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 extended to April 1, 2018 and the exercise price of the Share
Purchase Option was
re-priced
to $1.00 per share. This note has matured, but Monaco has not demanded payment because we are in negotiations with Monaco to set a new maturity date. As of the maturity date, the
interest rate was adjusted to the default rate of 18% per annum. See Loan Modification (March 2016) below. For the three-months ended June 30, 2018, interest expense in the amount of $142,885 was recorded. The outstanding
interest-bearing balance of these Notes is $2.8 million at June 30, 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 was payable on April 15, 2018. This note has matured, but Monaco has not demanded payment because we are in negotiations with Monaco to set a new
maturity date. As of the maturity date, the interest rate was adjusted to the default rate of 18% per annum. The current outstanding balance as of June 30, 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 net book value of this equipment is
$0.3 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.
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. Because 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 June 30, 2018 and 2017, interest expense related to the discount in the amount of $0 and $117,716, respectively, was recorded.
For the three-months ended June 30, 2018 and 2017, interest expense in the amount of $60,966 and $29,294, 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 were insufficient to pay off the loan balance by December 31, 2017, then Monaco could 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 related to the
Oceanica shares held by us was extended until December 31, 2017.
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