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 November 30, 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
---------------------------------------------------
(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 December 31, 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
November 30, 2004 ........................................ 3
Unaudited Consolidated Statements of Operations, Three
Months Ended November 30, 2004, and 2003.................. 4
Unaudited Consolidated Statements of Operations, Nine
Months Ended November 30, 2004, and 2003.................. 5
Unaudited Consolidated Statements of Cash Flows, Nine
Months Ended November 30, 2004 and 2003.................... 6 - 7
Notes to Consolidated Financial Statements................. 8 - 14
Item 2. Management's Discussion & Analysis...................... 14 - 19
Item 3. Controls and Procedures................................. 19
Part II: Other Information
Item 1. Legal Proceedings................................. 19
Item 2. Unregistered Sales of Equity Securities........... 19
Item 3. Defaults Upon Senior Securities................... 20
Item 4. Submission of Matters to a Vote
of Security Holders............................... 20
Item 5. Other Information................................. 20
Item 6. Exhibits.......................................... 20
Signatures ..................................................... 21
2
ITEM 1. FINANCIAL STATEMENTS
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 30, 2004 - Unaudited
ASSETS
CURRENT ASSETS
Cash $ 3,593,677
Accounts receivable 1,643,125
Inventory 7,355,955
Prepaid expense 318,463
Deferred tax asset 1,934,887
Other current assets 32,489
-----------
Total current assets 14,878,596
PROPERTY AND EQUIPMENT
Equipment and office fixtures 6,461,143
Building and land 3,255,581
Accumulated depreciation (1,244,706)
-----------
Total property and equipment 8,472,018
OTHER ASSETS
Artifacts 396,879
Inventory (non current) 2,097,844
Deposits 271,355
Deferred tax asset 895,142
Attraction development 433,204
-----------
Total other assets 4,094,424
-----------
Total assets $27,445,038
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 892,748
Accrued expenses 1,181,224
Loan payable 73,700
Mortgage payable 100,000
Tenant deposits 19,098
-----------
Total current liabilities 2,266,770
LONG TERM LIABILITIES
Mortgage payable 1,866,667
Deferred income from Revenue Participation Certificates 887,500
-----------
Total long term liabilities 2,754,167
-----------
Total liabilities 5,020,937
-----------
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 26,430,933
Accumulated unrealized gain on investment 714
Accumulated deficit (4,011,399)
-----------
Total stockholders' equity 22,424,101
-----------
Total liabilities and stockholders' equity $27,445,038
===========
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 November,
2004 2003
----------- -----------
REVENUE $ 6,300,371 $ 2,862
COST OF SALES 290,742 1,474
----------- -----------
GROSS PROFIT 6,009,629 1,388
OPERATING EXPENSES
Operations & research 691,368 1,247,230
Marketing, general & administrative 1,272,607 528,089
Depreciation 136,643 111,949
----------- -----------
Total operating expenses 2,100,618 1,887,268
INCOME (LOSS) FROM OPERATIONS 3,909,011 (1,885,880)
OTHER INCOME (EXPENSE)
Interest income 2,653 6,994
Interest expense (32,677) -
Other 26,380 40,000
----------- -----------
Total other income (expense) (3,644) 46,994
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 3,905,367 (1,838,886)
Income tax (provision) (1,493,178) -
----------- -----------
NET INCOME (LOSS) 2,412,189 (1,838,886)
=========== ===========
EARNINGS (LOSS) PER SHARE
Basic $ 0.06 $ (0.06)
Diluted $ 0.06 $ (0.06)
Weighted average number of common
shares outstanding
Basic 38,530,599 30,702,034
Diluted 39,241,760 30,702,034
The accompanying notes are an integral part of these financial statements.
4
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - Unaudited
Nine Months Ended November 30,
2004 2003
----------- -----------
REVENUE $15,879,000 $ 73,464
COST OF SALES 1,819,459 1,657
----------- -----------
GROSS PROFIT 14,059,541 71,807
OPERATING EXPENSES
Operations & research 1,650,433 2,168,619
Marketing, general & administrative 3,337,849 1,453,473
Depreciation 313,880 197,820
----------- -----------
Total operating expenses 5,302,162 3,819,912
INCOME (LOSS) FROM OPERATIONS 8,757,379 (3,748,105)
OTHER INCOME (EXPENSE)
Revenue participation expense - (12,986)
Interest income 4,253 19,364
Interest expense (48,917) (109,227)
Other 35,598 45,736
----------- -----------
Total other income (expense) (9,066) (57,113)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 8,748,313 (3,805,218)
Income tax (provision) (3,461,282) -
----------- -----------
NET INCOME (LOSS) 5,287,031 (3,805,218)
=========== ===========
EARNINGS (LOSS) PER SHARE
Basic $ 0.14 $ (0.12)
Diluted $ 0.13 $ (0.12)
Weighted average number of common
shares outstanding
Basic 38,385,644 30,702,034
Diluted 40,360,149 30,702,034
The accompanying notes are an integral part of these financial statements.
5
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
Nine Months Ended November 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 5,287,031 $(3,805,218)
Adjustments to reconcile net loss to
net cash used by operating activity:
Deferred income taxes 3,461,282 -
Common Stock issued for:
Services - 74,150
Officer and director compensation - 50,600
Interest payable - 108,750
Depreciation 313,880 225,663
Gain on disposal of equipment - (5,736)
Interest income related parties - (15,770)
Inventory (5,453,934) (575,877)
(Increase) decrease in:
Accounts receivable (1,640,297) -
Advances, prepaids, deposits (57,473) (270,934)
Increase(decrease) in:
Accounts payable (140,778) 360,820
Customer deposits 19,098 -
Accrued expenses 1,064,731 26,451
----------- -----------
NET CASH(USED) IN OPERATING ACTIVITIES 2,853,540 (3,827,101)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,984,653) (3,276,111)
Purchase of U.S. Treasury Bills - (2,988,664)
Attraction development (433,204) -
Purchase of building and land (1,255,581) -
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (3,673,438) (6,264,775)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of common stock 1,030,313 11,713,250
Related party loans receivable - 38,610
Loan payable 1,523,700 978,750
Sale of marketable securities 1,991,554 -
Repayment of note payable to related party - (2,144)
Repayment of loan payable (1,450,000)
Repayment of mortgage payable (33,332)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,062,235 12,728,466
----------- -----------
NET INCREASE IN CASH 2,242,337 2,636,590
CASH AT BEGINNING OF PERIOD 1,351,340 785,559
----------- -----------
CASH AT END OF PERIOD $ 3,593,677 $ 3,422,149
=========== ===========
SUPPLEMENTARY INFORMATION:
Interest paid $ 44,640 $ 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 November 30, 2004, total depreciation charged was
$261,771. Of this amount $125,128 was capitalized as inventory.
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
$167,897. 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 November 30, 2004, results of
operations, and cash flows for the interim periods presented. Operating
results for the three months and nine months ended November 30, 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. The depreciation charge for the nine months ended November 30, 2004
was $641,243. Of this amount, $327,363 was capitalized as inventory.
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 November 30, 2004, potential common shares, calculated using the treasury
stock method, were included in the computation of diluted EPS as follows:
Three Months Nine Months
Ended Nov 30, 04 Ended Nov 30, 04
----------------- -----------------
Weighted average shares outstanding 38,530,599 38,385,644
Potential common shares 711,161 1,974,505
----------------- -----------------
Weighted average common and potential
common shares outstanding 39,241,760 40,360,149
================= =================
9
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
At November 30, 2003 potential common shares were excluded in the computation
of diluted EPS because their inclusion would have had an anti-dilutive effect
on EPS. At November 30, 2003, there were options for 2,415,000 shares and
warrants for 4,880,000 shares that were exercisable between $.30 and $2.50 per
share which were thus excluded from the computation of diluted EPS.
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 November 30
2004 2003
----------- -----------
Net income(loss):
As reported $ 2,412,189 $(1,838,886)
Pro forma adjustment for
compensation, net of tax $ (217,243) (256,209)
----------- -----------
Pro forma $ 2,194,946 $(2,095,095)
=========== ===========
Basic income(loss) per share:
As reported $ 0.06 $ (0.06)
Pro forma $ 0.06 $ (0.07)
Diluted income(loss) per share:
As reported $ 0.06 $ (0.06)
Pro forma $ 0.06 $ (0.07)
Nine Months Ended November 30
2004 2003
----------- -----------
Net income(loss):
As reported $ 5,287,031 $(3,805,218)
Pro forma adjustment for
compensation, net of tax $ (681,857) (411,093)
----------- -----------
Pro forma $ 4,605,174 $(4,216,257)
=========== ===========
Basic income(loss) per share:
As reported $ 0.14 $ (0.12)
Pro forma $ 0.12 $ (0.14)
Diluted income(loss) per share:
As reported $ 0.13 $ (0.12)
Pro forma $ 0.11 $ (0.14)
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 November 30, 2004 was $2.70. No options were granted during
the three month period ending November 30, 2003. 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 November 30:
2004 2003
------- -------
Risk-free interest rate 3.72% N/A
Expected volatility of common stock 465.8% N/A
Dividend Yield 0% N/A
Expected life of options 5 years N/A
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 $1,643,125 resulted from the sale of inventory
and are due in 30 days or less.
NOTE D - INVENTORY
At November 30, 2004, our inventory was $9,453,799 and consisted primarily of
SS Republic artifacts. Of this amount $7,355,955 is classified as current
assets based upon our anticipated sales plan.
NOTE E - INCOME TAXES
As of November 30, 2004, the Company had consolidated income tax net operating
loss ("NOL") carryforwards for federal tax purposes of approximately
$17,900,000. 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 nine months ended November 30, 2004 and 2003, the components of the
provision for income taxes (benefits) are attributable to continuing
operations as follows:
November 30, 2004 November 30, 2003
----------------- -----------------
Current
Federal $ 0 $ 0
State 0 0
------------ ------------
$ 0 $ 0
Deferred
Federal $ 2,980,125 $ 0
State 481,157 0
------------ ------------
$ 3,461,282 $ 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 $6,798,944
Less: valuation allowance (10,993)
----------
$6,787,951
Deferred tax liability:
Excess of tax over book depreciation $ 539,591
Artifacts recovery costs 3,418,331
----------
$3,957,922
----------
Net deferred tax asset $2,830,029
Less: current net deferred tax asset 1,934,887
----------
Net non-current deferred tax asset $ 895,142
==========
As reflected above, the Company has recorded a net deferred tax asset of
$2,830,029 at November 30, 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:
November 30, 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 nine months ended November 30, 2004 and November 30, 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 $2,974,426 $ -
State income taxes net of federal benefits 393,640 -
Nondeductible expense 8,165 -
Change in valuation allowance 10,993 -
Effects of:
Change in rate estimate 101,535 -
Change in NOL estimate 87,031 -
Other, net (114,508) -
---------- ----------
$3,461,282 $ -
========== ==========
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
tenant improvements the facility is recorded on the books at a cost of
$3,255,581. We currently lease approximately 25% of the space to a tenant.
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 $25,309 and $37,812, respectively, for the three months and nine
months ended November 30, 2004. Of the principal amount due on the mortgage
$100,000 is classified as current liability. Future principal payments will be
$8,333 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 November 30, 2004 the balance due on the Loan
Payable was $73,700. Interest expense was $7,368 and $11,105, respectively,
for the three months and nine months ended November 30, 2004.
NOTE I - 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. As of November
30th 2004 there were no remaining commitments related to the letter of credit.
13
During October 2004 we committed to purchase coin boxes for February 2005
delivery in the amount of $358,450. A deposit of $89,613 was paid at the time
of order and the balance will be due upon delivery.
During November 2004 we entered into an agreement for $315,000 for the design
of a shipwreck attraction and exhibits. Also, we have committed for the
fabrication of two shipwreck traveling exhibits for $3.2 million which are
expected to open in mid 2005.
The company maybe subject to a variety of claims and suits that arise from
time to time in the ordinary course of business. Management currently
believes that these claims and suits will not have a material adverse impact
on its financial position or its results of operations.
NOTE J - RELATED PARTY TRANSACTIONS
A construction company, owned by a relative of a company officer, performed
building renovations amounting to $182,042.
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 November 30, 2004 the Odyssey team continued to
excavate the SS Republic shipwreck site. To date more than 51,000 coins and
approximately 14,000 artifacts have been recovered. At this point we have
thoroughly searched the hull of the shipwreck and are confident that there is
no specie remaining in that area. No purser's safe was found in the hull area.
14
The coins recovered to date represent approximately 25% of the "$400,000
in specie" (face value in 1865) that historical research indicates was on
board the Republic when she sank. It is possible that the balance of the
specie, believed to have been on board the ship, 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 is planned for January 2005, prior to departing
for our next project. Based on our current understanding of the debris field,
we believe that it should take no more than 10 to 20 operational days to
complete the search of this area.
The artifacts recovered from the SS Republic site include coins, bottles,
domino sets, religious artifacts, ceramics, pottery and some personal effects.
After artifacts are recovered, they are tagged, logged, measured and
stabilized aboard the Odyssey Explorer before being transferred to the
conservation facility. The majority of the Republic artifacts have been
conserved and are being prepared for sale or exhibition.
The RV Odyssey has been deployed to the Western Mediterranean, where it
has commenced operations with its new suite of ROV and acoustic positioning
technology. We plan on the Odyssey Explorer leaving for the Western
Mediterranean after completion of the Republic debris field search. There it
will take over operations which were initiated by the RV Odyssey.
To date the majority of our revenue has been generated through the sale
of coins from the SS Republic. These sales have been accomplished through a
network of coin dealers and marketers. In addition to our existing dealers,
our marketing team is testing a plan for telemarketing of Republic coins and
other merchandise associated with shipwrecks.
Work is continuing on the design and fabrication of our planned traveling
exhibits. We will be announcing venues as soon as the final contracts are in
place. We expect to begin generating revenues from the traveling exhibits in
the second or third quarter of 2005.
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 November 30, 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.
15
Three months ended November 30, 2004 compared to the three months ended
November 30, 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 $6.3 million.
Revenues for 2003 represented miscellaneous sales from merchandise.
Cost of Sales
Cost of Sales for 2004 of $.3 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 5%. 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. As of November 2004, the capitalized cost
of recovery per artifact, excluding grading, conservation, packaging and
shipping costs, was approximately $130. Approximately 65,000 artifacts have
been recovered to-date from the SS Republic. The lower cost of sales for the
quarter was attributable to a higher mix of gold coin sales.
Operating Expenses
Increase(Decrease)
Dollar Percent
(Dollars in thousands) 2004 2003 Change Change
----------- ----------- ------ -------
(unaudited) (unaudited)
Operations & research $ 691 $ 1,247 $ 556 45 %
Marketing, General &
Administrative 1,273 528 (745) (141)%
Depreciation 137 112 (25) (22)%
------ ------ ----- ----
$2,101 $1,887 $(214) (11)%
====== ====== ===== ====
Operations and research expenses were $.7 million in 2004, compared to
$1.2 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 $2.1 million compared to $1.7 in 2003. The increase in 2004 before
capitalization was primarily due to recovery operations for the vessel Odyssey
Explorer during the period. Vessel operating costs in 2004 for the Odyssey
Explorer averaged approximately $.5 million per month.
Marketing, general and administrative expenses were $1.3 million in 2004
as compared to $.5 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 increase, $.5 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 including attraction development and selling
commissions for artifacts.
16
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 in 2003 because of the uncertainty of future
taxable income.
Nine months ended November 30, 2004 compared to the nine months ended November
30, 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 of artifact sales of $15.9 million. Revenues
for 2003 represented miscellaneous sales from merchandise and search
operations.
Cost of Sales
Cost of Sales for 2004 of $1.8 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 11%. 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. As of November 2004, the capitalized cost of recovery
per artifact, excluding grading, conservation, packaging and shipping costs,
was approximately $130. Approximately 65,000 artifacts have been recovered
to-date from the SS Republic.
Operating Expenses
Increase(Decrease)
Dollar Percent
(Dollars in thousands) 2004 2003 Change Change
----------- ----------- ------ -------
(unaudited) (unaudited)
Operations & research $ 1,650 $2,168 $ 518 24 %
Marketing, general&
Administrative 3,338 1,453 (1,885) (130)%
Depreciation 314 198 (116) (59)%
------ ------ ------ ----
$5,302 $3,819 $(1,483) (39)%
====== ====== ====== ====
Operations and research expenses were $1.7 million in 2004, compared to
$2.2 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 $5.8
million compared to $2.6 million in 2003. The increase in 2004 before
capitalization was primarily due to recovery operations for the vessel Odyssey
Explorer during the period; additional archaeological, conservation, and
17
research expenses; and search operations by the vessel RV Odyssey. Vessel
operating costs in 2004 for the Odyssey Explorer averaged approximately $.5
million per month.
Marketing, general and administrative expenses were $3.3 million in 2004
as compared to $1.5 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 increase, $1.3 million was the result of increased general and
administrative expenses consisting primarily of personnel-related, insurance
and corporate communications expenses, and $.6 million was due to the
expansion of our marketing and sales function including attraction development
and selling commissions for artifacts.
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 in 2003 because of the uncertainty of future
taxable income.
Liquidity and Capital Resources
(Dollars in thousands) (unaudited)
Summary of Cash Flows: 2004
----------
Net cash provided by operating activities $ 2,849
Net cash used by investing activities $ (3,673)
Net cash provided by financing activities $ 3,067
---------
Net increase in cash and cash equivalents $ 2,242
Beginning cash and cash equivalents $ 1,351
---------
Ending cash and cash equivalents $ 3,594
---------
Cash and cash equivalents were $3.6 million at November 30, 2004, an
increase of $2.2 million from the February 29, 2004 balance of $1.4 million.
Of the $2.2 million increase in cash for the nine months of 2004, $3.7 million
was used for investing activities which was offset by $3.1 provided from
financing activities and $2.8 million from operating activities.
Cash provided from operating activities consisted of $5.3 million of net
income and non-cash expenses of $3.8 million representing deferred income
taxes and depreciation. Cash used in operating activities of $6.2 million
represented net changes in balance sheet accounts primarily consisting of an
increase in inventory costs and accounts receivable. Accrued expense
liabilities of $1.1 million consisted primarily of grading and conservation
costs of inventory incurred but not paid until coins are shipped.
Cash used in investing activities of $3.7 million consisted of $2.0
million of capital expenditures for purchases of property and equipment
primarily associated with our marine operations and corporate expansion
efforts, $.4 million for development of attractions, and $1.3 million for the
purchase of an existing office building and tenant improvements. A $2.0
million mortgage payable was entered into to provide the balance of the funds
required for the purchase of the building. Approximately 50% of the building
is being utilized as our corporate headquarters, 25% is currently leased and
25% is available for lease or expansion.
18
Cash provided by financing activities of $3.1 million included $1.5
million short term borrowing against our credit facility offset by a loan
repayment of $1.4 million, 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 November 30, 2004, we had working capital of $12.6 million as
indicated by current assets exceeding current liabilities. We believe the
value of our artifact inventory as of November 30, 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 have pledged a portion
of the numismatically significant gold coins as collateral for a $5 million
secured credit facility through The Bank of Tampa. This credit facility will
be used to cover any short-term cash requirements as necessary. As of November
30, 2004, we had loans outstanding of $73,700 against the credit facility. We
have also committed to the fabrication of two traveling exhibits for $3.2
million. The planned exhibits will showcase the history of shipwrecks
featuring the SS Republic. Interactive elements and exhibits will present the
science and technology the company utilizes to conduct deep ocean shipwreck
searches and archaeological excavations. We anticipate the funding for the
exhibits will come from bank financing or through revenue generated from the
sale of recovered cargoes. Also, design of a fixed shipwreck attraction has
been completed and we continue to evaluate financing alternatives with a plan
to begin construction later in 2005.
ITEM 3. CONTROLS AND PROCEDURES
As of November 30, 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 November 30,
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.
On or about December 14, 2004 a complaint was filed against seven
defendants including the Company in the Court of Common Pleas in the Ninth
Judicial Circuit, County of Charleston, in the State of South Carolina. The
complaint was filed by Republic & Eagle Associates, Inc. and Sea Miners, Inc.
against John Morris, Greg Stemm, John Lawrence, John Balch, Daniel Bagley,
Seahawk Deep Sea Technologies, Inc.("Seahawk") and the Company. The
plaintiffs allegations include breach of fiduciary duty, civil conspiracy and
breach of contract based primarily upon an alleged contract(s) between the
plaintiffs and Seahawk dated May 16, 1995 dealing with the search for the S.S.
Republic. The plaintiffs allege that their research which was provided to
Seahawk led to the discovery of the S.S. Republic and they seek an unspecified
amount of damages and public recognition of their contribution.
Management believes that the law suit is without merit with respect to
the Company and they intend to vigorously defend the action.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
19
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.
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
20
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: January 14, 2005 By:/s/ Michael J. Holmes
Michael J. Holmes, Chief Financial
Officer and Authorized Officer
21