OMEX

Business Context and Reporting Period

Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Twelve months ended December 31, 2005
Business Overview: Odyssey engages in the archaeologically sensitive exploration and recovery of deep-water shipwrecks and operates themed attractions. The company operates in two segments: Shipwreck Exploration and Themed Attractions. In 2005, the company completed the excavation of the SS Republic shipwreck and opened its first themed attraction in New Orleans, which was temporarily closed due to Hurricane Katrina before reopening in February 2006.

Key Financial Metrics

Note: 2004 represents a ten-month transition period. 2005 represents a full twelve-month period.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 43% to $10.0 million from $17.6 million in the prior period. This was primarily due to a reduction in the number of independent coin dealers (from 13 to 6) and a lower availability of high-value numismatic gold coins from the SS Republic recovery.
• Operating Expenses Surge: Total operating expenses increased 143% to $21.7 million.
  • Operations & Research: Increased 473% to $11.3 million. This included $4.2 million in vessel recovery costs that were expensed rather than capitalized (as recovery of the SS Republic concluded in Feb 2005), $1.8 million for chartering a vessel for the "Atlas" search project, and $1.0 million for the startup of the themed attractions segment.
  • Marketing, General & Administrative: Increased 84% to $9.3 million, driven by the expansion of direct sales efforts and Sarbanes-Oxley compliance costs.
• Net Loss: The company swung from a net income of $5.2 million in 2004 to a net loss of $14.9 million in 2005. A significant non-cash factor was a $7.8 million valuation allowance recorded against deferred tax assets, reducing net income by that amount.
• Cash Flow: Net cash used in operating activities was $11.0 million in 2005, compared to $2.8 million provided in 2004. Financing activities provided $16.7 million in 2005, primarily from the exercise of warrants and a private placement of common stock.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continuing net losses in 2006. Future profitability is dependent on the successful recovery and monetization of high-value shipwrecks, specifically the HMS Sussex and other targets in the "Atlas" project.
• Cash Requirements: Estimated cash requirements for operations and capital expenditures for the next twelve months range from $18 million to $20 million. Management believes current cash, credit facilities, and recent equity proceeds will satisfy requirements for 2006, but additional capital may be required if sales estimates are not met.
• Key Projects:
  • HMS Sussex: Operations were suspended in late 2005 due to jurisdictional disputes with Spanish authorities (Junta de Andalucia). A revised project plan was being prepared for resubmission in March 2006.
  • Atlas Project: Search operations were suspended for the winter of 2005/2006 due to weather. No primary targets were positively identified as of the filing date.
  • Themed Attractions: The New Orleans attraction reopened in February 2006. A second attraction is in development with $469,000 remaining in commitments.
• Risks:
  • Raw Material Availability: Revenue is heavily dependent on finding intrinsically valuable cargoes. Failure to locate new wrecks could limit sales.
  • Legal and Political: Risks include challenges to title of recovered objects, litigation (e.g., the South Carolina lawsuit regarding the SS Republic), and political interference (e.g., the HMS Sussex dispute).
  • Market Uncertainty: The market for recovered artifacts is uncertain and subject to fluctuations in precious metal prices.
• Subsequent Event: On March 13, 2006, the company sold 2.5 million shares of Series D Convertible Preferred Stock for $8.75 million.

Investor Verification Checklist

• Inventory Valuation: Verify the net realizable value of the remaining SS Republic inventory (approx. 1,200 gold and 39,000 silver coins) and the company's ability to sell them at projected prices.
• HMS Sussex Status: Monitor the resolution of the jurisdictional dispute with Spanish authorities and the approval of the revised project plan.
• Cash Burn Rate: Assess whether the $18-$20 million estimated cash requirement for 2006 can be met without further dilution, given the projected net losses.
• Revenue Participation Certificates (RPCs): Review the terms of the RPCs sold for the "Cambridge" (Sussex) project, which entitle holders to a significant percentage of future gross revenues.
• Legal Proceedings: Track the status of the South Carolina lawsuit filed by Republic & Eagle Associates, Inc., which seeks damages related to the SS Republic discovery.