OMEX

Business Context and Reporting Period

Company: Odyssey Marine Exploration, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Odyssey engages in the archaeologically sensitive exploration and recovery of deep-ocean shipwrecks using advanced technology (ROVs, side-scan sonar). Revenue is generated through the sale of recovered artifacts (primarily coins), expedition charters, and themed exhibits. The company operates several active projects, including "Atlas," "Black Swan," "HMS Victory," and "HMS Sussex."

Key Financial Metrics

Debt and Liquidity: The company maintains a $5.0 million revolving credit facility with Fifth Third Bank, secured by coin inventory and restricted cash. As of December 31, 2009, the outstanding balance was approximately $4.93 million. The company also holds long-term mortgages totaling approximately $3.12 million. Working capital was negative $4.9 million at year-end prior to a subsequent capital raise.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 6% to $4.35 million, driven by a 11% increase in expedition charter revenue ($2.12 million vs. $1.91 million) and a 31% increase in exhibit revenue. Artifact sales decreased slightly by 6% to $1.64 million.
• Expense Reduction: Total operating expenses decreased 22% to $22.70 million. Operations and research expenses dropped 32% to $12.59 million, primarily due to reduced vessel operating costs (fewer charters) and lower repair/maintenance expenses compared to 2008.
• Improved Loss Position: The net loss narrowed by approximately $6.2 million compared to 2008, reflecting the significant reduction in operating costs.
• Cash Position: Cash and cash equivalents declined by $8.6 million to $2.15 million, reflecting continued operating losses offset by financing activities (stock issuances).

Guidance, Outlook, and Risks

Outlook and Guidance: Management estimates net cash requirements for 2010 operations and capital expenditures to be approximately $7 million. The company expects to fund operations through existing cash, recent capital raises (including a $6.1 million offering in January 2010), and projected revenues from syndicated projects (e.g., "Enigma," "Firebrand," "Shantaram").

Key Projects and Contingencies:

• Black Swan: Odyssey recovered over 17 tons of silver and hundreds of gold coins but cannot monetize them pending a U.S. District Court ruling on title/salvage rights against Spain. The company appealed a December 2009 decision in favor of Spain.
• HMS Victory: An agreement with the UK Government was reached for an 80% salvage award on recovered cannon; negotiations continue for broader recovery.
• SS Gairsoppa: Awarded an exclusive salvage contract by the UK Government in January 2010 for a 2-year term.
• Subsea Minerals: Acquired a 25% interest in SMM Project LLC to explore deep-ocean gold and copper deposits.

Risks: The business is highly speculative. Key risks include the inability to establish title to recovered artifacts, legal challenges from sovereign nations (e.g., Spain, UK), failure to locate high-value targets, and the need for continued capital raises to fund operations. The company has recorded a full valuation allowance against deferred tax assets due to uncertainty in realizing future tax benefits.

Investor Verification Checklist

• Black Swan Litigation Status: Verify the current status of the appeal regarding the "Black Swan" (Nuestra Señora de las Mercedes) case, as monetization of significant inventory depends on this outcome.
• Cash Runway: Confirm the sufficiency of the $2.15 million year-end cash balance plus the $6.1 million January 2010 raise to cover the estimated $7 million 2010 burn rate.
• Debt Covenants: Review the terms of the Fifth Third Bank credit facility, specifically the borrowing base tied to coin inventory value and the renewal status of the facility.
• Revenue Concentration: Note that two customers accounted for 72% of artifact sales in 2009; verify the stability of these distribution channels.
• Project Milestones: Monitor progress on the "Enigma," "Firebrand," and "Shantaram" projects with Robert Fraser Marine Ltd, which are expected to generate significant cash in 2010.