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.
16
--------------------------------------------------------------------------------
•
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.
According to the procedural calendar, written closing arguments will be filed in
late August 2022, subject to any short extensions. Then the evidentiary phase of
the case will be closed, and the Tribunal can begin its 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
17
--------------------------------------------------------------------------------
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).
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. 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, Lahir 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
and commenced exploration activities in June 2022.
Through a wholly owned subsidiary, we have earned and now hold a position of
approximately 13.88% 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.
18
--------------------------------------------------------------------------------
Antigua and Barbuda:
In September 2021, Odyssey entered into a Memorandum of Understanding ("MoU")
with the Government of Antigua and Barbuda ("GOAB") 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.
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 America. 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 harvested 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 thousands and therefore do not
necessarily sum in columns or rows. For more detail refer to the Financial
Statements in Part I, Item 1.
Three months ended June 30, 2022, compared to three months ended June 30, 2021,
Increase/(Decrease) 2022 vs. 2021
(Dollars in thousands) 2022 2021 $ %
Total revenues $ 390 $ 182 $ 208 0 %
Marketing, general and administrative 2,292 1,700 $ 592 48.5 %
Operations and research
1,230 3,429 $ (2,199 ) 181.3 %
Total operating expenses $ 3,522 $ 5,129 $ (1,607 ) 125.8 %
Total other income (expense) $ (3,410 ) $ 1,191 $ (4,601 ) 46.8 %
Income tax benefit (provision) $ - $ - $ - 0 %
Non-controlling interest $ 1,858 $ 1,528 $ 330 32.6 %
Net income (loss) $ (4,683 ) $ (2,227 ) $ (2,456 ) 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
for the three months ended June 30, 2022 was $0.4 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).
19
--------------------------------------------------------------------------------
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 $2.3 million for the
three months ended June 30, 2022 compared to $1.7 million from the three months
ended June 30, 2021. The items contributing to this $0.6 million increase were
an increase of $0.1 million in employee benefits and compensation related
expenses and an increase of non-cash long term incentive share-based
compensation of $0.1 million. Legal fees increased by $0.1 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 decreased by
($2.2) million from three months ended June 30, 2022 to the three months ended
June 30, 2021 as a result of a $2.6 million decrease in litigation financed
costs directly associated with our NAFTA litigation offset in part by a $0.2
million increase in our concession permit fees for our Mexican subsidiary and 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 $1.2 million
in net income for three months ended June 30, 2022 and 2021, respectively,
resulting in a net expense increase of $4.6 million. This variance was
attributable to a $0.8 million increase in interest expense in connection with
our NAFTA litigation funding and a $0.1 million loan payable prepayment premium.
Additionally, during the three months ended June 30, 2021 the Company recognized
$3.8 million of other income, previously recorded as deferred revenue, as a
result of the cancellation of revenue participation rights of the Seattle and
Gault Resources projects in 2021.
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 three months ended June 30, 2022 was $1.9 million as compared to $1.5
million for the three months ended June 30, 2021. The substance of these amounts
is primarily due to the compounding of interest on intercompany debt and other
standard operating costs.
Six months ended June 30, 2022, compared to six months ended June 30, 2021,
Increase/(Decrease) 2022 vs. 2021
(Dollars in millions) 2022 2021 $ %
Total revenues $ 690 $ 474 $ 216 0 %
Marketing, general and administrative 4,211 2,991 $ 1,220 48.5 %
Operations and research
6,286 5,227 $ 1,059 181.3 %
Total operating expenses $ 10,497 $ 8,218 $ 2,279 125.8 %
Total other income (expense) $ (6,826 ) $ (1,135 ) $ (5,691 ) 46.8 %
Income tax benefit (provision) $ - $ - $ - 0 %
Non-controlling interest $ 3,719 $ 2,931 $ 788 32.6 %
Net income (loss) $ (12,914 ) $ (5,948 ) $ (6,966 ) 121.2 %
Revenue
Total revenue for the six months ended June 30, 2022 was $0.7 million, which is
consistent as compared to the same period a year ago.
Operating Expenses
Marketing, general and administrative expenses increased $1.2 million to $4.2
million for the six months ended June 30, 2022 as compared to $3.0 million for
the six months ended June 30, 2021. The items contributing to this $1.2 million
increase were an increase of $0.4 million in employee benefits and compensation
related expenses and an increase of non-cash long-term incentive
20
--------------------------------------------------------------------------------
share-based compensation of $0.1 million. Legal fees increased by $0.3 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 increased by $1.1 million for the six months
ended June 30, 2022 as compared to the six months ended June 30, 2021 as a
result of the following items: (a) a $.4 million increase in litigation financed
costs directly associated with our NAFTA litigation, (b) a $0.5 million increase
in our concession permit fees for our Mexican subsidiary and (c) a $0.2 million
increase in marine services primarily related to global prospectivity.
Total Other Income and Expense
Total other income and expense was $6.8 million in net expense and $1.1 million
in net expense for 2022 and 2021, respectively, resulting in a net expense
increase of $5.7 million. This variance was attributable to a $1.4 million
increase in interest expense in connection with our NAFTA litigation funding and
a $0.3 million loan payable prepayment premium. Additionally, during the six
months ended June 30, 2021 the Company recognized $3.8 million of other income
previously recorded as deferred revenue as a result of the cancellation of
revenue participation rights of the Seattle and Gault Resources projects in
2021.
© Edgar Online, source Glimpses