U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2004
Commission File Number 1-31895
ODYSSEY MARINE EXPLORATION, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 84-1018684
-------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
5215 W Laurel Street, Tampa, Florida 33607
------------------------------------------
(Address of principal executive offices)
(813) 876-1776
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(Registrant's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
As of September 30, 2004, the Registrant had 38,530,599 shares of Common
Stock, $.0001 Par Value, outstanding.
Transitional Small Business Disclosure format: Yes [ ] No [ X ]
INDEX
Part I: Financial Information Page No.
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheet - as of
August 31, 2004 .............................................. 3
Unaudited Consolidated Statements of Operations, Three
Months Ended August 31, 2004, and 2003........................ 4
Unaudited Consolidated Statements of Operations, Six
Months Ended August 31, 2004, and 2003........................ 5
Unaudited Consolidated Statements of Cash Flows, Six
Months Ended August 31, 2004 and 2003......................... 6 - 7
Notes to Consolidated Financial Statements................. 8 - 13
Item 2. Management's Discussion & Analysis...................... 14 - 18
Item 3. Controls and Procedures................................. 19
Part II: Other Information
Item 1. Legal Proceedings................................. 19
Item 2. Changes in Securities............................. 19
Item 3. Defaults Upon Senior Securities................... 19
Item 4. Submission of Matters to a Vote
of Security Holders............................... 19
Item 5. Other Information................................. 19
Item 6. Exhibits and Reports on Form 8-K.................. 19
Signatures ..................................................... 20
2
ITEM 1. FINANCIAL STATEMENTS
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF AUGUST 31, 2004 - Unaudited
ASSETS
CURRENT ASSETS
Cash $ 3,153,078
Accounts receivable 2,098,032
Inventory 5,199,310
Prepaid expense 345,797
Deferred tax asset 2,600,207
Other current assets 27,427
-----------
Total current assets 13,423,851
PROPERTY AND EQUIPMENT
Equipment and office fixtures 5,802,264
Building and land 3,140,802
Accumulated depreciation (982,936)
-----------
7,960,130
OTHER ASSETS
Artifacts 396,879
Inventory (non current) 2,471,556
Deposits 255,270
Deferred tax asset 1,723,000
Attraction development 238,104
-----------
Total other assets 5,084,809
-----------
Total assets $26,468,790
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 951,959
Accrued expenses 1,083,669
Loan payable 1,523,700
Mortgage payable 100,000
Tenant deposits 19,098
-----------
Total current liabilities 3,678,426
LONG TERM LIABILITIES
Mortgage payable 1,891,667
Deferred income from Revenue Participation Certificates 887,500
-----------
Total long term liabilities 2,779,167
-----------
Total liabilities 6,457,593
-----------
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value; 9,300,000
shares authorized; none outstanding -
Preferred stock series A convertible - $.0001 par value;
510,000 shares authorized; none issued
and none outstanding -
Common stock - $.0001 par value; 100,000,000 shares
authorized; 38,530,599 issued and outstanding 3,853
Additional paid-in capital 26,430,931
Accumulated deficit (6,423,587)
-----------
Total stockholders' equity 20,011,197
-----------
Total liabilities and stockholder's equity $26,468,790
===========
The accompanying notes are an integral part of these financial statements.
3
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
Three Months Ended August 31,
2004 2003
----------- -----------
REVENUE $ 6,141,068 $ 11,235
COST OF SALES 577,236 183
----------- -----------
GROSS PROFIT 5,563,832 11,052
OPERATING EXPENSES
Operations & research 480,601 696,984
Marketing, general & administrative 1,008,592 436,442
Depreciation 102,981 54,849
----------- -----------
Total operating expenses 1,592,174 1,188,276
INCOME (LOSS) FROM OPERATIONS 3,971,658 (1,177,223)
OTHER INCOME (EXPENSE)
Interest income 722 6,421
Interest expense (16,240) (108,316)
Other 11,182 5,736
----------- -----------
Total other income (expense) (4,336) (96,159)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 3,967,322 (1,273,382)
Income tax (provision) (1,559,313) -
----------- -----------
NET INCOME (LOSS) 2,408,009 (1,273,382)
=========== ===========
EARNINGS (LOSS) PER SHARE
Basic $ 0.06 $ (0.04)
Diluted $ 0.06 $ (0.04)
Weighted average number of common
shares outstanding
Basic 38,467,012 29,056,032
Diluted 39,719,740 29,056,032
The accompanying notes are an integral part of these financial statements.
4
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
Six Months Ended August 31,
2004 2003
----------- -----------
REVENUE $ 9,578,629 $ 70,602
COST OF SALES 1,528,717 183
----------- -----------
GROSS PROFIT 8,049,912 70,419
OPERATING EXPENSES
Operations & research 959,065 942,397
Marketing, general & administrative 2,065,241 904,375
Depreciation 177,238 85,871
----------- -----------
Total operating expenses 3,201,544 1,932,643
INCOME (LOSS) FROM OPERATIONS 4,848,368 (1,862,224)
OTHER INCOME (EXPENSE)
Revenue participation expense - (12,986)
Interest income 1,601 12,370
Interest expense (16,240) (109,227)
Other 9,218 5,736
----------- -----------
Total other income (expense) (5,421) (104,107)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 4,842,947 (1,966,331)
Income tax (provision) (1,968,104) -
----------- -----------
NET INCOME (LOSS) 2,874,843 (1,996,331)
=========== ===========
EARNINGS (LOSS) PER SHARE
Basic $ 0.08 $ (0.07)
Diluted $ 0.07 $ (0.07)
Weighted average number of common
shares outstanding
Basic 38,313,955 29,056,032
Diluted 40,715,763 29,056,032
The accompanying notes are an integral part of these financial statements.
5
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
Six Months Ended August 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 2,874,843 $(1,966,331)
Adjustments to reconcile net loss to
net cash used by operating activity:
Deferred income taxes 1,968,104 -
Common Stock issued for:
Services - 74,150
Officer and director compensation - 50,600
Interest payable - 108,750
Depreciation 177,238 85,871
Gain on disposal of equipment - (5,736)
Interest income related parties - (10,494)
Inventory (3,796,129) (1,968)
(Increase) decrease in:
Accounts receivable (2,095,203) -
Advances, prepaids, deposits (63,659) (547,839)
Increase(decrease) in:
Accounts payable (81,567) 158,200
Customer deposits 19,098 -
Accrued expenses 966,460 11,009
----------- -----------
NET CASH(USED) IN OPERATING ACTIVITIES (30,815) (2,043,788)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,325,776) (2,241,171)
Attraction development (238,104) -
Purchase of building and land (1,140,802) -
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (2,704,682) (2,241,171)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of common stock 1,030,313 5,157,625
Related party loans receivable - 38,610
Loan payable 1,523,700 978,750
Sale of marketable securities 1,991,555 -
Repayment of note payable to related party - (2,144)
Repayment of mortgage payable (8,333)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,537,235 6,172,841
------------ -----------
NET INCREASE IN CASH 1,801,738 1,887,882
CASH AT BEGINNING OF PERIOD 1,351,340 785,559
----------- -----------
CASH AT END OF PERIOD $ 3,153,078 $ 2,673,441
=========== ===========
SUPPLEMENTARY INFORMATION:
Interest paid $ 8,607 $ 11,229
Income taxes paid $ - $ -
The accompanying notes are an integral part of these financial statements.
6
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Summary of significant non-cash transactions:
During the quarter ended August 31, 2004, total depreciation charged was
$211,575. Of this amount $108,594 was capitalized as inventory. Also, we
borrowed $2,000,000 through a mortgage loan agreement to partially fund the
purchase of our corporate and operations headquarters.
During the quarter ended May 31, 2004, total depreciation charged was
$167,987. Of this amount, $93,641 was capitalized as inventory.
During March 2003 four consultants were issued 58,135 shares of common stock
for $33,700 in services, 6,635 shares for an account payable valued at $5,000
and 7,500 shares for prepaid expense of $4,200. Also, a note holder elected
to convert principal in the amount of $54,000 into 108,000 shares of common
stock. In addition, during March 2003, officer bonuses (42,000 shares valued
at $23,100) and director compensation (50,000 shares valued at $27,500) were
paid by the issuance of common stock.
The accompanying notes are an integral part of these financial statements.
7
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
Odyssey Marine Exploration, Inc. was incorporated March 5, 1986, as a Colorado
corporation named Universal Capital Corporation, Inc. On August 8, 1997
Odyssey Marine Exploration, Inc. (the "Company"), completed the acquisition of
100% of the outstanding Common Stock of Remarc International, Inc., a Delaware
corporation formed May 20, 1994,("Remarc") in exchange for the Company's
Common Stock in a reverse acquisition. On September 7, 1997, we changed our
domicile to Nevada and our name was changed to Odyssey Marine Exploration,
Inc. Odyssey Marine Exploration, Inc., is engaged in the archaeologically
sensitive exploration and recovery of deep-water shipwrecks throughout the
world. The corporate headquarters are located in Tampa, Florida.
The accompanying unaudited consolidated financial statements of Odyssey Marine
Exploration, Inc. and subsidiaries have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission and the
instructions to Form 10-QSB and, therefore, do not include all information and
footnotes normally included in financial statements prepared in accordance
with generally accepted accounting principles. We suggest that these interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's Form
10-KSB for the year ended February 29, 2004.
In the opinion of management, these financial statements reflect all
adjustments (including normal recurring adjustments) necessary for a fair
presentation of the financial position as of August 31, 2004, results of
operations, and cash flows for the interim periods presented. Operating
results for the three months and six months ended August 31, 2004 are not
necessarily indicative of the results that may be expected for the full year.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to
assist in understanding our financial statements. The financial statements
and notes are representations of the Company's management who are responsible
for their integrity and objectivity and have prepared them in accordance with
our customary accounting practices.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Odyssey Marine, Inc., Odyssey Marine Services,
Inc., OVH, Inc, and Odyssey Retriever, Inc. All significant inter-company
transactions and balances have been eliminated.
Use of Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the estimates
that were used.
Revenue Recognition and Accounts Receivable
Revenue from artifact sales is recognized at the point of sale when legal
title transfers. For artifact sales, legal title transfers when product is
shipped to customers. Bad debts are recorded as identified. We have not
experienced any bad debts and no allowance for bad debts has been recorded.
8
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Cash Equivalents
Cash equivalents include cash on hand and cash in banks. We also consider all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, prepaid expense, investments,
accounts payable, accrued expense, loan payable and mortgage payable
approximate fair value. Considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that
we could realize in a current market exchange.
Inventory
Our inventory consists primarily of artifacts from the SS Republic shipwreck
and the Tortugas artifacts collection. The Company has accounted for its
inventory at the lower of cost or market.
Long-Lived Assets
Our policy is to recognize impairment losses relating to long-lived assets in
accordance with Financial Accounting Standards Board No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" based on several factors,
including, but not limited to, management's plans for future operations,
recent operating results and projected cash flows. To date no such impairment
has been indicated.
Depreciation
Property and equipment is stated at historical cost. Depreciation is provided
using the straight-line method at rates based on the assets' estimated useful
lives.
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
would occur if dilutive securities and other contracts to issue Common Stock
were exercised or converted into Common Stock or resulted in the issuance of
Common Stock that then shared in our earnings.
At August 31 2004, potential common shares, calculated using the treasury
stock method, were included in the computation of diluted EPS as follows:
Three Months Six Months
Ending Aug 31, 04 Ending Aug 31, 04
----------------- -----------------
Weighted average shares outstanding 38,467,012 38,313,955
Potential common shares 1,252,728 2,401,808
----------------- -----------------
Weighted average common and potential
common shares outstanding 39,719,740 40,715,763
================= =================
9
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
At August 31, 2003 potential common shares were excluded in the computation of
diluted EPS because their inclusion would have had an antidilutive effect on
EPS. At August 31, 2003, there were options for 1,885,000 shares and warrants
for 230,000 shares that were exercisable between $0.30 and $1.40 per share
which were thus excluded from the computation of diluted EPS. On August 31,
2003, all of the other exercisable stock options and stock warrants were
excluded from the computation of diluted EPS because the options exercise
prices were greater than the average market price of the common shares.
Stock-Based Compensation
We account for stock-based compensation using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and have adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123." Under APB No. 25, when the exercise price of our employee
stock options equals or exceeds the market price of the underlying stock on
the date of grant, no compensation expense is recognized. Accordingly, no
compensation expense has been recognized in the consolidated financial
statements in connection with employee stock option grants.
The following table illustrates the effect on net income and earnings per
share had we applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
Three Months Ended August 31
2004 2003
----------- -----------
Net income(loss):
As reported $ 2,408,009 $(1,273,382)
Pro forma adjustment for
compensation, net of tax $ (206,589) (45,500)
----------- -----------
Pro forma $ 2,201,420 $(1,318,882)
=========== ===========
Basic income(loss) per share:
As reported $ 0.06 $ (0.04)
Pro forma $ 0.06 $ (0.05)
Diluted income(loss) per share:
As reported $ 0.06 $ (0.04)
Pro forma $ 0.06 $ (0.05)
Six Months Ended August 31
2004 2003
----------- -----------
Net income(loss):
As reported $ 2,874,843 $(1,966,331)
Pro forma adjustment for
compensation, net of tax $ (464,614) (154,830)
----------- -----------
Pro forma $ 2,410,229 $(2,121,161)
=========== ===========
Basic income(loss) per share:
As reported $ 0.08 $ (0.07)
Pro forma $ 0.06 $ (0.05)
Diluted income(loss) per share:
As reported $ 0.07 $ (0.04)
Pro forma $ 0.06 $ (0.05)
10
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The weighted average estimated fair value of stock options granted during the
three months ended August 31, 2004 and 2003 was $2.75 and $1.16 respectively.
These amounts were determined using the Black-Scholes option-pricing model,
which values options based on the stock price at the grant date, the expected
life of the option, the estimated volatility of the stock, the expected
dividend payments, and the risk-free interest rate over the life of the
option. The assumptions used in the Black-Scholes model were as follows for
stock options granted in the three months ended August 31:
2004 2003
------- -------
Risk-free interest rate 3.42% 1.74%
Expected volatility of common stock 475% 208%
Dividend Yield 0% 0%
Expected life of options 5 years 4 years
The Black-Scholes option valuation model was developed for estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions, changes in these assumptions can materially affect the fair value
of the options. Our options do not have the characteristics of traded options,
therefore, the option valuation models do not necessarily provide a reliable
measure of the fair value of our options.
Equity instruments issued, if any, to non-employees in exchange for goods,
fees and services are accounted for under the fair value based method of SFAS
No. 123.
Income Taxes
Income taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.
NOTE C - ACCOUNTS RECEIVABLE
Trade accounts receivable of $2,098,032 resulted from the sale of inventory
and are due in 30 days or less.
NOTE D - INVENTORY
At August 31, 2004, our inventory was $7,670,866 and consisted primarily of SS
Republic artifacts. Of this amount $5,199,310 is classified as current assets
based upon our anticipated sales plan.
NOTE E - INCOME TAXES
As of August 31, 2004, the Company had consolidated income tax net operating
loss ("NOL") carryforwards for federal tax purposes of approximately
$20,100,000. The NOL will expire in various years ending through the year
2024.
11
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - INCOME TAXES - continued
For the six month periods ended August 31, 2004 and 2003, the components of
the provision for income taxes (benefits) are attributable to continuing
operations as follows:
August 31, 2004 August 31, 2003
--------------- ---------------
Current
Federal $ 0 $ 0
State 0 0
------------ ------------
$ 0 $ 0
Deferred
Federal $ 1,696,133 $ 0
State 271,971 0
------------ ------------
$ 1,968,104 $ 0
============ ============
Deferred income taxes reflect the net tax effects of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
Deferred tax assets:
Net operating loss
and capital loss carryforwards $7,633,200
Less: valuation allowance (10,993)
----------
$7,622,207
Deferred tax liability:
Excess of tax over book depreciation $ 401,806
Artifacts recovery costs 2,897,194
----------
$3,299,000
----------
Net deferred tax asset $4,323,207
Less: current net deferred tax asset 2,600,207
----------
Net non-current deferred tax asset $1,723,000
==========
As reflected above, the Company has recorded a net deferred tax asset of
$4,323,207 at August 31, 2004. Management has determined that a valuation
allowance is necessary because of the uncertainty in the utilization of its
capital loss carryforwards. No valuation allowance is provided for its net
operating loss carryforwards since management believes the Company will be
profitable from sales and will generate taxable income sufficient to utilize
the loss carryforwards. The amount of the net deferred tax assets considered
realizable, however, could change in the near future if estimates of future
taxable income during the carryforward period are changed.
The change in the valuation allowance is as follow:
August 31, 2004 $10,993
February 29, 2004 $ -
-------
Change in valuation allowance $10,993
=======
12
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - INCOME TAXES - continued
Income taxes for the years ended August 31, 2004 and August 31, 2003 differ
from the amounts computed by applying the effective federal income tax rate of
34% to income before income taxes as a result of the following:
2004 2003
---------- ----------
Federal income tax computed at US statutory rate $1,646,602 $ -
State income taxes net of federal benefits 173,798 -
Nondeductible expense 5,223 -
Change in valuation allowance 10,993 -
Effects of :
Change in rate estimate 101,535 -
Change in NOL estimate 87,031 -
Other, net (57,078) -
---------- ----------
$1,968,104 $ -
========== ==========
NOTE F - BUILDING AND LAND
On July 23, 2004, we purchased a 23,500 square foot two story office building
for $3,058,770 to serve as our corporate and operations headquarters. With
improvements the facility is reflected on the books at a cost of $3,140,802.
We plan to occupy approximately one half of the space and lease the remainder
of the space.
NOTE G - MORTGAGE PAYABLE
On July 23, 2004, we entered into a mortgage loan for $2,000,000 with the Bank
of Tampa for the purchase of our corporate office building. The mortgage loan
is due in 10 years and monthly payments are based on a 20 year amortization
schedule. Interest, initially at 4.94%, will be adjustable semiannually based
upon changes in the LIBOR (London Interbank Offered Rate) index. Interest
expense was $10,694 for the 3 months ended August 31, 2004. Of the principal
amount due on the mortgage $100,000 is classified as current liability. Future
principal payments will be $34,667 through December 31, 2004 and will be
$100,000 per year for the years 2005 through 2009.
NOTE H - LOAN PAYABLE
Revolving Credit Facility
On June 24, 2004, the Company entered into a $5 million revolving credit
facility from The Bank of Tampa (the "Bank"). The interest-only credit line
carries a floating interest rate of the bank's published prime rate and a term
of one year. It is secured by a portion of the numismatically significant gold
coins recovered by us from the SS Republic shipwreck, and by any of our funds
on deposit with the Bank. At August 31, 2004, the balance due on the Loan
Payable was $1,523,700. Interest expense was $3,737 for the 3 months ended
August 31, 2004.
NOTE G - COMMITMENTS AND CONTINGENCIES
Commitments
During June 2004 we entered into an irrevocable standby letter of credit for
an amount up to $334,000 which expires on December 31, 2004.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Forward-Looking Information
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Act of 1934. The statements regarding Odyssey Marine
Exploration, Inc. and its subsidiaries contained in this report that are not
historical in nature, particularly those that utilize terminology such as
"may," "will," "should," "likely," "expects," "anticipates," "estimates,"
"believes" or "plans," or comparable terminology, are forward-looking
statements based on current expectations and assumptions, and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements.
Important factors known to us that could cause such material differences
are identified in our Annual Report of Form 10-KSB for the period ended
February 29, 2004, under the heading "RISK FACTORS". We undertake no
obligation to correct or update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised,
however, to consult any future disclosures we make on related subjects in
future reports to the SEC.
Overview
Odyssey Marine Exploration, Inc. is engaged in the archaeologically
sensitive exploration and recovery of deep-water shipwrecks throughout the
world. We employ advanced state-of-the-art technology including side scan
sonar, remotely operated vehicles, or ROVs, and other advanced technology,
which enables us to locate and recover shipwrecks at depths that were
previously unreachable in an economically feasible manner. The cost of
mobilizing vessels, complex equipment and a professional team of technicians,
archaeologists, conservators and scientists capable of conducting deep-water
search and recovery is very high. Therefore, our strategy is to build a
"pipeline" of well-researched projects and then move equipment and personnel
from project to project in a cost-effective and efficient manner.
During the quarter ended August 31, 2004, the Odyssey team continued to
excavate the SS Republic shipwreck site. To date more than 51,000 coins and
approximately 11,500 artifacts have been recovered. The face value of
recovered coins represents approximately 25% of the "$400,000 in specie" (face
value in 1865) that historical research indicates was on board the Republic
when she sank. The artifacts recovered from the site include domino sets,
religious artifacts, personal effects, ceramics, pottery and bottles. After
artifacts are recovered, they are tagged, logged, measured and stabilized
aboard the Odyssey Explorer before being transferred to the conservation
facility.
We plan to continue recovery operations on the Republic site until we
have located the remainder of the specie believed to be on board or until we
are reasonably sure that it does not exist within the context of the wreck
site. If the specie is not found on the wrecksite itself, we believe that it
may be in the debris field leading from the location of sinking to the ship's
final resting place. A detailed search of this area will follow. We originally
thought this work would be complete by late October or early November.
However, we lost a substantial amount of productive time during August and
September as a result of the unusual number of hurricanes that came through
the area, including Hurricane Gaston which formed up directly over the site.
We are now planning to complete the Republic exploration during December.
We have recently mobilized the RV Odyssey with advanced new ROV
equipment, long baseline acoustic positioning system, transponders and other
gear necessary to begin the early stages of the Sussex recovery project.
Additionally, we are working with the British Government to make the final
14
amendments to the project plan with respect to archaeological staffing based
upon the available qualified personnel and certain technical changes based
upon the knowledge gained through the recovery operations on SS Republic. The
final plan amendments have been submitted and we expect approval very soon. We
plan on the RV Odyssey arriving in Gibraltar within the next month to begin
the first stages of the project.
Once the preliminary work has been completed, the Odyssey Explorer will
continue the recovery operation on the Sussex and the RV Odyssey will be sent
to another search and identification operation. Based upon our contract and
the revised project plan, there is no requirement for us to recover artifacts
in the immediate future.
Our marketing team has developed, and is executing, a plan for Republic
coin sales that should continue to produce significant revenue for the
company. In addition, plans are being made for the monetization of the other
artifacts recovered from the site.
Critical Accounting Policies and Changes to Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
There have been no material changes in our critical accounting estimates
since May 31, 2004, nor have we adopted any accounting policy that has or will
have a material impact on our consolidated financial statements. For further
discussion of our accounting policies see Footnote 2 "Summary of Significant
Accounting Policies' in the Notes to Consolidated Financial Statements
included in this Quarterly Report on Form 10-QSB and in our Annual Report on
Form 10-KSB for the fiscal year ended February 29, 2004.
Results of Operations
The following is a discussion of the historical consolidated financial
condition and results of operations of Odyssey Marine Exploration, Inc. and
its wholly owned subsidiaries and should be read in conjunction with the
consolidated financial statements and notes thereto set forth in this Form
10-QSB. Additional information concerning factors that could cause actual
results to differ materially from those in the Company's forward looking
statements is contained from time to time in the Company's SEC filings,
including but not limited to the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 29, 2004.
Three months ended August 31, 2004 compared to the three months ended August
31, 2003
The dollar values discussed below, except as otherwise indicated, are
approximations to the nearest $100,000. For more detail refer to the Financial
Statements in Item 1.
Revenues
Revenues for 2004 consisted primarily of coin sales of $6.1 million.
Revenues for 2003 represented miscellaneous sales from merchandise and search
operations.
15
Cost of Sales
Cost of Sales for 2004 of $.6 million consisted of shipwreck recovery
costs, grading, conservation and packaging, and shipping costs associated with
coin sales. Cost of sales as a percentage of revenue for 2004 was 9%. The
major factors that contribute to cost of sales as a percentage of revenue
include capitalized ship recovery costs, number of artifacts recovered, and
revenue per artifact sold. Artifact sales during 2004 consisted of both gold
and silver coins. Cost of sales as a percentage of revenue will change
depending on the sales mix because of the significantly different unit sales
prices for gold and silver coins.
Operating Expenses
Incr(Decr)
Dollar Percent
(Dollars in thousands) 2004 2003 Change Change
----------- ----------- ------ -------
(unaudited) (unaudited)
Operations & research $ 481 $ 697 $(216) (31)%
Marketing, general&
Administrative 1,008 436 572 131 %
Depreciation 103 55 48 88 %
------ ------ ----- ----
$1,592 $1,188 $ 404 34 %
====== ====== ===== ====
Operations and research expenses were $.5 million in 2004, compared to
$.7 million in 2003. Our recovery vessel was purchased in August 2003 when
deployment operations began. Ship recovery costs were capitalized beginning in
November 2003 associated with the discovery of artifacts on the SS Republic.
Operations expenses were higher in 2003 because deployment costs were not
capitalized. Total operations & research costs in 2004 before capitalization
were $2.0 million compared to $.7 in 2003. The increase in 2004 before
capitalization was due to ship costs attributed to recovery operations.
Marketing, general and administrative expenses were $1.0 million in 2004
as compared to $.4 million in 2003. The major increase resulted from
expansion of our corporate support functions due to execution of our business
plan primarily associated with the recovery of the SS Republic artifacts. Of
the $.6 million increase, $.4 million was the result of increased general and
administrative expenses consisting primarily of personnel-related and
corporate communication expenses and $.2 million was due to the expansion of
our marketing and sales function.
Depreciation increases were the result of acquisitions of additional
property and equipment.
Provision for Income Taxes (Benefit)
Federal and state income taxes for 2004 have been provided for at an
estimated annual effective rate of 37.6%. For 2003, we did not have any
taxable income. Net operating loss carryforwards resulted in a net deferred
tax asset in 2003. However, we included a valuation allowance of 100% against
the net deferred tax asset because of the uncertainty of future taxable
income.
Six months ended August 31, 2004 compared to the six months ended August 31,
2003
The dollar values discussed below, except as otherwise indicated, are
approximations to the nearest $100,000. For more detail refer to the Financial
Statements in Item 1.
16
Revenues
Revenues for 2004 consisted of coin sales of $9.6 million. Revenues for
2003 represented miscellaneous sales from merchandise and search operations.
Cost of Sales
Cost of Sales for 2004 of $1.5 million consisted of shipwreck recovery
costs, grading, conservation and packaging, and shipping costs associated with
coin sales. Cost of sales as a percentage of revenue for 2004 was 16%. The
major factors that contribute to cost of sales as a percentage of revenue
include capitalized ship recovery costs, number of artifacts recovered, and
revenue per artifact sold. Artifact sales during 2004 consisted of gold and
silver coins. Cost of sales as a percentage of revenue will change depending
on the sales mix because of the significantly different unit sales prices for
gold and silver coins.
Operating Expenses
Incr(Decr)
Dollar Percent
(Dollars in thousands) 2004 2003 Change Change
----------- ----------- ------ -------
(unaudited) (unaudited)
Operations & research $ 959 $ 942 $ 17 2%
Marketing, general&
Administrative 2,065 904 1,161 128%
Depreciation 177 86 91 106%
------ ------ ------ ----
$3,201 $1,932 $1,269 66%
====== ====== ====== ====
Operations and research expenses were $1.0 million in 2004, compared to
$.9 million in 2003. Our recovery vessel was purchased in August 2003 when
deployment operations began. Ship recovery costs were capitalized beginning in
November 2003 associated with the discovery of artifacts on the SS Republic.
Total operations & research costs in 2004 before capitalization were $3.7
million compared to $.9 in 2003. The increase in 2004 before capitalization
was primarily due to ship costs attributed to recovery operations and
additional archaeological and research efforts.
Marketing, general and administrative expenses were $2.1 million in 2004
as compared to $.9 million in 2003. The major increase resulted from
expansion of our corporate support functions due to execution of our business
plan primarily associated with the recovery of the SS Republic artifacts. Of
the $1.2 million increase, $.9 million was the result of increased general and
administrative expenses consisting primarily of personnel-related and
corporate communications expenses and $.3 million was due to the expansion of
our marketing and sales function.
Depreciation increases were the result of acquisitions of additional
property and equipment.
Provision for Income Taxes (Benefit)
Federal and state income taxes for 2004 have been provided for at an
estimated annual effective rate of 37.6%. For 2003, we did not have any
taxable income. Net operating loss carryforwards resulted in a net deferred
tax asset in 2003. However, we included a valuation allowance of 100% against
the net deferred tax asset because of the uncertainty of future taxable
income.
17
Liquidity and Capital Resources
Six Months
Ended August 31,
(Dollars in thousands) 2004
Summary of Cash Flows: ----------------
(Unaudited)
Net cash used by operating activities $ (31)
Net cash used by investing activities $ (2,704)
Net cash provided by financing activities $ 4,537
---------
Net increase in cash and cash equivalents $ 1,802
Beginning cash and cash equivalents $ 1,351
---------
Ending cash and cash equivalents $ 3,153
---------
Cash and cash equivalents were $3.2 million at August 31, 2004, an
increase of $1.8 million from the February 29, 2004 balance of $1.4 million.
Of the $1.8 million of cash provided for the six months of 2004, $2.7 million
was used for investing activities offset by $4.5 provided by financing
activities.
There was a minor amount of net cash used in operating activities.
However, cash provided from operating activities consisted of $2.9 million of
net income and non-cash expenses of $2.1 million representing deferred income
taxes and depreciation. Cash used in operating activities of $5.1 million
represented net changes in balance sheet accounts primarily consisting of an
increase in inventory costs and accounts receivable.
Cash used in investing activities of $2.7 million consisted of $1.3
million of capital expenditures for purchases of property and equipment
primarily associated with our marine operations, $.3 million for development
of attractions, and $1.1 million for the purchase of an existing office
building. A $2.0 million bank mortgage was entered into to provide the balance
of the funds required for the purchase of the building. Approximately 50% of
the building will be utilized as our corporate headquarters and the other half
will be leased to tenants.
Cash provided by financing activities of $4.5 million included $1.5
million short term borrowing against our credit facility, sales of marketable
securities of $2 million and proceeds from a combination of warrants and stock
options exercised for the issuance of common stock of $1 million.
As of August 31, 2004, the company had working capital of $9.7 million as
indicated by current assets exceeding current liabilities. We believe the
value of our artifact inventory as of August 31, 2004, as shown in the
financial statements, is significantly less than the net proceeds we would
expect to receive from the sale of the artifacts. We believe sales will
provide sufficient working capital to meet our financial commitments and
obligations for the remainder of 2004. In addition, we have pledged a portion
of the numismatically significant gold coins as collateral for a $5 million
secured credit facility through The Bank of Tampa which was closed in June
2004. This credit facility will be used to cover any short-term cash
requirements as necessary. We are also in the process of conceptual design
for both a traveling exhibit featuring the SS Republic and a fixed shipwreck
attraction. We anticipate the funding for these operations will come from the
exercise of warrants, bank financing or through revenue generated from the
sale of recovered cargoes.
18
ITEM 3. CONTROLS AND PROCEDURES.
As of August 31, 2004, under the supervision and with the participation
of the Company's Chief Executive Officer and the Chief Financial Officer,
management has evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of August 31,
2004. There were no changes in internal control over financial reporting that
occurred during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to affect, the Company's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification of Chief Executive Filed herewith electronically
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Filed herewith electronically
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Filed herewith electronically
Officer pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial Filed herewith electronically
Officer pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K.
During the quarter ended August 31, 2004, we filed three reports on Form
8-K, as follows:
Date of Report Form 8-K Item Numbers
------------------ -------------------------
July 23, 2004 Item 2
June 24, 2004 Items 5 and 7
June 21, 2004 Items 7 and 12
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ODYSSEY MARINE EXPLORATION, INC.
Date: October 14, 2004 By:/s/ Michael J. Holmes
Michael J. Holmes, Chief Financial
Officer and Authorized Officer
20