OMEX

Business Context and Reporting Period

Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2006
Business Overview: The Company engages in the archaeologically sensitive exploration and recovery of deep-water shipwrecks and the marketing of recovered artifacts. Operations are divided into two segments: Shipwreck Exploration and Themed Attractions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue for the nine months ended September 30, 2006, decreased by 58% to $3.4 million compared to $8.2 million in the prior year. This was driven by a lower availability of high-value gold coins and a strategic shift toward selling lower-priced silver coins directly to consumers.
• Increased Operating Loss: The net loss for the nine-month period widened to $14.3 million from $4.2 million in the prior year. This increase was primarily due to higher operations and research expenses ($11.1 million vs. $8.0 million) and the closure of the New Orleans themed attraction.
• Attraction Closure Impact: The Company closed its New Orleans themed attraction in September 2006 due to insufficient attendance post-Hurricane Katrina. This resulted in an accelerated depreciation and amortization charge of approximately $645,000.
• Debt and Liquidity: Total debt increased significantly due to a $2.5 million mortgage refinancing and a $1.12 million loan for a new remotely operated vehicle (ROV). Cash balances decreased by $1.9 million from the prior year-end, despite raising $8.75 million through a Series D Preferred Stock offering.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continuing net losses in the short term. Future profitability is dependent on the successful recovery and monetization of high-value shipwrecks. The Company plans to relocate its themed attraction to a new market in 2007.
• Operational Updates:
  • Atlas Project: Search operations focused on the "Tripoli" target concluded with the identification of 161 shipwrecks. A preliminary injunction was granted in October 2006 for a 17th-century merchant vessel.
  • Sussex Project: Operations on the HMS Sussex (1694) were temporarily halted due to negotiations with Spanish authorities regarding archaeological plans. Resolution is expected later in the year.
• Risks and Contingencies:
  • Liquidity Risk: The Company may need to raise additional capital to meet cash requirements for 2006 and 2007. Failure to secure funding could force a curtailment of exploration efforts.
  • Legal Proceedings: A lawsuit filed in South Carolina regarding the SS Republic discovery was dismissed in June 2006, but the plaintiffs filed a motion for rehearing which remains pending as of the filing date.
  • Insurance Claim: The Company received a partial settlement of $350,000 for Hurricane Katrina damages to its New Orleans attraction but cannot estimate the remaining proceeds.

Investor Verification Checklist

• Cash Burn Rate: Verify the sustainability of current cash reserves ($1.36 million) against the reported operating cash burn of $11.5 million for the nine-month period.
• Inventory Valuation: Review the $9.96 million inventory balance, specifically the $7.32 million classified as non-current (SS Republic artifacts), to assess net realizable value assumptions.
• Debt Covenants: Confirm compliance with the revolving credit facility covenant requiring minimum stockholders' equity of $20 million (currently $20.1 million).
• Legal Status: Monitor the status of the South Carolina court's ruling on the motion for rehearing regarding the SS Republic dispute.
• Attraction Relocation: Track progress on the planned relocation of the themed attraction in 2007 and the resumption of the HMS Sussex project.