The following discussion will assist in the understanding of our financial
condition and results of operations. The information below should be read in
conjunction with the financial statements, the related notes to the financial
statements and our Annual Report on Form 10-K for the year ended December 31,
2019.
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-Kfor the year ended December 31, 2019. 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.
We have numerous marine projects in various stages of development around the
world for ourselves and on behalf of clients. In order to protect the targets of
our planned survey, environmental, and/or geological operations, we may defer
disclosing specific information relating to our projects until we have located
mineral deposits or other potentially valuable sources of interest and
determined a course of action to protect our property rights and those of our
clients. With respect to mineral deposits, SEC Industry Guide 7 outlines the
Commission's basic mining disclosure policy and what information may be
disclosed in public filings. If work is conducted on behalf of a client, release
of information may be limited by the client.
Subsea Mineral Mining Exploration Projects
Oceanica Resources, S. de R.L.
In February 2013, we disclosed Odyssey's ownership interest, through Odyssey
Marine Enterprises, Ltd., a wholly owned Bahamian company ("Enterprises"), in
Oceanica Resources, S. de R.L., a Panamanian company ("Oceanica"), and
Exploraciones Oceanicas, S. De R.L. De C.V. ("ExO"), a subsidiary of Oceanica.
ExO is in the business of mineral exploration and controls exclusive permits in
an area in Mexican waters that contain a large amount of phosphate mineralized
material. Phosphate is a key ingredient of fertilizers. In March 2014, Odyssey
completed a first NI 43-101 compliant report on the deposit and periodically
updates this report. This deposit is currently our main mineral project, and
success of this project is important to Odyssey's future. Odyssey believes that
this deposit contains a large amount of high-grade phosphate rock that can be
extracted on a financially attractive basis (essentially a dredging operation)
and that the product will be attractive to Mexican and other world producers of
fertilizers.
ExO has conducted extensive scientific testing of the mineralized phosphate
material and of the environmental impact of recovering the mineralized material
from the seafloor. ExO has been working with leading environmental experts on
the impact assessment and permitting process and, with Royal Boskalis
Westminster N.V on the extraction and processing program.
ExO applied for and was granted additional mining concession areas by the
Mexican government. These additional areas are adjacent to the zones with the
highest concentration of mineralization in the original mining concession area.
ExO also relinquished certain parts of the granted concession areas where the
mineral concentration levels were less attractive for mining purposes.
In September 2014, ExO reported that the EIA for proposed dredging and recovery
of phosphate sands from the deposit had been filed with the Mexican Secretary of
Environment and Natural Resources (SEMARNAT). Approval of the EIA is needed to
obtain an environmental permit to begin the commercial extraction of phosphate
from the tenement area. In November 2014, SEMARNAT held a public hearing on the
EIA in Mexico and asked supplemental questions to ExO on the EIA. In full
compliance with the SEMARNAT process, a response to the questions was filed in
March 2015. In addition to providing supplemental scientific information and
studies, the response included additional mitigation and economic considerations
to reinforce ExO's commitment to being good corporate citizens and stewards of
the environment. In June 2015, ExO withdrew its EIA application. The EIA was
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re-submitted in June 2015, and additional information was filed in August 2015.
A public hearing on this application was conducted by SEMARNAT on October 8,
2015, additional questions were received from SEMARNAT in November 2015, and
ExO's responses to the questions were filed with SEMARNAT on December 3, 2015.
On April 8, 2016, SEMARNAT denied the application.
On March 21, 2018, the Tribunal Federal de Justicia Administrativa (TFJA) in
Mexico ruled unanimously in favor of our subsidiary, ExO, nullifying the April
2016 denial of the environmental license application for the extraction of
phosphate sand from ExO's deposit. In May 2018, after the statutory period for
appeal of the ruling had passed with no appeals filed, the Mexican court
published the full ruling on its website.
On October 18, 2018, we were notified that SEMARNAT repeated their refusal to
issue the environmental approval for the phosphate deposit controlled by ExO. On
October 22, 2018, legal counsel for ExO filed an action before the TFJA
requesting sanctions be imposed upon SEMARNAT and ordering SEMARNAT to
reevaluate the application in compliance with their policies and consider the
environmental science and mitigation measures presented by ExO as directed in
the TFJA's original order.
At a hearing on April 24, 2019, the TFJA advised ExO that in light of a
procedural issue arising under Mexican law, its current application would have
to be resubmitted to the court in a different form. The TFJA issued a formal
order on June 17, 2019, which allowed ExO to file an alternative administrative
action. In August 2019, ExO submitted this filing seeking to annul SEMARNAT's
decision of October 12, 2018. On August 3, 2020, ExO filed expert testimony with
the TFJA supporting the argument to annul SEMARNAT's 2018 denial. The case is
on-going in the Mexican judicial system.
According to ExO's Mexican legal counsel, the TFJA's recent determination
neither reverses their unanimous decision of March 21, 2018, which nullified
SEMARNAT's original denial of the MIA on April 7, 2016, nor does it decide the
legality of SEMARNAT's denial of the MIA on October 12, 2018. To move to the
next phase of development of the deposit, Odyssey and its subsidiaries need the
issuance of this environmental permit. Odyssey and its subsidiary ExO continue
to work to obtain the necessary environmental permission.
We have full confidence in the environmental and economic merits of our venture
in Mexico. We are taking all necessary steps to protect our interests and the
interests of our shareholders. The past administration in Mexico has treated our
environmental permit application in a manifestly arbitrary, discriminatory and
non-transparent manner, in bad faith and in clear disregard of their own
applicable legal regime. In these circumstances, to protect our rights and to
defend shareholder value, on January 4, 2019, we notified Mexico of our intent
to submit a claim against Mexico to arbitration under the investment protection
chapter of the North American Free Trade Agreement (NAFTA). Filing this notice
of intent (NOI) initiated a consultation period during which we and the Mexican
Government are to seek to resolve this dispute amicably. The first consultation
occurred on April 2, 2019 and the Notice of Arbitration (NOA) was submitted on
April 5, 2019. A public version of the NOI and NOA are available on our website
at www.odysseymarine.com.com/nafta.
The Arbitral Tribunal, consisting of three international arbitrators well-versed
in international investment treaties, has been constituted. Procedural Order
No. 1, which includes a filing deadline in the first half of the third quarter
2020 for Odyssey's Memorial, has been issued by the Tribunal. On September 4,
2020, the First Memorial was filed with the Tribunal. The 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.
Additional Mineral Projects
We have two additional strategic mineral projects currently under development.
One project is being conducted under contract with CIC LLC, a mineral
development company, working in the South Pacific where we are receiving cash
and equity for services rendered to the venture. This model is in line with the
company's strategic plan. CIC, LLC is majority owned and controlled by Greg
Stemm, the past Chairman of the Board for our Company. See NOTES C, D and F.
Additionally, on July 9, 2019, Odyssey acquired a 79.9% equity interest
in Bismarck Mining Corporation (PNG) Limited ("Bismarck") in exchange for
249,584 shares of Odyssey's common stock.
Bismarck's primary asset is an exclusive exploration license covering
approximately 320 square kilometers of subsea area containing at least five
prospective exploration targets in two different mineralization types:
seamount-related epithermal and modern placer gold. In connection with the
acquisition by Odyssey, Bismarck and the seller entered into a royalty agreement
that provides for Bismarck to pay the seller a 2.496% net smelter royalty on
minerals mined from the license area.
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The license area is adjacent to Lihir Island in Papua New Guinea where one of
the world's largest known terrestrial gold deposits is currently being mined and
processed by a major international mining company.
The deposit has significant strategic value to Odyssey and adds valuable
diversification to the company's mineral asset portfolio. Previous exploration
expeditions in the license area, including a survey conducted by Odyssey,
indicate a polymetallic resource with commercially viable grade gold content may
exist. Additionally, the two subsea debris fields within the area and adjacent
to the terrestrial Ladolam Gold Mine are believed to have originated from the
same volcanogenic source that is currently being mined on Lihir.
Odyssey is currently planning offshore operations in the licensed area during
2021 contingent on the ability to execute operations safely and to standard in
light of current travel and operational issues worldwide. These operations are
expected to include sampling (rock and sediment), water sampling, biological
sampling and other environmental data acquisition to aid in the production of a
resource estimate, environmental impact assessment and eventual mining plan. In
the third quarter of 2020, Bismarck filed for renewal of its exploration license
which is expected to be granted in the first quarter of 2021, extending its
rights for an additional two years.
Other Projects
Odyssey offers its marine exploration services to third-party companies. This
may be for mineral exploration, environmental studies, shipwreck search and
recovery, subsea surveys, and other off-shore work requiring specialized
equipment, personnel, project planning and management as well as research and
scientific services.
Critical Accounting Policies and Changes to Accounting Policies
There have been no material changes in our critical accounting estimates since
December 31, 2019.
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 September 30, 2020, compared to three-months ended
September 30, 2019
Increase/(Decrease) 2020 vs. 2019
(Dollars in millions) 2020 2019 $ %
Total revenues $ 0.2 $ 0.8 $ (0.6 ) 72 %
Marketing, general and administrative 0.0 2.1 (2.1 ) 99 %
Operations and research 4.9 2.1 2.7 129 %
Total operating expenses $ 4.9 $ 4.2 $ 0.7 16 %
Other income (expense) $ (2.9 ) $ (2.4 ) $ 0.5 22 %
Income tax benefit (provision) $ 0.0 $ 0.0 $ 0.0 0 %
Non-controlling interest $ 2.1 $ 1.6 $ 0.5 32 %
Net income (loss) $ (5.4 ) $ (4.2 ) $ 1.2 29 %
Revenue
Revenue is primarily generated through the sale of technical and marine services
either through expedition charters or for the services from our crew and
equipment that are on a fee or cost-plus basis.
Total revenue in the current quarter was $0.2 million, a $0.6 million decrease
compared to the same period a year ago. The revenue generated in each period was
a result of performing marine research, project administration and search and
recovery operations for our customers and related parties. One company we
provided these services to is a deep-sea mineral exploration company, CIC, owned
and controlled by our past Chairman of the Board (see NOTE D) which we consider
a related party. The primary reason for this reduction was that the long-term
project we were engaged on the last two years reached its life expectancy during
this quarter.
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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. Marketing, general and administrative expense decreased
$2.1 million to $0.0 million for the three-month period ended September 30, 2020
compared to $2.1 million from the same period in the prior year. The key items
contributing to this $2.1 million reduction was a decrease of $1.3 million in
employee incentives and compensation related. The $1.3 million decrease was
primarily due to the reduction of the discretionary incentive reserve resulting
from management's decision to not pay discretionary incentives until
appropriate. A $0.6 million reduction in non-cash share-based compensation and a
reduction of $0.2 million of professional corporate services accounted for the
remaining decrease.
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
$2.7 million from 2019 to 2020 primarily as a result of the following items:
(i) a $2.7 million increase in financed litigation costs directly associated
with our NAFTA litigation pursuit, (ii) a $0.3 million decrease in our marine
services project contract labor and (iii) a $0.1 million savings in operational
overhead reductions.
Other Income and Expense
Other income and expense generally consists of interest expense on our debt
financing arrangements as well as, from time to time, the fair value change of
derivatives carried on the balance sheet. Total other income and expense was
$2.9 and $2.4 million in net expenses for 2020 and 2019, respectively, resulting
in a net expense increase of $0.5 million. This variance was primarily
attributable to a decrease in interest expense of $0.2 million due to the
reduction of debt accretion in 2020 from 2019, a $0.5 million incremental
expense due to the fair value accounting of our hybrid debt instrument (NOTE I)
and a $0.2 million debt extinguishment accounting loss as noted in NOTE I.
Taxes and Non-ControllingInterest
Due to losses, we did not accrue any taxes in either period ending 2020 or 2019.
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 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 in the third quarter of 2020
was $2.1 million as compared to $1.6 million in the third quarter of 2019. The
$0.5 million increase was primarily due to the compounding of interest on
intercompany debt as well as NAFTA litigation costs linked to the minority
interests in Oceanica.
Nine-months ended September 30, 2020, compared to nine-months ended
September 30, 2019
Increase/(Decrease) 2020 vs. 2019
(Dollars in millions) 2020 2019 $ %
Total revenues $ 1.7 $ 2.3 $ (0.6 ) 25
Marketing, general and administrative 2.7 5.0 (2.3 ) 46 %
Operations and research 10.6 5.5 5.1 92 %
Total operating expenses $ 13.3 $ 10.5 $ 2.8 27 %
Other income (expense) $ (6.2 ) $ (3.8 ) $ 2.4 63 %
Income tax benefit (provision) $ 0.0 $ 0.0 $ 0.0 0 %
Non-controlling interest $ 5.3 $ 3.8 $ 1.5 40 %
Net income (loss) $ (12.4 ) $ (8.2 ) $ 4.3 52 %
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Revenue
Total revenue in the nine-month period ended September 30, 2020 was
$1.7 million, a $0.6 million decrease compared to the same period a year ago.
The revenue generated in each period was a result of performing marine research,
project administration and search and recovery operations for our customers and
related parties. One company we provided these services to is a deep-sea mineral
exploration company, CIC, owned and controlled by our past Chairman of the Board
(see NOTE D) which we consider a related party. The primary reason for this
reduction was that the long-term project we were engaged on the last two years
reached its life expectancy during this period.
Operating Expenses
Marketing, general and administrative expense decreased $2.3 million to
$2.7 million for the nine-month period ended September 30, 2020 compared to
$5.0 million from the same period in the prior year. The key items contributing
to this $2.3 million decrease was a non-cash decrease of share-based
compensation of $0.4 million and a reduction of $1.6 in employee incentives and
compensation related. The $1.6 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
$0.3 million reduction in professional corporate services which includes a
reduction of maritime legal services associated with the HMS Victory as well as
fees related to legal and audit.
Operations and research expenses increased by $5.1 million from 2019 to 2020
primarily as a result of the following items: (i) a $5.6 million increase in
financed professional fees, legal fees, and other expenses directly associated
with our NAFTA litigation pursuit, (ii) a $0.7 million decrease in marine
services operating technical contract costs, (iii) a $0.3 million increase in
our concession permit fees for our Mexican subsidiary and (iv) a $0.1 million
decrease in our general operational overhead which includes items such as travel
related and rent.
Other Income and Expense
Other income and expense was $6.2 and $3.8 million in net expenses for 2020 and
2019, respectively, resulting in a net expense increase of $2.4 million. This
variance was primarily attributable to an increase in interest expense of
$2.1 million primarily from our litigation financing agreement (NOTE I), a
reduction in debt discount accretion in the amount of $0.8 million, a
$0.7 million incremental expense due to the fair value accounting of our hybrid
debt instrument (NOTE I), 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 write down of deferred revenue that was caused by the 2019
cancelation of the HMS Sussex contract.
Taxes and Non-Controlling Interest
Due to losses, we did not accrue any taxes in either period ending 2020 or 2019.
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 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 in the nine-months ended
September 30, 2020 was $5.3 million as compared to $3.8 million for the same
period 2019. The $1.5 million increase was primarily due to the compounding of
interest on intercompany debt as well as NAFTA litigation costs linked to the
minority interests in Oceanica.
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ODYSSEY MARINE EXPLORATION, INC. 
