OMEX

Business Context and Reporting Period

Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Odyssey is a deep-ocean shipwreck exploration company utilizing advanced technology (ROVs, side-scan sonar) to locate and recover artifacts. In 2010, the company shifted its primary revenue model from artifact sales to expedition charter services, providing search and recovery services to governments, insurance companies, and private syndicates (e.g., Robert Fraser Partners, Dorado Ocean Resources).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Surge: Revenue increased 383% to $21.0 million, driven almost entirely by a shift to expedition charter services ($20.5 million in 2010 vs. $2.1 million in 2009). Key clients included Robert Fraser Partners (RFP) and Dorado Ocean Resources (DOR).
• Artifact Sales Decline: Artifact sales and other revenue dropped 76% to $0.4 million due to poor economic conditions and limited new product offerings.
• Increased Expenses: Total operating expenses rose 65% to $37.4 million. This included a $7.0 million increase in operations and research costs (primarily vessel charters) and a new $8.5 million receivable reserve.
• Equity Deficit: The company moved from positive equity ($7.6 million) in 2009 to a deficit of $(7.5) million in 2010, largely due to the net loss and the classification of Series G Preferred Stock as mezzanine equity/liability.
• Derivative Liabilities: A $6.4 million liability was recorded for derivatives related to Series G Preferred Stock and warrants, contributing to a $3.6 million loss on fair value changes.

Guidance, Outlook, Risks, and Contingencies

• Liquidity Concerns: Cash on hand was only $0.2 million at year-end. Management estimates positive cash flow for 2011 but notes this depends on securing project financing. A $5.0 million revolving credit facility is due April 2011 and requires renewal.
• Legal Contingency (Black Swan): The company recovered ~594,000 coins from the "Black Swan" site but cannot monetize them pending the outcome of litigation with Spain regarding sovereign immunity. The case was dismissed in the District Court; Odyssey is appealing to the Eleventh Circuit.
• Receivable Reserves: An $8.5 million reserve was established against accounts receivable. This includes $6.9 million related to DOR (where collection is uncertain) and $1.5 million related to the "Shantaram" project.
• Future Projects: Active projects include the SS Gairsoppa (UK Government contract), HMS Victory (UK MOD), and various RFP syndicated projects. Subsea mineral exploration with DOR and Neptune Minerals is ongoing.
• Risk Factors: High risk of failure to locate wrecks, inability to establish title to recovered objects, market volatility for precious metals, and dependence on key employees and capital raising.

Investor Verification Checklist

• Cash Runway: Verify the status of the $5.0 million credit facility renewal with Fifth Third Bank, given the low cash balance ($0.2M) and upcoming debt maturity in April 2011.
• Receivable Collectability: Assess the likelihood of collecting the $6.9 million reserved receivable from Dorado Ocean Resources (DOR) and the $1.5 million from the "Shantaram" project.
• Black Swan Litigation: Monitor the appeal status in the Eleventh Circuit Court regarding the "Black Swan" salvage rights, as this represents a potential high-value asset currently held in limbo.
• Derivative Liability Impact: Review the volatility of the $6.4 million derivative liability associated with Series G Preferred Stock, which significantly impacts net income.
• Project Syndication: Confirm the execution of new syndication deals (e.g., Galt Resources) to fund upcoming capital expenditures estimated at $3.5 million.