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, see NOTE B and 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. $30,000 remains in other receivables from the sale of a marine asset.
The accompanying notes are an integral part of these
financial statements.
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,
2016.
In the opinion of management, these financial statements reflect all adjustments, including normal recurring adjustments, necessary
for a fair presentation of the financial position as of June 30, 2017 and the results of operations and cash flows for the interim period presented. Operating results for the six-month period ended June 30, 2017 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 will apply for annual periods beginning after December 15, 2017, including interim
periods therein. Early adoption is prohibited. Based on managements review of this new standard along with the substance of our transactions, management is of the position 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.
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.
6
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: 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 $10,000 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. Major overhaul items (such as engines or generators) that
enhanced or extended the useful life of vessel related assets qualified 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 2016 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-
7
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 June 30, 2017 and 2016, the weighted average common shares outstanding year-to-date were 8,022,108 and 7,542,728, respectively. For
the periods in which net losses occurred, all potential common shares were excluded from diluted EPS because the effect of including such shares would be anti-dilutive.
The potential common shares in the following tables represent potential common shares calculated using the treasury stock method from
outstanding options, stock awards and warrants that were excluded from the calculation of diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Average market price during the period
|
|
$
|
3.58
|
|
|
$
|
3.08
|
|
|
$
|
3.90
|
|
|
$
|
3.35
|
|
In the money potential common shares from options excluded
|
|
|
5,315
|
|
|
|
4,089
|
|
|
|
6,706
|
|
|
|
4,717
|
|
In the money potential common shares from warrants excluded
|
|
|
2,010
|
|
|
|
|
|
|
|
11,691
|
|
|
|
|
|
Potential common shares from out of the money options and warrants were also excluded from the computation of
diluted EPS because calculation of the associated potential common shares has an anti-dilutive effect on EPS. The following table lists options and warrants that were excluded from diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six-Months Ended
|
|
|
|
Per share
exercise price
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Out of the money options excluded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.59
|
|
|
|
7,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12.48
|
|
|
|
137,666
|
|
|
|
137,666
|
|
|
|
137,666
|
|
|
|
137,666
|
|
|
|
$
|
12.84
|
|
|
|
4,167
|
|
|
|
4,167
|
|
|
|
4,167
|
|
|
|
4,167
|
|
|
|
$
|
26.40
|
|
|
|
75,158
|
|
|
|
75,794
|
|
|
|
75,158
|
|
|
|
75,794
|
|
|
|
$
|
32.76
|
|
|
|
|
|
|
|
53,707
|
|
|
|
|
|
|
|
53,707
|
|
|
|
$
|
34.68
|
|
|
|
73,765
|
|
|
|
74,265
|
|
|
|
73,765
|
|
|
|
74,265
|
|
|
|
$
|
39.00
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
$
|
41.16
|
|
|
|
833
|
|
|
|
833
|
|
|
|
833
|
|
|
|
833
|
|
|
|
$
|
42.00
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
8,333
|
|
|
|
$
|
46.80
|
|
|
|
1,667
|
|
|
|
1,667
|
|
|
|
1,667
|
|
|
|
1,667
|
|
Out-of-the-money warrants excluded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43.20
|
|
|
|
|
|
|
|
130,208
|
|
|
|
|
|
|
|
130,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluded
|
|
|
|
317,443
|
|
|
|
494,973
|
|
|
|
309,922
|
|
|
|
494,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average equivalent common shares relating to our unvested restricted stock awards that were
excluded from potential common shares in the earning per share calculation due to having an anti-dilutive effect are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Potential common shares from unvested restricted stock awards excluded from EPS
|
|
|
238,921
|
|
|
|
88,096
|
|
|
|
238,921
|
|
|
|
88,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
The following is a reconciliation of the numerators and denominators used in computing basic and
diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Net income (loss)
|
|
$
|
(1,916,885
|
)
|
|
$
|
(1,858,778
|
)
|
|
$
|
(4,116,148
|
)
|
|
$
|
(1,774,133
|
)
|
Numerator, basic and diluted net income (loss) available to stockholders
|
|
$
|
(1,916,885
|
)
|
|
$
|
(1,858,778
|
)
|
|
$
|
(4,116,148
|
)
|
|
$
|
(1,774,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
8,322,512
|
|
|
|
7,544,345
|
|
|
|
8,022,108
|
|
|
|
7,542,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
8,322,512
|
|
|
|
7,544,345
|
|
|
|
8,022,108
|
|
|
|
7,542,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
8,322,512
|
|
|
|
7,544,345
|
|
|
|
8,022,108
|
|
|
|
7,542,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per share
|
|
|
8,322,512
|
|
|
|
7,544,345
|
|
|
|
8,022,108
|
|
|
|
7,542,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic
|
|
$
|
(0.23
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.24
|
)
|
Net (loss) per share diluted
|
|
$
|
(0.23
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.24
|
)
|
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that
some portion or the entire deferred tax asset will not be realized.
Stock-based Compensation
Our stock-based compensation is recorded in accordance with the guidance in the ASC topic for
Stock-Based Compensation
(See NOTE I).
Fair Value of Financial Instruments
Financial instruments consist of cash, evidence of ownership in an entity, and contracts that both (i) impose on one entity a contractual
obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right
(a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and mortgage and loans payable. We carry cash and cash equivalents, accounts payable and accrued liabilities, and mortgage and loans payable at
the approximate fair market value, and, accordingly, these estimates are not necessarily indicative of the amounts that we could realize in a current market exchange. We carry derivative financial instruments at fair value as is required under
current accounting standards. Redeemable preferred stock has been carried at historical cost and accreted carrying values to estimated redemption values over the term of the financial instrument.
Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying
variables (e.g., interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative
financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. See NOTE K for additional information. We generally do not use derivative financial instruments to hedge
exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts with features that are either (i) not afforded equity classification, (ii) embody risks not clearly
and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815
Derivatives and Hedging
, these instruments are required to be carried as derivative liabilities, at fair value, in
our financial statements with changes in fair value reflected in our income.
Fair Value Hierarchy
The three levels of inputs that may be used to measure fair value are as follows:
Level 1.
Quoted prices in active markets for identical assets or liabilities.
9
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 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Trade
|
|
$
|
1,389
|
|
|
$
|
2,569,108
|
|
Related party
|
|
|
200,970
|
|
|
|
205,497
|
|
Other
|
|
|
83,019
|
|
|
|
44,930
|
|
Reserve allowance
|
|
|
|
|
|
|
(2,345,729
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
285,378
|
|
|
$
|
473,806
|
|
|
|
|
|
|
|
|
|
|
The trade receivable balance at December 31, 2016 consists primarily of a trade receivable from Neptune
Minerals, Inc., for which a reserve allowance for the full amount of $2,345,729 has been made for the reported period end. In February 2017, we entered into a debt agreement with SMOM Limited (SMOM) for a financing arrangement pursuant
to which we assigned this Neptune Minerals, Inc. receivable to SMOM as a commitment fee. Being fully reserved, this Neptune Minerals, Inc. receivable had a carrying value of zero. Monaco and related affiliates owe us $200,970 and $205,497 for the
periods ended June 30, 2017 and December 31, 2016, respectively, for support services and marine services rendered on their behalf. See NOTE H 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 S to the
consolidated financial statements included in our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2015 for further information. We had accounts receivable with Monaco and related affiliates at
June 30, 2017 and December 31, 2016 of $200,970 and $205,497, respectively. We had operating payables with Monaco at June 30, 2017 and December 31, 2016 of $259,213 and $267,824, respectively. 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. We have and expect
to perform and complete marine shipwreck search and recovery charter services for this related party from which we will recognize the appropriate revenue. We also lease our corporate office space on an annually renewable basis from Monaco at market
rate of $20,080 per month.
10
NOTE E INVESTMENTS IN UNCONSOLIDATED ENTITIES
Neptune Minerals, Inc. (NMI)
Our current investment position in NMI consists of 3,092,488 Class B Common non-voting shares and 2,612 Series A Preferred non-voting shares.
These preferred shares are convertible into an aggregate of 261,200 shares of Class B non-voting common stock. Our holdings now constitute an approximate 14% ownership in NMI. At December 31, 2016, 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 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 and are not required to consolidate NMI. As of June 30, 2017, 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 141,884 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 six-month period ended June 30, 2017, we generated a federal net operating loss (NOL) carryforward of $2.9 million and generated
$3.1 million of foreign NOL carryforwards. As of June 30, 2017, we had consolidated income tax NOL carryforwards for federal tax purposes of approximately $157.2 million and net operating loss carryforwards for foreign income tax purposes of
approximately $28.3 million. The federal NOL carryforwards from 2005 forward will expire in various years beginning in 2025 and ending through the year 2035.
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. We have recorded a net deferred tax asset of $0
at June 30, 2017. As required by the
Accounting for Income Taxes
topic in the ASC, we have concluded it is more likely than not that those assets would not be realizable without the recovery and rights of ownership or salvage rights of
high value shipwrecks or substantial profits from our mining operations and thus a valuation allowance has been recorded as of June 30, 2017. There was no U.S. income tax expense for the six months ended June 30, 2017 due to the generation
of net operating losses.
The increase in the valuation allowance as of June 30, 2017 is due to the generation of approximately $4.1 million in net
operating loss year-to-date.
The change in the valuation allowance is as follows:
|
|
|
|
|
June 30, 2017
|
|
$
|
70,515,931
|
|
December 31, 2016
|
|
|
69,481,041
|
|
|
|
|
|
|
Change in valuation allowance
|
|
$
|
1,034,890
|
|
|
|
|
|
|
11
Our estimated annual effective tax rate as of June 30, 2017 is 25.14% while our June 30, 2017 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 2013.
NOTE G COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
The Company may be subject to a variety of claims and suits that arise from time to time in the ordinary course of
business. We are currently not a party to any litigation.
Contingency
During March 2016, our Board of Directors approved the grant and issuance of 3.0 million new equity shares of Oceanica Resources, S.R.L.
to two attorneys for their future services. This equity is only issuable upon the Mexicans government approval of the Environmental Impact Assessment (EIA) for our Mexican subsidiary. This grant of new shares was also approved by
the Administrators of Oceanica Resources, S.R.L. We also owe a consultant a contingent success fee of $200,000 upon the approval of the EIA. The EIA has not been approved 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. On March 24, 2017, we received NASDAQ communication notifying us our market capitalization was below the required minimum of $35.0 million for 30 consecutive days. The notice provided 180 days,
or until September 20, 2017, to regain compliance. To regain compliance during this period, the market capitalization of our public common shares must be at least $35.0 million for ten consecutive business days. On August 3, 2017, we met
this compliance requirement. Our 2017 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. In May 2017, we entered into a loan agreement with SMOM for $3.0 million, of which all $3.0 million has been received, see NOTE H. 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 short-term, 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. Even though we executed the above noted
financing arrangements, Penelope must purchase the shares for us to be able to complete the equity component of the transaction. The Penelope equity transaction is heavily dependent on the outcome of our subsidiarys application approval
process for an environmental permit to commercially develop a mineralized phosphate deposit 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 June 30, 2017 was $1.5 million which is insufficient to support operations for the following 12 months. We have a working capital deficit at June 30, 2017 of
$26.8 million. Therefore, the factors 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.
12
NOTE H LOANS PAYABLE
The Companys consolidated debt consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Note 1 Monaco 2014
|
|
$
|
2,800,000
|
|
|
|
2,800,000
|
|
Note 2 Monaco 2016
|
|
|
1,059,439
|
|
|
|
1,535,501
|
|
Note 3 MINOSA
|
|
|
14,750,001
|
|
|
|
14,750,001
|
|
Note 4 Epsilon
|
|
|
3,000,000
|
|
|
|
5,981,806
|
|
Note 5 SMOM
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,609,440
|
|
|
$
|
25,067,308
|
|
|
|
|
|
|
|
|
|
|
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 issued on October 1, 2014; and (iii) $2.5 million (the Third Tranche) was issued 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. 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 amended to April 1, 2018 and the purchase price of the Share Purchase
Option was re-priced to $1.00 per share. See Loan Modification (March 2016) below.
The outstanding interest-bearing balance
of these Notes was $2.8 million at June 30, 2017 and December 31, 2016, respectively. The book carrying value of the Notes was $2.8 million, all of which is classified as long term. There was no amortization of debt discount recorded for
the six months ended June 30, 2017 or June 30, 2016.
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. The current outstanding balance 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 Odyssey and its subsidiaries to Monaco under this loan agreement. As further
consideration for the loan, Monaco was granted an option (the Option) to purchase the OMO Collateral. The Option is exercisable at any time before the earlier of (a) the date that is 30 days after the loan is paid in full or
(b) the maturity date of the ExO Note, for aggregate consideration of $9.3 million, $1.8 million of which would be paid at the closing of the exercise of the Option, with the balance paid in ten monthly installments of $750,000. During the
three-months ended, 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. 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. The BCF represents a debt discount which will be amortized over the life of the loan. For the three months ended June 30, 2017 and June 30, 2016, interest expense related to the discount in the amount of
$117,716 and $50,472, respectively, was recorded. For the three months ended June 30, 2017 and June 30, 2016, accrued interest in the amount of $29,294 and $45,500, respectively, was recorded.
13
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 issued on August 14, 2014), Monaco agreed to cease interest as of December 10, 2015 and reduce the loan balance by (i) the cash or other
value received 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 issued on October 1,
2014), Monaco agreed to reduce the principal amount by $2,200,000 leaving a new principal balance of $300,000 and extension of maturity to December 31, 2017. For the Third Tranche ($2,500,000 issued on December 1, 2014), Monaco agreed to
the extension of maturity to December 31, 2017.
On December 10, 2015, the Monaco call option on $10 million of Oceanica shares
held by Odyssey was maintained for the full amount of the original loan amount and was extended until December 31, 2017.
The
Acquisition Agreement was accounted for as a troubled debt restructuring in accordance with ASC 470-60. As a result of the troubled debt restructuring, the carrying values of the remaining Monaco loans were required to be recorded at their
undiscounted future cash flow values, which amounted to $3,449,632. No interest expense was to be recorded going forward. Interest payments in the three months ended March 31, 2016 reduced the carrying value.
Loan modification (March 2016)
In connection with the $1.825 million loan agreement with Monaco in March 2016, the existing $2.8 million notes were modified. Of the 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 market to its pre-modification fair value, the fair value of the new debt is
determined. The fair value of the new debt is as follows:
|
|
|
|
|
Monaco loans
|
|
Loan one
|
|
Forward cash flows:
|
|
|
|
|
Principal
|
|
$
|
2,800,000
|
|
Interest
|
|
|
559,463
|
|
|
|
|
|
|
Total forward cash flows
|
|
$
|
3,359,463
|
|
|
|
|
|
|
Present value of forward cash flows
|
|
$
|
2,554,371
|
|
Fair value of equity conversion option
|
|
|
1,063,487
|
|
|
|
|
|
|
Fair value of debt
|
|
$
|
3,617,858
|
|
|
|
|
|
|
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:
|
|
|
Underlying price on valuation date
|
|
$1.25
|
Contractual conversion rate
|
|
$1.00
|
Contractual term to maturity
|
|
1.82 Years
|
Implied expected term to maturity
|
|
1.82 Years
|
Market volatility:
|
|
|
Range of volatilities
|
|
96.0% - 154.0%
|
Equivalent volatilities
|
|
120.1%
|
Risk free rates using zero coupon US Treasury Security rates
|
|
0.29% - 0.68%
|
Equivalent market risk adjusted interest rates
|
|
0.52%
|
|
|
|
|
|
Monaco loans
|
|
Loan one
|
|
Forward cash flows:
|
|
|
|
|
Face value
|
|
$
|
2,800,000
|
|
Fair value
|
|
|
3,617,858
|
|
|
|
|
|
|
Difference (premium)*
|
|
$
|
817,858
|
|
|
|
|
|
|
*
|
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:
|
|
|
|
|
|
|
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.
|
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. In connection with the loans, we granted MINOSA an option to purchase our 54% interest in Oceanica for $40.0 million (the Oceanica Call Option. As of March 11, 2016, the Oceanica Call
has expired. Completion of the transaction requires amending the Companys articles of incorporation to (a) effect a reverse stock split, which was done on February 19, 2016, (b) adjusting the Companys authorized
capitalization, which was also done on February 19, 2016, and (c) establishing a classified board of directors (collectively, the Amendments). The Amendments have been or will be set forth in certificates of amendment to the
Companys articles of incorporation filed or to be filed with the Nevada Secretary of State. As collateral for the loan, we granted MINOSA a security interest in the Companys 54% interest in Oceanica. The outstanding principal balance of
this debt was $14.75 million at June 30, 2017 and December 31, 2016, respectively. The maturity date of this note has been amended and matured on March 18, 2017.
15
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
16
In connection with the execution and delivery of the Purchase Agreement, we and Epsilon entered
into a registration rights agreement pursuant to which we agreed to register new shares of our common stock with a formal registration statement with the Securities and Exchange Commission upon the conversion of the indebtedness.
Accounting considerations
We have accounted for this transaction as a financing transaction, wherein the net proceeds received were allocated to the financial
instruments issued. Prior to making the accounting allocation, we evaluated for proper classification under ASC 480
Distinguishing Liabilities from Equity
(ASC 480), ASC 815
Derivatives and Hedging
(ASC 815) and
ASC 320
Property, Plant and Equipment
(ASC 320).
This debt agreement did not contain any embedded terms or features
that have characteristics of derivatives. However, we were required to consider whether the hybrid contract embodied a beneficial conversion feature (BCF). The calculation of the effective conversion amount did result in a BCF because
the effective conversion price was less than the Companys stock price on the date of issuance, therefore a BCF of $96,000 was recorded. The BCF represents a debt discount which will be amortized over the life of the loan.
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. The principal balance of this debt at June 30, 2017 is $3,000,000. 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 2016, Epsilon assigned Tranche 4 and 5 totaling $2,000,000 of this debt to MINOSA under the same terms as the original debt.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
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 June 30, 2017 and June 30, 2016, interest expense related to the
discount in the amount of $0 and $23,472, respectively, was recorded. For the three months ended June 30, 2017 and June 30, 2016, accrued interest in the amount of $83,151 and $78,547, 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, the current
indebtedness is $3.0 million.
Note 5 SMOM
On May 4, 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 (See
NOTE C). All $3.0 million represented by this Loan Agreement has been funded. The indebtedness bears interest at a rate of 10% per annum and matures on the second anniversary of this Loan Agreement. 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 50.0% 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.
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 value of the Companys value on the date of issuance.
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. 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):
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
|
|
Shares
|
|
|
Price
Per
Share
|
|
|
Total
Investment
|
|
Series AA-1
|
|
|
8,427,004
|
|
|
$
|
12.00
|
|
|
$
|
101,124,048
|
|
Series AA-2
|
|
|
7,223,145
|
|
|
$
|
6.00
|
|
|
|
43,338,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,650,149
|
|
|
|
|
|
|
$
|
144,462,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Investors option to purchase the Series AA-2 shares is subject to the closing price of the Common
Stock on the NASDAQ market having been greater than or equal to $15.12 per share for a period of twenty (20) consecutive business days on which the NASDAQ market is open.
The closing of the sale and issuance of shares of the Companys preferred stock to the Investor is subject to certain conditions,
including the Companys receipt of required approvals from the Companys stockholders, the receipt of regulatory approval, performance by the Company of its obligations under the Stock Purchase Agreement, the listing of the underlying
common stock on the NASDAQ Stock Market and the Investors satisfaction, in its sole discretion, with the viability of certain undersea mining projects of the Company. This transaction received stockholders approval on June 9, 2015.
Completion of the transaction requires amending the Companys articles of incorporation to (a) effect a reverse stock split, which was done on February 19, 2016, (b) adjusting the Companys authorized capitalization, which
was also done on February 19, 2016, and (c) establishing a classified board of directors (collectively, the Amendments). The Amendments have been or will be set forth in certificates of amendment to the Companys articles
of incorporation filed or to be filed with the Nevada Secretary of State.
Series AA Convertible Preferred Stock Designation
The Purchase Agreement provides for the issuance of up to 8,427,004 shares of Series AA-1 Convertible Preferred Stock, par value
$0.0001 per share (the Series AA-1 Preferred) and 7,223,145 shares of Series AA-2 Convertible Preferred Stock, par value $0.0001 per share (the Series AA-2 Preferred), subject to stockholder approval which was received on
June 9, 2015 and satisfaction of other conditions. Significant terms and conditions of the Series AA Preferred are as follows:
Dividends
. If and when the Company declares a dividend and any other distribution (including, without limitation, in cash, in
capital stock (which shall include, without limitation, any options, warrants or other rights to acquire capital stock) of the Company, then the holders of each share of Series AA Preferred Stock are entitled to receive, a dividend or distribution
in an amount equal to the amount of dividend or distribution received by the holders of common stock for which such share of Series AA Preferred Stock is convertible.
Liquidation Preference
. The Liquidation Preference on each share of Series AA Preferred Stock is its Stated Value plus accretion
at the rate of 8% per annum compounded on each December 31 from the date of issue of such share until the date such share is converted. For any accretion period which is less than a full year, the Liquidation
Preference shall accrete in an amount to be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed.
Voting Rights
. The holders of Series AA Preferred will be entitled to one vote for each share of common stock into which the
Series AA Preferred is convertible and will be entitled to notice of meetings of stockholders.
Conversion Rights
. At any
time after the Preferred Shares have been issued, any holder of shares of Series AA Preferred may convert any or all of the shares of preferred stock into one fully paid and non-assessable share of Common Stock.
Adjustments to Conversion Rights
. If Odyssey pays a dividend or makes a distribution on its common stock in shares of common
stock, subdivides its outstanding common stock into a greater number of shares, or combines its outstanding common stock into a smaller number of shares, or if there is a reorganization, or a merger or consolidation of Odyssey with or into any other
entity which results in a conversion, exchange, or cancellation of the common stock, or a sale of all or substantially all of Odysseys assets, then the conversion rights described above will be adjusted appropriately so that each holder of
Series AA 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.
19
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.
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 and
six-month periods ended June 30, 2017 and 2016 was $208,497 and $357,872 and $416,993 and $692,501, respectively.
20
We did not grant employee stock options in the three-month periods ended June 30, 2017 and
2016. 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 June 30, 2017, our uninsured cash balance was approximately $1.2
million.
We do not currently have any debt obligations with variable interest rates.
NOTE K DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the amounts that were reflected in our income related to our derivatives for the three and six months ended
June 30, 2017 and June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Derivative income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) from fair value changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Convertible Promissory Notes
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
3,396,190
|
|
Warrant derivatives
|
|
|
|
|
|
|
61,051
|
|
|
|
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,051
|
|
|
|
|
|
|
|
3,398,525
|
|
Redemptions of Senior Convertible Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative income (expense)
|
|
$
|
|
|
|
$
|
61,051
|
|
|
$
|
|
|
|
$
|
3,398,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accounting principles that are provided in ASC 815
Derivatives and Hedging
require
derivative financial instruments to be classified in liabilities and carried at fair value with changes recorded in income. In addition, the standards do not permit an issuer to account separately for individual derivative terms and features
embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be bundled together and fair valued as a single, compound embedded derivative.
We have selected the Monte Carlo Simulations valuation technique to fair value the compound embedded derivative because we believe that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market
participants would likely consider in transactions involving compound embedded derivatives. Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional inputs
for option models such as market trading volatility and risk free rates. We have selected Binomial Lattice to fair value our warrant derivatives because we believe this technique is reflective of all significant assumption types market participants
would likely consider in transactions involving freestanding warrants derivatives. The Monte Carlo Simulations (MCS) technique is a level three valuation technique because it requires the development of significant internal assumptions
in addition to observable market indicators.
Significant inputs and results arising from the Monte Carlo Simulations process are as
follows for the share purchase options that have been bifurcated from our Monaco Notes and classified in liabilities as of March 8, 2016, (Modification Date):
|
|
|
Tranche 1 August 14, 2014:
|
|
March 8, 2016***
|
Underlying price on valuation date*
|
|
$1.25
|
Contractual conversion rate
|
|
$3.15
|
Contractual term to maturity**
|
|
1.82 Years
|
Implied expected term to maturity
|
|
1.24 Years
|
Market volatility:
|
|
|
Range of volatilities
|
|
96.0% - 154.0%
|
Equivalent volatilities
|
|
120.1%
|
Contractual interest rate
|
|
11.00%
|
Equivalent market risk adjusted interest rates
|
|
11.60%
|
Range of credit risk adjusted yields
|
|
3.49% - 5.02%
|
Equivalent credit risk adjusted yield
|
|
4.13%
|
21
|
|
|
Tranche 2 October 1, 2014:
|
|
March 8, 2016***
|
Underlying price on valuation date*
|
|
$1.25
|
Contractual conversion rate
|
|
$3.15
|
Contractual term to maturity**
|
|
1.82 Years
|
Implied expected term to maturity
|
|
1.24 Years
|
Market volatility:
|
|
|
Range of volatilities
|
|
96.0% - 154.0%
|
Equivalent volatilities
|
|
120.1%
|
Contractual interest rate
|
|
11.00%
|
Equivalent market risk adjusted interest rates
|
|
11.60%
|
Range of credit risk adjusted yields
|
|
3.49% - 5.02%
|
Equivalent credit risk adjusted yield
|
|
4.13%
|
|
|
Tranche 3 December 1, 2014:
|
|
March 8, 2016***
|
Underlying price on valuation date*
|
|
$1.25
|
Contractual conversion rate
|
|
$3.15
|
Contractual term to maturity**
|
|
1.82 Years
|
Implied expected term to maturity
|
|
1.24 Years
|
Market volatility:
|
|
|
Range of volatilities
|
|
96.0% - 154.0%
|
Equivalent volatilities
|
|
120.1%
|
Contractual interest rate
|
|
11.00%
|
Equivalent market risk adjusted interest rates
|
|
11.60%
|
Range of credit risk adjusted yields
|
|
3.49% - 5.02%
|
Equivalent credit risk adjusted yield
|
|
4.13%
|
*
|
The instrument is convertible into shares of the Companys subsidiary, Oceanica, which is not a publicly-traded entity. Therefore, its shares do not trade on a public exchange. As a result, the underlying value was
originally based on private sales of the subsidiarys shares because that was the best indicator of the value of the shares in the past. The last sale of Oceanicas shares in which a private investor accumulated 24% of the shares of which
their last purchase price was for $2.50 per share in December 2013. Accordingly, the underlying price used in the past in the MCS calculations was the $2.50 for the inception dates and December 31, 2015. Being far removed from December 2013
while considering the modification in March 2016 of the new option price of $1.00 and other market conditions currently prevailing, management determined $1.25 to be representative of the per share fair value.
|
**
|
On December 10, 2015, the term was extended to December 31, 2017.
|
In March 2016, the
term was extended to April 1, 2018.
***
|
In March 2016, the purchase price of the share purchase options was modified to $1.00 per share. As a result of the re-pricing, the share purchase options became convertible into a fixed number of shares and no longer
required measurement as derivative liabilities. The MCS were calculated for the instruments just prior to the modification on March 8, 2016.
|
The following table reflects the issuances of the Share Purchase Option derivatives and changes in fair value inputs and assumptions for these
derivatives during the six months ended June 30, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balances at January 1
|
|
$
|
|
|
|
$
|
3,396,190
|
|
Issuances
|
|
|
|
|
|
|
|
|
Modification
|
|
|
|
|
|
|
(1,456,825
|
)
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
|
|
|
|
(1,939,365
|
)
|
|
|
|
|
|
|
|
|
|
Balances at June 30
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of all Share Purchase Option derivatives is significantly influenced by our trading market
price, the price volatility in trading and the risk-free interest components of the Binomial Lattice technique.
22
On October 11, 2010, we also issued warrants to acquire 150,000 of our common shares in
connection with the Series G Convertible Preferred Stock Financing. During April 4-8, 2011, we issued warrants to acquire 43,750 of our common shares in connection the Series G Convertible Preferred Stock and Warrant Settlement Transaction.
Finally, on November 8, 2011, we issued warrants to acquire 108,507 of our common shares in connection with the Senior Convertible Note Financing Transaction. These warrants required liability classification as derivative financial instruments
because certain down-round anti-dilution protection or price protection features included in the warrant agreements are not consistent with the concept of equity. We applied the Binomial Lattice valuation technique in estimating the fair value of
the warrants because we believe that this technique is most appropriate and reflects all of the assumptions that market participants would likely consider in transactions involving the warrants, including the potential incremental value associated
with the down-round anti-dilution protections.
The Binomial Lattice technique is a level three valuation technique because it requires
the development of significant internal assumptions in addition to observable market indicators. Warrants linked to 143,750 shares of common stock associated with the Series G Convertible Preferred Stock Financing were exercised on October 11,
2013.
Of the 108,507 common shares for which the warrant issued on November 8, 2011 could be exercised, 36,169 of those common
shares were accessible only based upon the Companys election to require the lender to provide the additional financing. When the lender provided additional financing of $8,000,000 on May 10, 2012, the additional 36,169 of common shares
became accessible. Warrants indexed to an additional 21,701 were issued in conjunction with the additional financing.
All remaining
warrants linked to 43,750 shares of common stock associated with the Series G Convertible Preferred Stock Financing expired unexercised on April 13, 2014 and are no longer outstanding.
All remaining warrants linked to 130,208 shares of common stock associated with the Senior Convertible Note Financing Transaction expired
unexercised on April 13, 2014 and are no longer outstanding.
The following table reflects the issuances of derivative warrants and
changes in fair value related to the derivative warrants during the six months ended June 30, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balances at January 1
|
|
$
|
|
|
|
$
|
6,226
|
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
|
|
|
|
(2,335
|
)
|
|
|
|
|
|
|
|
|
|
Balances at June 30
|
|
$
|
|
|
|
$
|
3,891
|
|
|
|
|
|
|
|
|
|
|
The fair value of all warrant derivatives is significantly influenced by our trading market price, the price
volatility in trading and the risk-free interest components of the Binomial Lattice technique.
NOTE L REVENUE PARTICIPATION RIGHTS
The Companys participating revenue rights consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
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.
23
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.
24