OMEX

Business Context and Reporting Period

Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Odyssey engages in the archaeologically sensitive exploration and recovery of deep-ocean shipwrecks. The company operates two primary segments: Shipwreck Exploration (recovery and sale of artifacts/coins) and Themed Attractions (interactive exhibits). In 2007, the company reorganized its Themed Attractions segment to focus on partnerships rather than direct operations.

Key Financial Metrics

Margins: Gross margin declined to approximately 63% in 2007 from 79% in 2006, primarily due to inventory reserves and discounts on remaining gold coin sales.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 21% to $6.15 million, driven by higher sales volume of gold and silver coins from the SS Republic project.
• Increased Losses: Net loss widened by $4.74 million. This was driven by a $4.6 million increase in Marketing, General, and Administrative expenses (including $0.8 million in legal fees related to the "Black Swan" project and $0.9 million in accelerated depreciation for attraction assets) and a $1.2 million increase in Cost of Sales.
• Liquidity Improvement: Cash and cash equivalents surged from $2.42 million to $18.32 million. This increase was primarily funded by $35.1 million in net proceeds from the sale of common and preferred stock (Series D, E, and F) during 2007.
• Segment Restructuring: The company accelerated the useful lives of attraction development assets, resulting in $0.9 million in additional expenses, and recorded $0.4 million in inventory reserves for attraction merchandise.

Guidance, Outlook, and Risks

Outlook: Management anticipates continuing net losses in 2008. The 2008 business plan estimates net cash requirements for operations and capital expenditures between $18 million and $23 million. The company believes current cash, operations, and a new $5 million credit facility will satisfy working capital needs through 2008.

Key Projects & Contingencies:

• "Black Swan" Project: In May 2007, Odyssey recovered over 500,000 silver coins and hundreds of gold coins. However, the company cannot monetize this cargo until title or a salvage award is granted by the U.S. District Court. The Kingdom of Spain has filed claims asserting rights to the property, creating significant legal uncertainty.
• HMS Sussex: Operations are delayed pending the appointment of Spanish archaeological observers. The project involves a revenue-sharing agreement with the British Government.
• SS Republic: The company continues to sell remaining inventory (approx. 33,000 silver coins) from this completed recovery.

Risks: The business is highly speculative. Success depends on locating valuable cargoes, establishing legal title against sovereign claims (specifically Spain), and market conditions for numismatic items. Legal proceedings regarding the "Black Swan" and other sites could result in significant costs or loss of revenue.

Investor Verification Checklist

• Legal Status of "Black Swan": Verify the current status of the U.S. District Court proceedings regarding title to the "Black Swan" cargo and the extent of Spain's claims.
• Cash Burn Rate: Confirm if the $18-$23 million cash requirement for 2008 remains accurate given ongoing legal expenses and operational costs.
• Inventory Valuation: Review the remaining inventory of SS Republic coins and the assumptions used for the $0.56 million inventory reserve recorded in 2007.
• Revenue Participation Certificates (RPCs): Understand the obligations to share future revenues from the HMS Sussex ("Cambridge") project with RPC holders and the British Government.
• Debt Covenants: Review the terms of the new $5 million revolving credit facility with Fifth Third Bank, specifically the borrowing base tied to coin inventory sales.