Operations
The principal business of the Company is salvage of high value non-ferrous metals and other valuable cargoes from deep water ship-wrecks. SubSea is headquartered in the United Kingdom, with its main offshore activities in the Atlantic and the Mediterranean.
The 4 S's Business Model:
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Winter 2007/08
Status: As announced in December 2007 in the Interim Results for the 6 months ended 30 September 2007
Active Operational Projects
SubSea has previously disclosed information concerning each of its existing and planned search operations. In order to protect the identities of the targets of its planned search operations, and in the context of developing best-practice in the industry, the Board has decided to defer disclosing specific information relating to its search targets until it has located the targeted shipwreck or shipwrecks and determined a course of action to protect its intellectual property rights.
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As at 30 November 2007 cash was £2.9m and outstanding creditors (including the interest payment accrual for the Bond to 30 November 2007 of £0.75m including recoverable withholding tax) were approximately £1.5m, leaving free cash (excluding the bond liabilities of £ 5.0m repayable in 2011) of around £ 1.4m.
An interest payment to the bondholder of £0.81m (including £0.16m recoverable withholding tax) is due on 31 December 2007.
The Group has a covenant with its Bondholder to advise it if at any time it has less than £1,000,000 freely available cash. If such a situation should arise, the Company may not make or enter into any obligation whether by payment, contract or otherwise having a value in excess of £75,000 and /or make any decision that may have a material impact on its business without giving the Bondholder at least 2 Business Days notification of such proposed event.
Section 142 of the Companies Act 1985 states that where the net assets of a public company are half or less of its called up share capital, the directors shall not later than 28 days from the earliest day on which the fact is known, duly convene an Extraordinary General Meeting for the purpose of considering what action should be taken.
On approving the Group's Financial Statements to 31 March 2007, including new accounting policies and updated asset valuations, the Directors became aware that the Group's net assets were 18% of the issued share capital. At the Extraordinary General Meeting ('EGM') on 30 October 2007 the Board and shareholders discussed potential plans to deal with this deficiency, including the necessity for further funding, as set out under Funding requirements below.
These discussions were held in the context of the announcement of 2 October 2007 that the Company announced that it had "received approaches regarding a possible change of control arising from a placing of new ordinary shares of the Company, or sale of the business of the Company. One of the approaches received by the Company also contemplated the possibility of an offer for the entire issued share capital of the Company. These discussions have only been very preliminary and a further announcement will be made in due course as appropriate." Further information is provided under Update on Approaches below.
Funding requirements
As announced following shareholders' approval of the Placing in July 2007. "The proceeds of the Placing will be used to strengthen the Company's financial position and operational resilience over the coming year, which the Board believes is a necessary, but not sufficient, critical element in successfully achieving the Company's strategic objective of identifying and subsequently undertaking the salvage of deep water commercial cargoes. In addition, funding will assist the Company in continuing to comply with the financial covenants contained in its bond arrangements".
The Independent Auditors' report to Shareholders for the year ended 31 March 2007 drew the attention of shareholders to the following Emphasis of Matter:
"In forming our opinion, which is not qualified, we have considered the adequacy of the disclosures made in Note 1 of the financial statements concerning the ability of the Group to continue as a going concern. In addition to the financing currently available, the Group will require additional financing to remain operational for the following 12 months. As set forth in Note 1, although these additional funds have yet to be committed, the Directors are confident of being able to raise them through a combination of "project farm-in agreements" and further financing in the form of debt or equity.
These conditions indicate the existence of a material uncertainty which may cast significant doubt on the ability of the Group to continue as a going concern. These financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern."
The Company's Independent Auditors in their review of the Interim Results for the 6 months ended 30 September 2007 report under Emphasis of Matter - Going Concern:
"In forming our review conclusion, we have considered the adequacy of the disclosures made in Note 1 of the financial statements concerning the ability of the Group to continue as a going concern. In addition to the cash currently available, the Group will require additional financing to remain operational for the following 12 months. As set forth in Note 1 and the Chairman's statement, the Directors continue to pursue a number of potential opportunities, however should none of these opportunities prove viable and the group is liquidated, the sale of assets may well fail to generate sufficient funds to settle the secured creditors. These conditions indicate the existence of a material uncertainty which may cast significant doubt on the ability of the Group to continue as a going concern. This financial statements does not include the adjustments that would result if the Group was unable to continue as a going concern."
As announced on 9 May 2007, the Board has been actively and urgently considering new potential business models and associated funding opportunities, particularly project farm-ins for one or more wrecks. On 25 September 2007 the Board reported that 'since May some progress on funding from project farm-ins for a potential historic target has been made.' Since the 25 September 2007 announcement it has become clear that securing financing through a project farm-in agreement is virtually certain to require a satisfactory outcome to the Group's overall funding requirements from equity and/or debt finance.
In the 25 September 2007 announcement the Board reported that:
"if a satisfactory outcome to the current negotiations for a project farm-in agreement is not achieved, the Directors are of the opinion that the Group would require debt, equity or an alternative source of financing before the end of Calendar 2007. The Directors recognise that there is currently no certainty to the outcome of the current project farm-in negotiations and they further recognise that there is a material uncertainty over the Group's ability to raise additional debt or equity finance. Such ability is dependent upon delivering the strategy set out in this statement. There is therefore a material uncertainty related to the above events and conditions which casts significant doubt on the entity's ability to continue as a going concern and it maybe unable to realise its assets and discharge its liabilities in the normal course of business."
Since the 25 September 2007 announcement the Board has sought to balance undertaking operations with the potential to generate longer term value to shareholders (such as the successful search for the wreck code-named Audrey, as announced on 13 November 2007) while preserving cash resources.
The Company has submitted a bid for a five month survey, starting in May 2008, of seafloor massive sulphide deposits utilising the John Lethbridge and its associated equipment. The Company understands that this contract will be awarded early in 2008.
Notwithstanding this policy of balance and the survey opportunity, the Directors are of the opinion that the Group will require debt, equity or an alternative source of financing within the first few weeks of Calendar 2008. Subject to the terms of the contract, if the survey bid referred to above is successful, the Board believes it could make a positive impact to the Company's cash flows in the short term.
Update on Approaches
On 2 October 2007 the Company announced that it had: 'received approaches regarding a possible change of control arising from a placing of new ordinary shares of the Company, or sale of the business of the Company. One of the approaches received by the Company also contemplated the possibility of an offer for the entire issued share capital of the Company.
These discussions have only been very preliminary and a further announcement will be made in due course as appropriate.'
Since 2 October 2007 the Board has been in discussions with a number of parties, including ones who approached the Company after the announcement made on that date.
Indicative proposals currently being considered include the injection of equity into the Company by a new trade investor. Other proposals are for the sale of all or substantially all of the Company's assets and/or business, the proceeds from which would be used to repay the bond. The intention of this proposal would be to leave the Company with inter alia an AIM listing, cash and tax losses which could be a basis for a new business to be reversed into the Company.
Tangible asset valuation
Recently commissioned independent valuations of the John Lethbridge and the Remote Operating Vehicle have confirmed that the valuations of each asset are above their carrying values in the Group's balance sheet as at 30 September 2007.
Immediate future
As noted above, the Directors are of the opinion that the Group requires debt, equity or an alternative source of financing within the first few weeks of Calendar 2008.
The Board continues to work with a number of parties on approaches to providing finance and it remains possible that a transaction or transactions could be completed. However, the Board must alert shareholders that, even if such a completion occurred, it may well be that the sale of assets may well fail to generate sufficient funds to settle the bond in full or otherwise that the Company may have insufficient funds to continue trading.
A further announcement will be made in due course as appropriate.
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