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OMEX > SEC Filings for OMEX > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ODYSSEY MARINE EXPLORATION INC

Form 10-Q for ODYSSEY MARINE EXPLORATION INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion will assist in the understanding of our financial position and results of operations. The information below should be read in conjunction with the financial statements, the related notes to the financial statements and our Annual Report on Form 10-K for the year ended December 31, 2011.

In addition to historical information, this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 regarding the Company's expectations concerning its future operations, earnings and prospects. On the date the forward-looking statements are made, the statements represent the Company's expectations, but the expectations concerning its future operations, earnings and prospects may change. The Company's expectations involve risks and uncertainties (both favorable and unfavorable) and are based on many assumptions that the Company believes to be reasonable, but such assumptions may ultimately prove to be inaccurate or incomplete, in whole or in part. Accordingly, there can be no assurances that the Company's expectations and the forward-looking statements will be correct. Please refer to the Company's most recent Annual Report on Form 10-K for a description of risk factors that could cause actual results to differ (favorably or unfavorably) from the expectations stated in this discussion. Odyssey disclaims any obligation to update any of these forward-looking statements except as required by law.

Operational Update

Additional information regarding our announced projects may be found in our Annual Report on Form 10-K for the year ended December 31, 2011 and our Quarterly Reports for the period ended March 31, 2012 and June 30, 2012. Only projects with material status updates since those report were filed are discussed below. We may have other projects in various stages of planning or execution that may not be disclosed for security or legal reasons until considered appropriate by management.

We may use our owned vessel, the Odyssey Explorer, or chartered vessels to conduct operations based on availability.

HMS Victory Project

In 2008, Odyssey discovered HMS Victory (lost 1744) and is, as recognized by the owner and under maritime law, salvor-in-possession of the wreck. After a period of joint consultation between the UK Ministry of Defense (MOD) and the UK Department for Culture, Media and Sport, and a public consultation period, the title to the HMS Victory was transferred to the Maritime Heritage Foundation in January 2012. The Foundation, a charity established to locate shipwrecks, investigate, recover and preserve artifacts to the highest archaeological standards and to promote knowledge and understanding of Britain's maritime heritage, has now assumed responsibility for the future management of the wreck site. The Foundation has contracted with Odyssey to provide a full range of archaeological, recovery, conservation and other services.

Pursuant to an agreement with the Foundation, Odyssey has produced an extensive project design for the archaeological excavation of the site, including a complete plan for recording, documentation, conservation, publication and public education. The agreement calls for Odyssey's project costs to be reimbursed and for Odyssey to be paid a percentage of the recovered artifacts' fair value. The preferred option is for Odyssey to be compensated in cash.

A report was provided to the Foundation and the UK MOD that details monitoring of the site conducted by Odyssey and Wreck Watch International between 2008 and early 2012. The report includes evidence, including photographs, of additional damage to the site since 2008 caused by human and natural forces. This report was published in June 2012 and is available here http://shipwreck.net/victorypapers.php. We also provided a revised archaeological project design, developed as a result of the impact report, to the Maritime Heritage Foundation. This revised project design has been approved by the Foundation's Scientific Advisory Committee, chaired by marine archaeologist; Dr. Margaret Rule. The Foundation has been informed that it should expect a response shortly from the government.


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Reports detailing the phased archaeological operations at the shipwreck site will be provided to the Maritime Heritage Foundation after the completion of each phase.

While awaiting final feedback on the proposal, the Odyssey Explorer is conducting search and target inspection operations in a section of the "Atlas" survey area, which is a continuation of our extensive survey of a large area in the English Channel and Western Approaches where a number of high value shipwrecks have been lost throughout history.

"Gairsoppa" Project

On January 25, 2010, Odyssey was awarded the exclusive salvage contract for the cargo of the SS Gairsoppa by the United Kingdom Government (UKG) Department for Transport. The contract was awarded after a competitive bid process. This contract has been extended to allow recovery operations to continue through 2013.

The SS Gairsoppa was a 412-foot steel-hulled British cargo ship that was torpedoed by a German U-boat in February 1941 while enlisted in the service of the UKG Ministry of War Transport. Contemporary research and official documents indicate that the ship was carrying 600,000 (1941 value) or up to 7 million total ounces of silver, including over 3 million ounces of private silver bullion insured by the UKG. The British Ministry of War Transport paid a War Risk Insurance Claim for 325,514 (in 1941 value) for 2,817 bars of silver that was reported to be on board the Gairsoppa when she sank. The UKG only paid this insurance on privately owned cargo. Any cargo owned by the UKG would not have been insured through the War Risk Insurance Office.

Under the recovery contract, Odyssey assumes the risk, expense, and responsibility for the search, cargo recovery, documentation, and marketing of the cargo. Any monetary proceeds from the salvage will first be applied to reimbursement of Odyssey's search, recovery and processing expenses. Any remaining monetary proceeds will next be divided with Odyssey retaining 80% of the net salved value, and 20% retained by the UKG.

Search operations began in July 2011. On September 26, 2011, we announced confirmation of the identity and location of the SS Gairsoppa approximately 300 miles southwest of Galway, Ireland in waters approximately 4700 meters deep.

Initial recovery operations began aboard the MV Seabed Worker on June 4, 2012 and ended on September 23, 2012 due to deteriorating weather conditions in the North Atlantic and a previous commitment of the Seabed Worker to another charter. During 2012 operations, a total of 1,218 silver ingots, weighing approximately 1.4 million troy ounces, were recovered from the SS Gairsoppa, as well as several hundred artifacts which have been declared to the UKG Receiver of Wreck.

During the 83 operational days of this period (days not affected by weather delays, transit or time in port), 71 days were spent surgically opening and clearing approximately 70% of the holds and compartments of the SS Gairsoppa which were suitable for transporting silver cargo. These areas were opened and inspected using the ROV controlled hydraulic shears, deck removal tool and small grab system operated from nearly three miles above the shipwreck site. Based on experience and data gained this season, and armed with improved tools and technology, it is expected that the rest of these areas can be searched and cleared within 30-45 operational days upon Odyssey's return to the site in 2013.

The silver bullion recovered is being refined and sold on the London Metals Exchange. The first sale occurred in September 2012 and all silver remaining is expected to be sold in the fourth quarter 2012 (approximately $41 million in proceeds). Some of the silver may be used in numismatic or collectible coins which may provide extra revenue to the company above and beyond bullion value.

"Mantola" Project

Odyssey was also awarded the exclusive salvage contract for the cargo of the SS Mantola by the UKG Department for Transport. On October 10, 2011, we announced the discovery of the SS Mantola, which sank on February 9, 1917, after being torpedoed by German submarine U-81. Odyssey discovered the shipwreck approximately 2,500 meters beneath the surface of the northern Atlantic Ocean, approximately 100 miles from the SS Gairsoppa shipwreck.

In 1917, the British Ministry of War Transport paid a War Risk Insurance Claim for 110,000 (in 1917 value) for silver that was reported to be on board the Mantola when she sank. This sum would equate to more than 600,000 ounces of silver based on silver prices in 1917. In September 2011, the UK Government Department for Transport awarded Odyssey a salvage contract for the cargo of the SS Mantola. The terms and conditions are similar to the SS Gairsoppa salvage contract. Under the agreement, Odyssey will retain 80% of the net salved silver value recovered.

Operations on the Mantola were planned in conjunction with operations on the SS Gairsoppa under the umbrella of "North Atlantic Expedition 2012". Operations on the Mantola were conducted to test ship and equipment capabilities during 12 days early in the expedition. Recovery operations on the Mantola are planned to continue immediately after completion of Gairsoppa recovery operations during the 2013 season.


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Commodity Wreck Program

On September 20, 2012, we announced project approval and salvage contracts from ship owners for a multi-year commodity shipwreck program with a potential total recovery value of more than $230 million based upon current commodity prices and related assumptions. The company has negotiated salvage contracts with ship owners that will award 90% of the net recovered cargo value to Odyssey for four separate deep-ocean shipwrecks carrying valuable commodities when they sank. There are additional valuable shipwrecks that do not require salvage agreements that can be added to the program and undertaken while Odyssey has a ship and equipment nearby.

Planning is underway to assemble the necessary ship and equipment for the recovery of these cargoes, which is targeted to begin in 2013.

Robert Fraser Projects

Odyssey is currently working on the initial phase of a verification project under a contract executed in first quarter 2011 with certain client companies of Robert Fraser & Partners utilizing a chartered ship.

Subsea Mineral Mining Exploration Projects

We currently own 6.2 million shares of Neptune Minerals, a company focused on discovering and commercializing high-value mineral deposits. To-date Neptune Minerals has been successful in attracting the investment capital required to fund mineral exploration expeditions and is currently conducting a drilling program on one of their highly prospective tenement areas. Neptune's capital raise, completed in December 2011, was at $12 per share of Class B common stock. Neptune Minerals recently completed another private placement for approximately $17 million at $17.50 per share. Our current ownership is approximately 30%.

In May 2012 we received our final cash payment of $1 million for charter services from Chatham Rock Phosphates, Ltd. We also received 9.3 million shares of Chatham Rock Phosphate Ltd. common stock for charter services valued at $1.7 million (12.2 % of Chatham shares outstanding). Chatham Rock Phosphate Ltd currently holds a license covering over 4,000 square kilometers off the coast of New Zealand believed to have significant seabed deposits of rock phosphate and other potentially valuable minerals. Since our share acquisition, the stock price has approximately doubled in value. Also, other major investors have acquired shares that have diluted our position to approximately 7.3%.

The Dorado Discovery is currently working on an environmental survey and mineral exploration project in the Pacific Ocean.

Recent Activities

Odyssey expects to announce within the fourth quarter one or more agreements with a country or countries granting exclusive exploration rights for geographic regions thought to contain high value shipwrecks or other valuable resources or assets.

According to the agreements, Odyssey will bear the costs and risk associated with these projects and will follow archaeological guidelines and the project design submitted to the governments. If the target shipwreck(s) are located, Odyssey will have an exclusive license to recover the underwater cultural heritage and will receive a salvage award as negotiated, similar to prior Odyssey projects. In the case of contracts related to mineral exploration or assets other than shipwrecks, the company will conduct survey operations and recoveries pursuant to contracts to be issued.

We also recently completed a shipwreck search expedition utilizing new sonar technology and are extremely pleased with the results produced by the new technology, which produces super high resolution images of targets even in very difficult underwater terrain. This technology shows strong potential to significantly enhance our future search capability. Several promising targets were acquired during this program and after further analysis an inspection program will be developed to further examine these targets.

Admiralty Legal Proceedings

An admiralty arrest is a legal process in which we seek recognition from the Court of our salvor-in-possession status for a specific shipwreck, site or cargo. It is the first legal step in establishing our rights to ownership or to a salvage award. If we are able to confirm that any entity has a potential legitimate legal claim to any materials recovered from any shipwreck site, we will provide legal notice to any and all potential claimants and pursue prompt resolutions of all claims.

"Black Swan" Arrest

The Eleventh Circuit Court of Appeals upheld the dismissal of the case by the United States Federal District Court for the Middle District of Florida finding no subject matter jurisdiction under the Foreign Sovereign Immunities Act. Without concluding that the coins and artifacts recovered were owned by the Kingdom of Spain, the Court upheld the order to transfer all property to Spain based upon a finding that it was once carried aboard the Nuestra Senora de Las Mercedes, a Spanish naval vessel. The United States Supreme Court declined to hear the case. On February 23, 2012, Odyssey complied with the Court's order by transferring the coins and artifacts to Spain. On April 16, 2012 Spain filed a motion with the district court for an award of unspecified fees and costs (footnoted roughly $4 million). We are opposing the motion vigorously and have submitted substantial arguments in opposition. However, we cannot predict the court's ruling at this time.

All of Odyssey's significant filings to-date, including those made at the district court level, can be viewed at
http://www.shipwreck.net/blackswanlegal.php.


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Unidentified Shipwreck (Bray Case)

On August 15, 2012, the district court dismissed this case once again, finding that the Plaintiff had failed to state a cause of action upon which relief could be granted. The Plaintiff has filed a notice of appeal stating that he intends to once again appeal the dismissal. We will continue to vigorously defend against what we consider to be a frivolous claim.

Critical Accounting Policies and Changes to Accounting Policies

There have been no material changes in our critical accounting estimates since December 31, 2011, nor have we adopted any accounting policy that has or will have a material impact on our consolidated financial statements.

Results of Operations

The dollar values discussed in the following tables, except as otherwise indicated, are approximations to the nearest $100,000 and therefore do not necessarily sum in columns or rows. For more detail refer to the Financial Statements in Part I, Item 1.

Three-months ended September 30, 2012, compared to three-months ended September 30, 2011

    Increase/(Decrease)                                                2012 vs. 2011
    (Dollars in millions)                    2012        2011          $           %
    Artifact sales and other                $   .7      $   .2      $    .5         215 %
    Exhibit                                     .1          -            -           78
    Expedition charter                          .2         5.7         (5.5 )       (97 )

    Total revenue                           $   .9      $  5.9      $  (5.0 )       (84 )%

    Cost of sales                           $   .1      $   .1      $   (-  )       (44 )%
    Marketing, general and administrative      3.0         2.3           .7          30
    Operations and research                   (3.0 )       7.5        (10.5 )      (140 )

    Total operating expenses                $   -       $  9.9      $  (9.9 )      (100 )%

    Other income (expense)                  $  2.9      $ (1.2 )    $   4.0         347 %

    Net income (loss)                       $  3.8      $ (5.1 )    $   8.9         174 %

The explanations that follow are for the three-months ended September 30, 2012, compared to the three-months ended September 30, 2011.

Revenue

The decrease in total revenue of $5.0 million was primarily related to a decrease in expedition charter revenue of $5.5 million and an increase in artifact sales & other of $.5 million. The decrease in expedition charter revenue in 2012 was associated with our subsea mineral mining charters primarily related to Neptune Minerals charter services in 2011 ($5.3 million) and a reduction of Robert Fraser shipwreck projects ($.4 million). Also, our operational efforts in 2012 were focused on our shipwreck recovery projects (i.e., Gairsoppa, Mantola and HMS Victory).

The increase in artifact and other sales of $.5 million in 2012 was due to an increase in other revenue of $.6 million associated with the deferred revenue from the Gairsoppa project offset by a reduction in artifact sales of $.1 million.

Operating Expenses

Marketing, general and administrative expenses were $3.0 million in 2012 as compared to $2.3 million in 2011. The increase of $.7 million primarily represented an increase in our professional fees and services (.5 million) and an increase in employee-related expenses ($.2 million).

Operations and research expenses had a credit balance of $3.0 million in 2012 as compared to $7.5 million in 2011. The decrease in operating and research expenses of $10.5 million primarily represented a recoupment of Gairsoppa project search and recovery costs of $17.8 million which have been recovered based upon silver proceeds from the project in 2012. Other favorable variances of $2.9 million include the Ocean Alert which was sold in 2011 and not utilized in 2012 ($1.0 million) and the charter vessel RV Yuzhmorgeologiya utilized in 2011 only ($1.9 million).

Other Income (Expense)

Other income and expense generally consists of interest income on investments offset by interest expense on our bank term and other mortgage loans and convertible notes. Beginning in the fourth quarter 2009, it also included the income or loss from our equity investment in subsea mineral mining which has since been written down to zero. It also includes the change in fair value of the derivatives related to our issuance of Series G convertible preferred stock and senior convertible notes. The favorable other income variance of $4.0 million in the third quarter of 2012 was primarily related to a favorable impact on the fair value of the derivative financial instruments ($3.1 million, see Note M). Also included in other income (expense) was a favorable


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impact of $2.9 million on the loss on equity investment since the investment had been written down to zero in 2011. This favorable impact was offset by unfavorable interest expense variance of $1.8 million which primarily related to the interest accretion on the senior convertible note payable ($1.4 million), interest payable on the convertible note ($.3 million) and other interest ($.1 million).

Nine-months ended September 30, 2012, compared to nine-months ended September 30, 2011

    Increase/(Decrease)                                                 2012 vs. 2011
    (Dollars in millions)                    2012         2011           $           %
    Artifact sales and other                $    .9      $    .7      $    .2         32 %
    Exhibit                                      .2           .1           .1         51
    Expedition charter                          4.2         14.0         (9.8 )      (70 )

    Total revenue                           $   5.3      $  14.8      $  (9.5 )      (64 )%

    Cost of sales                           $    .2      $    .3      $   (.1 )      (45 )%
    Marketing, general and administrative       7.8          6.9           .9         13
    Operations and research                    11.7         16.2         (4.6 )      (28 )

    Total operating expenses                $  19.7      $  23.5      $  (3.8 )      (16 )%

    Other income (expense)                  $  (2.8 )    $  (3.6 )    $   (.7 )      (20 )%

    Net income (loss) before income tax     $ (17.3 )    $ (12.2 )    $   5.0         41 %

The explanations that follow are for the nine-months ended September 30, 2012, compared to the nine-months ended September 30, 2011.

Revenue

The decrease in total revenue of $9.5 million was primarily related to a decrease in expedition charter revenue of $9.8 million and an increase in artifact sales & other of $.2 million. The decrease in expedition charter revenue in 2012 was associated with our subsea mineral mining charters primarily related to Neptune Minerals ($6.7 million) and a reduction of Robert Fraser shipwreck projects ($2.8 million). The expedition charter revenue of $4.2 million in 2012 was primarily associated with a subsea mineral mining charter with Chatham Rock Phosphates off the coast of New Zealand. The expedition charter revenue in 2011 of $14.0 million related to subsea mineral mining charters with Neptune Minerals. Also, our operational efforts in 2012 were focused on our shipwreck recovery projects (i.e., Gairsoppa, Mantola and HMS Victory).

The increase in artifact and other sales of $.2 million in 2012 was due to an increase in other revenue of $.6 million associated with the deferred revenue from the Gairsoppa project offset by a reduction in artifact sales of $.4 million.

Operating Expenses

Cost of sales decreased by $.1 million in 2012 versus 2011 due to fewer silver coins sold in the first quarter 2012 versus 2011.

Marketing, general and administrative expenses were $7.8 million in 2012 as compared to $6.9 million in 2011. The increase of $.9 million primarily represented an increase in our professional fees and services (.7 million) and an increase in employee-related and other expenses ($.2 million).

Operations and research expenses were $11.7 million in 2012 as compared to $16.2 million in 2011. The decrease in operating and research expenses of $4.6 million primarily represented a recoupment of Gairsoppa project search and recovery costs of $17.8 million which have been recovered based upon silver proceeds from the project in 2012. Other favorable variances of $3.6 million include the Ocean Alert which was sold in 2011 and not utilized in 2012 ($1.8 million) and the charter vessel RV Yuzhmorgeologiya which was utilized in 2011 only ($1.9 million).


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Other Income (Expense)

Other income and expense generally consists of interest income on investments offset by interest expense on our bank term and other mortgage loans and convertible notes. Beginning in the fourth quarter 2009, it also included the income or loss from our equity investment in subsea mineral mining which has since been written down to zero. It also includes the change in fair value of the derivatives related to our issuance of Series G convertible preferred stock and senior convertible notes. The favorable other income variance of $.7 million in 2012 was primarily related to a favorable impact on the fair value of the derivative financial instruments ($.5 million, see Note M). Also included in other income (expense) was a favorable impact of $4.5 million on the loss on equity investment since the investment had been written down to zero in 2011. This favorable impact was offset by unfavorable interest expense variance of $4.3 million which primarily related to the interest accretion on the senior convertible note payable ($3.1 million), interest on the convertible note ($.9 million) and other interest ($.3 million).

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