NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of Odyssey Marine Exploration, Inc. and subsidiaries (the Company, Odyssey, us, we or our) have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in accordance with generally accepted
accounting principles. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Companys Annual Report on Form 10-K for the year ended December 31,
2015.
In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, necessary
for a fair presentation of the financial position as of June 30, 2016 and the results of operations and cash flows for the interim periods presented. Operating results for the six-month period ended June 30, 2016 are not necessarily
indicative of the results that may be expected for the full year.
See NOTE I regarding our 1-for-12 reverse stock split. Share related
amounts have been retroactively adjusted in this report to reflect this reverse stock split.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding our financial statements. The
financial statements and notes are representations of the Companys management, who is responsible for their integrity and objectivity, and have been prepared them in accordance with our customary accounting practices.
Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, Odyssey Marine Services, Inc., OVH, Inc., Odyssey Retriever, Inc., Odyssey Marine Entertainment, Inc., Odyssey Marine
Enterprises, Ltd., Marine Exploration Holdings, LLC, Odyssey Marine Management, Ltd., Oceanica Marine Operations, S.R.L., Aldama Mining Company, S. De R.L. De C.V., Telemachus Minerals, S. De R.L. De C.V. and majority interest in Oceanica Resources,
S.R.L. and Exploraciones Oceanicas, S. De R.L. De C.V. Equity investments in which we exercise significant influence but do not control and of which we are not the primary beneficiary are accounted for using the equity method. All significant
inter-company and intra-company transactions and balances have been eliminated. The results of operations attributable to the non-controlling interest are presented within equity and net income, and are shown separately from the Companys
equity and net income attributable to the Company. Some of the existing inter-company balances, which are eliminated upon consolidation, include features allowing the liability to be converted into equity, which if exercised, could increase the
direct or indirect interest of the Company in the non-wholly owned subsidiaries.
Use of Estimates
Management used estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Revenue Recognition and Accounts Receivable
In accordance with Topic A.1. in SAB 13: Revenue Recognition, exhibit and expedition charter revenue is recognized ratably when realized and
earned as time passes throughout the contract period as defined by the terms of the agreement. Expenses related to the exhibit and expedition charter revenue (also referred to as marine services revenue) are recorded as incurred and
presented under the caption Operations and research on our Consolidated Statements of Income.
Bad debts are recorded as
identified and, from time to time, a specific reserve allowance will be established when required. A return allowance is established for sales that have a right of return. Accounts receivable is stated net of any recorded allowances.
Cash and Cash Equivalents
Cash, cash
equivalents and restricted cash include cash on hand and cash in banks. We also consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
6
Inventory
Prior to December 10, 2015, Odyssey held two main types of inventory: (i) artifacts and coins held for sale and exhibits, and
(ii) merchandise inventory held for sale. On December 10, 2015, we sold all of the existing inventory items to Monaco Financial, LLC and its affiliates. See NOTE S in our Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 2015 for further information.
Our inventory principally consisted of cargo recovered from the SS
Republic
shipwreck, other artifacts, general branded merchandise and related packaging material. Inventoried costs of recovered cargo included the costs of recovery, conservation and administrative costs to obtain legal title to the cargo. We
continually monitored the recorded aggregate costs of the recovered cargo in inventory to ensure these costs did not exceed the net realizable value. Historical sales, publications or available public market data were used to assess market value.
Packaging materials and merchandise were recorded at average cost. We recorded our inventory at the lower of cost or market.
Costs associated with the above noted items were included in our costs of goods. Vessel costs associated with expedition revenue as well as
exhibit costs were not included in cost of goods sold. Vessel costs include, but are not limited to, charter costs, fuel, crew and port fees. Vessel and exhibit costs are included in Operations and research in the Consolidated Statements of
Operations.
Long-Lived Assets
Our
policy is to recognize impairment losses relating to long-lived assets in accordance with the ASC topic for Property, Plant and Equipment. Decisions on asset impairments are based on several factors, including, but not limited to, managements
plans for future operations, recent operating results and projected cash flows. Impairment losses are included in depreciation at the time of impairment. During May 2016, we sold our vessel,
Odyssey Explorer
, for $200,000 cash and a smaller
vessel as in-kind. The vessel received as in-kind consideration has been valued at $350,000 based on managements best estimate of the evaluation at this time considering its physical condition and the prevailing market. We expect to receive an
appraisal from our insurance broker in the near future. If further relevant information should arise in the future, the estimate will be revised if needed.
Property and Equipment and Depreciation
Property and equipment is stated at historical cost. Depreciation is calculated using the straight-line method at rates based on the
assets estimated useful lives which are normally between three and thirty years. Leasehold improvements are amortized over their estimated useful lives or lease term, if shorter. Major overhaul items (such as engines or generators) that
enhance or extend the useful life of vessel related assets qualify to be capitalized and depreciated over the useful life or remaining life of that asset, whichever is shorter. Certain major repair items required by industry standards to ensure a
vessels seaworthiness also qualify to be capitalized and depreciated over the period of time until the next scheduled planned major maintenance for that item. All other repairs and maintenance are accounted for under the direct-expensing
method and are expensed when incurred.
Earnings Per Share
See NOTE I regarding our 1-for-12 reverse stock split. Share related amounts have been retroactively adjusted in this report to reflect this
reverse stock-split.
Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. In periods when the Company has income, the Company would calculate basic earnings per share using the two-class method, if required, pursuant to ASC 260
Earnings Per Share.
The two-class method was required effective with the issuance of certain senior convertible notes in the past because these notes qualified as a participating security, giving the holder the right to receive dividends should dividends be declared on
common stock. Under the two-class method, earnings for a period are allocated on a pro rata basis to the common stockholders and to the holders of convertible notes based on the weighted average number of common shares outstanding and number of
shares that could be converted. The Company does not use the two-class method in periods when it generates a loss because the holder of the convertible notes does not participate in losses. We do not have any convertible notes that qualify as a
participating security.
Diluted EPS reflects the potential dilution that would occur if dilutive securities and other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. We use the treasury stock method to compute potential common shares from stock options and warrants and the
if-converted method to compute potential common shares from preferred stock, convertible notes or other convertible securities. For diluted earnings per share, the Company uses the more dilutive of the if-converted method or two-class method. When a
net loss occurs, potential common shares have an anti-dilutive effect on earnings per share and such shares are excluded from the Diluted EPS calculation.
7
At June 30, 2016 and 2015, the weighted average common shares outstanding year-to-date were
7,542,728 and 7,340,272, respectively. For the periods in which net losses occurred, all potential common shares were excluded from diluted EPS because the effect of including such shares would be anti-dilutive.
The potential common shares in the following tables represent potential common shares calculated using the treasury stock method from
outstanding options, stock awards and warrants that were excluded from the calculation of diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Average market price during the period
|
|
$
|
3.08
|
|
|
$
|
7.20
|
|
|
$
|
3.35
|
|
|
$
|
8.28
|
|
In the money potential common shares from options excluded
|
|
|
4,089
|
|
|
|
|
|
|
|
4,717
|
|
|
|
|
|
In the money potential common shares from warrants excluded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common shares from out of the money options and warrants were also excluded from the computation of
diluted EPS because calculation of the associated potential common shares has an anti-dilutive effect on EPS. The following table lists options and warrants that were excluded from diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Out of the money options and warrants excluded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options with an exercise price of $12.48 per share
|
|
|
137,666
|
|
|
|
137,666
|
|
|
|
137,666
|
|
|
|
137,666
|
|
Stock options with an exercise price of $12.84 per share
|
|
|
4,167
|
|
|
|
4,167
|
|
|
|
4,167
|
|
|
|
4,167
|
|
Stock options with an exercise price of $20.88 per share
|
|
|
|
|
|
|
4,313
|
|
|
|
|
|
|
|
4,313
|
|
Stock options with an exercise price of $26.40 per share
|
|
|
75,794
|
|
|
|
79,847
|
|
|
|
75,794
|
|
|
|
79,847
|
|
Stock options with an exercise price of $32.76 per share
|
|
|
53,707
|
|
|
|
53,706
|
|
|
|
53,707
|
|
|
|
53,706
|
|
Stock options with an exercise price of $32.88 per share
|
|
|
|
|
|
|
52,820
|
|
|
|
|
|
|
|
52,820
|
|
Stock options with an exercise price of $34.68 per share
|
|
|
74,265
|
|
|
|
80,893
|
|
|
|
74,265
|
|
|
|
80,893
|
|
Stock options with an exercise price of $39.00 per share
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
Stock options with an exercise price of $40.80 per share
|
|
|
|
|
|
|
8,333
|
|
|
|
|
|
|
|
8,333
|
|
Stock options with an exercise price of $41.16 per share
|
|
|
833
|
|
|
|
3,333
|
|
|
|
833
|
|
|
|
3,333
|
|
Stock options with an exercise price of $42.00 per share
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
Stock options with an exercise price of $46.80 per share
|
|
|
1,667
|
|
|
|
1,667
|
|
|
|
1,667
|
|
|
|
1,667
|
|
Warrants with an exercise price of $43.20 per share
|
|
|
130,208
|
|
|
|
130,208
|
|
|
|
130,208
|
|
|
|
130,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total anti-dilutive warrants and options excluded from EPS
|
|
|
494,973
|
|
|
|
573,619
|
|
|
|
494,973
|
|
|
|
573,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average equivalent common shares relating to our unvested restricted stock awards that were
excluded from potential common shares in the earning per share calculation due to having an anti-dilutive effect are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Potential common shares from unvested restricted stock awards excluded from EPS
|
|
|
88,096
|
|
|
|
129,570
|
|
|
|
88,096
|
|
|
|
129,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Net income (loss)
|
|
$
|
(1,858,778
|
)
|
|
$
|
(6,126,218
|
)
|
|
$
|
(1,774,133
|
)
|
|
$
|
(15,840,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator, basic and diluted net income (loss) available to stockholders
|
|
$
|
(1,858,778
|
)
|
|
$
|
(6,126,218
|
)
|
|
$
|
(1,774,133
|
)
|
|
$
|
(15,840,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
7,544,345
|
|
|
|
7,469,455
|
|
|
|
7,542,728
|
|
|
|
7,340,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
7,544,345
|
|
|
|
7,469,455
|
|
|
|
7,542,728
|
|
|
|
7,340,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
7,544,345
|
|
|
|
7,469,455
|
|
|
|
7,542,728
|
|
|
|
7,340,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per share
|
|
|
7,544,345
|
|
|
|
7,469,455
|
|
|
|
7,542,728
|
|
|
|
7,340,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic
|
|
$
|
(0.25
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(2.16
|
)
|
Net (loss) per share diluted
|
|
$
|
(0.25
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(2.16
|
)
|
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that
some portion or the entire deferred tax asset will not be realized.
Stock-based Compensation
Our stock-based compensation is recorded in accordance with the guidance in the ASC topic for
Stock-Based Compensation
(See NOTE I).
Fair Value of Financial Instruments
Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual
obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right
(a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and mortgage and loans payable. We carry cash and cash equivalents, accounts payable and accrued liabilities, and mortgage and loans payable at
the approximate fair market value, and, accordingly, these estimates are not necessarily indicative of the amounts that we could realize in a current market exchange. We carry derivative financial instruments at fair value as is required under
current accounting standards. Redeemable preferred stock has been carried at historical cost and accreted carrying values to estimated redemption values over the term of the financial instrument.
Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying
variables (e.g., interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative
financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. See NOTE K for additional information. We generally do not use derivative financial instruments to hedge
exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts with features that are either (i) not afforded equity classification, (ii) embody risks not clearly
and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815
Derivatives and Hedging
, these instruments are required to be carried as derivative liabilities, at fair value, in
our financial statements with changes in fair value reflected in our income.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1.
Quoted prices in active markets for identical assets or liabilities.
Level 2.
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in
markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all
9
significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also
include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.
Level 3.
Unobservable inputs to the valuation methodology are significant to the measurement of the fair value of assets or
liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
Redeemable Preferred Stock
If we issue
redeemable preferred stock instruments (or any other redeemable financial instrument), they are initially evaluated for possible classification as a liability in instances where redemption is certain to occur pursuant to ASC 480
Distinguishing Liabilities from Equity
. Redeemable preferred stock classified as a liability is recorded and carried at fair value. Redeemable preferred stock that does not, in its entirety, require liability classification be evaluated
for embedded features that may require bifurcation and separate classification as derivative liabilities. In all instances, the classification of the redeemable preferred stock host contract that does not require liability classification is
evaluated for equity classification or mezzanine classification based upon the nature of the redemption features. Generally, mandatory redemption requirements or any feature that could require cash redemption for matters not within our control,
irrespective of probability of the event occurring, requires classification outside of stockholders equity. Redeemable preferred stock that is recorded in the mezzanine section is accreted to its redemption value through charges to
stockholders equity when redemption is probable using the effective interest method.
Subsequent Events
We have evaluated subsequent events for recognition or disclosure through the date this Form 10-Q is filed with the Securities and Exchange
Commission.
NOTE C ACCOUNTS RECEIVABLE
Our accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Trade
|
|
$
|
3,365,977
|
|
|
$
|
2,371,304
|
|
Related party
|
|
|
501,228
|
|
|
|
629,400
|
|
Other
|
|
|
48,512
|
|
|
|
116,668
|
|
Reserve allowance
|
|
|
(2,315,797
|
)
|
|
|
(2,315,797
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
1,599,920
|
|
|
$
|
801,575
|
|
|
|
|
|
|
|
|
|
|
The trade receivable balance at June 30, 2016 and December 31, 2015 consists primarily of a trade
receivable from Neptune Minerals, Inc., for which a reserve allowance for the full amount of $2,315,797 has been made for both reported period ends, as well as $1,018,732 from one other customer. In December 2015, as part of the acquisition
agreement with Monaco Financial, LLC, (Monaco) a related party, we sold 50% of the Neptune Minerals, Inc. receivable to Monaco. The remaining receivable balance from Neptune Minerals, Inc. on our balance sheet is owned by us. Monaco owes
us $501,228 and $629,400 for the periods ended June 30, 2016 and December 31, 2015, respectively, for coin sales and other items that were not part of the December 10, 2015 acquisition agreement. See NOTE S in our Form 10-K file with
the Securities and Exchange Commission for the year ended December 31, 2015 for further information.
NOTE D RELATED PARTY TRANSACTIONS
In December 2015, we entered into an asset acquisition agreement with Monaco Financial, LLC (Monaco). See NOTE S in our
Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2015 for further information. We had accounts receivable with Monaco and related affiliates at June 30, 2016 and December 31, 2015 of $501,228
and $629,400, respectively. We had general operating payables with Monaco at June 31, 2016 and December 31, 2015 of $135,716 and $47,858, respectively. See NOTE I for further debt commitments between the entities. Based on the economic
substance of these business transactions, we consider Monaco Financial, LLC to be an affiliated company, thus a related party. We do not own any financial interest in Monaco.
10
NOTE E INVESTMENTS IN UNCONSOLIDATED ENTITIES
Neptune Minerals, Inc. (NMI)
Our current investment position in NMI consists of 3,092,488 Class B Common non-voting shares and 2,612 Series A Preferred non-voting shares.
These preferred shares are convertible into an aggregate of 261,200 shares of Class B non-voting common stock. Our holdings now constitute an approximate 14% ownership in NMI. At June 30, 2016, our estimated share of unrecognized NMI
equity-method losses is approximately $20.7 million. We have not recognized the accumulated $20.7 million in our income statement because these losses exceeded our investment in NMI. Our investment has a carrying value of zero as a result of the
recognition of our share of prior losses incurred by NMI under the equity method of accounting. We believe it is appropriate to allocate this loss carryforward of $20.7 million to any incremental NMI investment that may be recognized on our balance
sheet in excess of zero. The aforementioned loss carryforward is based on NMIs last unaudited financial statements as of December 31, 2014. Since then, financial statements of NMI have not been made available to us. We do reasonably
believe NMIs losses since then are minimal. We do not have any financial obligations to NMI, and we are not committed to provide financial support.
Although we are a shareholder of NMI, we have no representation on the board of directors or in management of NMI and do not hold any
Class A voting shares. We are not involved in the management of NMI nor do we participate in their policy-making. At June 30, 2016, the net carrying value of our investment in NMI was zero in our consolidated financial statements.
Chatham Rock Phosphate, Ltd.
During 2012, we performed deep-sea mining exploratory services for Chatham Rock Phosphate, Ltd. (CRP) valued at $1,680,000. As
payment for these services, CRP issued 9,320,348 ordinary shares to us. The shares currently represent less than 3% of the outstanding equity of CRP. With CRP being a thinly traded stock and pursuant to guidance per ASC 320:
Debt and Equity
Securities
regarding readily determinable fair value, we believe it was appropriate to not recognize this amount as an asset nor as revenue during that period. The net carrying value of this investment in CRP is zero in our consolidated
financial statements.
NOTE F - INCOME TAXES
During the six-month period ended June 30, 2016, we generated a federal net operating loss (NOL) carryforward of $0.9 million
and generated $2.8 million of foreign NOL carryforwards. As of June 30, 2016, we had consolidated income tax NOL carryforwards for federal tax purposes of approximately $145 million and net operating loss carryforwards for foreign income tax
purposes of approximately $22 million. The federal NOL carryforwards from 2005 forward will expire in various years beginning in 2025 and ending through the year 2035.
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. We have recorded a net
deferred tax asset of $0 at June 30, 2016. As required by the
Accounting for Income Taxes
topic in the ASC, we have concluded it is more likely than not that those assets would not be realizable without the recovery and rights of
ownership or salvage rights of high value shipwrecks or substantial profits from our mining operations and thus a valuation allowance has been recorded as of June 30, 2016. There was no U.S. income tax expense for the six months ended
June 30, 2016 due to the generation of net operating losses.
The increase in the valuation allowance as of June 30, 2016 is due
to the generation of approximately $1.8 million in net operating loss year-to-date.
The change in the valuation allowance is as follows:
|
|
|
|
|
June 30, 2016
|
|
$
|
65,093,249
|
|
December 31, 2015
|
|
|
64,553,394
|
|
|
|
|
|
|
Change in valuation allowance
|
|
$
|
539,855
|
|
|
|
|
|
|
Our estimated annual effective tax rate as of June 30, 2016 is 26.54%, while our June 30, 2016
effective tax rate is 0.0% because of the full valuation allowance.
We have not recognized a material adjustment in the liability for
unrecognized tax benefits and have not recorded any provisions for accrued interest and penalties related to uncertain tax positions. The earliest tax year still subject to examination by a major taxing jurisdiction is 2012.
11
NOTE G COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company may be
subject to a variety of claims and suits that arise from time to time in the ordinary course of business. We are currently not a party to any litigation.
Contingency
During March 2016, our Board
of Directors approved the grant and issuance of 3.0 million new equity shares of Oceanica Resources, S.R.L. to two attorneys for their future services. This equity is only issuable upon the Mexicans government approval of the
Environmental Impact Assessment (EIA) for our Mexican subsidiary. The EIA has not been approved as of the date of this report. This grant of new shares was also approved by the Administrators of Oceanica Resources, S.R.L.
Going Concern Consideration
We have
experienced several years of net losses and may continue to do so. Our ability to generate net income or positive cash flows for the remainder of 2016 or the following twelve months is dependent upon our success in chartering our marine equipment
and services to third parties, monetizing our interests in mineral exploration entities, collecting on amounts owed to us, generating income from other project or asset based financing, and completing the MINOSA/Penelope equity financing transaction
approved by our stockholders on June 9, 2015. Our 2016 business plan requires us to generate new cash inflows during 2016 to effectively allow us to perform our planned projects. We plan to generate new cash inflows through the chartering of
our equipment and services, the monetization of our receivables and equity stakes in seabed mineral companies, financings, syndications or other partnership opportunities. One or more of the planned opportunities for raising cash may not be realized
to the extent needed to meet our desired projected business plan requirements, which may require us to follow a contingency business plan that is based on curtailed expenses and requires less cash inflows. We may not be able to maintain compliance
with NASDAQs continued listing requirements, which could lead to a de-listing from NASDAQ and move to a different quotation service. This may have a negative impact on our ability to raise funds. On April 11, 2016 our market
capitalization value fell below $35.0 million, the required minimum for continued listing of our stock on NASDAQ. Maintaining a market capitalization of at least $35.0 million for a minimum of ten consecutive business days before November 21,
2016 will permit us to remain listed. Management is working on multiple initiatives that could have the effect of curing this deficiency, however, we cannot provide any assurance the deficiency will be resolved. Initiatives include generating new
business results with high positive impact and ongoing efforts to support the environmental application approval process for the Don Diego project, with the goal of approval in the second half of 2016. On March 11, 2015, we entered into a Stock
Purchase Agreement with Minera del Norte S.A. de c.v. (MINOSA) and Penelope Mining LLC (Penelope), an affiliate of MINOSA, pursuant to which Penelope agreed to invest up to $101 million over three years in convertible
preferred stock of Odyssey. This equity financing is subject to the satisfaction of certain conditions, including the approval of our stockholders, which occurred on June 9, 2015. MINOSA and Penelope are currently under no obligation to make
the preferred share equity investments. (See Item 2, Managements Discussion and Analysis of Financial Condition and Results of OperationsGeneral Discussion 2015Financings.) Our consolidated non-restricted cash balance at
June 30, 2016 was $1.8 million, which is insufficient to support operations through the end of 2016. We have a working capital deficit at June 30, 2016 of $20.7 million. We sold a substantial part of our assets to Monaco and its affiliates
on December 10, 2015 and we have pledged the majority of our remaining assets to MINOSA and its affiliates, and to Monaco, leaving us with few opportunities to raise additional funds based on our balance sheet. The total consolidated book value
of our assets was $6.8 million at June 30, 2016 and the fair market value of these assets may differ from their net carrying book value. Even though we executed the above noted financing arrangements, Penelope must purchase the shares for us to
be able to complete the equity component of the transaction. The Penelope equity transaction is heavily dependent on the outcome of our subsidiarys application approval process for an environmental permit to commercially develop a mineralized
phosphate deposit in Mexicos exclusive economic zone in the Pacific ocean. The environmental permit application filed in June 2015 was denied on April 8, 2016. We continue to pursue approval of the environmental permit for the dredging
and extraction of the phosphate sands off the western coast of Mexico, but the April 2016 decision has delayed our expected cash inflows from this project. Therefore, the factors noted above raise doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
NOTE H LOANS PAYABLE
The
Companys consolidated debt consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Note 1 Monaco 2014
|
|
$
|
2,800,000
|
|
|
$
|
3,449,631
|
|
Note 2 Monaco 2016
|
|
|
1,428,944
|
|
|
|
|
|
Note 3 MINOSA
|
|
|
14,750,001
|
|
|
|
14,750,001
|
|
Note 4 Epsilon
|
|
|
2,981,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,960,276
|
|
|
$
|
18,199,632
|
|
|
|
|
|
|
|
|
|
|
12
Note 1 Monaco 2014
On August 14, 2014, we entered into a Loan Agreement with Monaco Financial, LLC (Monaco), a strategic marketing partner,
pursuant to which Monaco agreed to lend us up to $10.0 million, the first $5.0 million of which (the First Tranche) was advanced upon execution of the Loan Agreement. Subject to the satisfaction of conditions set forth in the Loan
Agreement, we had the right to borrow up to an additional $5.0 million in two separate advances of $2.5 million each, which we refer to as the Second Tranche and the Third Tranche. Each of the three advances is evidenced by
separate promissory notes (the Notes). The Second Tranche was advanced on October 1, 2014, and the Third Tranche was advanced on December 1, 2014. On December 10, 2015, these promissory notes were amended as part of the
asset acquisition agreement with Monaco (See NOTE S in our Form 10-K for the period ended December 31, 2015). The amendment included the following material changes: (i) $2.2 million of the indebtedness represented by the Notes was
extinguished, (ii) $5.0 million of the indebtedness represented by the Notes ceased to bear interest and is only repayable under certain circumstances from certain sources of cash, and (iii) the maturity date on the Notes was extended to
December 31, 2017. The outstanding interest-bearing balance of these Notes at June 30, 2016 was $2.8 million. The book carrying value of the Notes was $2.8 million, all of which is classified as long term. The maturity date has been
amended to April 1, 2018. See Loan Modification below.
The indebtedness evidenced by the Notes bears interest at 8.0%
percent per year until the first anniversary of the note and 11% per annum from the first anniversary through the maturity date. Principal is payable at the maturity date while interest is payable monthly. As consideration for the Notes, the
Company (i) entered into a multi-year agreement in which we granted Monaco an exclusive right to market valuable trade cargo through a marketing joint venture, (ii) assigned to Monaco 100,000 shares of Oceanica Resources S. de. R.L
(Oceanica) and (iii) granted Monaco an option whereby Monaco may purchase shares of Oceanica held by Odyssey ( the Share Purchase Option) at a purchase price which is the lower of (a) $3.15 per share or (b) the
price per share of a contemplated equity offering of Oceanica which totals $1.0 million or more in the aggregate. The option may be exercised (i) by conversion of the outstanding principal, (ii) in cash for up to 50% of the initial
principal amount of the Note (exercisable until the end of the term of the note) if the Note has been repaid early at the request of Monaco, or (iii) in cash for up to 100% of the initial principal amount of the Note (exercisable until the end
of the term of the note) if the Note has been repaid early at the request of the Company. For collateral, we granted the lender a security interest in the proceeds from the sale of valuable trade cargo whenever held, in excess of the proceeds
previously pledged under other arrangements, a certain quantity of our Oceanica shares based on the loan balance and certain marine equipment and technology as evidenced by equity in two of our wholly owned subsidiaries. During March 2016, the
purchase price of the Share Purchase Option was re-priced to $1.00 per share. See Loan Modification March 2016 below.
Accounting
considerations
We have accounted for the three Tranches as a financing transaction, wherein the net proceeds that we received were
allocated to the financial instruments issued. Prior to making the accounting allocation, we evaluated the First Tranche for proper classification under ASC 480
Distinguishing Liabilities from Equity
(ASC 480) and ASC 815
Derivatives and Hedging
(ASC 815).
ASC 815 generally requires the analysis of embedded terms and features that have
characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. The material embedded
derivative feature consisted of the share purchase option. The share purchase option was not clearly and closely related to the host debt agreement and required bifurcation.
Based on the previous conclusions, we allocated the cash proceeds first to the derivative components at their fair values with the residual
allocated to the host debt contract, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T1 Allocation
|
|
|
T2 Allocation
|
|
|
T3 Allocation
|
|
Promissory Note
|
|
$
|
3,918,254
|
|
|
$
|
1,937,540
|
|
|
$
|
1,909,127
|
|
Embedded derivative (share purchase option)
|
|
|
831,746
|
|
|
|
562,460
|
|
|
|
590,873
|
|
Common shares of Oceanica
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,000,000
|
|
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No value was assigned to the multi-year exclusive marketing agreement (entered into with Monaco at the same
time as the Loan Agreement) because the value attributable to the multi-year exclusive marketing agreement is compensatory in nature. The value of the compensation will be determined when i) the valuable trade cargo is recovered, and ii) the
marketing and sales activities are successful. Accordingly, the compensation related to the 5% fee will be a period expense in the period incurred, or
13
when a sale takes place. The assignment to Monaco of 100,000 shares of Oceanica was valued at $250,000 and was included as part of the allocation of proceeds. The financing basis allocated to the
Notes is subject to amortization with periodic charges to interest expense using the effective interest method. Amortization of these components included in interest expense during the year ended December 31, 2015 amounted to $1,895,263. There
is no amortization in 2016. The derivative components are subject to re-measurement to fair value at the end of each reporting period with the change reflected in income.
Note 2 Monaco 2016
In March 2016,
Monaco agreed to lend us an additional $1.825 million. These loan proceeds were received in full during the first quarter of 2016. The indebtedness bears interest at 10.0% percent per year. All principal and any unpaid interest is payable on
April 1, 2018. The indebtedness is convertible at any time until the maturity date into shares of Oceanica held by us at a conversion price of $1.00 per share. Pursuant to this loan and as security for the indebtedness, Monaco was granted a
second position in a security interest in (a) one-half of the indebtedness evidenced by the Amended and Restated Consolidated Note and Guaranty, dated September 25, 2015 (the ExO Note), in the original principal amount of $18.0
million, issued by Exploraciones Oceanicas S. de R.L. de C.V. to Oceanica Marine Operations, S.R.L. (OMO), and all rights associated therewith (the OMO Collateral); and (b) all technology and assets aboard the MV Dorado
Discovery and in our possession or control used for offshore exploration, including an ROV system, deep-tow search systems, winches, multi-beam sonar, and other equipment. We unconditionally and irrevocably guaranteed all obligations of Odyssey and
its subsidiaries to Monaco under this loan agreement. As further consideration for the loan, Monaco was granted an option (the Option) to purchase the OMO Collateral. The Option is exercisable at any time before the earlier of
(a) the date that is 30 days after the loan is paid in full or (b) the maturity date of the ExO Note, for aggregate consideration of $9.3 million, $1.8 million of which would be paid at the closing of the exercise of the Option, with the
balance paid in ten monthly installments of $750,000.
Accounting considerations
ASC 815 generally requires the analysis of embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation
and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. The option to purchase the OMO Collateral is an embedded feature that is not clearly and
closely related to the host debt agreement and thus requires bifurcation. However since the option is out of the money, it has no material fair value as of the inception date or at June 30, 2016. The debt agreement did not contain additional
any embedded terms or features that have characteristics of derivatives. However, we were required to consider whether the hybrid contract embodied a beneficial conversion feature (BCF). The calculation of the effective conversion amount
did result in a BCF because the effective conversion price was less than the market price on the date of issuance, therefore a BCF of $456,250 was recorded. The BCF represents a debt discount which will be amortized over the life of the loan. For
the six months ended June 30, 2016, interest expense related to the discount in the amount of $60,194 was recorded.
Loan
modification (December 10, 2015)
In connection with the Acquisition Agreement entered into with Monaco on December 10, 2015,
Monaco agreed to modify certain terms of the loans as partial consideration for the purchase of assets. For the First Tranche ($5,000,000 issued on August 14, 2014), Monaco agreed to cease interest as of December 10, 2015 and reduce the
loan balance by (i) the cash or other value received by Monaco from the SS
Central America
shipwreck project (SSCA) or (ii) if the proceeds received by Monaco from the SSCA project are insufficient to pay off the loan
balance by December 31, 2017, then Monaco can seek repayment of the remaining outstanding balance on the loan by withholding Odysseys 21.25% additional consideration in new shipwreck projects performed for Monaco in the
future. For the Second Tranche ($2,500,000 issued on October 1, 2014), Monaco agreed to reduce the principal amount by $2,200,000 leaving a new principal balance of $300,000 and extension of maturity to December 31, 2017. For the Third
Tranche ($2,500,000 issued on December 1, 2014), Monaco agreed to the extension of maturity to December 31, 2017.
On
December 10, 2015, the Monaco call option on $10 million of Oceanica shares held by Odyssey was maintained for the full amount of the original loan amount and was extended until December 31, 2017.
As further described in NOTE S in our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2015,
the Acquisition Agreement was accounted for as a troubled debt restructuring in accordance with ASC 470-60. As a result of the troubled debt restructuring, the carrying values of the remaining Monaco loans were required to be recorded at their
undiscounted future cash flow values, which amounted to $3,449,632. No interest expense was to be recorded going forward. Interest payments in the three months ended March 31, 2016 reduced the carrying value.
Loan modification (March 2016)
In connection with the $1.825 million loan agreement with Monaco in March 2016, the existing $2.8 million notes were modified. Of the $2.8
million existing loans, $1,349,603 is convertible into shares of Oceanica at a fixed conversion price of
14
$1.00 per share while the remaining $1,450,397 is not convertible. Additionally, the modification eliminated Monacos option (share purchase option) to purchase 3,174,603 shares
of Oceanica stock at a price of $3.15 per share. The modification was analyzed under ASC 480
Distinguishing Liabilities from Equity
(ASC 480) to determine if extinguishment accounting was applicable. Under ASC 470-50-40-10 a
modification or an exchange that adds or eliminates a substantive conversion option as of the conversion date is always considered substantial and requires extinguishment accounting. Since this modification added a substantive conversion option,
extinguishment accounting is applicable. In accordance with the extinguishment accounting guidance (a) the share purchase option was first marked to its pre-modification fair value, (b) the new debt was recorded at fair value and
(c) the old debt and share purchased option was removed. The difference between the fair value of the new debt and the sum of the pre-modification carrying amount of the old debt and the share purchase options fair value represented a
gain on extinguishment. ASC 470-50-40-2 indicates that debt restructuring with a related party may be in essence a capital transaction and as a result the gain upon extinguishment was recognized in additional paid in capital. We performed the
following steps:
Step 1
: After the share purchase option has been market to its pre-modification fair value, the fair value
of the new debt is determined. The fair value of the new debt is as follows:
|
|
|
|
|
Monaco loans
|
|
Loan one
|
|
Forward cash flows:
|
|
|
|
|
Principal
|
|
$
|
2,800,000
|
|
Interest
|
|
|
559,463
|
|
|
|
|
|
|
Total forward cash flows
|
|
$
|
3,359,463
|
|
|
|
|
|
|
Present value of forward cash flows
|
|
$
|
2,554,372
|
|
Fair value of equity conversion option
|
|
|
1,063,487
|
|
|
|
|
|
|
Fair value of debt
|
|
$
|
3,617,859
|
|
|
|
|
|
|
Significant inputs and results arising from the Binomial Lattice process are as follows for the conversion
option that is classified in equity after the modification in March 2016:
|
|
|
|
|
Underlying price on valuation date
|
|
$
|
1.25
|
|
Contractual conversion rate
|
|
$
|
1.00
|
|
Contractual term to maturity
|
|
|
1.82 Years
|
|
Implied expected term to maturity
|
|
|
1.82 Years
|
|
Market volatility:
|
|
|
|
|
Range of volatilities
|
|
|
96.0% - 154.0
|
%
|
Equivalent volatilities
|
|
|
120.1
|
%
|
Risk free rates using zero coupon US Treasury Security rates
|
|
|
0.29% - 0.68
|
%
|
Equivalent market risk adjusted interest rates
|
|
|
0.52
|
%
|
|
|
|
|
|
Monaco loans
|
|
Loan one
|
|
Forward cash flows:
|
|
|
|
|
Face value
|
|
$
|
2,800,000
|
|
Fair value
|
|
|
3,617,859
|
|
|
|
|
|
|
Difference (premium)*
|
|
$
|
817,859
|
|
|
|
|
|
|
*
|
ASC 470-20-25-13 provides that if a convertible debt instrument is issued at a substantial premium, there is a presumption that such premium represents paid in capital. Since the total face amount of the new loans is
$2,800,000, we conclude that the $817,859 was substantial and recorded that premium to additional paid-in capital.
|
Step 2
: The old debt and call option are removed with any difference between the fair value of the new debt and the sum of the
pre-modification carrying amount of the old debt and the call options fair value recognized as a gain or loss upon extinguishment. The allocation is as follows:
|
|
|
|
|
|
|
Allocation
|
|
Derivative liabilities (share purchase options)
|
|
$
|
1,456,825
|
|
Monaco Loan (Old Debt)
|
|
|
3,372,844
|
|
Monaco Loan (New Debt)
|
|
|
(2,800,000
|
)
|
APIC (Premium)
|
|
|
(817,859
|
)
|
|
|
|
|
|
Difference to APIC*
|
|
$
|
1,211,810
|
|
|
|
|
|
|
15
*
|
The difference between the fair value of the new debt and the sum of the pre-modification carrying amount of the old debt and the share purchase options fair value represented a gain on extinguishment. ASC
470-50-40-2 indicates that debt restructuring with a related party may be in essence a capital transaction and as a result the gain upon extinguishment was recognized in additional paid in capital.
|
Note 3 MINOSA
On March 11,
2015, in connection with a Stock Purchase Agreement (See NOTE I), Minera del Norte, S.A. de C.V. (MINOSA) agreed to lend us up to $14.75 million. The entire $14.75 million was loaned in five advances from March 11 through
June 30, 2015. The outstanding indebtedness bears interest at 8.0% percent per annum. The Promissory Note was amended on April 10, 2015 and on October 1, 2015 so that, unless otherwise converted as provided in the Note, the adjusted
principal balance shall be due and payable in full upon written demand by MINOSA; provided that MINOSA agrees that it shall not demand payment of the adjusted principal balance earlier than the first to occur of: (i) 30 days after the date on
which (x) SEMARNAT makes a determination with respect to the current application for the Manifestacion de Impacto Ambiental relating to the Don Diego Project, which determination is other than an approval or (y) Odyssey Marine Enterprises
or any of its affiliates withdraws such application without MINOSAs prior written consent; (ii) termination by Odyssey of the Stock Purchase Agreement, dated March 11, 2015 (the Purchase Agreement), among Odyssey, MINOSA,
and Penelope Mining, LLC (the Investor); (iii) the occurrence of an event of default under the Promissory Note; (iv) December 31, 2015; or (v) if and only if the Investor shall have terminated the Purchase Agreement
pursuant to Section 8.1(d)(iii) thereof, March 30, 2016. In connection with the loans, we granted MINOSA an option to purchase our 54% interest in Oceanica for $40.0 million (the Oceanica Call Option. As of March 11, 2016, the
Oceanica Call has expired. Completion of the transaction requires amending the Companys articles of incorporation to (a) effect a reverse stock split, which was done on February 19, 2016, (b) adjusting the Companys
authorized capitalization, which was also done on February 19, 2016, and (c) establishing a classified board of directors (collectively, the Amendments). The Amendments have been or will be set forth in certificates of
amendment to the Companys articles of incorporation filed or to be filed with the Nevada Secretary of State. As collateral for the loan, we granted MINOSA a security interest in the Companys 54% interest in Oceanica. The outstanding
principal balance of this debt at June 30, 2016 was $14.75 million. The maturity date of this note has been amended and is now March 18, 2017.
Accounting considerations
We have accounted for this transaction as a financing transaction, wherein the net proceeds received were allocated to the financial
instruments issued. Prior to making the accounting allocation, we evaluated for proper classification under ASC 480
Distinguishing Liabilities from Equity
(ASC 480), ASC 815
Derivatives and Hedging
(ASC 815) and
ASC 320
Property, Plant and Equipment
(ASC 320).
This debt agreement did not contain any embedded terms or features
that have characteristics of derivatives. The Oceanica Call Option is considered a freestanding financial instrument because it is both (i) legally detachable and (ii) separately exercisable. The Oceanica Call Option did not fall under the
guidance of ASC 480. Additionally it did not meet the definition of a derivative under ASC 815 because the option has a fixed value of $40.0 million and does not contain an underlying variable which is indicative of a derivative. This instrument is
considered an option contract for a sale of an asset. The guidance applied in this case is ASC 360.20, which provides that in situations when a party lends funds to a seller and is given an option to buy the property at a certain date in the future,
the loan shall be recorded at its present value using market interest rates and any excess of the proceeds over that amount credited to an option deposit account. If the option is exercised, the deposit shall be included as part of the sales
proceeds; if not exercised, it shall be credited to income in the period in which the option lapses.
Based on the previous conclusions,
we allocated the cash proceeds first to the debt at its present value using a market rate of 15%, which is managements estimate of a market rate loan for the Company, with the residual allocated to the Oceanica Call Option, as follows:
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|
|
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|
|
|
|
|
|
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|
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|
|
|
|
|
Tranche 1
|
|
|
Tranche 2
|
|
|
Tranche 3
|
|
|
Tranche 4
|
|
|
Tranche 5
|
|
|
Total
|
|
Promissory Note
|
|
$
|
1,932,759
|
|
|
$
|
5,826,341
|
|
|
$
|
2,924,172
|
|
|
$
|
1,960,089
|
|
|
$
|
1,723,491
|
|
|
$
|
14,366,852
|
|
Deferred Income (Oceanica Call Option)
|
|
|
67,241
|
|
|
|
173,659
|
|
|
|
75,828
|
|
|
|
39,911
|
|
|
|
26,509
|
|
|
|
383,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
2,000,000
|
|
|
$
|
6,000,000
|
|
|
$
|
3,000,000
|
|
|
$
|
2,000,000
|
|
|
$
|
1,750,000
|
|
|
$
|
14,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The option amount of $383,148 represented a debt discount (see NOTE L). This discount has been fully accreted
up to face value using the effective interest method. Accrued interest recorded on the note for the six months ended June 30, 2016 amounted to $634,659.
16
Note 4 Epsilon
On March 18, 2016 we entered into a Note Purchase Agreement (Purchase Agreement) with Epsilon Acquisitions LLC
(Epsilon). Pursuant to the Purchase Agreement, Epsilon loaned us $3.0 million in two installments of $1.5 million on March 31, 2016 and April 30, 2016. The indebtedness bears interest at a rate of 10% per annum and is due
on March 18, 2017. We were also responsible for $50,000 of the lenders out of pocket costs. This amount is included in the loan balance. The outstanding principal at June 30, 2016 was $3,050,000. In pledge agreements related to the
loans, we granted security interests to Epsilon in (a) the 54 million cuotas (a unit of ownership under Panamanian law) of Oceanica Resources S. de R.L. (Oceanica) held by our wholly owned subsidiary, Odyssey Marine
Enterprises, Ltd. (OME), (b) all notes and other receivables from Oceanica and its subsidiary owed to the Odyssey Pledgors, and (c) all of the outstanding equity in OME. Epsilon has the right to convert the outstanding
indebtedness into shares of our common stock upon 75 days notice to us or upon a merger, consolidation, third party tender offer, or similar transaction relating to us at the conversion price of $5.00 per share, which represents the five-day
volume-weighted average price of Odysseys common stock for the five trading day period ending on March 17, 2016. Upon the occurrence and during the continuance of an event of default, the conversion price will be reduced to $2.50 per
share. Following any conversion of the indebtedness, Penelope Mining LLC (an affiliate of Epsilon) (Penelope), may elect to reduce its commitment to purchase preferred stock of Odyssey under the Stock Purchase Agreement, dated as of
March 11, 2015 (as amended, the Stock Purchase Agreement), among Odyssey, Penelope, and Minera del Norte, S.A. de C.V. (MINOSA) by the amount of indebtedness converted.
Pursuant to the Purchase Agreement (a) we agreed to waive our rights to terminate the Stock Purchase Agreement in accordance with the
terms thereof until December 31, 2016, and (b) MINOSA agreed to extend, until March 18, 2017, the maturity date of the $14.75 million loan extended by MINOSA to OME pursuant to the Stock Purchase Agreement. The indebtedness may be
accelerated upon the occurrence of specified events of default including (a) OMEs failure to pay any amount payable on the date due and payable; (b) OME or we fail to perform or observe any term, covenant, or agreement in the
Purchase Agreement or the related documents, subject to a five-day cure period; (c) an event of default or material breach by OME, us or any of our affiliates under any of the other loan documents shall have occurred and all grace periods,
if any, applicable thereto shall have expired; (d) the Stock Purchase Agreement shall have been terminated; (e) specified dissolution, liquidation, insolvency, bankruptcy, reorganization, or similar cases or actions are commenced by or
against OME or any of its subsidiaries, in specified circumstances unless dismissed or stayed within 60 days; (f) the entry of judgment or award against OME or any of its subsidiaries in excess or $100,000; and (g) a change in control (as
defined in the Purchase Agreement) occurs.
In connection with the execution and delivery of the Purchase Agreement, we and Epsilon
entered into a registration rights agreement pursuant to which we agreed to register new shares of our common stock with a formal registration statement with the Securities and Exchange Commission upon the conversion of the indebtedness.
Accounting considerations
We have accounted for this transaction as a financing transaction, wherein the net proceeds received were allocated to the financial
instruments issued. Prior to making the accounting allocation, we evaluated for proper classification under ASC 480
Distinguishing Liabilities from Equity
(ASC 480), ASC 815
Derivatives and Hedging
(ASC 815) and
ASC 320
Property, Plant and Equipment
(ASC 320).
This debt agreement did not contain any embedded terms or features
that have characteristics of derivatives. However, we were required to consider whether the hybrid contract embodied a beneficial conversion feature (BCF). The calculation of the effective conversion amount did result in a BCF because
the effective conversion price was less than the Companys stock price on the date of issuance, therefore a BCF of $96,000 was recorded. The BCF represents a debt discount which will be amortized over the life of the loan. For the six months
ended June 30, 2016, interest expense related to the discount in the amount of $27,331 was recorded.
NOTE I STOCKHOLDERS EQUITY
(DEFICIT)
At our Annual Meeting of Stockholders on June 9, 2015, our stockholders approved a 1-for-6 reverse stock split. On
February 9, 2016, our Board of Directors authorized an additional 1-for-2 reverse stock split, to be effective immediately after the stockholder-approved 1-for-6 reverse stock split is implemented. The reverse stock splits were effective on
February 19, 2016. The two reverse stock splits had the combined effect of a 1-for-12 reverse stock split. At the effective time of the reverse stock splits, every 12 shares of issued and outstanding common stock were converted into one share
of issued and outstanding common stock, and the authorized shares of common stock were reduced from 150,000,000 to 75,000,000 shares. The par value remained at $0.0001 per share. All shares and related financial information in this Form 10-Q have
been retroactively adjusted to reflect this 1-for-12 reverse stock split.
17
Common Stock
In March 2015, we issued 333,333 shares of our common stock to Mako Resources, LLC, an Oceanica shareholder, valued in total at $2,520,000
based on our closing stock price on March 11, 2015. These shares were issued as consideration for termination of Makos option to acquire up to 6.0 million of the shares we hold in Oceanica.
Convertible Preferred Stock
On
March 11, 2015, we entered into a Stock Purchase Agreement (the Purchase Agreement) with Penelope Mining LLC (the Investor), and, solely with respect to certain provisions of the Purchase Agreement, Minera del Norte,
S.A. de C.V. (the Lender). The Purchase Agreement provides for the Company to issue and sell to the Investor shares of the Companys preferred stock in the amounts set forth in the following table (numbers have been adjusted for the
February 2016 reverse stock split):
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock
|
|
Shares
|
|
|
Price Per Share
|
|
|
Total Investment
|
|
Series AA-1
|
|
|
8,427,004
|
|
|
$
|
12.00
|
|
|
$
|
101,124,048
|
|
Series AA-2
|
|
|
7,223,145
|
|
|
$
|
6.00
|
|
|
|
43,338,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,650,149
|
|
|
|
|
|
|
$
|
144,462,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Investors option to purchase the Series AA-2 shares is subject to the closing price of the Common
Stock on the NASDAQ market having been greater than or equal to $15.12 per share for a period of twenty (20) consecutive business days on which the NASDAQ market is open.
The closing of the sale and issuance of shares of the Companys preferred stock to the Investor is subject to certain conditions,
including the Companys receipt of required approvals from the Companys stockholders, the receipt of regulatory approval, performance by the Company of its obligations under the Stock Purchase Agreement, the listing of the underlying
common stock on the NASDAQ Stock Market and the Investors satisfaction, in its sole discretion, with the viability of certain undersea mining projects of the Company. This transaction received stockholders approval on June 9, 2015.
Completion of the transaction requires amending the Companys articles of incorporation to (a) effect a reverse stock split, which was done on February 19, 2016, (b) adjusting the Companys authorized capitalization, which
was also done on February 19, 2016, and (c) establishing a classified board of directors (collectively, the Amendments). The Amendments have been or will be set forth in certificates of amendment to the Companys articles
of incorporation filed or to be filed with the Nevada Secretary of State.
Series AA Convertible Preferred Stock Designation
The Purchase Agreement provides for the issuance of up to 8,427,004 shares of Series AA-1 Convertible Preferred Stock, par value
$0.0001 per share (the Series AA-1 Preferred) and 7,223,145 shares of Series AA-2 Convertible Preferred Stock, par value $0.0001 per share (the Series AA-2 Preferred), subject to stockholder approval which was received on
June 9, 2015 and satisfaction of other conditions. Significant terms and conditions of the Series AA Preferred are as follows:
Dividends
. If and when the Company declares a dividend and any other distribution (including, without limitation, in cash, in
capital stock (which shall include, without limitation, any options, warrants or other rights to acquire capital stock) of the Company, then the holders of each share of Series AA Preferred Stock are entitled to receive, a dividend or distribution
in an amount equal to the amount of dividend or distribution received by the holders of common stock for which such share of Series AA Preferred Stock is convertible.
Liquidation Preference
. The Liquidation Preference on each share of Series AA Preferred Stock is its Stated Value plus accretion
at the rate of 8% per annum compounded on each December 31 from the date of issue of such share until the date such share is converted. For any accretion period which is less than a full year, the Liquidation
Preference shall accrete in an amount to be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed.
Voting Rights
. The holders of Series AA Preferred will be entitled to one vote for each share of common stock into which the
Series AA Preferred is convertible and will be entitled to notice of meetings of stockholders.
Conversion Rights
. At any
time after the Preferred Shares have been issued, any holder of shares of Series AA Preferred may convert any or all of the shares of preferred stock into one fully paid and non-assessable share of Common Stock.
Adjustments to Conversion Rights
. If Odyssey pays a dividend or makes a distribution on its common stock in shares of common
stock, subdivides its outstanding common stock into a greater number of shares, or combines its outstanding common stock into a smaller number of shares, or if there is a reorganization, or a merger or consolidation of Odyssey with or into any other
entity which results in a conversion, exchange, or cancellation of the common stock, or a sale of all or substantially all of Odysseys assets, then the conversion rights described above will be adjusted appropriately so that each holder of
Series AA
18
Preferred will receive the securities or other consideration the holder would have received if the holders Series AA Preferred had been converted before the happening of the event. The
conversion price in effect from time to time is also subject to downward adjustment if we issue or sell shares of common stock for a purchase price less than the conversion price or if we issue or sell shares convertible into or exercisable for
shares of common stock with a conversion price or exercise price less than the conversion price for the Series AA Preferred.
Accounting
considerations
As stated above the issuance of the Series AA Convertible Preferred Stock is based on certain contingencies. No
accounting treatment determination is required until these contingencies are met and the Series AA Convertible Preferred Stock has been issued. However, we have analyzed the instrument to determine the proper accounting treatment that will be
necessary once the instruments have been issued.
ASC 480 generally requires liability classification for financial instruments that are
certain to be redeemed, represent obligations to purchase shares of stock or represent obligations to issue a variable number of common shares. We concluded that the Series AA Preferred was not within the scope of ASC 480 because none of the three
conditions for liability classification was present.
ASC 815 generally requires the analysis of embedded terms and features that have
characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. However, in order to perform
this analysis we were first required to evaluate the economic risks and characteristics of the Series AA Convertible Preferred Stock in its entirety as being either akin to equity or akin to debt. Our evaluation concluded that the Series AA
Convertible Preferred Stock was more akin to an equity-like contract largely due to the fact that most of its features were participatory in nature. As a result we concluded that the embedded conversion feature is clearly and closely related to the
host equity contract and will not require bifurcation and liability classification.
The option to purchase the Series AA-2 Convertible
Preferred Stock was analyzed as a freestanding financial instruments and has terms and features of derivative financial instruments. However, in analyzing this instrument under applicable guidance it was determined that it is both (i) indexed
to the Companys stock and (ii) meet the conditions for equity classification.
Warrants
Warrants to purchase 130,208 shares of common stock were attached to our formerly outstanding Senior Convertible debt. The exercise price on
these warrants is $43.20, and they expire on November 9, 2016.
Stock-Based Compensation
We have two stock incentive plans. The first is the 2005 Stock Incentive Plan that expired in August 2015. After the expiration of this plan,
equity instruments cannot be granted but this plan shall continue in effect until all outstanding awards have been exercised in full or are no longer exercisable and all equity instruments have vested or been forfeited.
On June 9, 2015, our shareholders approved our 2015 Stock Incentive Plan (the Plan) that was adopted by our Board of
Directors (the Board) on January 2, 2015, which is the effective date. The plan expires on the tenth anniversary of the effective date. The Plan provides for the grant of incentive stock options, non-qualified stock options,
restricted stock awards, restricted stock units and stock appreciation rights. This plan was initially capitalized with 450,000 shares that may be granted. The Plan is intended to comply with Section 162(m) of the Internal Revenue Code, which
stipulates that the maximum aggregate number of Shares with respect to one or more Awards that may be granted to any one person during any calendar year shall be 83,333, and the maximum aggregate amount of cash that may be paid in cash to any person
during any calendar year with respect to one or more Awards payable in cash shall be $2,000,000. The original maximum number of shares that were to be used for Incentive Stock Options (ISO) under the Plan shall be 450,000. During our
June 2016 shareholder meeting, the shareholders elected to add 200,000 incremental shares to the Plan. With respect to each grant of an ISO to a Participant who is not a Ten Percent Stockholder, the Exercise Price shall not be less than the Fair
Market Value of a Share on the date the ISO is granted. With respect to each grant of an ISO to a Participant who is a Ten Percent Stockholder, the Exercise Price shall not be less than one hundred ten percent (110%) of the Fair Market Value of
a Share on the date the ISO is granted. If an Award is a Non-Qualifying Stock Option (NQSO), the Exercise Price for each Share shall be no less than (1) the minimum price required by applicable state law, or (2) the Fair Market
Value of a Share on the date the NQSO is granted, whichever price is greatest. Any Award intended to meet the Performance Based Exception must be granted with an Exercise Price not less than the Fair Market Value of a Share determined as of the date
of such grant.
Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment
awards that is ultimately expected to vest. As share-based compensation expense recognized in the statement of
19
operations is based on awards ultimately expected to vest, it can be reduced for estimated forfeitures. The ASC topic Stock Compensation requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The share based compensation charged against income for the three and six-month periods ended June 30, 2016 and 2015 was $357,872 and $798,773
and $692,501 and $1,393,379, respectively.
We did not grant stock options in the three-month periods ended June 30, 2015. We did
grant stock options in the quarter ended June 30, 2016 to two independent directors in lieu of cash for services rendered to the Company as directors. The weighted average estimated fair value of these granted stock options was $1.55. The
weighted average fair value of stock options granted is determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock,
the expected dividend payments, and the risk-free interest rate over the life of the option. The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective assumptions, changes in or variations from these assumptions can materially affect the fair value of the options.
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Risk-free interest rate
|
|
|
1.29
|
%
|
|
|
|
|
Expected volatility of common stock
|
|
|
80.87
|
%
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
|
|
Expected life of options
|
|
|
8.2 years
|
|
|
|
|
|
NOTE J CONCENTRATION OF CREDIT RISK
We maintain the majority of our cash at one financial institution. At June 30, 2016, our uninsured cash balance was approximately
$1,622,296.
At June 30, 2016, we do not have any debt obligations with variable interest rates.
NOTE K
DERIVATIVE FINANCIAL INSTRUMENTS
The following tables summarize the components of our derivative liabilities and linked common shares as of June 30, 2016 and
December 31, 2015 and the amounts that were reflected in our income related to our derivatives for the periods then ended:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
Embedded derivatives derived from:
|
|
|
|
|
|
|
|
|
2014 Convertible Promissory Notes
|
|
$
|
|
|
|
$
|
3,396,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,396,191
|
|
Warrant derivatives
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
|
3,891
|
|
|
|
6,225
|
|
|
|
|
|
|
|
|
|
|
Warrant derivatives
|
|
|
3,891
|
|
|
|
6,225
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
3,891
|
|
|
$
|
3,402,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Common shares linked to derivative liabilities:
|
|
|
|
|
|
|
|
|
Embedded derivatives:
|
|
|
|
|
|
|
|
|
2014 Convertible Promissory Notes*
|
|
|
|
|
|
|
3,174,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,174,604
|
|
|
|
|
|
|
|
|
|
|
Warrant derivatives
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
|
130,208
|
|
|
|
130,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,208
|
|
|
|
130,208
|
|
|
|
|
|
|
|
|
|
|
Total common shares linked to derivative liabilities
|
|
|
130,208
|
|
|
|
3,304,812
|
|
|
|
|
|
|
|
|
|
|
*
|
The common shares indexed to the 2014 Convertible Promissory Notes are shares indexed to Oceanica.
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Derivative income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) from fair value changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2014 Convertible Promissory Notes
|
|
|
|
|
|
|
147,142
|
|
|
|
3,396,190
|
|
|
|
(331,984
|
)
|
Warrant derivatives
|
|
|
61,051
|
|
|
|
64,748
|
|
|
|
2,335
|
|
|
|
80,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,051
|
|
|
|
211,890
|
|
|
|
3,398,525
|
|
|
|
(251,013
|
)
|
Redemptions of Senior Convertible Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative income (expense)
|
|
$
|
61,051
|
|
|
$
|
211,890
|
|
|
$
|
3,398,525
|
|
|
$
|
(251,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accounting principles that are provided in ASC 815 -
Derivatives and Hedging
require derivative
financial instruments to be classified in liabilities and carried at fair value with changes recorded in income. In addition, the standards do not permit an issuer to account separately for individual derivative terms and features embedded in hybrid
financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be bundled together and fair valued as a single, compound embedded derivative. We have selected the
Monte Carlo Simulations valuation technique to fair value the compound embedded derivative because we believe that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market participants would
likely consider in transactions involving compound embedded derivatives. Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional inputs for option models
such as market trading volatility and risk free rates. We have selected Binomial Lattice to fair value our warrant derivatives because we believe this technique is reflective of all significant assumption types market participants would likely
consider in transactions involving freestanding warrants derivatives. The Monte Carlo Simulations (MCS) technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to
observable market indicators.
Significant inputs and results arising from the Monte Carlo Simulations process are as follows for the
share purchase options that have been bifurcated from our Monaco Notes and classified in liabilities as of March 8, 2016 (Modification Date), December 31, 2015, and the inception dates (Tranche 1 August 14, 2014, Tranche 2
October 1, 2014, Tranche 3 December 1, 2014):
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 1 August 14, 2014:
|
|
March 8, 2016***
|
|
|
December 31, 2015
|
|
|
August 14, 2014
|
|
Underlying price on valuation date*
|
|
$
|
1.25
|
|
|
$
|
2.50
|
|
|
$
|
2.50
|
|
Contractual conversion rate
|
|
$
|
3.15
|
|
|
$
|
3.15
|
|
|
$
|
3.15
|
|
Contractual term to maturity**
|
|
|
1.82 Years
|
|
|
|
2.00 Years
|
|
|
|
2.00 Years
|
|
Implied expected term to maturity
|
|
|
1.24 Years
|
|
|
|
1.82 Years
|
|
|
|
1.85 Years
|
|
Market volatility:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of volatilities
|
|
|
96.0% - 154.0
|
%
|
|
|
85.2% - 109.8
|
%
|
|
|
37.0% - 62.2
|
%
|
Equivalent volatilities
|
|
|
120.1
|
%
|
|
|
98.1
|
%
|
|
|
51.2
|
%
|
Contractual interest rate
|
|
|
11.00
|
%
|
|
|
11.00
|
%
|
|
|
8.0% - 11.0
|
%
|
Equivalent market risk adjusted interest rates
|
|
|
11.60
|
%
|
|
|
11.00
|
%
|
|
|
9.50
|
%
|
Range of credit risk adjusted yields
|
|
|
3.49% - 5.02
|
%
|
|
|
3.29% - 4.22
|
%
|
|
|
3.94% - 4.45
|
%
|
Equivalent credit risk adjusted yield
|
|
|
4.13
|
%
|
|
|
3.76
|
%
|
|
|
4.15
|
%
|
|
|
|
|
Tranche 2 October 1, 2014:
|
|
March 8, 2016***
|
|
|
December 31, 2015
|
|
|
October 1, 2014
|
|
Underlying price on valuation date*
|
|
$
|
1.25
|
|
|
$
|
2.50
|
|
|
$
|
2.50
|
|
Contractual conversion rate
|
|
$
|
3.15
|
|
|
$
|
3.15
|
|
|
$
|
3.15
|
|
Contractual term to maturity**
|
|
|
1.82 Years
|
|
|
|
2.00 Years
|
|
|
|
2.00 Years
|
|
Implied expected term to maturity
|
|
|
1.24 Years
|
|
|
|
1.82 Years
|
|
|
|
1.79 Years
|
|
Market volatility:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of volatilities
|
|
|
96.0% - 154.0
|
%
|
|
|
85.2% - 109.8
|
%
|
|
|
58.6% - 75.3
|
%
|
Equivalent volatilities
|
|
|
120.1
|
%
|
|
|
98.1
|
%
|
|
|
68.00
|
%
|
Contractual interest rate
|
|
|
11.00
|
%
|
|
|
11.00
|
%
|
|
|
8.0% - 11.0
|
%
|
Equivalent market risk adjusted interest rates
|
|
|
11.60
|
%
|
|
|
11.00
|
%
|
|
|
9.25
|
%
|
Range of credit risk adjusted yields
|
|
|
3.49% - 5.02
|
%
|
|
|
3.29% - 4.22
|
%
|
|
|
3.97% - 4.61
|
%
|
Equivalent credit risk adjusted yield
|
|
|
4.13
|
%
|
|
|
3.76
|
%
|
|
|
4.24
|
%
|
|
|
|
|
Tranche 3 December 1, 2014:
|
|
March 8, 2016***
|
|
|
December 31, 2015
|
|
|
December 1, 2014
|
|
Underlying price on valuation date*
|
|
$
|
1.25
|
|
|
$
|
2.50
|
|
|
$
|
2.50
|
|
Contractual conversion rate
|
|
$
|
3.15
|
|
|
$
|
3.15
|
|
|
$
|
3.15
|
|
Contractual term to maturity**
|
|
|
1.82 Years
|
|
|
|
2.00 Years
|
|
|
|
2.00 Years
|
|
Implied expected term to maturity
|
|
|
1.24 Years
|
|
|
|
1.82 Years
|
|
|
|
1.76 Years
|
|
Market volatility:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of volatilities
|
|
|
96.0% - 154.0
|
%
|
|
|
85.2% - 109.8
|
%
|
|
|
61.8% - 79.8
|
%
|
Equivalent volatilities
|
|
|
120.1
|
%
|
|
|
98.1
|
%
|
|
|
72.2
|
%
|
Contractual interest rate
|
|
|
11.00
|
%
|
|
|
11.00
|
%
|
|
|
8.0% - 11.0
|
%
|
Equivalent market risk adjusted interest rates
|
|
|
11.60
|
%
|
|
|
11.00
|
%
|
|
|
9.25
|
%
|
Range of credit risk adjusted yields
|
|
|
3.49% - 5.02
|
%
|
|
|
3.29% - 4.22
|
%
|
|
|
4.29% - 4.84
|
%
|
Equivalent credit risk adjusted yield
|
|
|
4.13
|
%
|
|
|
3.76
|
%
|
|
|
4.52
|
%
|
21
*
|
The instrument is convertible into shares of the Companys subsidiary, Oceanica, which is not a publicly-traded entity. Therefore its shares do not trade on a public exchange. As a result, the underlying value was
originally based on private sales of the subsidiarys shares because that was the best indicator of the value of the shares in the past. The last sale of Oceanicas shares in which a private investor accumulated 24% of the shares of which
their last purchase price was for $2.50 per share in December 2013. Accordingly the underlying price used in the past in the MCS calculations was the $2.50 for the inception dates and December 31, 2015. Being far removed from December 2013
while considering the modification in March 2016 of the new option price of $1.00 and other market conditions currently prevailing, management determined $1.25 to be fairly representative of the per share fair value.
|
**
|
On December 10, 2015 the term was extended to December 31, 2017. In March 2016 the term was extended to March 8, 2018.
|
***
|
In March 2016 the purchase price of the share purchase options was modified to $1.00 per share. As a result of the re-pricing, the share purchase options no longer require measurement as derivative liabilities. The MCS
were calculated for the instruments just prior to the modification on March 8, 2016.
|
The following table reflects the
issuances of the Share Purchase Option derivatives and changes in fair value inputs and assumptions for these derivatives during the six months ended June 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Balances at January 1
|
|
$
|
3,396,191
|
|
|
$
|
2,115,318
|
|
Issuances
|
|
|
|
|
|
|
|
|
Modification
|
|
|
(1,456,826
|
)
|
|
|
|
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
(1,939,365
|
)
|
|
|
331,984
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30
|
|
$
|
|
|
|
$
|
2,447,302
|
|
|
|
|
|
|
|
|
|
|
The fair value of all Share Purchase Option derivatives is significantly influenced by our trading market
price, the price volatility in trading and the risk free interest components of the Binomial Lattice technique.
On October 11, 2010,
we also issued warrants to acquire 150,000 of our common shares in connection with the Series G Convertible Preferred Stock Financing. During April 4-8, 2011, we issued warrants to acquire 43,750 of our common shares in connection the Series G
Convertible Preferred Stock and Warrant Settlement Transaction. Finally, on November 8, 2011, we issued warrants to acquire 108,507 of our common shares in connection with the Senior Convertible Note Financing Transaction. These warrants
required liability classification as derivative financial instruments because certain down-round anti-dilution protection or price protection features included in the warrant agreements are not consistent with the concept of equity. We applied the
Binomial Lattice valuation technique in estimating the fair value of the warrants because we believe that this technique is most appropriate and reflects all of the assumptions that market participants would likely consider in transactions involving
the warrants, including the potential incremental value associated with the down-round anti-dilution protections.
The Binomial Lattice
technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators. All remaining warrants linked to 1,725,000 shares of common stock were exercised on
October 11, 2013.
All remaining warrants linked to 525,000 shares of common stock expired unexercised on April 13, 2014.
Therefore, the warrants linked to 525,000 shares of common stock were not outstanding as of June 30, 2016 or December 31, 2015.
Significant assumptions and utilized in the Binomial Lattice process are as follows for the warrants linked to 130,208 shares of common stock
as of June 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Linked common shares
|
|
|
130,208
|
|
|
|
130,208
|
|
Quoted market price on valuation date
|
|
$
|
2.02
|
|
|
$
|
3.24
|
|
Contractual exercise price
|
|
$
|
43.20
|
|
|
$
|
43.20
|
|
Term (years)
|
|
|
1.10
|
|
|
|
1.35
|
|
Range of market volatilities
|
|
|
66.2% - 188.1
|
%
|
|
|
92.9% - 113.2
|
%
|
Risk free rates using zero coupon US Treasury
|
|
|
|
|
|
|
|
|
Security rates
|
|
|
0.20% - 0.36
|
%
|
|
|
0.16% - 0.65
|
%
|
22
Of the 108,507 common shares for which the warrant issued on November 8, 2011 could be
exercised, 36,169 of those common shares were accessible only based upon the Companys election to require the lender to provide the additional financing. When the lender provided additional financing of $8,000,000 on May 10, 2012, the
additional 36,169 of common shares became accessible. Warrants indexed to an additional 260,417 were issued in conjunction with the additional financing.
The following table reflects the issuances of derivative warrants and changes in fair value inputs and assumptions related to the derivative
warrants during the six months ended June 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Balances at January 1
|
|
$
|
6,225
|
|
|
$
|
111,127
|
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
(2,334
|
)
|
|
|
(80,971
|
)
|
|
|
|
|
|
|
|
|
|
Balances at June 30
|
|
$
|
3,891
|
|
|
$
|
30,156
|
|
|
|
|
|
|
|
|
|
|
The fair value of all warrant derivatives is significantly influenced by our trading market price, the price
volatility in trading and the risk free interest components of the Binomial Lattice technique.
NOTE L DEFERRED INCOME AND REVENUE PARTICIPATION
RIGHTS
The Companys participating revenue rights and deferred income consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Cambridge
project
|
|
$
|
825,000
|
|
|
$
|
825,000
|
|
Seattle
project
|
|
|
62,500
|
|
|
|
62,500
|
|
Galt Resources, LLC (HMS Victory project)
|
|
|
3,756,250
|
|
|
|
3,756,250
|
|
Oceanica call option (MINOSA)
|
|
|
|
|
|
|
383,148
|
|
|
|
|
|
|
|
|
|
|
Total deferred income and participating revenue rights
|
|
$
|
4,643,750
|
|
|
$
|
5,026,898
|
|
|
|
|
|
|
|
|
|
|
Cambridge
project
We previously sold Revenue Participation Certificates (RPCs) that represent the right to share in our future revenues derived from
the
Cambridge
project, which is also referred to as the HMS
Sussex
shipwreck project. The
Cambridge
RPC units constitute restricted securities.
Each $50,000 convertible
Cambridge
RPC entitles the holder to receive a percentage of the gross revenue received by us from
the
Cambridge
project, which is defined as all cash proceeds payable to us as a result of the
Cambridge
project, less any amounts paid to the British Government or their designee(s); provided, however, that all
funds received by us to finance the project are excluded from gross revenue. The
Cambridge
project holders are entitled to 100% of the first $825,000 of gross revenue, 24.75% of gross revenue from $4 - 35 million, and 12.375%
of gross revenue above $35 million generated by the project.
Seattle
project
In a private placement that closed in September 2000, we sold units consisting of
Republic
Revenue Participation
Certificates and Common Stock. Each $50,000 unit entitled the holder to 1% of the gross revenue generated by the now named
Seattle
project (formerly referred to as the
Republic
project), and 100,000
shares of Common Stock. Gross revenue is defined as all cash proceeds payable to us as a result of the
Seattle
project, excluding funds received by us to finance the project.
The participating rights balance will be amortized under the units of revenue method once management can reasonably estimate potential revenue
for each of these projects. The RPCs for the
Cambridge
and
Seattle
projects do not have a termination date, therefore these liabilities will be carried on the books until revenue is recognized from these
projects or we permanently abandon either project.
Galt Resources, LLC
In February 2011, we entered into a project syndication deal with Galt Resources LLC (Galt) for which they invested $7,512,500
representing rights to future revenues of any one project Galt selected prior to December 31, 2011. If the project is
23
successful and generates sufficient proceeds, Galt will recoup their investment plus three times the investment. Galts investment return will be paid out of project proceeds. Galt will
receive 50% of project proceeds until this amount is recouped. Thereafter, they will share in additional net proceeds of the project at the rate of 1% for every million invested. Subsequent to the original syndication deal, we reached an agreement
permitting Galt to bifurcate their selection between two projects, the SS
Gairsoppa
and HMS
Victory
with the residual 1% on additional net proceeds assigned to the HMS
Victory
project only. The bifurcation resulted in $3,756,250
being allocated to each of the two projects. Therefore, Galt will receive 7.5125% of net proceeds from the HMS
Victory
project after they recoup their investment of $3,756,250 plus three times the investment. Galt has been paid in full for
their share of the
Gairsoppa
project investment. There are no future payments remaining due to Galt for the
Gairsoppa
project. Based on the timing of the proceeds earmarked for Galt, the relative corresponding amount of Galts
revenue participation right of $3,756,250 was amortized into revenue in 2012 based upon the percent of Galt-related proceeds from the sale of silver as a percentage of total proceeds that Galt earned under the revenue participation agreement ($15.0
million). There is no expiration date on the Galt deal for the HMS Victory project. If the archaeological excavation of the shipwreck is performed and insufficient proceeds are obtained, then the deferred income balance will be recognized as other
income. If the archaeological excavation of the shipwreck is performed and sufficient proceeds are obtained, then the deferred income balance will be recognized as revenue.
Oceanica Call Option
On March 11,
2015, we agreed to issue and sell up to $14.75 million in Promissory Notes (See NOTE H) to Minera del Norte, S.A. de C.V. (MINOSA) In connection with the loans, we granted MINOSA an option to purchase our 54% interest in Oceanica for
$40.0 million (the Oceanica Call Option). The guidance applied in this case is ASC 360.20, which provides that in situations when a party lends funds to a seller and is given an option to buy the property at a certain date in the future,
the loan shall be recorded at its present value using market interest rates and any excess of the proceeds over that amount credited to an option deposit account. If the option is exercised, the deposit shall be included as part of the sales
proceeds; if not exercised, it shall be credited to income in the period in which the option lapses. The option deposit account in this case is deferred income. This Oceanica Call Option expired on March 11, 2016 and has been charged to other
income.
24