ecosystem (including primary production).
•
The seabed would be restored after dredging in such a way as to promote rapid regeneration of seabed organisms in dredged areas.
•
Ecotoxicology tests demonstrated that the dredging and return of sediment to the seabed would not have toxic effects on organisms.
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•
Sound propagation studies concluded that noise levels generated during dredging would be similar to whale-watching vessels, merchant ships and fisherman’s ships that already regularly transit this area, proving the system is not a threat to marine mammals.
•
Dredging limited to less than one square kilometre each year, which means the project would operate in only a tiny proportion of the concession area each year.
•
Proven turtle protection measures were incorporated, even though the deposit and the dredging activity are much deeper and colder than where turtles feed and live, making material harm to the species highly remote.
•
There will be no material impact on local fisheries as fishermen have historically avoided the water column directly above the deposit due to the naturally low occurrence of fish there.
•
The project would not be visible from the shoreline and would not impact tourism or coastal activities.
•
Precautionary mitigation measures were incorporated into the development plan in line with best-practice global operational standards.
•
The technology proposed to recover the phosphate sands has been safely used in Mexican waters for over 20 years on more than 200 projects.
Notwithstanding the factors stated above, in April 2016 the Mexican Ministry of the Environment and Natural Resources (“SEMARNAT”) unlawfully rejected the permission to move forward with the project.
ExO challenged the decision in Mexican Federal court and in March 2018, the Tribunal Federal de Justicia Administrativa (“TFJA”), an 11-judge
panel, ruled unanimously that SEMARNAT denied the application in violation of Mexican law and ordered the agency to re-take
their decision. Just prior to the change in administration later in 2018, SEMARNAT denied the permit a second time in defiance of the court. ExO is once again challenging the unlawful decision of the Peña Nieto administration before the TFJA. In addition, in April 2019, we filed a North American Free Trade Agreement (“NAFTA”) Claim against Mexico to protect our shareholders’ interests and significant investment in the project.
Our claim seeks compensation of over $2 billion on the basis that SEMARNAT’s wrongful repeated denial of authorization has destroyed the value of our investment in the country and is in violation of the following provisions of NAFTA:
•
Article 1102. National Treatment.
•
Article 1105. Minimum Standard of Treatment; and
•
Article 1110. Expropriation and compensation.
We filed First Memorial in the NAFTA case in September 2020. It is supported by documentary evidence and 20 expert reports and witness statements. In summary, this evidence includes:
•
MERITS: Testimony from independent environmental experts that the environmental impact of ExO’s phosphate project is minimal and readily mitigated by the mitigation measures proposed by ExO. Witnesses also testified that Mexico’s denial of environmental approval by the prior administration was politically motivated and not justified on environmental grounds, and that Mexico granted environmental permits to similar dredging projects in areas that are considered more environmentally sensitive than ExO’s project location.
•
RESOURCE: An independent certified marine geologist testified as to the size and character of the resource.
•
OPERATIONAL VIABILITY: Engineering experts testified that the project uses established dredging and processing technology, and the project’s anticipated CAPEX and OPEX was reasonable.
•
VALUE: A phosphate market analyst testified that the project’s projected CAPEX and OPEX would make the project one of the lowest cost phosphate rock resources in the world, and damages experts testified the project would be commercially viable and profitable.
Odyssey filed its First Memorial in the case on September 4, 2020. Mexico filed its Counter-Memorial on February 23, 2021. On June 29, 2021, we filed our reply to Mexico’s Counter-Memorial. Odyssey’s filings are available at www.odysseymarine.com/nafta. Mexico filed their Rejoinder on October 19, 2021. All filings are available on the ICSID website. The NAFTA Tribunal hearing took place from January 24 – January 29, 2022. On May 10, 2022, one final witness, whose testimony was delayed due to COVID, testified before the NAFTA Tribunal. As soon as the hearing transcripts are finalized, final questions from the Tribunal are answered by the parties, and closing arguments are filed, the evidentiary phase of the case will be closed and the Tribunal can begin their deliberations. Odyssey cannot predict the length of these deliberations or when a ruling will be issued, but we remain confident in the merits of our case.
On June 14, 2019, Odyssey executed an agreement that provided up to $6.5 million in funding for prior, current and future costs of the NAFTA action. On January 31, 2020, this agreement was amended and restated, as a result of which the availability increased to $10.0 million. In December 2020, Odyssey announced it secured an additional $10 million from the funder to aid in our NAFTA case. On June 14, 2021, the funder agreed to fund up to an additional $5.0 million for litigation costs. The funder will not have any right of recourse against us unless the environmental permit is awarded or if proceeds are received (See NOTE H – Litigation Financing).
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LIHIR Gold Project:
The exploration license for the Lihir Gold Project covers a subsea area that contains at least five prospective gold exploration targets in two different mineralization types: seamount-related epithermal and modern placer gold. Two subaqueous debris fields within the area are adjacent to the terrestrial Ladolam Gold Mine and are believed to have originated from the same volcanogenic source. The resource lies 500-2,000
meters deep in the Papua New Guinea Exclusive Economic Zone off the coast of Lihir Island, adjacent to the location of one of the world’s largest know terrestrial gold deposits. We have an 85.6% interest in Bismarck Mining Corporation, Ltd, the Papua New Guinea company that holds the exploration license for the project.
Previous exploration expeditions in the license area, including a survey conducted by Odyssey, indicate it is highly prospective for commercially viable gold content.
In August 2021, Papua New Guinea (“PNG”) issued a permit extension allowing Odyssey to continue with our exploration program. We have developed an exploration program for the Lihir Gold Project to validate and quantify the precious and base metal content of the prospective resource. The Company met with local regulatory authorities, specialists in local mining, environmental legal experts, and logistics support service companies in PNG to establish baseline business functions essential for a successful program to support upcoming marine exploration operations in the license area. This offshore work began in late 2021 and will continue, provided there are no constraints from the COVID-19
pandemic or other unexpected impediments. Bismarck and Odyssey value the environment and respect the interests and people of Papua New Guinea and Lihir and are committed to transparent sharing of all environmental data collected during the exploration program.
Offshore survey and mapping operations commenced in December 2021 in the Papua New Guinea, Lihir license area. Raw data is being processed to produce a report and full analysis. The goals of this work include producing a high-resolution acoustic terrain model of the seafloor in the area, as well as acquiring acoustic images of subseafloor sediments and lithology. This will provide a basis for characterizing the geologic setting of the area and essentially creating a “snapshot” of the environment. These activities will help us to further characterize the value of this project and allow informed decision making on how to proceed with environmentally sensitive direct geologic sampling.
Odyssey’s multi-year exploration program will focus on robust environmental surveys and studies that will accrue to environmental permitting in compliance with PNG’s requirements as well as the development of an Environmental Impact Assessment (“EIA”). During the exploration phase, steps to validate and quantify the precious and base metal content of the prospective resource will also be carried out. Once completed, if the data shows extraction can be carried out responsibly, Odyssey will apply for a Mining License.
Further development of this project is dependent on the characterization of any present resources during exploration and license approvals.
CIC Project:
Odyssey is a member of the CIC Consortium, which was founded and is led by Odyssey co-founder and former CEO, Greg Stemm, and includes Royal Boskalis Westminster NV and Odyssey Marine Exploration.
In December 2021, the Cook Islands Seabed Minerals Authority’s (“SBMA”) Licensing Panel evaluated three applications and announced that CIC Limited (“CIC”) met the qualification criteria for an exploration license. On February 23, 2022, CIC was awarded a five-year exploration license by the Cook Islands.
Through a wholly owned subsidiary, we have earned and now hold a position of approximately 13.6% of the current outstanding equity units of CIC. We have the ability to earn up to 20.0 million equity units over the next several calendar years, which represents an approximate 16.0% interest in CIC based on the currently outstanding equity units. This means we can earn approximately 3.5 million additional equity units in CIC under our current services agreement. We achieved our current equity position through the provision of services rendered to this venture, see NOTE D.
Antigua and Barbuda:
In September 2021, Odyssey entered into a Memorandum of Understanding (“MoU”) with the Government of Antigua and Barbuda to determine the feasibility of a sustainable seabed mineral resource program from highly prospective areas in their Exclusive Economic Zone. There is a high probability for polymetallic nodule formation based on legacy data, regional analysis and seafloor conditions which are similar to and adjacent to our target area. Development of an exploration program, which will be the basis for a definitive agreement between the parties, is in late-stage development. Additional information will be released upon execution of the definitive agreement.
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South American Phosphate Project:
Odyssey reached an exclusive agreement early in 2022 with BlueSea Minerals, Ltd. and BlueSea Minerals Brasil Ltda, (collectively “BlueSea Group”) to create a new joint venture (“JV”) company in which Odyssey will own a 75% interest. The new company will have exclusive rights to 19 highly prospective phosphate areas in the Exclusive Economic Zone (EEZ) of a South American country. Legacy data and desktop research indicate high-grade phosphate deposits in the concession areas.
Pending execution of the definitive agreement, Odyssey will manage the overall South American Phosphate Project development, and BlueSea Group will manage business operations in South Anerica. A related party to BlueSea Group, SeaSeep, will provide marine operations services, supervised by Odyssey.
The 19 licenses to be developed by the JV include 366 square kilometres of seabed. The geological setting of these licenses is similar to the geology Odyssey identified off the coast of Mexico, which is now known as the ExO Phosphate deposit (“ExO project”). Since then, phosphate prices have surged and the need for phosphate to combat world hunger continues to grow. It is anticipated that the South American deposits can be dredged with the standard and similar technology and engineering solutions already identified for the ExO Project, which will allow the phosphate to be recovered in an environmentally responsible manner without the addition of any chemicals into the sea.
Critical Accounting Policies and Changes to Accounting Policies
There have been no material changes in our critical accounting estimates since December 31, 2021.
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 in Part I, Item 1.
Three months ended March 31, 2022, compared to three months ended March 31, 2021.
2022 vs. 2021
Increase/(Decrease)
(Dollars in millions)
2022
2021
$
%
Total revenues
$
0.3
$
0.3
$
0.0
0
%
Marketing, general and administrative
1.9
1.3
0.6
48.5
%
Operations and research
5.1
1.8
3.3
181.3
%
Total operating expenses
$
7.0
$
3.1
$
3.9
125.8
%
Total other income (expense)
$
(3.4
)
$
(2.3
)
$
(1.1
)
46.8
%
Income tax benefit (provision)
$
0.0
$
0.0
$
0.0
0
%
Non-controlling
interest
$
1.9
$
1.4
$
0.5
32.6
%
Net income (loss)
$
(8.2
)
$
(3.7
)
$
(4.5
)
121.2
%
Revenue
The revenue generated in each period was a result of performing marine research and project administration for our customers and related parties. Total revenue in the current quarter was $0.3 million, which is consistent as compared to the same period a year ago. One company to which we provided these services in both years was a deep-sea
mineral exploration company, CIC, which we consider to be a related party since it is owned and controlled by our past Chairman of the Board (see NOTE D).
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Operating Expenses
Marketing, general and administrative expenses primarily include all costs within the following departments: Executive, Finance & Accounting, Legal, Information Technology, Human Resources, Marketing & Communications, Sales and Business Development. Expenses increased $0.6 million to $1.9 million for the three-month period ended March 31, 2022 compared to $1.3 million from the same period in the prior year. The items contributing to this $0.6 million increase were an increase of $0.2 million in employee benefits and compensation related and an increase of non-cash
long term incentive share-based compensation of $0.1million. Legal fees increased by $0.2 million which is primarily related to supporting the expansion of our seafloor minerals portfolio. Insurance expenses increased by $0.1 million as a result of increased premiums.
Operations and research expenses are primarily focused around deep-sea
mineral exploration which include minerals research, scientific services, marine operations and project management. Operations and research expenses increased by $3.3 million from 2021 to 2022 as a result of the following items: (a) a $3.0 million increase in litigation financed costs directly associated with our NAFTA litigation, (b) a $0.2 million increase in our concession permit fees for our Mexican subsidiary and (c) a $0.1 million increase in marine services primarily related to global prospectivity.
Total
Other
Income and Expense
Total other income and expense was $3.4 million in net expense and $2.3 million in net expense for 2022 and 2021, respectively, resulting in a net expense increase of $1.1 million. This variance was attributable to a $0.6 million increase in interest expense in connection with our NAFTA litigation funding and a $0.2 million loan payable prepayment premium.
Taxes and Non-Controlling
Interest
Due to losses, we did not accrue any taxes in either period ending 2022 or 2021.
Starting in 2013, we became the controlling shareholder of Oceanica. Our financial statements thus include the financial results of Oceanica and its subsidiary, ExO. Except for intercompany transactions that are fully eliminated upon consolidation, Oceanica’s revenues and expenses, in their entirety, are shown in our condensed consolidated financial statements. The share of Oceanica’s net losses corresponding to the equity of Oceanica not owned by us is subsequently shown as the “Non-Controlling
Interest” in the condensed consolidated statements of operations. The non-controlling
interest adjustment in the first quarter of 2022 was $1.9 million as compared to $1.4 million in the first quarter of 2021. The substance of these amounts is primarily due to the compounding of interest on intercompany debt and other standard operating costs.
Liquidity and Capital Resources
Three Months Ended
(In thousands)
March 31,
2022
March 31,
2021
Summary of Cash Flows:
Net cash used in operating activities
$
(2,140
)
$
(1,431
)
Net cash used in investing activities
(3
)
—
Net cash provided by financing activities
1,974
503
Net decrease in cash and cash equivalents
$
(168
)
$
(928
)
Beginning cash and cash equivalents
2,274
6,163
Ending cash and cash equivalents
$
2,106
$
5,235
Discussion of Cash Flows
Net cash used in operating activities for the first three months of 2022 was $2.1 million. This represents an approximate $0.7 million increase in use of funds when compared to the use of $1.4 million in the same period of 2021. The net cash used in operating activities reflected a net loss before non-controlling
interest of $10.1 million and is adjusted primarily by non-cash
items of $0.1 million, which primarily includes an investment in unconsolidated entity of $0.3 million, share-based compensation of $0.1 million, and offset by the $0.2 million non-cash
adjustment loan payable prepayment premium. Other operating activities resulted in an increase in working capital of $8.0 million. This $8.0 million increase includes a $3.4 million increase to accrued expenses and an increase of $4.6 million to accounts payable in 2022. The increase to accrued expenses and accounts payable is predominantly related to our NAFTA financed litigation.
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Cash flows used in investing activities for the first three months of 2022 were minimal and zero for the three months ended 2021.
Cash flows provided by financing activities for the first three months of 2022 were $2.0 million. The $2.0 million is comprised of $2.2 million received from the issuance of loan payable offset by the $0.2 million of debt obligation payments. Cash flows provided by financing activities for the first three months of 2021 were $0.5 million. The $0.5 million is comprised of $0.7 million from the sale of equity in our subsidiary offset by the outflows of less than $0.1 million for our lease obligation and $0.2 of debt obligation payments.
Other Cash Flow and Equity Areas
General Discussion
At March 31, 2022, we had cash and cash equivalents of $2.1 million, a decrease of $0.2 million from the December 31, 2021 balance of $2.3 million. During March 2021, Epsilon Acquisitions LLC converted its indebtedness comprised of $1.0 million of principal and $0.4 million of accrued interest into 411,562 shares of our common stock, and during July 2021, certain creditors converted $1.1 million of our convertible debt and accrued interest of $0.3 million into 283,850 shares of our common stock. Our litigation funder paid, on our behalf, $0.7 million of amounts due to vendors who are supporting our NAFTA litigation as well as directly reimbursing the Company $0.2 million for expended costs related directly to our NAFTA litigation.
Financial debt of the company, was $44.5 million at March 31, 2022 and $42.2 million at December 31, 2021. During October 2021 we entered into a Termination and Settlement Agreement with Monaco and SMOM which removed $14.5 million of debt principal and accrued interest from our balance sheet.
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 NAFTA. On September 4, 2020, we filed our First Memorial with the Tribunal. The First Memorial is the filing that fully lays out our case, witnesses and evidence for the Tribunal. Mexico filed its counter-memorial, which is available on the International Centre for Settlement of Investment Disputes (“ICSID”) website, on February 23, 2021. On June 29, 2021, we filed our reply to Mexico’s counter-memorial. Odyssey’s filings are available at www.odysseymarine.com/nafta. The NAFTA Tribunal hearing took place from January 24 – January 29, 2022. On May 10, 2022, one final witness, whose testimony was delayed due to COVID, testified before the NAFTA Tribunal. As soon as the hearing transcripts are finalized, final questions from the Tribunal are answered by the parties, and closing arguments are filed, the evidentiary phase of the case will be closed and the Tribunal can begin their deliberations. Odyssey cannot predict the length of these deliberations or when a ruling will be issued, but we remain confident in the merits of our case. See Litigation Financing below regarding the funding of this litigation.
Financings
The Company’s consolidated notes payable consisted of the following carrying values and related interest expense at:
Note payable
Interest expense
March 31,
2022
December 31,
2021
March 31,
2022
March 31,
2021
MINOSA 1
$
14,750,001
$
14,750,001
$
290,959
$
290,959
MINOSA 2
5,050,000
5,050,000
124,520
124,520
Litigation financing
19,334,009
18,323,097
2,412,348
1,505,032
Emergency Injury Disaster Loan
149,900
149,900
1,461
—
Vendor note payable
484,009
484,009
14,322
14,321
Monaco
2,500,000
2,500,000
111,000
—
37North
2,200,000
—
200,000
—
$
44,467,919
$
41,257,007
Litigation Financing
For the three months ended March 31, 2022 and 2021, we recorded $68,140 and $50,479, respectively, of interest expense from the amortization of the debt discount and $36,724 and $28,982 interest from the fee amortization, respectively. The March 31, 2022 and December 31, 2021 carrying value of the debt was $19,334,009 and $18,323,097, respectively, and were net of unamortized debt fees of $257,069 and $293,793, respectively, as well as the net unamortized debt discount of $581,788 and $649,928, respectively, associated with the fair value of the warrant. The total face value of this obligation at March 31, 2022 and December 31, 2021 was $20, 172,866 and 19,266,818, respectively.
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37North
On March 17, 2022 we entered into a Note Purchase Agreement (“Note Agreement”) with 37North SPV 11, LLC (“37N”) in which 37N agreed to loan us up to $2,000,000. These loan proceeds were received in full on March 25, 2022. Pursuant to the Note Agreement, the indebtedness is non-interest
bearing and matures on June 15, 2022. Anytime from 30 days after the maturity date, 37N has the option to convert all or a portion of the outstanding amount of the indebtedness into conversion shares equal to the quotient obtained by dividing (A) 125% of the amount of the indebtedness, by (B) the lower of $5.94 and 70% of the 10-day
VWAP. The aggregate maximum number of shares of Common Stock to be issued in connection with conversion of the indebtedness will not exceed i) 19.9% of the outstanding shares of Common Stock prior to the date of the Agreement, ii) 19.9% of the combined voting power of the outstanding voting securities, or iii) exceed the applicable listing rules of the Principal Market if the stockholders don’t approve the issuance of Common Stock upon conversion of the indebtedness.
Any time prior to maturity, we have the option to prepay the indebtedness at an amount of 110% of the unpaid principal. From the maturity date to 29 days after the maturity date (July 14, 2022), we may prepay all (but not less than) an amount equal to 115% of the unpaid amount of the indebtedness. Anytime, after the 30th day after the maturity date (July 15, 2022), we may prepay all (but not less than) an amount equal to 125% of the unpaid amount of the indebtedness, however, we must provide 37N a prepayment notice at least 10 days prior to repayment. If 37N delivers an exercise notice during this 10-day
period, the Note will be converted, rather than prepaid.
If 37N delivers an exercise notice and the number of shares issuable is limited by the 19.9% limitation outlined above, then we may prepay all (but not less than all) an amount equal to 130% of the remaining unpaid amount.
Accounting considerations
We evaluated the indebtedness and determined the shares issuable pursuant to the conversion option were determinate due to the cap on the number of issuable shares, and, as such, met the requirements for a derivative scope exception for instruments that are both indexed to an entity’s own stock and classified in stockholders’ equity. The optional and contingent prepayment options provide the right to accelerate the settlement of debt; however, the prepayment options can only be exercised by the Company. As such, they are considered clearly and closely related to the debt host instrument and bifurcation was not necessary. We early adopted ASC 2020-06,
so we were not required to analyze the instrument for a beneficial conversion feature, and the instrument was recorded wholly as debt. Although the indebtedness does not bear interest, it must be repaid at amounts greater than the face value. According to ASC 470-10-35-2,
if a debt instrument has a contractual maturity date that can be extended at the issuer’s option, at an increasing rate, the debt discounts and issuance costs must be amortized over the period in which the debt is estimated to be outstanding, even if that period extends beyond the debt’s original contractual maturity date. The difference between the proceeds received and the repayment amount are generally amortized over the expected life of the indebtedness using the effective interest method. Management estimated the expected life to be very limited, so the entire expected repayment amount of $2.2 million, representing 110% of the indebtedness, was recorded upon issuance of the Note Agreement.
Certain default put provisions were not considered to be clearly and closely related to the debt host, but management concluded that the value of these default put provisions was de minimis. We reconsider the value of the default put provisions each reporting period to determine if the value is material to the financial statements.
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, or completing the MINOSA/Penelope equity financing transaction.
Our 2021 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 becomes insufficient to meet our desired projected business plan requirements, we would be required to follow a contingency business plan that 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 1,901,985 shares of our common stock. The net proceeds received from this sale, after offering expenses of $0.3 million, were $11.2 million. These proceeds, coupled with other anticipated cash inflows, provided 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 March 31, 2022 was $2.1 million. We have a working capital deficit at March 31, 2022 of $58.5 million. The majority of our remaining assets have been pledged to MINOSA, leaving us with few opportunities to raise additional funds from our balance sheet. The total consolidated book value of our assets was approximately $9.0 million at March 31, 2022, which includes cash of $2.1 million. 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”), as well as the current NAFTA litigation, 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. Our condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
New Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06,
Debt-Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40).
The amendments in this update are effective for public business entities that meet the definition of a Securities and Exchange Commission (“SEC”) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, 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.
On October 31, 2018, the SEC adopted a final rule (“New Final Rule”) that will replace SEC Industry Guide 7 with new disclosure requirements that are more closely aligned with current industry and global regulatory practices and standards, including NI 43-101.
Companies must comply with the New Final Rule for the company’s first fiscal year beginning on or after January 1, 2021. We adopted this New Final Rule on January 1, 2021.
Other recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not or are not believed by management to have a material effect, if any, on the Company’s financial statements.
Off-Balance
Sheet Arrangements
We do not engage in off-balance
sheet financing arrangements. In particular, we do not have any interest in so-called
limited purpose entities, which include special purpose entities (“SPEs”) and structured finance entities.
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Table of Contents
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