During the second quarter of 2017, we sold a marine vessel to a related party, Monaco Financial, LLC, for $650,000. The
consideration for this vessel was applied against our loan balance to Monaco in the amount of $650,000, see NOTE H. During this same period, Epsilon
Acquisitions LLC converted $3,050,000 plus accrued interest of $302,274 into 670,455 of our common shares, see NOTE H.
During the three
months ended March 31, 2018, we converted $1.0 million of amounts advanced related to the contractual obligation settlement to a loan with Monaco Financial, LLC, see NOTE H
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, 2017.
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 March 31, 2018 and the results of operations and cash flows for the interim periods presented.
Operating results for the three-month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the full year.
Recent accounting pronouncements
In May
2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update
2014-09, Revenue
from Contracts with Customers, or ASU
2014-09,
which establishes a comprehensive revenue recognition standard under GAAP for almost all industries. The new standard applies for annual periods beginning after December 15, 2017, including interim periods therein. Based on managements
review of this new standard along with the substance of our transactions, management believes this standard will not have a material impact on our financial statements.
In February 2016, the FASB issued Accounting Standards Update
2016-02, Leases,
which establishes
a comprehensive lease standard under GAAP for virtually all industries. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is
effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is
also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance
for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. The new standard will apply
for annual periods beginning after December 15, 2018, including interim periods therein, and requires modified retrospective application. Early adoption is permitted. Based on managements current understanding of this new standard along
with the underlying substance of our operations, management believes it will not have a material impact on our financial statements.
In
May 2017, the FASB issued ASU
2017-09,
Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting.
The amendments in this Update provide guidance about which changes
to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are now effective for all entities for annual periods, and interim periods within those annual
periods, beginning after December 15, 2017. Based on managements understanding of this new standard along with the underlying substance of our operations, this standard did not have a material impact on our financial statements.
In July 2017, the FASB issued Accounting Standards Update (ASU)
No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).
The amendments in Part I of this Update change
the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entitys own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a
freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified
financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction
of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20,
DebtDebt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of
Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after
6
December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If
an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Based on managements current understanding of this new standard along
with the underlying substance of our operations, management believes it will not have a material impact on our financial statements.
Other recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not or are not believed by management to have a material
effect, if any, on the Companys financial statements.
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 are responsible for their integrity and objectivity and have 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, both domestic and international. 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 of a subsidiary, which if exercised, could increase the direct or indirect interest of the Company in the
non-wholly
owned subsidiaries.
Use of Estimates
Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with U.S. GAAP. 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 as well as ASU
2019-09,
Revenue from Contracts: Revenue
Recognition, marine services 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 marine services 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 Operations.
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. We have $10,010 of restricted cash for collateral related to a corporate credit card program.
Long-Lived Assets
Our policy is to
recognize impairment losses relating to long-lived assets in accordance with the Accounting Standards Codification (ASC) topic for Property, Plant and Equipment. Decisions 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.
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. Items that may require major overhauls (such as engines or
7
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 was shorter.
Certain major repair items required by industry standards to ensure a vessels seaworthiness also qualified 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 were accounted for under the direct-expensing method and are expensed when incurred.
The smaller vessel we
received as consideration when we sold our
Odyssey Explorer
was sold in May 2017 to a creditor whose related party credited us $650,000 towards indebtedness owed by us as consideration for their acquisition of this vessel, see NOTE H. The
amount capitalized for this asset was $416,329.
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 for all periods presented.
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 issued upon conversion. 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. Currently, we do not have any outstanding 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.
At
March 31, 2018 and 2017, the weighted average common shares outstanding
year-to-date
were 8,466,909 and 7,718,366, 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
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Average market price during the period
|
|
$
|
4.48
|
|
|
$
|
4.22
|
|
|
|
|
In the money potential common shares from options excluded
|
|
|
8,749
|
|
|
|
7,903
|
|
In the money potential common shares from warrants excluded
|
|
|
25,713
|
|
|
|
19,905
|
|
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
|
|
Per share
exercise price
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Out of the money options excluded:
|
|
|
|
|
|
$12.48
|
|
|
137,666
|
|
|
|
137,666
|
|
$12.84
|
|
|
4,167
|
|
|
|
4,167
|
|
$26.40
|
|
|
75,158
|
|
|
|
75,158
|
|
$34.68
|
|
|
|
|
|
|
73,765
|
|
$39.00
|
|
|
8,333
|
|
|
|
8,333
|
|
$41.16
|
|
|
|
|
|
|
833
|
|
$42.00
|
|
|
|
|
|
|
8,333
|
|
$46.80
|
|
|
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
Total excluded
|
|
|
225,324
|
|
|
|
309,922
|
|
|
|
|
|
|
|
|
|
|
8
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
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Potential common shares from unvested restricted stock awards excluded from EPS
|
|
|
132,826
|
|
|
|
238,921
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net
income per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Net income (loss)
|
|
$
|
(1,744,762
|
)
|
|
$
|
(2,199,263
|
)
|
|
|
|
|
|
|
|
|
|
Numerator, basic and diluted net income (loss) available to stockholders
|
|
$
|
(1,744,762
|
)
|
|
$
|
(2,199,263
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares used in computation basic:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
8,466,909
|
|
|
|
7,718,366
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
8,466,909
|
|
|
|
7,718,366
|
|
|
|
|
|
|
|
|
|
|
Additional shares used in computation diluted:
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
8,466,909
|
|
|
|
7,718,366
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per share
|
|
|
8,466,909
|
|
|
|
7,718,366
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic
|
|
$
|
(0.21
|
)
|
|
$
|
(0.28
|
)
|
Net (loss) per share diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.28
|
)
|
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
9
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. 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 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 is 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. We have no redeemable preferred stock outstanding for the periods
presented.
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 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Trade
|
|
$
|
|
|
|
$
|
7,376
|
|
Related party
|
|
|
480,955
|
|
|
|
183,453
|
|
Other
|
|
|
61,420
|
|
|
|
41,551
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
542,375
|
|
|
$
|
232,380
|
|
|
|
|
|
|
|
|
|
|
10
Monaco and related affiliates owe us $480,955 and $183,453 for the periods ended March 31,
2018 and December 31, 2017, respectively, for support services and marine services rendered on their behalf. See NOTE D for further information regarding Monaco.
NOTE D RELATED PARTY TRANSACTIONS
In December 2015, we entered into an asset acquisition agreement with Monaco Financial, LLC (Monaco) (See NOTE R in our Form
10-K
filed with the Securities and Exchange Commission for the period ended December 31, 2017 for further information). We had accounts receivable with Monaco and related affiliates at March 31, 2018 of
$480,955 and at December 31, 2017 of $183,453. We had general operating payables with Monaco at March 31, 2018 of $644,987 and at December 31 2017 of $508,802. See NOTE H 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. During the first part of 2018, we performed marine shipwreck
search and recovery services for this related party and recognized revenue of $0.5 million. We also lease our corporate office space on an annually renewable basis from Monaco at $20,080 per month.
NOTE E INVESTMENTS IN UNCONSOLIDATED ENTITIES
Neptune Minerals, Inc. (NMI)
Our current investment 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 March 31, 2018, our estimated share of unrecognized NMI equity-method losses is approximately $21.3 million. We have not recognized the accumulated $21.3 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 $21.3 million to any incremental NMI investment that may be recognized on our balance sheet in excess of zero since the losses occurred when they were an equity-method investment. The
aforementioned loss carryforward is based on NMIs last unaudited financial statements as of December 31, 2016. We do not believe losses NMI may have incurred in the three months ended March 31, 2018 and year ended December 31,
2017 to be material. We do not have any financial obligations to NMI, and we are not committed to provide financial support to NMI.
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. Accordingly, we are not the primary beneficiary of NMI. As of March 31, 2018, 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. During March 2017, Antipodes Gold Limited completed the acquisition of CRP. The surviving entity is now named Chatham Rock Phosphate
Limited (CRPL). In exchange for our 9,320,348 shares of CRP, we received 142,100 shares of CPRL, which represents equity ownership of approximately 1% of the surviving entity. Since CRP was 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. We continue to carry the value of our investment in
CPRL at zero in our consolidated financial statements.
NOTE F - INCOME TAXES
During the three-month period ended March 31, 2018, we generated a federal net operating loss (NOL) carryforward of
$1.1 million and generated $1.8 million of foreign NOL carryforwards. As of March 31, 2018, we had consolidated income tax NOL carryforwards for federal tax purposes of approximately $162.7 million and net operating loss carryforwards
for foreign income tax purposes of approximately $33.5 million. The federal NOL carryforwards from 2005 forward will expire in various years beginning in 2025 and ending through the year 2037.
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 March 31, 2018. As required by the
Accounting for Income Taxes
topic in the ASC, we
11
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 March 31, 2018. There was no U.S. income tax expense for the three months ended March 31, 2018 due to the generation of net operating losses.
The increase in the valuation allowance as of March 31, 2018 is due to the generation of approximately $1.7 million in net operating loss
year-to-date.
The change in the valuation allowance is as
follows:
|
|
|
|
|
March 31, 2018
|
|
$
|
49,687,918
|
|
December 31, 2017
|
|
|
49,235,133
|
|
|
|
|
|
|
Change in valuation allowance
|
|
$
|
452,785
|
|
|
|
|
|
|
Our estimated annual effective tax rate as of March 31, 2018 is 25.951% while our March 31, 2018 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 2014.
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 issuance of the Environmental Impact Assessment (EIA) for our Mexican subsidiary. This grant of new shares was also approved by
the Administrators of Oceanica Resources, S.R.L. We also owe consultants contingent success fees of up to $425,000 upon the approval and issuance of the EIA. The EIA has not been issued as of the date of this report.
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 following twelve months is dependent upon our success in developing and monetizing our interests in mineral
exploration entities, generating income from exploration charters, collecting on amounts owed to us, and completing the Minera del Norte S.A. de c.v. (MINOSA) and Penelope Mining LLC (Penelope) equity financing transaction
approved by our stockholders on June 9, 2015. Our 2018 business plan requires us to generate new cash inflows to effectively allow us to perform our planned projects. We plan to generate new cash inflows through 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 which may require us to
curtail our desired business plan until we generate additional cash. Even though we have been able to consistently raise cash in the past through debt agreements, there are no assurances we may be able to do so in the future. On March 11, 2015,
we entered into a Stock Purchase Agreement with MINOSA and Penelope, an affiliate of MINOSA, pursuant to which (a) MINOSA agreed to extend debt financing to Odyssey of up to $14.75 million, and (b) Penelope agreed to invest up to
$101 million over three years in convertible preferred stock of Odyssey. The equity financing is subject to the satisfaction of certain conditions, including the approval of our stockholders, which occurred on June 9, 2015, and MINOSA and
Penelope are currently under no obligation to make the preferred share equity investments. (See Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancings.) See NOTE H for further detail on MINOSA
related debt. Although we executed the Stock Purchase Agreement, 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 off the coast of Mexico. We pledged the majority of our remaining assets to MINOSA, and its affiliates, and to Monaco
Financial LLC, leaving us with few opportunities to raise additional funds from our balance sheet. If cash inflow is not sufficient to meet our desired projected business plan requirements, we will be required to follow a contingency business plan
which is based on curtailed expenses and fewer cash requirements. Our consolidated
non-restricted
cash balance at March 31, 2018 is $1.4 million which is insufficient to support operations for the
following 12 months. We have a working capital deficit at March 31, 2018 of $33.9 million, most of which is convertible into equity. Therefore, the factors
12
noted above raise doubt about our ability to continue as a going concern. These 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:
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|
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|
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|
|
|
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Note 1 Monaco 2014
|
|
$
|
2,800,000
|
|
|
$
|
2,800,000
|
|
Note 2 Monaco 2016
|
|
|
1,175,000
|
|
|
|
1,138,441
|
|
Note 3 MINOSA 1
|
|
|
14,750,001
|
|
|
|
14,750,001
|
|
Note 4 Epsilon
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Note 5 SMOM
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
Note 6 MINOSA 2
|
|
|
5,050,000
|
|
|
|
4,675,000
|
|
Note 7 Monaco 2018
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,775,001
|
|
|
$
|
27,363,442
|
|
|
|
|
|
|
|
|
|
|
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 loan was issued in three tranches: (i) $5.0 million (the First Tranche) was advanced upon execution of the Loan Agreement; (ii) $2.5 million (the
Second Tranche) was advanced on October 1, 2014; and (iii) $2.5 million (the Third Tranche) was advanced on December 1, 2014. The Notes bear interest at a rate equal to 11% per annum. The Notes also contain an
option whereby Monaco can 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 share purchase option was not clearly and closely related to the host debt agreement and required bifurcation.
On December 10, 2015, these promissory notes were amended as part of the asset acquisition agreement with Monaco (See NOTE R in our Form
10-K
filed with the Securities and Exchange Commission for the period ended December 31, 2017 for further information). 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. During March 2016, the maturity date was further amended to April 1, 2018 and the purchase price of the Share Purchase Option was
re-priced
to $1.00 per share. This note has matured, but Monaco has not demanded payment since we are in negotiations with Monaco to set a new maturity date. See Loan Modification (March 2016)
below. For the three-months ended March 31, 2018, accrued interest in the amount of $75,945 was recorded.
The outstanding
interest-bearing balance of these Notes is $2.8 million at March 31, 2018.
Note 2 Monaco 2016
In March 2016, Monaco agreed to lend us an additional $1,825,000. 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 15, 2018. This note has matured, but Monaco has not demanded payment since we are in negotiations with Monaco to set a new
maturity date. The current outstanding balance as of March 31, 2018 is $1,175,000. 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 priority 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 in our possession or control used for offshore exploration, including an ROV system,
deep-tow
search systems, winches,
multi-beam sonar, and other equipment. The carrying value of this equipment is $0.9 million. We unconditionally and irrevocably guaranteed all obligations of ours and our 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.
During the three-months ended June 30, 2017, we sold a marine vessel to a related party of Monaco for $650,000. The consideration for this vessel was applied against our loan balance to Monaco in the amount of $650,000.
13
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. Since the option is out of the money, it has no material fair value as of the inception date or currently. The debt agreement did not contain any additional 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. This BCF has been fully amortized as of March 31, 2018. For the three-months ended March 31, 2018 and
2017, interest expense related to the discount in the amount of $36,599 and $56,222, respectively, was recorded. For the three-months ended March 31, 2018 and 2017, accrued interest in the amount of $28,972 and $45,000, respectively, was
recorded.
Loan modification (December 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 advanced 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 from the SS
Central America
shipwreck project (SSCA) or (ii) if the proceeds received 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 advanced 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 advanced 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.
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
combined total indebtedness of Monacos Note 1 and Note 2, Monaco can convert this debt into 3,174,603 shares of Oceanica at a fixed conversion price of $1.00 per share, or $3,174,603. Any remaining debt in excess of $3,174,603 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 $3.15 per share. The modification was analyzed under ASC 480
Distinguishing Liabilities from Equity
(ASC 480) to determine if extinguishment accounting was applicable. Under ASC
470-50-40-10
a modification or an exchange that adds or eliminates a substantive conversion option as of the conversion date is
always considered substantial and requires extinguishment accounting. Since this modification added a substantive conversion option, extinguishment accounting is applicable. In accordance with the extinguishment accounting guidance (a) the
share purchase option was first marked to its pre-modification fair value, (b) the new debt was recorded at fair value and (c) the old debt and share purchased option was removed. The difference between the fair value of the new debt and
the sum of the
pre-modification
carrying amount of the old debt and the share purchase options fair value represented a gain on extinguishment. ASC
470-50-40-2
indicates that debt restructuring with a related party may be in essence a capital transaction and as a result the gain upon extinguishment was recognized
in additional paid in capital. We performed the following steps:
Step 1
: After the share purchase option has been marked to
its
pre-modification
fair value, the fair value of the new debt is determined. The fair value of the new debt is as follows:
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Monaco loans
|
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Loan one
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Forward cash flows:
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|
|
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Principal
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$
|
2,800,000
|
|
Interest
|
|
|
559,463
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|
|
|
|
|
|
Total forward cash flows
|
|
$
|
3,359,463
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|
|
|
|
|
|
Present value of forward cash flows
|
|
$
|
2,554,371
|
|
Fair value of equity conversion option
|
|
|
1,063,487
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|
|
|
|
|
|
Fair value of debt
|
|
$
|
3,617,858
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|
|
|
|
|
14
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:
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|
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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
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Market volatility:
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|
|
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:
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|
|
|
|
Face value
|
|
$
|
2,800,000
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|
Fair value
|
|
|
3,617,858
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|
|
|
|
|
|
Difference (premium)*
|
|
$
|
817,858
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|
|
|
|
|
|
*
|
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 $817,858 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:
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|
|
|
|
|
|
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)
|
|
|
(817,858
|
)
|
|
|
|
|
|
Difference to APIC*
|
|
$
|
1,211,811
|
|
|
|
|
|
|
*
|
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.
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Note 3 MINOSA
On March 11, 2015, in connection with a Stock Purchase Agreement, 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. This debt is classified as short-term debt. 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. On 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
15
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 was $14.75 million at March 31, 2018. The maturity date of this note has been amended and matured on March 18, 2017. Per Note 6 MINOSA 2 below,
the Minosa Purchase Agreement amended the due date of this note to a due date which may be no earlier than December 31, 2017, that is at least 60 days subsequent to written notice that Minosa intends to demand payment. See Note 6 MINOSA
2 for further qualifications. During December 2017, MINOSA transferred this debt to its parent company. For the three-months ended March 31, 2018 and 2017, accrued interest in the amount of $290,959 and $290,959, respectively, was recorded.
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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
1,723,492
|
|
|
$
|
14,366,853
|
|
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
|
|
|
$
|
1,750,0001
|
|
|
$
|
14,750,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The call option amount of $383,148 represented a debt discount. This discount has been fully accreted up to
face value using the effective interest method.
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
was 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. 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. On January 25, 2017, Epsilon provided notice to us that it will convert the initial $3.0 million plus accrued interest per the Restated
Note Purchase Agreement at $5.00 per share in accordance with the terms of the agreement. The conversion and issuance of new shares is effective April 10, 2017 and includes accrued interest of $302,274 for a total 670,455 shares. Upon the
occurrence and during the continuance of an event of default, the conversion price was to 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
16
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 was amortized over the life of the loan.
Loan modification (October 1, 2016)
On October 1, 2016 Odyssey Marine Enterprises, Ltd. (OME), entered into an Amended and Restated Note Purchase Agreement (the
Restated Note Purchase Agreement) with Epsilon Acquisitions LLC (Epsilon). In connection with the existing $3.0 million loan agreement, Epsilon agreed to lend an additional $3.0 million of secured convertible
promissory notes. The convertible promissory notes bear an interest rate of 10.0% per annum and are due and payable on March 18, 2017. Epsilon has the right to convert all amounts outstanding under the Restated Note into shares of our common
stock upon 75 days notice to OME or upon a merger, consolidation, third party tender offer, or similar transaction relating to us at the applicable conversion price, which is (a) $5.00 per share with respect to the $3.0 million
already advanced under the Restated Note and (b) with respect to additional advances under the Restated Note, the
five-day
volume-weighted average price of our common stock for the five trading day period
ending on the trading day immediately prior to the date on which OME submits a borrowing notice for such advance. Notwithstanding anything herein to the contrary, we shall not issue any of our common stock upon conversion of any outstanding tranche
(other than the first $3.0 million already advanced) under this Restated Note in excess of 1,388,769 shares of common stock. The additional tranches were issued as follows: (a) $1,000,000 (Tranche 3) was issued on
October 16, 2016 with a conversion price of $3.52 per share; (b) $1,000,000 (Tranche 4) was issued on November 15, 2016 with a conversion price of $4.19 per share; and (c) $1,000,000 (Tranche 5) was issued on
December 15, 2016 with a conversion price of $4.13 per share. During 2017, Epsilon assigned Tranche 4 and 5 totaling $2,000,000 of this debt to MINOSA under the same terms as the original debt. See Note MINOSA 2 below for further detail.
As an inducement for the issuance of the additional $3.0 million of promissory notes, we also delivered to Epsilon a common stock
purchase warrant (the Warrant) pursuant to which Epsilon has the right to purchase up to 120,000 shares of our common stock at an exercise price of $3.52 per share, which exercise price represents the
five-day
volume-weighted average price of our common stock for the five trading day period ending on the trading day immediately prior to the day on which the Warrant was issued. Epsilon may exercise the
Warrant in whole or in part at any time during the period ending October 1, 2021. The Warrant includes a cashless exercise feature and provides that, if Epsilon is in default of its obligations to fund any advance pursuant to and in accordance
with the Restated Note Purchase Agreement, then, thereafter, the maximum aggregate number of shares of common stock that may be purchased under the Warrant shall be the number determined by multiplying 120,000 by a fraction, (a) the numerator
of which is the aggregate principal amount of advances that have been extended to the OME by Epsilon pursuant to the Restated Note Purchase Agreement on or after the date of the Warrant and prior to the date of such failure and (b) the
denominator of which is $3.0 million.
Accounting considerations for additional tranches
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. Additionally,
the warrant agreement did not contain any terms or features that would preclude equity classification. We were required to consider whether the hybrid contract embodied a beneficial conversion feature (BCF). The allocations of the three
additional tranches were as follows.
17
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|
|
|
|
|
|
Tranche 3
|
|
|
Tranche 4
|
|
|
Tranche 5
|
|
Promissory Note
|
|
$
|
981,796
|
|
|
$
|
939,935
|
|
|
$
|
1,000,000
|
|
Beneficial Conversion Feature (BCF)*
|
|
|
18,204
|
|
|
|
60,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A beneficial conversion feature arises when the calculation of the effective conversion price is less than the
Companys stock price on the date of issuance. Tranche 5 did not result in a BCF because the effective conversion price was greater than the companys stock price on the date of issuance.
The warrants fair values were calculated using Black-Scholes Merton (BSM). The aggregate fair value of the warrants totaled
$303,712. Since the warrants were issued as an inducement to Epsilon to issue additional debt, we recorded an inducement expense of $303,712. For the three-months ended March 31, 2018 and 2017, accrued interest in the amount of $24,657 and
$149,775, respectively, was recorded.
Term Extension (March 21, 2017)
On March 21, 2017 we entered into an amendment to the Restated Note Purchase Agreement with Epsilon. In connection with the existing
$6.0 million loan agreement, the adjusted principal balance is due and payable in full upon the earlier of (i) written demand by Epsilon or (ii) such time as Odyssey or the guarantor pays any other indebtedness for borrowed money
prior to its stated maturity date. As such the Company amortized the notes up to their face value of $6,050,000 and they are classified as short-term. However, since Epsilon converted the first $3.0 million into 670,455 of our common shares and
assigned $2.0 million to MINOSA, the current principal indebtedness at March 31, 2018 is $1.0 million.
Note 5 SMOM
On May 3, 2017, we entered into a Loan and Security Agreement (Loan Agreement) with SMOM. Pursuant to the Loan Agreement, SMOM
agreed to loan us up to $3.0 million as evidenced by a convertible promissory note. As a commitment fee, we assigned the remaining 50% of our Neptune Minerals, LLC receivable to SMOM. This receivable had zero carrying value on our balance
sheet. The loan balance at March 31, 2018 is $3.0 million. The indebtedness bears interest at a rate of 10% per annum and matures on the second anniversary of this Loan Agreement which is May 3, 2019. The holder has the option to
convert any unpaid principal and interest into up to 50% of the equity interest held by Odyssey in Aldama Mining Company, S.de R.L. de C.V. which is a wholly owned subsidiary of ours. The conversion value of $1.0 million equates to 10% of the
equity interest in Aldama. If the holder elects to acquire the entire 50% of the equity interest, but the amount of debt and interest accumulated to be converted is insufficient to acquire the entire 50% equity interest, the Holder has to pay the
deficiency in cash. As additional consideration for the loan, the holder has the right to purchase from Odyssey all or a portion of the equity collateral (up to the 50% of the equity interest of Aldama) for the option consideration
($1.0 million for each 10% of equity interests) during the period that is the later of (i) one year after the maturity date and (ii) one year after the loan is repaid in full, the expiration date. The lender may also choose to extend
the expiration date annually by paying $500,000 for each year extended. For the three-months ended March 31, 2018 and 2017, accrued interest in the amount of $73,972 and $8,836, respectively, was recorded.
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 not result in a BCF
because the effective conversion price was equal to the Companys stock price on the date of issuance.
Note 6 MINOSA 2
On August 10, 2017, we entered into a Note Purchase Agreement (the Minosa Purchase Agreement) with MINOSA. Pursuant to the
Minosa Purchase Agreement, MINOSA whereas MINOSA will loan Enterprises up to $3.0 million. During 2017, we borrowed $2.7 million against this facility and Epsilon assigned $2.0 million of its debt to MINOSA. At March 31, 2018,
the outstanding principal balance, including the Epsilon assignment, is $5.05 million. The indebtedness is evidenced by a secured convertible promissory note (the Minosa Note) and bears interest at a rate equal to 10.0% per
annum. Unless otherwise converted as described below, the entire outstanding principal balance under this Minosa Note and all accrued interest and fees are due and payable upon written demand by MINOSA; provided, that MINOSA agreed not make a demand
for payment prior to
18
the earlier of (a) an event of default (as defined in the Minosa Note) or (b) a date, which may be no earlier than December 31, 2017, that is at least 60 days subsequent to written
notice that MINOSA intends to demand payment. MINOSA has not provided any notice they intend to issue a payment demand notice. We unconditionally and irrevocably guaranteed all of the obligations under the Minosa Purchase Agreement and the Minosa
Note. MINOSA has the right to convert all amounts outstanding under the Minosa Note 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 $4.41 per share. During December 2017, MINOSA transferred this debt to its parent company.
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 $62,925 was recorded. As of December 31,2017, all of the BCF has
been accreted to the income statement. The BCF represented a debt discount that was amortized over the life of the loan. For the three-months ended March 31, 2018, accrued interest in the amount of $138,904 was recorded.
As previously reported, Epsilon loaned us an aggregate of $6.0 million pursuant to an amended and restated convertible promissory Minosa
Note, dated as of March 18, 2016, as further amended and restated on October 1, 2016 (the Epsilon Note). Since then, Epsilon has assigned $2.0 million of the indebtedness under the Epsilon Note to MINOSA. Along with
Epsilon, we entered into a second amended and restated convertible promissory note (the Second AR Epsilon Note), which further amends and restates the Epsilon Note. The stated principal amount of the Second AR Epsilon Note is
$1.0 million (which reflects the outstanding principal balance remaining after giving effect to Epsilons (x) previous assignment of $2.0 million of the indebtedness under the Epsilon Note to MINOSA and (y) conversion of
$3.0 million of the indebtedness under the Epsilon Note into shares of our common stock). The Second AR Epsilon Note further provides that the outstanding principal balance under the Second AR Epsilon Note and all accrued interest and fees are
due and payable upon written demand by Epsilon; provided, that Epsilon agreed not make a demand for payment prior to the earlier of (a) an event of default (as defined in the Second AR Epsilon Note) or (b) a date, which may be no earlier
than December 31, 2017, that is at least 60 days subsequent to written notice that MINOSA intends to demand payment.
Upon the
closing of the Minosa Purchase Agreement, along with MINOSA, and Penelope Mining LLC, an affiliate of Minosa (Penelope), executed and delivered a Second Amended and Restated Waiver and Consent and Amendment No. 5 to Promissory Note
and Amendment No. 2 to Stock Purchase Agreement (the Second AR Waiver). Pursuant to the Second AR Waiver, Minosa and Penelope consented to the transactions contemplated by the Minosa Purchase Agreement and waived any
breach of any representation or warranty and violation of any covenant in the Stock Purchase Agreement, dated as of March 11, 2015, as amended April 10, 2015 (the SPA), by and among us, Minosa, and Penelope, arising out of the
Companys execution and delivery of the Minosa Purchase Agreement and the consummation of the transactions contemplated thereby. Pursuant to the Second AR Waiver, we also waived, and agreed not to exercise our right to terminate the SPA
pursuant to Section 8.1(c)(ii) thereto, both (a) until after the earlier of (i) July 1, 2018, (ii) the date that MINOSA fails, refuses, or declines to fund (or otherwise does not fund) any subsequent loan under the Minosa
Purchase Agreement and (iii) demand is made for repayment of all or any part of the indebtedness outstanding under the Minosa Note, the Second AR Epsilon Note, or the Promissory Note, dated as of March 11, 2015, as amended (the SPA
Note), in the principal amount of $14.75 million that was issued by us to MINOSA under the SPA, and (b) unless on or prior to such termination, the Notes are paid in full.
The Second AR Waiver (x) further provides that following any conversion of the indebtedness evidenced by the Minosa Note, Penelope
may elect to reduce its commitment to purchase our preferred stock under the SPA by the amount of indebtedness converted by MINOSA and (y) amends the SPA Note to provide that the outstanding principal balance under the SPA Note and all accrued
interest and fees are due and payable upon written demand by MINOSA; provided, that Minosa agreed not make a demand for payment prior to the earlier of (a) an event of default (as defined in the Minosa Note) or (b) a date, which may be no
earlier than December 31, 2017, that is at least 60 days subsequent to written notice that Minosa intends to demand payment.
The
obligations under the Minosa Note may be accelerated upon the occurrence of specified events of default including (a) our failure to pay any amount payable under the Minosa Note on the date due and payable; (b) our failure to perform or
observe any term, covenant, or agreement in the Minosa Note or the related documents, subject to a
five-day
cure period; (c) the occurrence and expiration of all applicable grace periods, if any, of
an event of default or material breach by us under any of the other loan documents; (d) the termination of the SPA; (e) commencement of certain specified dissolution, liquidation, insolvency, bankruptcy, reorganization, or similar cases or
actions by or against us, in specified circumstances unless dismissed or stayed within 60 days; (f) the entry of a judgment or award against us in excess of $100,000; and (g) the occurrence of a change in control (as defined in the Minosa
Note).
Pursuant to second amended and restated pledge agreements (the Second AR Pledge Agreements) entered into by us in
favor of MINOSA, we pledged and granted security interests to MINOSA in (a) the 54 million cuotas (a unit of ownership under Panamanian law) of Oceanica held by us, (b) all notes and other receivables from Oceanica and its subsidiary
owed to us, and (c) all of the outstanding equity in our wholly owned subsidiary, Odyssey Marine Enterprises, Ltd.
19
In connection with the execution and delivery of the Minosa Purchase Agreement, Odyssey and
MINOSA entered into a second amended and restated registration rights agreement (the Second AR Registration Rights Agreement) pursuant to which Odyssey agreed to register the offer and sale of the shares (the Conversion
Shares) of our common stock issuable upon the conversion of the indebtedness evidenced by the Minosa Note. Subject to specified limitations set forth in the Second AR Registration Rights Agreement, including that we are eligible to use Form
S-3,
the holder of the Minosa Note can require us to register the offer and sale of the Conversion Shares if the aggregate offering price thereof (before any underwriting discounts and commissions) is not less than
$3.0 million. In addition, we agreed to file a registration statement relating to the offer and sale of the Conversion Shares on a continuous basis promptly (but in no event later than 60 days after) after the conversion of the Minosa Note into
the Conversion Shares and to thereafter use its reasonable best efforts to have such registration statement declared effective by the Securities and Exchange Commission.
Note 7 Monaco 2018
During the
period ended March 31, 2018, Monaco advanced us $1.0 million that was applied to a loan agreement that was executed on April 20, 2018. The indebtedness bears interest at 10.0% percent per year. All principal and any unpaid interest is
to be payable on the first anniversary of this agreement, April 20, 2019. This debt is secured by cash proceeds, if any, from our future shipwreck projects we have contracted with Magellan. As additional consideration, their share purchase
option expiration date, as discussed in Note 1 Monaco 2014 and Note 2 Monaco 2016 above, has been extended from 30 days to seven months after the note becomes paid in full.
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 have 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 remains 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.
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):
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|
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|
|
|
|
|
|
|
|
|
|
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.
20
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 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 subject to 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.
21
Warrants
In conjunction with the Restated Note Purchase Agreement related to Note 4 Epsilon in NOTE H, we issued warrants tied to each of the
three tranches of debt issued. A total of 120,000 warrants were granted. These warrants have an expiration date of October 1, 2021. All of these 120,000 warrants have an exercise price of $3.52. Each single warrant is exercisable to purchase
one share of our common stock.
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 was 450,000. During our June 2016 stockholders meeting, the stockholders approved the addition of 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-qualified
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 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 -month periods ended
March 31, 2018 and 2017 as $103,904 and $208,496, respectively.
We did not grant employee stock options in the three-month periods
ended March 31, 2018 and 2017. When granted, 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.
NOTE J CONCENTRATION OF CREDIT RISK
We maintain the majority of our cash at one financial institution. At March 31, 2018, our uninsured cash balance was approximately
$1.1 million.
We do not currently have any debt obligations with variable interest rates.
NOTE K DEPOSIT RELATED TO SALE OF MARINE ASSETS
In the first quarter of 2018, we received a deposit of $1.0 million that is consideration to be applied to a future sale of marine assets
transaction is being structured with Magellan. These assets have a gross carrying value of $4.9 million and a net book value of $0.1 million at March 31, 2018. Total consideration for this sale is to be $1.6 million. The
additional $0.6 million is contingent consideration which is trade debt and interest assumed by Magellan, see NOTE M. On behalf of Magellan, we are to guarantee this debt as part of this transaction.
22
NOTE L REVENUE PARTICIPATION RIGHTS
The Companys participating revenue rights consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Cambridge
project
|
|
$
|
825,000
|
|
|
$
|
825,000
|
|
Seattle
project
|
|
|
62,500
|
|
|
|
62,500
|
|
Galt Resources, LLC (HMS Victory project)
|
|
|
3,756,250
|
|
|
|
3,756,250
|
|
|
|
|
|
|
|
|
|
|
Total revenue participation rights
|
|
$
|
4,643,750
|
|
|
$
|
4,643,750
|
|
|
|
|
|
|
|
|
|
|
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 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.
NOTE M OTHER DEBT
During August 2016, we entered into an agreement with a vendor allowing the vendor to purchase certain marine assets from us. Resulting from
this transaction, we are carrying a $553,072 trade payable in accounts payable for the current period that has terms attached. This balance is the final amount owed to this vendor from prior dealings. This trade payable bears a simple annual
interest rate of 12%. As collateral, they have been granted a primary lien on certain of our equipment. The carrying value of this equipment is zero. If this equipment generates revenue for us, the greater of 15% of gross revenue or 50% of net
proceeds received will be applied to the outstanding balance of this debt. There are no covenants. This agreement matures in August of 2018.
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