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 May 31, 2004
Commission File Number 0-26136
ODYSSEY MARINE EXPLORATION, INC.
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(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.)
3604 Swann Avenue, Tampa, Florida 33609
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(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 June 30, 2004, the Registrant had 38,455,599 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
May 31, 2004 .............................................. 3
Unaudited Consolidated Statements of Operations, Three
Months Ended May 31, 2004, and 2003........................ 4
Unaudited Consolidated Statements of Cash Flows, Three
Months Ended May 31, 2004 and 2003......................... 5 - 6
Notes to Consolidated Financial Statements................. 7 - 12
Item 2. Management's Discussion & Analysis...................... 13 - 16
Item 3. Controls and Procedures................................. 16
Part II: Other Information
Item 1. Legal Proceedings................................. 17
Item 2. Changes in Securities............................. 17
Item 3. Defaults Upon Senior Securities................... 17
Item 4. Submission of Matters to a Vote
of Security Holders............................... 17
Item 5. Other Information................................. 17
Item 6. Exhibits and Reports on Form 8-K.................. 17
Signatures ..................................................... 18
2
ITEM 1. FINANCIAL STATEMENTS
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2004 - Unaudited
ASSETS
CURRENT ASSETS
Cash $ 3,062,602
Accounts receivable 716,447
Inventory 3,287,635
Prepaid expense 320,041
Deferred tax asset 3,358,920
Other current assets 10,213
-----------
Total current assets 10,755,858
PROPERTY AND EQUIPMENT
Equipment and office fixtures 5,079,839
Accumulated depreciation (771,360)
-----------
4,308,479
OTHER ASSETS
Artifacts 396,879
Inventory (non current) 2,017,584
Deposits 134,266
Deferred tax asset 2,497,071
Attraction development 143,994
-----------
Total other assets 5,189,794
-----------
Total assets $20,254,131
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,101,805
Accrued expenses 477,354
Customer deposits 286,010
-----------
Total current liabilities 1,865,169
DEFERRED INCOME FROM REVENUE PARTICIPATION CERTIFICATES 887,500
-----------
Total liabilities 2,752,669
-----------
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; 38,455,599 issued and outstanding 3,846
Additional paid-in capital 26,329,411
Unrealized loss on investment (198)
Accumulated deficit (8,831,597)
-----------
Total stockholders' equity 17,501,462
-----------
Total liabilities and stockholder's equity $20,254,131
===========
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 May 31,
2004 2003
----------- -----------
REVENUE $ 3,437,561 $ 59,367
COST OF SALES 951,481 -
----------- -----------
GROSS PROFIT 2,486,080 59,367
OPERATING EXPENSES
Operations & research 478,464 245,413
Marketing, general & administrative 1,056,650 467,934
Depreciation 74,256 31,021
----------- ----------
Total operating expenses 1,609,370 744,368
INCOME FROM OPERATIONS 876,710 (685,001)
OTHER INCOME (EXPENSE)
Interest income 879 5,950
Interest expense - (911)
Revenue participation expense - (12,986)
Other (1,964) -
----------- -----------
Total other income (expense) (1,085) 7,947
----------- -----------
NET INCOME (LOSS) 875,625 (692,948)
Income tax provision 408,791 -
----------- -----------
NET INCOME AFTER TAXES 466,834 (692,948)
=========== ===========
EARNINGS PER SHARE
Basic $ 0.01 $ (0.02)
Diluted $ 0.01 $ (0.02)
Weighted average number of common
shares outstanding
Basic 38,043,548 28,771,910
Diluted 40,647,567 28,771,910
The accompanying notes are an integral part of these financial statements.
4
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
Three Months Ended May 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 466,834 $ (692,948)
Adjustments to reconcile net loss to
net cash used by operating activity:
Deferred income taxes 408,791 -
Common Stock issued for:
Services - 33,700
Officer and director compensation - 50,600
Depreciation 74,256 31,022
Interest income related parties - (5,266)
Interest expense accrued - 434
Inventory (1,539,077) -
(Increase) decrease in:
Accounts receivable (713,618) (37,200)
Advances, prepaids, deposits 386,325 (60,826)
Increase(decrease) in:
Accounts payable 68,278 94,088
Accrued expenses 360,146 2,909
----------- -----------
NET CASH(USED) IN OPERATING ACTIVITIES (488,065) (583,487)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (603,349) (2,759)
Attraction development (143,994) -
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (747,343) (2,759)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Issuance of common stock 955,313 -
Related party loans receivable - 38,610
Notes payable - 660,250
Sale of marketable securities 1,991,357 -
Repayment of note payable to related party - (2,144)
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,946,670 696,716
----------- -----------
NET INCREASE IN CASH 1,711,262 110,470
CASH AT BEGINNING OF PERIOD 1,351,340 785,559
----------- -----------
CASH AT END OF PERIOD $ 3,062,602 $ 896,029
=========== ===========
SUPPLEMENTARY INFORMATION:
Interest paid $ - $ 11,229
Income taxes paid $ - $ -
The accompanying notes are an integral part of these financial statements.
5
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
Summary of significant non-cash transactions:
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.
6
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 May 31, 2004, results of
operations, and cash flows for the interim periods presented. Operating
results for the three months ended May 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.
7
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
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 unaffiliated customers. Bad debts are recorded as identified. We
have not experienced any bad debts and no allowance for bad debts has been
recorded.
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, investments, accounts payable, and accrued
expenses 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.
Comprehensive Income
United States Treasury bills owned by us during the interim period ended May
31, 2004, were deemed available-for-sale and carried at fair value. Unrealized
gains and losses on these securities were excluded from earnings and reported,
net of any income tax effect, as a separate component of stockholders' equity.
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 year. 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.
8
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings Per Share - Continued
At May 31 2004 potential common shares, calculated using the treasury stock
method, were included in the computation of diluted EPS as follows:
Weighted average shares outstanding 38,043,548
Potential common shares due to warrants and options 2,604,019
----------
Weighted average common and potential
common shares outstanding 40,647,567
==========
At May 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 May 31, 2003, there were options for 767,500 shares and warrants for
230,000 shares that were exercisable between $0.30 and $1.00 per share which
were thus excluded from the computation of diluted EPS. On May 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 May 31
2004 2003
----------- -----------
Net income(loss):
As reported $ 466,834 $ (692,948)
Pro forma adjustment for
compensation, net of tax $ (258,025) (109,330)
----------- ----------
Pro forma $ 208,809 $ (802,278)
=========== ==========
Basic income(loss) per share:
As reported $ 0.01 $ (0.02)
Pro forma $ 0.01 $ (0.03)
Diluted income(loss) per share:
As reported $ 0.01 $ (0.02)
Pro forma $ 0.01 $ (0.03)
9
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Stock-Based Compensation - Continued
The weighted average estimated fair value of stock options granted during the
three months ended May 31, 2004 and 2003 was $4.64 and $.53 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 May 31:
2004 2003
------- -------
Risk-free interest rate 3.9% 2.3%
Expected volatility of common stock 487% 188%
Dividend Yield 0% 0%
Expected life of options 5 years 5 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 - INVENTORY
At May 31, 2004, our inventory was $5,305,219 and consisted primarily of SS
Republic artifacts.
10
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INCOME TAXES
As of May 31, 2004, the Company had consolidated income tax net operating loss
("NOL") carryforwards for federal tax purposes of approximately $20,500,000.
The NOL will expire in various years ending through the year 2024.
For the quarters ended May 31, 2004 and 2003, the components of the provision
for income taxes (benefits) are attributable to continuing operations as
follows:
May 31, 2004 May 31, 2003
------------ ------------
Current
Federal $ 0 $ 0
State 0 0
------------ ------------
$ 0 $ 0
Deferred
Federal $ (5,291,087) $ 0
State (564,904) 0
------------ ------------
$ (5,855,991) $ 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 $8,146,142
Less: valuation allowance (10,993)
----------
$8,135,149
Unrealized loss on marketable securities 1,952
----------
$8,137,101
----------
Deferred tax liability:
Excess of tax over book depreciation $ 315,821
Artifacts recovery costs 1,965,289
----------
$2,281,110
----------
Net deferred tax asset $5,855,991
Less: current net deferred tax asset 3,358,920
----------
Net non-current deferred tax asset $2,497,071
==========
As reflected above, the Company has recorded a net deferred tax asset of
$5,855,991 at May 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
11
ODYSSEY MARINE EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - INCOME TAXES - Continued
operating loss carryforwards since management believes the Company will be
profitable from coin 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:
May 31, 2004 $10,993
February 29, 2004 $ 0
-------
Change in valuation allowance $10,993
=======
Income taxes for the years ended May 31, 2004 and May 31, 2003 differ from the
amounts computed by applying the effective income tax rate of 37.6% to income
before income taxes as a result of the following:
2004 2003
-------- ---------
Federal income tax computed at US statutory rate $297,713 $(235,602)
State income taxes net of federal benefits 31,785 (25,154)
Valuation allowance adjustment 10,993 260,756
Other, net 68,300 -
-------- ---------
$408,791 $ 0
======== =========
NOTE E - SUBSEQUENT EVENTS
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.
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 Odyssey from the SS Republic shipwreck, and by any of the
Company's funds on deposit with the Bank. Odyssey has no other debt for
borrowed money at this time, and the credit line is intended as a strategic
cushion to fund ongoing operations and equipment acquisition while allowing
the coin sales strategy to be driven by the market.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 first week of June we dry-docked our recovery vessel, Odyssey
Explorer, in order to complete the inspections required to update our vessel
operating certificates. We also upgraded our remotely operated vehicle by
adding new manipulators and added certain technological improvements to our
artifact recovery and data logging systems. These improvements have allowed us
to begin recovery operations on the bow section of the SS Republic to the same
operational and procedural specifications that we have agreed with the British
Government to use during the recovery of HMS Sussex. Conducting the recovery
work on the SS Republic in this fashion will serve to train our technical crew
and test the new technologies and equipment prior to beginning the Sussex
recovery operation.
The Odyssey team has excavated approximately one half of the SS Republic
shipwreck site. To date more than 51,000 coins have been recovered including
$20.00 Double Eagles, $10.00 Eagles, Half Dollars and Quarter Dollars. 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. In addition to the coins, Odyssey has excavated
and recovered approximately 4,000 artifacts from the site including domino
sets, religious artifacts, personal effects, pottery and bottles. After
artifacts are recovered, they are tagged, logged, measured and stabilized
aboard the Odyssey Explorer before being transferred to the company's
conservation facility.
13
We plan to continue recovery operations with the Odyssey Explorer on the
SS Republic site until late summer at which time we plan to relocate the
vessel to the Gibraltar area to begin the Sussex recovery project. We remain
confident in the research that suggests that $400,000 in specie went down with
the ship and have no reason to believe that the balance of the coins, if
there, cannot be found with the demonstrated capabilities of our equipment and
techniques.
We are currently making preparations to begin the HMS Sussex recovery and
our search vessel, RV Odyssey, is conducting operations off the east coast of
the United States.
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 February 29, 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 May 31, 2004 compared to the three months ended May 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 of coin sales of $3.4 million. All
significant revenue for 2004 occurred in the last month of the quarter when
the marketing and sales of SS Republic "shipwreck effect" Liberty Seated Half
Dollars began. Revenues for 2003 represented miscellaneous sales from
merchandise and search operations.
14
Cost of Sales
Cost of Sales for 2004 of $1 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 28%. 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 silver
coins only. Cost of sales as a percentage of revenue will change as gold
coins become part of the sales mix because of the significantly higher sales
price.
Operating Expenses
Dollar Percent
(Dollars in thousands) 2004 2003 Change Change
----------- ----------- ------ -------
(unaudited) (unaudited)
Operations & research $ 478 $245 $233 95%
Marketing, general&
Administrative 1,057 468 589 126%
Depreciation 74 31 43 139%
------ ---- ---- ----
$1,609 $744 $865 116%
====== ==== ==== ====
Operations and research expenses were $.5 million in 2004, compared to
$.2 million in 2003. The primary increase consisted of archaeology and
research expenses due to expansion of our research department and marine
operating expenses associated with the purchase of our search and recovery
vessels in mid 2003 offset by our capitalized ship recovery costs which began
in November 2003 associated with the discovery of artifacts on the SS
Republic.
Marketing, general and administrative expenses were $1.1 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 $.6 million increase, $.4 million was the result of increased general and
administrative expenses consisting primarily of personnel-related expenses and
$.2 million was due to the expansion of our marketing and sales function.
Depreciation increases were the result of acquisition 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.
15
Liquidity and Capital Resources
(Dollars in thousands) (unaudited)
Summary of Cash Flows: 2004
----------
Net cash used by operating activities $ (488)
Net cash used by investing activities $ (747)
Net cash provided by financing activities $ 2,947
---------
Net increase in cash and cash equivalents $ 1,711
Beginning cash and cash equivalents $ 1,351
---------
Ending cash and cash equivalents $ 3,062
---------
Cash and cash equivalents were $3.1 million at May 31, 2004, an increase
of $1.7 million from the February 29, 2004 balance of $1.4 million. Of the
$1.7 million of cash provided for the first quarter of 2004, $.5 million was
used for operating activities and $.7 million for investing activities offset
by $2.9 provided by financing activities. Operating activities consisted of
$.5 million of net profit and non-cash expenses of $.4 million offset by $1.4
million of net changes in balance sheet accounts primarily consisting of an
increase in inventory due to an increase in capitalized ship recovery costs.
Cash used in investing activities of $.7 million were primarily capital
expenditures for purchases of property and equipment associated with our
marine operations. Cash provided by financing activities of $2.9 million
included 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 May 31, 2004, we had working capital of $8.9 million as indicated
by current assets exceeding current liabilities. We believe the value of our
artifact inventory as of May 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. During May 2004 the Company began selling coins
from the SS Republic. We believe the revenue through coin 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 and to
purchase a new remotely operated vehicle, estimated to cost $1.7 million. We
have also begun preliminary concept design for both a traveling exhibit
featuring the SS Republic and fixed shipwreck attraction. We anticipate the
funding for these operations will come from the exercise of warrants, the bank
credit facility or through revenue generated from the sale of recovered
cargoes.
ITEM 3. CONTROLS AND PROCEDURES.
As of May 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 May 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.
16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
During the quarter ended May 31, 2004 we issued a total of 300,000 shares
of our common stock to two accredited investors in private transactions upon
the exercise of warrants held by those persons. The Company received total
proceeds of $750,000 from the exercise of the warrants. The warrants were
issued to the investors as part of earlier private offerings of the Company's
securities. In connection with these issuances, the Company relied on the
exemptions provided by Section 4(2) of the Securities Act of 1933, and Rule
506 of Regulation D thereunder. The investors are accredited investors who had
access to complete information concerning the Company, and we believe that
such persons had knowledge and experience in financial and business matters
such that they were capable of evaluating the merits and risks of the
investment. The certificates representing the shares were issued with an
appropriate restrictive legend.
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 May 31, 2004, we filed one report on Form 8-K.
That report, dated May 26, 2004, reported information under Item 8 concerning
the Company's adoption of a new fiscal year to end on December 31. We
previously had a fiscal year end on February 28.
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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: July 15, 2004 By:/s/ Michael J. Holmes
Michael J. Holmes, Chief Financial
Officer and Authorized Officer
18