OMEX

Business Context and Reporting Period

Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Odyssey engages in the archaeologically sensitive exploration and recovery of deep-water shipwrecks and operates themed attractions. The company operates in two primary segments: Shipwreck Exploration and Themed Attractions. The fiscal year 2006 represents a twelve-month period following a transition from a February fiscal year-end.

Key Financial Metrics

Cash Flow Summary (2006): Net cash used in operating activities was $13.1 million. Net cash used in investing activities was $1.9 million. Net cash provided by financing activities was $14.1 million, primarily driven by the sale of preferred and common stock.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased by approximately 50% ($4.9 million) compared to 2005. This was primarily due to a lower availability of high-value numismatic gold coins from the SS Republic recovery and a strategic shift toward selling lower-priced silver coins through direct marketing channels.
• Increased Operating Loss: The net loss widened by $4.17 million. Operating expenses increased by $3.1 million, driven by a $2.8 million increase in vessel operations (including the purchase of a new search vessel) and $0.9 million in accelerated depreciation expenses related to the closure of the New Orleans themed attraction.
• Inventory Reduction: Inventory decreased significantly from $10.57 million in 2005 to $9.62 million in 2006, reflecting the sale of artifacts and coins.
• Debt Increase: Total debt obligations increased due to new financing for a remotely operated vehicle (ROV) and the refinancing of the corporate office building mortgage.

Guidance, Outlook, and Risks

Outlook and Guidance: Management anticipates continuing net losses in 2007. The company estimates cash requirements for 2007 operations and capital expenditures to range between $18 million and $22 million. Based on year-end 2006 cash and projected revenues, an additional $5 million to $7 million in financing is estimated to be required. Management is confident in potential high-value targets for 2007 but notes that current estimates do not include monetizing assets from future recoveries.

Material Risks and Contingencies:

• Capital Requirements: The company faces a risk of being unable to raise necessary capital to fund operations if warrant exercises do not materialize or financing is unavailable.
• Legal Proceedings: A lawsuit filed by Republic & Eagle Associates, Inc. and Sea Miners, Inc. regarding the SS Republic discovery was initially dismissed but the judge reversed the decision in February 2007, denying the motion to dismiss. Management intends to vigorously defend the action.
• Project Delays: The HMS Sussex project is subject to complex multi-national negotiations involving the UK, Spain, and the Autonomous Region of Andalucia. While a diplomatic note has been issued, resolution of site mapping and positional issues is ongoing.
• Inventory Realizability: The company recorded a full valuation allowance of $14.9 million against deferred tax assets, concluding they are not realizable without the recovery of high-value shipwrecks.

Investor Verification Checklist

• Cash Runway: Verify the company's ability to secure the estimated $5–$7 million in additional funding required for 2007 operations.
• Legal Status: Monitor the status of the Republic & Eagle Associates lawsuit, specifically the outcome of the motion to reconsider filed in March 2007.
• Warrant Exercises: Confirm the exercise of outstanding warrants (specifically the $3.50 warrants expiring March 2007) which could provide up to $7.7 million in proceeds.
• Inventory Sales: Track the sales velocity of the remaining SS Republic inventory (approx. 800 gold coins and 36,000 silver coins) to assess revenue generation capabilities.
• HMS Sussex Progress: Verify the resolution of diplomatic and archaeological plan approvals required to proceed with the HMS Sussex excavation.