NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE ABASIS 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,
2013.
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, 2014, and the results of operations and cash flows for the interim periods presented. Operating results for the three-month period ended June 30, 2014, are not necessarily
indicative of the results that may be expected for the full year.
NOTE BSUMMARY 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, Odyssey Marine Services, Inc., OVH, Inc., Odyssey Retriever, Inc., Odyssey Marine Entertainment, Inc., Odyssey Marine
Enterprises, Ltd., Odyssey Marine Management, Ltd., Oceanica Marine Operations, S.R.L., and majority interests in Oceanica Resources, S.R.L. and Exploraciones Oceanicas, S. De R.L. De C.V. Equity investments in which we exercise significant
influence but do not control and of which we are not the primary beneficiary are accounted for using the equity method. All significant inter-company and intra-company transactions and balances have been eliminated. The results of operations
attributable to the non-controlling interest are presented within equity and net income, and are shown separately from the Companys equity and net income attributable to the Company.
Use of Estimates
Management used
estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Revenue Recognition and Accounts
Receivable
In accordance with Topic A.1. in SAB 13: Revenue Recognition, exhibit and expedition charter revenue is recognized ratably
when realized and earned as time passes throughout the contract period as defined by the terms of the agreement. Expenses related to the exhibit and expedition charter revenue are recorded as incurred and presented under the caption Operations
and research on our Consolidated Statements of Income.
Artifact sales and other may also consist of revenues related to the
recovery of bulk silver bullion from the
Gairsoppa
project that exceeds the directly related operating and recovery expenses. Revenue is recognized when our contractual obligation is completed to deliver the silver bullion to the refining
agent, the amount of revenue is reasonably assured based on the London Bullion Market rates and the bullion is in a format ready for sale into the market. 2014 revenue does not contain
Gairsoppa
project bullion sales. Operating and recovery
expenses incurred in connection with the
Gairsoppa
contract consist of vessel-related expenses (ships crew, provisions, port fees and charter expenses), fuel, specialized equipment and administrative expenses. These expenses were
charged to the Consolidated Statements of Operations as incurred and subsequently reimbursed per our contract and recorded as a benefit (credit to expense) in the period when we were assured of recoupment. There are no Gairsoppa operating expenses
in 2014.
Artifact sales and other is where we would recognize deferred revenue related to revenue participation rights we previously sold
to investors. Upon receipt of funds payable to the investors for their revenue participation rights, revenue would be recognized based upon the percent of investor-related proceeds from the sale of silver as a percentage of total proceeds that
investor could earn under the revenue participation agreement.
6
Under our agreement with the United Kingdom Government for the
Gairsoppa
project, any
proceeds from the recovery of the government-owned silver cargo were first applied as a reimbursement to us for search and recovery expenses related to the project. Any remaining net proceeds from the silver owned by the United Kingdom Government
were then split 20/80 between the government and us, respectively. In 2013 the proceeds from the silver sales were sufficient to fully reimburse our expenses and to provide net proceeds that were split between the two parties. The
Gairsoppa
project revenue recognized by us in 2013 resulted from our share of the net proceeds from the sale of the recovered silver bullion that belonged to the United Kingdom Government. The United Kingdom Government reimburses us for all of the expenses
incurred by us to recover their silver. Accordingly, we applied the expense reimbursement credit against our search and recovery expenses in our respective years Consolidated Statement of Income under the caption Operating Expenses: Operations
and Research.
In 2014, we were contracted to recover gold and other artifacts from the shipwreck SS
Central America
. Our
agreement allows for the reimbursement of priority recoupment costs which are based on pre-defined and quantifiable contractual amounts. Priority recoupment relates to the reimbursement to us of operating and recovery expenses related to this
project. Operating and recovery expenses consist of vessel-related expenses such as ships crew, provisions, fuel and specialized off-shore equipment. These expenses are charged to the Consolidated Statements of Operations as incurred and the
priority recoupment is recorded as a benefit (credit to expense) in the period we are assured of recoupment. These costs are recouped out of first cash proceeds from the monetization of recovered cargo items that are split 80% to us and 20% to the
contractor. After these project costs are reimbursed, subsequent cash proceeds are split 45% to us and 55% to the contractor, at which point in time we will record these additional proceeds as revenue. Staff Accounting Bulletin requires four
criteria to be present before recognizing revenue. These criteria are: collection is probable, delivery of goods or services are complete, persuasive evidence of an arrangement exists and the price or amount can be determined. Priority cost
recoupment is not a revenue but the same criteria are applied when determining to recognize or not. We have recovered a significant amount of gold, and based on an independent appraisal of the recovered cargo, our June 30, 2014 priority recoupment
is reasonably assured of being collected when the gold is monetized. We continued to work on the project subsequent to June 30, 2014, and we will earn further priority recoupment during the three-month period ending September 30, 2014. Should the
appraised value exceed our priority recoupment and we are able to accurately measure or quantify a dollar amount for our 45% interest in these additional cash proceeds, we will record revenue in future periods. The value of monetization is based on
what the market will bear, which is undeterminable at this time therefore we have not recorded any revenues related to our 45% portion of proceeds in excess of the priority recoupment. See NOTE D regarding the SS
Central America
.
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, Cash Equivalents
and Restricted Cash
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.
Inventory
Our inventory consists of artifacts purchased from the SS
Gairsoppa
project and recovered from the SS
Republic
shipwreck, general
branded merchandise and related packaging material. Inventoried costs of recovered artifacts include the costs of recovery, conservation and administrative costs to obtain legal title to the artifacts. Administrative costs are generally legal fees
or insurance settlements required in order to obtain clear title. The capitalized recovery costs include direct costs such as vessel and related equipment operations and maintenance, crew and technical labor, fuel, provisions, supplies, port fees
and depreciation. Conservation costs include fees paid to conservators for cleaning and preserving the artifacts. We continually monitor the recorded aggregate costs of the artifacts in inventory to ensure these costs do not exceed the net
realizable value. Historical sales, publications or available public market data are used to assess market value.
Packaging materials and
merchandise are recorded at average cost. We record our inventory at the lower of cost or market.
Costs associated with the above noted
items are the costs included in our costs of goods. Vessel costs associated with expedition revenue as well as exhibit costs are not included in cost of goods sold. Vessel costs include, but are not limited to, charter costs, fuel, crew and port
fees. Vessel and exhibit costs are included in Operations and research in the Consolidated Statements of Operations. In the case of prior revenues associated with the
Gairsoppa
project, the United Kingdom owned the silver we sold into the
London Bullion Market on their behalf, therefore, there was no associated cost of goods.
7
Long-Lived Assets
Our policy is to recognize impairment losses relating to long-lived assets in accordance with the ASC topic for Property, Plant and Equipment.
Decisions are based on several factors, including, but not limited to, managements plans for future operations, recent operating results and projected cash flows.
Comprehensive Income
Securities with a
maturity greater than three months from purchase date are deemed available-for-sale and carried at fair value. Unrealized gains and losses on these securities are excluded from earnings and reported as a separate component of stockholders
equity. At June 30, 2014, we did not own securities with a maturity greater than three months.
Property and Equipment and Depreciation
Property and equipment is stated at historical cost. Depreciation is provided using the straight-line method at rates based on the assets
estimated useful lives, which are normally between three and ten years. Leasehold improvements are amortized over their estimated useful lives or lease term, if shorter. Major overhaul items (such as engines or generators) that enhance or extend the
useful life of vessel-related assets qualify to be capitalized and depreciated over the useful life or remaining life of that asset, whichever is shorter. Certain major repair items required by industry standards to ensure a vessels
seaworthiness also qualify to be capitalized and depreciated over the period of time until the next scheduled planned major maintenance for that item. All other repairs and maintenance are accounted for under the direct-expensing method and are
expensed when incurred.
Earnings Per Share
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 generates income, the Company calculates basic earnings per share using the two-class method pursuant to ASC 260
Earnings Per Share.
The two-class method was required
effective with the issuance of the Senior Convertible Note disclosed in Note I because the note qualifies 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 the period are allocated on a pro-rata basis to the common stockholders and to the holders of Convertible Notes based on the weighted average number of common shares outstanding and number of shares that could be converted. The
Company does not use the two-class method in periods when it generates a loss as the holder of the Convertible Notes do not participate in losses.
Diluted EPS reflects the potential dilution that would occur if dilutive securities and other contracts to issue Common Stock were exercised
or converted into Common Stock or resulted in the issuance of Common Stock that then shared in our earnings. We use the treasury stock method to compute potential common shares from stock options and warrants and the if-converted method to compute
potential common shares from Preferred Stock, Convertible Notes or other convertible securities. As it relates solely to the Senior Convertible Note, 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, 2014 and 2013, weighted average common shares outstanding year-to-date were 84,420,661 and 78,350,236, respectively. For the
periods ended June 30, 2014 and 2013, 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,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Average market price during the period
|
|
$
|
1.79
|
|
|
$
|
3.14
|
|
|
$
|
1.94
|
|
|
$
|
3.19
|
|
In the money potential common shares from options excluded
|
|
|
1,586
|
|
|
|
299,539
|
|
|
|
5,849
|
|
|
|
333,062
|
|
In the money potential common shares from warrants excluded
|
|
|
|
|
|
|
493,329
|
|
|
|
|
|
|
|
525,093
|
|
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:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Out of the money options and warrants excluded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options with an exercise price of $2.73 per share
|
|
|
649,469
|
|
|
|
|
|
|
|
649,469
|
|
|
|
|
|
Stock options with an exercise price of $2.74 per share
|
|
|
633,835
|
|
|
|
|
|
|
|
633,835
|
|
|
|
|
|
Stock options with an exercise price of $2.89 per share
|
|
|
987,155
|
|
|
|
|
|
|
|
987,155
|
|
|
|
|
|
Stock options with an exercise price of $3.25 per share
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
Stock options with an exercise price of $3.40 per share
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Stock options with an exercise price of $3.43 per share
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
40,000
|
|
Stock options with an exercise price of $3.50 per share
|
|
|
100,000
|
|
|
|
345,000
|
|
|
|
100,000
|
|
|
|
345,000
|
|
Stock options with an exercise price of $3.51 per share
|
|
|
|
|
|
|
959,500
|
|
|
|
|
|
|
|
959,500
|
|
Stock options with an exercise price of $3.53 per share
|
|
|
|
|
|
|
191,700
|
|
|
|
|
|
|
|
191,700
|
|
Stock options with an exercise price of $3.90 per share
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Stock options with an exercise price of $4.00 per share
|
|
|
|
|
|
|
52,500
|
|
|
|
|
|
|
|
52,500
|
|
Stock options with an exercise price of $5.00 per share
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
Stock options with an exercise price of $7.00 per share
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
Warrants with an exercise price of $3.60 per share
|
|
|
1,562,500
|
|
|
|
1,562,500
|
|
|
|
1,562,500
|
|
|
|
1,562,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total anti-dilutive warrants and options excluded from EPS
|
|
|
4,192,959
|
|
|
|
3,471,200
|
|
|
|
4,192,959
|
|
|
|
3,471,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common shares from outstanding Convertible Preferred Stock calculated on an if-converted basis
having an anti-dilutive effect on diluted earnings per share were excluded from potential common shares as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Potential common shares from Convertible Preferred Stock excluded from EPS
|
|
|
32,400
|
|
|
|
32,400
|
|
|
|
32,400
|
|
|
|
32,400
|
|
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,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Potential common shares from unvested restricted stock awards excluded from EPS
|
|
|
653,736
|
|
|
|
512,928
|
|
|
|
653,736
|
|
|
|
509,236
|
|
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,
2014
|
|
|
June 30,
2013
|
|
|
June 30,
2014
|
|
|
June 30,
2013
|
|
Net income (loss)
|
|
$
|
(4,015,881
|
)
|
|
$
|
(10,895,976
|
)
|
|
$
|
(13,814,639
|
)
|
|
$
|
(20,561,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator, basic and diluted net income (loss) available to stockholders
|
|
$
|
(4,015,881
|
)
|
|
$
|
(10,895,976
|
)
|
|
$
|
(13,814,639
|
)
|
|
$
|
(20,561,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
84,898,133
|
|
|
|
79,345,030
|
|
|
|
84,420,661
|
|
|
|
78,350,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
84,898,133
|
|
|
|
79,345,030
|
|
|
|
84,420,661
|
|
|
|
78,350,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding for basic
|
|
|
84,898,133
|
|
|
|
79,345,030
|
|
|
|
84,420,661
|
|
|
|
78,350,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per share
|
|
|
84,898,133
|
|
|
|
79,345,030
|
|
|
|
84,420,661
|
|
|
|
78,350,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.26
|
)
|
Net (loss) per share diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.26
|
)
|
9
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 J).
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, mortgage and loans payable, and redeemable preferred stock, if any. 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. If any, we carry redeemable preferred stock at historical cost and accrete 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 L for additional information). We generally do not use derivative financial instruments to hedge
exposures to cash-flow, market or foreign-currency risks. However, in the past, we have entered into certain other financial instruments and contracts, such as the sale and issuance of redeemable preferred stock and freestanding warrants with
features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815
Derivatives
and Hedging
, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements with changes in fair value reflected in our income.
Fair Value Hierarchy
The three levels of
inputs that may be used to measure fair value are as follows:
Level 1.
Quoted prices in active markets for identical assets or
liabilities.
Level 2.
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities,
quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market
data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for
security-specific restrictions.
Level 3.
Unobservable inputs to the valuation methodology are significant to the measurement
of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.
10
Redeemable Preferred Stock
If we issue redeemable preferred stock instruments (and, if ever, any other redeemable financial instrument we may enter into) 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.
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 CRESTRICTED CASH
As required by the original mortgage loan entered into with Fifth Third Bank (the Bank) on July 11, 2008,
$500,000 was deposited into an interest-bearing account from which principal and interest payments are made. This mortgage loan has since been extended to July 2016. As extended, the new loan calls for a restricted cash balance of $400,000 to be
funded annually for principal and interest payments (see NOTE I). The balance in the restricted cash account is held as additional collateral by the Bank and is not available for operations. The balance in this account at June 30, 2014, was
$316,880.
During May 2014, we entered into a $10.0 million project loan facility with the Bank (see NOTE I). This loan matures in May
2015. Per the agreement, we deposited, from the loan proceeds, $500,000 into a restricted bank account to cover principal and interest payments. This account balance is also pledged as additional security for the loan. There is no requirement to
fund this account in the future. The balance in this account at June 30, 2014, was $483,638.
NOTE DACCOUNTS RECEIVABLE
Our accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Trade
|
|
$
|
8,428,990
|
|
|
$
|
4,808,678
|
|
Other
|
|
|
48,539
|
|
|
|
529,920
|
|
Reserve allowance
|
|
|
(4,631,593
|
)
|
|
|
(5,131,593
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
3,845,936
|
|
|
$
|
207,005
|
|
|
|
|
|
|
|
|
|
|
The December 31, 2013 reserve amount of $5,131,593 relates to Neptune Minerals, Inc. discussed in greater
detail in NOTE F. Of this total, $4,631,593 at June 30, 2014 relates to Dorado Ocean Resources, Ltd. from 2010 also discussed further in NOTE F. During the three-months ended June 30, 2014, we recorded a priority recoupment of costs in the
amount $3,506,960 as a reduction to our Operations and research costs. This amount is based on set and determinable contractual amounts for the recovery of the SS
Central America
shipwreck. These determinable amounts define the day rate and
fixed obligation due to us for our services rendered as it relates to priority recoupment. See revenue recognition and accounts receivable in NOTE B and ITEM 2 of this Form 10-Q.
NOTE EINVENTORY
Our inventory consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Artifacts
|
|
$
|
5,361,389
|
|
|
$
|
5,406,183
|
|
Packaging
|
|
|
78,738
|
|
|
|
85,133
|
|
Merchandise
|
|
|
745,445
|
|
|
|
401,072
|
|
Merchandise reserve
|
|
|
(371,332
|
)
|
|
|
(371,332
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
5,814,240
|
|
|
$
|
5,521,056
|
|
|
|
|
|
|
|
|
|
|
Of these amounts, $5,152,261 and $5,206,318 are classified as non-current as of June 30, 2014 and
December 31, 2013, respectively.
11
NOTE FINVESTMENTS IN UNCONSOLIDATED ENTITIES
Neptune Minerals, Inc.
During the quarter ended December 31, 2009, we invested $500,000 for a 25% interest (five membership units) in SMM Project, LLC
(SMM) to pursue opportunities in the exploration of deep-ocean gold and copper deposits. SMM purchased a majority interest in Bluewater Metals Pty, Ltd. (Bluewater), an Australian company with licenses for mineral exploration
of approximately 150,000 square kilometers of ocean floor in territorial waters controlled by four different countries in the South Pacific. In April 2010, SMM was acquired by Dorado Ocean Resources, Ltd. (DOR) through a share exchange.
At that time, DOR also acquired the remaining interest in Bluewater. We were issued 450 DOR shares in exchange for the surrender of our units in SMM. We also acquired an additional 1,200 shares of DOR valued at $2,000,000 that resulted in a 41.25%
ownership of DOR. Under the terms of the Share Subscription Agreement, we had the option to pay for this investment in cash, provide marine services to DOR over a three-year period commencing April 2010, or exercise our contractual right to offset
against the $2,000,000 marine services accounts receivable owed to us. During 2011, we exercised our contractual right and offset these two amounts. The focus of DOR was on the exploration and monetization of gold- and copper-rich Seafloor Massive
Sulfide (SMS) deposits.
During 2011, we were engaged by Neptune Minerals, Inc. (NMI) and its affiliates to
perform marine services relating to deep-sea mining. The agreements provided for payments in cash and shares of Class B non-voting common stock of NMI. In 2011, we earned 2,066,600 shares of the Class B non-voting common stock from these
engagements. During this same period, NMI completed a share exchange with DOR shareholders whereby each one outstanding share of DOR was exchanged for 1,000 shares of NMI Class B non-voting common stock. We received 1,650,000 shares of NMI Class B
non-voting common stock for our 1,650 DOR shares pursuant to the share exchange. In connection with this share exchange, NMI executed an assignment and assumption agreement, whereby NMI assumed $8,227,675 of the outstanding debt DOR owed to us.
Additionally in 2011, we executed a debt conversion agreement with NMI, whereby we converted $2,500,000 of the debt owed to us for 2,500,000 shares of NMI Class B non-voting common stock. We have a net share position in NMI of 6,184,976 Class B
non-voting shares, which currently represents an approximate 29% ownership interest.
Regarding the debt conversion noted in the preceding
paragraph, NMIs shares were valued at $1.00 based on their most recent capital raise at the time when we executed the debt conversion agreement. Pursuant to that agreement, we converted $2,500,000 of the debt owed to us for 2,500,000 shares of
NMI Class B non-voting common stock. All the $8,227,675 receivable was fully reserved for in 2010. Thus the $2,500,000 portion of the debt owed to us had a book basis of zero. When we received the 2,500,000 shares as settlement of this accounts
receivable, we took the position that the shares received had a carryover basis of zero until we could convert the shares to cash. Accordingly, no gain or loss was recognized in our financial statements in connection with this transaction.
At June 30, 2014, our share of unrecognized DOR (NMI) losses is $19.8 million. We have not recognized the accumulated $19.8 million in
our income statement because these losses exceed our investment in DOR (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. Based on the
NMI and DOR transactions described above, we believe it is appropriate to allocate this loss carryforward of $19.8 million to any incremental NMI investment that may be recognized on our balance sheet in excess of zero. The aforementioned loss
carryforward is based on NMIs last unaudited financial statements as of March 31, 2014 and an estimate for the three-months ended June 30, 2014. We do not have any guaranteed obligations to NMI, nor are we otherwise committed to provide
financial support. Even though we were not obligated, during the three-months ended September 30, 2013, we, along with a second creditor, loaned funds to NMI of which our share is $500,000, and this indebtedness is evidenced by a convertible
note. This funding was not for the purpose of funding NMIs prior losses but for current requirements. Per ASC 323-10-35-29:
Additional Investment After Suspension of Loss Recognition
, we concluded this loan did not increase our
ownership nor was it to be considered in-substance stock. Based on the financial position of NMI at December 31, 2013, we reserved for this note in its entirety. This note carried an interest rate of 6% per annum and matured on
April 26, 2014. The note contained a mandatory conversion clause if the note remained unpaid at maturity. The note was convertible into NMIs Class A voting shares at $12.00 per share upon maturity. During April 2014, we modified the
conversion feature with NMI whereas, during April 2014, the note was converted into 5,225 shares of Class A Preferred non-voting stock. These shares are convertible into 522,500 shares of Class A voting shares and require no further
exchange of consideration for conversion. As a result of the conversion of the loan into equity, we recognized $522,500 of additional investment in NMI and appropriately wrote it down to the loss in unconsolidated entity.
Although we are a shareholder of NMI, we have no representation in the board of directors or management of NMI and hold no Series A voting
shares. Neither we nor our representatives are involved in any of the management or operations of NMI.
12
Chatham Rock Phosphate, Ltd.
During the period ended June 30, 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 of ordinary shares to us. The shares currently represent a 5.9% equity stake in CRP. With CRP being a thinly traded stock on the New Zealand Stock Exchange
and 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.
NOTE GINCOME TAXES
As of June 30, 2014 we generated approximately $12.1 million of the federal NOL carryforwards and $2.1 million of
foreign NOL carryforwards. As of June 30, 2014, the Company had consolidated income tax net operating loss (NOL) carryforwards for federal tax purposes of approximately $120.6 million and net operating loss carryforwards for foreign
income tax purposes of approximately $11.3 million. The federal NOL carryforwards from 1998 forward will expire in various years beginning in 2018 and ending through the year 2032.
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, 2014. As required by the Accounting for Income Taxes topic in the ASC, we have evaluated whether it is more likely than not that the deferred tax assets will be realized. Based on the available evidence, we
have concluded that it is more likely than not that those assets would not be realized without the recovery and rights of ownership or salvage rights of high-value shipwrecks or other forms of taxable income, thus a valuation allowance has been
recorded as of June 30, 2014. There was no U.S. income tax expense for the three months ended June 30, 2014 due to the generation of net operating losses which were not previously benefited in the Companys financial statements.
The increase in the valuation allowance as of June 30, 2014 is due to the generation of approximately $14.2 million in net operating loss
carryforwards year-to-date.
The change in the valuation allowance is as follows:
|
|
|
|
|
June 30, 2014
|
|
$
|
56,604,359
|
|
December 31, 2013
|
|
|
51,625,159
|
|
|
|
|
|
|
Change in valuation allowance
|
|
$
|
4,979,200
|
|
|
|
|
|
|
Our estimated annual effective tax rate as of June 30, 2014 is 34.83% while our June 30, 2014 effective tax
rate is 10.70%. Generally we would expect our quarterly effective tax rate to be 0% because we are in a full valuation allowance, however, we have an income tax benefit being recognized in the three-months ended June 30, 2014 of $481,055
related to a reversal of our December 31, 2013 AMT income tax accrual based on the acceptance of our private letter ruling discussed below.
On July 3, 2014 we received confirmation from the Internal Revenue Service that our private letter ruling was accepted granting us relief
to make the election to carryback our 2008 federal net operating loss five taxable years preceding the taxable year of the NOL in lieu of the general two-year carryback period. There will be no cash-tax benefit related to the carryback as we had a
taxable loss during the 2003 tax year. The benefit of making the five year carryback election is that the 2008 NOL will now be able to offset 100 percent of future alternative minimum taxable income instead of only 90 percent. The AMT tax accrual
for 2013 in the amount of $481,055 was reversed during the three-months ended June 30, 2014 resulting in a tax benefit.
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 2010.
NOTE HCOMMITMENTS AND CONTINGENCIES
Legal Proceedings
The
Company may be subject to a variety of other claims and suits that arise from time to time in the ordinary course of business. We are currently not a party to any pending litigation.
Trends and Uncertainties
Our 2014
business plan requires us to generate new cash inflows during 2014 to effectively allow us to perform our planned projects. We plan to generate new cash inflows through the monetization of shipwreck cargo and/or our equity stakes in seabed mineral
companies, financings, syndications or other partnership opportunities. One or more of the planned shipwreck or mining project monetizations, financings, syndications or partnership opportunities may not be realized to the extent needed which may
require us to curtail our desired business plan until we generate additional cash. We can offer no assurance any of our
13
planned projects will be successful in providing additional cash during 2014. We have experienced several years of net losses. Our capacity to generate net income or positive cash flows for the
remainder of 2014 or the following twelve months is dependent upon our success in recovering and monetizing shipwrecks, monetizing our interests in mineral exploration entities, generating income from shipwreck or mineral exploration charters or
generating income from other project or asset based financing. In 2014, we are seeking to monetize a portion of our stake in our mineral exploration shareholdings, recover and monetize cargo from the SS
Central America
, and generate cash
inflows from other projects and opportunities. In 2014, we have been unable to generate charter revenue from our leased
Dorado Discovery
vessel and are considering other alternatives for the vessel, such as returning the vessel to the owner.
The original vessel charter expired in the second quarter of 2014 and we are currently on a month-by-month charter for the vessel. If cash inflow is not sufficient to meet our desired projected business plan requirements, we will be required to
follow our contingency business plan which is based on curtailed expenses and requires less cash inflows. We may also have to revert to capital raises that include equity and/or convertible debt to allow us to continue as a going concern. Our
consolidated cash balance at June 30, 2014 was $5.7 million which is sufficient to support approximately two months of operations. We have been the target of repeated attacks by third parties seeking to drive down our stock price. These attacks are
primarily organized by certain short sellers seeking to distort the truth and thereby profit from the decline of a companys share price (short and distort). These attacks have taken the form of public false statements,
misrepresentations, and scare tactics in unregulated internet media channels, but have also taken the form of both direct and indirect attempts to disrupt our business by seeking to negatively influence our business partners and business ventures.
These attacks have had a consequence on the companys share price, on various of our business deals, and on our ability to secure certain financing alternatives. While we have been successful in generating cash inflows and raising the necessary
funds in the past, there can be no assurance that we can continue to do so in 2014 or the following twelve months.
NOTE IMORTGAGE AND LOANS PAYABLE
The Companys consolidated debt consisted of the following at June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Term loan
|
|
$
|
4,500,000
|
|
|
$
|
5,000,000
|
|
Project term loans
|
|
|
7,436,514
|
|
|
|
10,000,000
|
|
Face value $10,000,000, 8% Convertible Senior Note Payable
|
|
|
|
|
|
|
1,176,076
|
|
Face value $8,000,000, 9% Convertible Senior Note Payable
|
|
|
|
|
|
|
4,039,446
|
|
Mortgage payable
|
|
|
1,739,662
|
|
|
|
1,816,286
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,676,176
|
|
|
$
|
22,031,808
|
|
|
|
|
|
|
|
|
|
|
Term Loan
Our current term loan, which is a result of amending its predecessor during July 2013, has a maturity date in July 2016. This facility bears
floating interest at the one month LIBOR rate as reported in the
Wall Street Journal
plus 500 basis points. Beginning January 2014, we were required to make semi-annual payments of $500,000. Any prepayments made in full or in part were
without premium or penalty. No restricted cash payments are required to be kept on deposit. This facility has substantially all the same terms that were attached to its predecessors as disclosed in previous Securities and Exchange Commissions
filings.
This term loan is secured by approximately 24,800 numismatic coins recovered from the SS
Republic
shipwreck, which amount
will be reduced over the term by the amount of coins sold by the Company. The coins used as collateral are held by a custodian for the security of the Bank. The carrying value of the borrowing base is not to exceed forty percent (40%) of the
eligible coin inventory valued on a rolling twelve-month wholesale average value. The Company is required to comply with a number of customary covenants. The significant covenants include: maintaining insurance on the inventory; ensuring the
collateral is free from encumbrances and without the consent of the Bank, the Company cannot merge or consolidate with or into any other corporation or entity nor can the Company enter into a material debt agreement with a third party without
approval. We were in compliance with all covenants at June 30, 2014. At June 30, 2014, the outstanding loan balance for this term loan is $4,500,000.
Project Term Loans
On May 7, 2014,
we entered into a new $10.0 million credit facility with Fifth Third bank similar to the loans obtained in 2012 and 2013 for the
Gairsoppa
project. The bank will advance funds based upon our recovery of valuable cargo from shipwrecks over the
coming 12 months. The advances are at pre-defined amounts or percentages of the value of a projects recovered cargo. The proceeds from our shipwreck recovery contracts or from our sales of recovered cargo will be used to repay the new
loan, as was done for the previous
Gairsoppa
loans. The interest rate on the new loan is a floating rate equal to the one
14
month LIBOR rate plus 500 basis points. An origination fee of $50,000 was paid at closing. This facility matures in May 2015. A restricted cash deposit of $500,000 was required to cover interest
payments when the term loan was funded, or portion thereof, were advanced. We are required to comply with a number of customary affirmative and negative covenants of which we were in compliance at June 30, 2014. The proceeds are to be used to
fund various project recovery costs. At June 30, 2014, the outstanding loan balance on this credit facility was $7,436,514.
During
July 2013, we entered into a $10.0 million project term loan agreement with Fifth Third Bank for the
Gairsoppa
shipwreck project. The facility that was outstanding at December 31, 2013 was to mature on July 24, 2014 but was repaid
in its entirety during March 2014. This term loan bore interest at a floating rate equal to the one-month LIBOR rate plus 500 basis points. We were able to make prepayments in whole or in part without premium or penalty. An origination fee of
$50,000 was paid at closing. A restricted cash deposit of $500,000 was required to cover interest payments. The term loan was secured by $10.0 million that was monetized from approximately 1.8 million ounces of silver recovered from the SS
Gairsoppa
. We were required to comply with a number of customary affirmative and negative covenants of which we were in compliance during the existence of this facility. The proceeds were used to fund project recovery costs.
Mortgage Payable
On July 11, 2008,
we entered into a mortgage loan with Fifth Third Bank. Pursuant to the Loan Agreement, we borrowed $2,580,000. The loan bore interest at a variable rate equal to the prime rate plus three-fourths of one percent (0.75%) per annum. The loan matured on
July 11, 2013, and required monthly principal payments in the amount of $10,750 plus accrued interest. This loan was secured by a restricted cash balance as well as a first mortgage on our corporate office building. This loan contained
customary representations and warranties, affirmative and negative covenants, conditions, and other provisions.
During July 2013 when the
above noted mortgage matured, we extended it on substantially the same terms that previously existed. The new maturity date is July 2016. The loan bears interest at a variable rate equal to the prime rate plus three-fourths of one percent (0.75%)
per annum. Monthly principal payments in the amount of $10,750 plus accrued interest are required. This loan is secured by a restricted cash balance (See NOTE C) as well as a first mortgage on our corporate office building. This loan contains
customary representations and warranties, affirmative and negative covenants, conditions, and other provisions. As of June 30, 2014, the loan balance outstanding was $1,183,751.
During May 2008, we entered into a mortgage loan in the principal amount of $679,000 with The Bank of Tampa to purchase our conservation lab
and storage facility. This obligation has a monthly payment of $5,080 with a maturity date of May 14, 2015. Principal and interest payments are payable monthly. Interest is at a fixed annual rate of 6.45%. This debt is secured by the related
mortgaged real property. As of June 30, 2014, the loan balance outstanding was $555,911.
Senior Convertible Notes
Initial Note
During November 2011,
we entered into a securities purchase agreement (the Purchase Agreement) with one institutional investor pursuant to which we issued and sold a Senior Convertible Note in the original principal amount of $10.0 million (the Initial
Note) and a warrant (the Warrant) to purchase up to 1,302,083 shares of our common stock. Subject to the satisfaction of conditions set forth in the Purchase Agreement, we had the right to require the investor to purchase an
additional senior convertible note in the original principal amount of up to $5.0 million on the six-month anniversary of the initial closing date (the Additional Note and, collectively Notes). Aggregate direct finance costs
amounted to $545,000 of which $45,000 related to costs of the lender and, accordingly, were included in the original issue discount on the Initial Note.
The indebtedness evidenced by the Initial Note bore interest at 8.0% percent per year (15% under default conditions, if applicable). Interest
was compounded monthly and payable quarterly at the beginning of each calendar quarter. The Initial Note was amortized with equal monthly principal installments of $434,783 that commenced on July 8, 2012. Prepayment was not allowed. Further,
the Notes could be converted into our common stock, at the option of the holder, at any time following issuance, with respect to the Initial Note, or at any time following six months after the date of issuance, with respect to the Additional Note.
The initial conversion price of the Initial Note was $3.74, subject to adjustment on the six-month anniversary of the initial closing date as follows: The reset conversion price applicable to the Initial Note was to be adjusted to the lesser of
(a) the then current conversion price and (b) the greater of (i) $1.44 and (ii) 110.0% of the market price of our common stock on the six-month anniversary of the initial closing date (as applicable, the Conversion
Price). On May 10, 2012 (the six-month anniversary of the initial closing date), the conversion price applicable to the Initial Note was adjusted to $3.17, which represented 110.0% of the market price of Odysseys common stock. The
conversion price was also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. We agreed to pay each amortization payment in shares of our common stock, if certain conditions were met; provided, that
we could, at our option, elect to pay such amortization payments in cash. The conversion rate applicable to any amortization payment that was made in shares of our common stock were the lower of (a) the Conversion Price and (b) a price
equal to 85.0% of the average for a ten-day period immediately prior to the applicable amortization date of the volume-weighted average price of our shares of common stock.
15
The Initial Note provided for redemption upon the occurrence of an event of default. Default
conditions include non-servicing of the debt and certain other credit risk related conditions. Default conditions also included certain equity indexed events including failures to file public information documents, non-conversion or insufficient
share authorizations to effect conversion and failure to obtain and maintain an effective registration statement covering the underlying common shares. The remedies to the investor for events of default include acceleration of payment at 125% of the
remaining face value in certain circumstances. In the event the default redemption was not paid, the investor had the right to elect conversion of the note at an adjusted conversion price approximating 75% of quoted market prices. A change in
control would also result in a redemption requirement at 125% of the face value.
The Notes extend no voting rights to the investors.
However, the Notes extended participation rights in dividend payments, if any, made to the holders of the Companys common or other class of stock, except our Series G Preferred Stock.
The holder of the Initial Note elected to apply some of the payments due on the principal balance of the Initial Note to the Additional Note
described below. During the term of this note, we issued 3,282,960 shares of common stock as payment of $8,608,694 in outstanding principal. During the six months ended June 30, 2014, the remaining principal balance of $1,391,306 was paid in
full in cash. No amounts remain due on this Note and the Note was retired in the first quarter of 2014.
Under the terms of the Warrant,
the holder is entitled to exercise the Warrant to purchase up to 1,302,083 shares of our common stock at an initial exercise price of $4.32 per share, during the five-year period beginning on the six-month anniversary of the initial closing date;
provided, that 434,027 shares of our common stock issuable upon exercise of the Warrant could not be exercised unless the investor purchased the Additional Note. In accordance with the terms of the warrant agreement, on May 10, 2012, the
exercise price applicable to the Warrant was adjusted to $3.60 which was the lesser of (a) the then current exercise price and (b) 125.0% of the market price of our common stock on the six-month anniversary of the initial closing date. The
Exercise Price is also subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions. We are generally prohibited from issuing shares of common stock upon exercise of the Warrant if such exercise would cause us
to breach our obligations under the rules or regulations of the stock market on which the common stock is traded.
In connection with the
financing, we entered into a registration rights agreement pursuant to which we filed a registration statement with the Securities and Exchange Commission (with the SEC) relating to the offer and sale by the investor of the shares of
common stock issuable upon conversion of the Notes and the exercise of the Warrant. Pursuant to the agreement, we were required to file the registration statement within six months of the initial closing date and to use best efforts for the
registration statement to be declared effective 90 days thereafter (or 120 days thereafter if the registration statement is subject to review by the SEC).
Additional Note
On May 10,
2012, we issued the Additional Note in the original principal amount of $8.0 million, and the number of shares of Odysseys common stock issuable upon exercise of the Warrant increased to 1,562,500. The Additional Note bore interest at
9.0% per year and matured on the 30-month anniversary of the initial closing date. The Additional Note was amortized in equal monthly installments commencing on the eighth-month anniversary of the initial note and could be paid in cash or
Odyssey common stock. The Additional Note could be converted into Odysseys common stock, at the option of the holder, at any time following six months after the date of issuance. The conversion rate applicable to any amortization payment that
was made in shares of our common stock was the lower of (a) the Conversion Price and (b) a price equal to 85.0% of the average for a ten-day period immediately prior to the applicable amortization date of the volume-weighted average price
of our shares of common stock. The initial conversion price of the Additional Note was $3.74, subject to reset on the earlier of the date the registration statement registering the offer and sale of the common stock issuable under the notes and the
warrants became effective and a prospectus contained therein was available for the resale by the holder of all of the registrable securities or the six-month anniversary of the additional closing date. The registration statement was declared
effective on July 6, 2012, and there was no reset to the conversion price of the Additional Note.
On January 2, 2013, we
entered into an agreement to amend the terms of the Additional Note. The installment payments due December 1, 2012, January 1, 2013 and February 1, 2013 were deferred until March 1, 2013 and the conversion price on the
Additional Note was decreased from $3.74 to $3.17. We evaluated the amendments impact on the accounting for the Additional Note in accordance with ASC 470-50-40-6 through 12 to determine whether extinguishment accounting was appropriate. The
modification had a cash flow effect on a present value basis of less than 10% and the reduction in the conversion price resulted in a change in the fair value of the embedded conversion option that was less than 10% of the carrying value of the
Additional Note immediately prior to the modification. Since the amendment did not result in a substantial modification, extinguishment accounting was not applicable. During the six months ended June 30, 2014, $1,739,130 of the principal
balance was paid in cash and the remaining principal balance of $2,347,826 was converted into common stock. No amounts remain due on this Note and the Note was retired in the second quarter of 2014.
16
Accounting considerations
We have accounted for the Initial Note, Additional Note and Warrant issued for cash as a financing transaction, wherein the net proceeds that
we received were allocated to the financial instruments issued. Prior to making the accounting allocation, we evaluated the Initial Note, Additional Note and the Warrant for proper classification under ASC 480
Distinguishing Liabilities from
Equity
(ASC 480) and ASC 815
Derivatives and Hedging
(ASC 815).
ASC 815 generally requires the
analysis embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the
host contract. The material embedded derivative features consisted of the conversion option and related conversion reset price protection, the Companys redemption privilege, and certain redemption rights that were indexed to equity risks. The
conversion option and conversion reset price protection, along with the redemption features bearing risks of equity, were not clearly and closely related to the host debt agreement and required bifurcation. Current accounting principles that are
also provided in ASC 815 do not permit an issuer to account separately for individual derivative terms and features that require bifurcation and liability classification. Rather, such terms and features must be and were bundled together and fair
valued as a single, compound embedded derivative.
The Warrant has a term of five and one-half years and at inception, had an initial
exercise price of $4.32. The contractual exercise price was subject to adjustment for both traditional recapitalization events and was reset on the sixth month anniversary of issuance to $3.60 per share. Although the warrant did not fall within the
scope of ASC 480, the warrant required derivative liability accounting because the conversion price reset protection terms are not consistent with the definition for financial instruments indexed to a companys own stock.
Based on the previous conclusions, we allocated the cash proceeds first to the derivative components at their fair values (see NOTE L) with
the residual allocated to the host debt contract, as follows:
|
|
|
|
|
|
|
Allocation
|
|
Initial Note
|
|
$
|
4,910,862
|
|
Compound embedded derivative
|
|
|
2,989,537
|
|
Derivative warrants
|
|
|
2,054,601
|
|
|
|
|
|
|
|
|
$
|
9,955,000
|
|
|
|
|
|
|
The basis that was subject to allocation included the gross proceeds of $10,000,000, less costs of the
investor paid out of proceeds that amounted to $45,000. We also allocated the direct financing costs of $500,000 to the note payable and the derivative components based upon the relative fair values of these financial instruments. As a result of
this allocation, $246,653 was recorded in deferred costs and $253,347 was recorded as expense.
Allocation of the cash proceeds related to
the Additional Financing was as follows:
|
|
|
|
|
|
|
Allocation
|
|
Additional Note
|
|
$
|
6,339,642
|
|
Compound embedded derivative
|
|
|
1,291,298
|
|
Derivative warrants
|
|
|
363,542
|
|
|
|
|
|
|
|
|
$
|
7,994,482
|
|
|
|
|
|
|
The basis that was subject to allocation included the gross proceeds of $8,000,000, less costs of the investor
paid out of proceeds that amounted to $5,518. We also allocated the direct financing costs of $400,000 to the note payable and the derivative components based upon the relative fair values of these financial instruments. As a result of this
allocation, $317,201 was recorded in deferred costs and $82,799 was recorded as expense.
The financing basis allocated to the notes
payable and the deferred asset arising from direct finance costs are subject to amortization with periodic charges to interest expense using the effective interest method. Amortization of these components included in interest expense during the six
months ended June 30, 2014 and 2013 amounted to $279,070 and $1,295,833, respectively. The derivative components are subject to re-measurement to fair value at the end of each reporting period with the change reflected in income. See NOTE L for
information about our derivatives.
17
NOTE JSTOCKHOLDERS EQUITY
Common Stock
In 2014,
we issued 1,290,155 shares of common stock, valued at $2,420,863, representing payment for principal and interest on the Additional Note as described in NOTE I.
In 2013, we issued 3,552,357 shares of common stock, valued at $9,280,242, representing payment for principal and interest on the Initial Note
and Additional Note as described in NOTE I.
During the three-month period ended March 31, 2013, we issued 2,010,500 shares of common
stock to accredited investors upon exercise of their outstanding warrants.
Warrants
1,562,500 warrants were attached to our formerly outstanding Senior Convertible debt discussed further in NOTES I and L. The conversion price
on these warrants is $3.60 and they are set to expire on November 9, 2016. See NOTE L for further information on these warrants.
Stock-Based
Compensation
We have one active stock incentive plan, the 2005 Stock Incentive Plan. The 1997 Stock Incentive Plan expired on
August 17, 2007. As of that date, options could no longer be granted from that Plan but any granted and unexercised options continued to exist until exercised or they expired. As of December 31, 2013 all outstanding options in the 1997
Stock Incentive Plan have expired. The 2005 Stock Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units and stock appreciation rights. We initially reserved
2,500,000 of our authorized but unissued shares of common stock for issuance under the Plan, and, at the time the Plan was adopted, not more than 500,000 of these shares could be used for restricted stock awards and restricted stock units. On
January 16, 2008, the Board of Directors approved amendments to the Plan to add 2,500,000 shares of common stock to the Plan, to allow any number of shares to be used for restricted stock awards, to clarify certain other provisions in the Plan
and to submit the amended Plan for stockholder approval. The amended Plan was approved at the annual meeting of stockholders on May 7, 2008. On June 3, 2010, our stockholders approved an amendment to the 2005 Stock Incentive Plan
which resulted in the addition of 3,000,000 shares of common stock to the Plan. Any incentive option and non-qualified option granted under the Plan must provide for an exercise price of not less than the fair market value of the underlying shares
on the date of grant, but the exercise price of any incentive option granted to an officer, director or eligible employee owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant.
Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is
ultimately expected to vest. As share-based compensation expense recognized in the statement of operations is based on awards ultimately expected to vest, it can be reduced for estimated forfeitures. The ASC topic Stock Compensation requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The share based compensation charged against income for the three-month periods ended June 30,
2014 and 2013 was $477,886 and $552,193, respectively and for the six-month periods ended June 30, 2014 and 2013 was $1,220,661 and $1,240,773, respectively.
We did not issue stock options in the three-month periods ended June 30, 2014 and 2013. 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 KCONCENTRATION OF CREDIT RISK
We maintain the majority of our cash at one financial institution. At June 30, 2014, our uninsured cash balance was
approximately $6.5 million.
Our term loans bear a variable interest rate based on LIBOR and our primary mortgage bears interest at a
variable rate based on the prime rate. See NOTE I for further detail on these instruments. These instruments expose us to interest rate risk. On our primary mortgage, for an increase of every 100 basis points, our interest obligation increases by
approximately, on average, $857 per month until maturity in July 2016. An increase of 100 basis points to the interest rate on our term loans increases our interest obligation, at most, by approximately, on average, $2,700 per month while an
increase of 100 basis points our project term loan would increase the monthly interest payment by approximately $6,100. See NOTE I. If an increase to the rates on these instruments occurs, it will have an adverse effect on our operating cash flows
and financial condition but we believe it would not be material.
18
NOTE LDERIVATIVE FINANCIAL INSTRUMENTS
The following tables summarize the components of our derivative liabilities and linked common shares as of June 30,
2014 and December 31, 2013 and the amounts that were reflected in our income related to our derivatives for the years then ended:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
Embedded derivatives derived from:
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
$
|
|
|
|
$
|
47,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,243
|
|
Warrant derivatives
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
|
599,844
|
|
|
|
840,000
|
|
Series G Convertible Preferred Stock
|
|
|
|
|
|
|
83,580
|
|
|
|
|
|
|
|
|
|
|
Warrant derivatives
|
|
|
599,844
|
|
|
|
923,580
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
$
|
599,844
|
|
|
$
|
970,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Common shares linked to derivative liabilities:
|
|
|
|
|
|
|
|
|
Embedded derivatives:
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
|
|
|
|
|
1,729,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,729,647
|
|
|
|
|
|
|
|
|
|
|
Warrant derivatives
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
|
1,562,500
|
|
|
|
1,562,500
|
|
Series G Convertible Preferred Stock
|
|
|
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,562,500
|
|
|
|
2,087,500
|
|
|
|
|
|
|
|
|
|
|
Total common shares linked to derivative liabilities
|
|
|
1,562,500
|
|
|
|
3,817,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Derivative income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) from fair value changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible Notes
|
|
$
|
|
|
|
$
|
682,831
|
|
|
$
|
47,243
|
|
|
$
|
42,269
|
|
Warrant derivatives
|
|
|
553,693
|
|
|
|
1,120,306
|
|
|
|
323,736
|
|
|
|
660,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553,693
|
|
|
|
1,803,137
|
|
|
|
370,979
|
|
|
|
702,838
|
|
Redemptions of Senior Convertible Notes
|
|
|
|
|
|
|
195,462
|
|
|
|
|
|
|
|
633,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative income (expense)
|
|
$
|
553,693
|
|
|
$
|
1,998,599
|
|
|
$
|
370,979
|
|
|
$
|
1,336,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Series G Convertible Preferred Stock and Warrant Financing Transaction on October 11, 2010, Series G
Convertible Preferred Stock and Warrant Settlement Transaction during April 2011, and Senior Convertible Note and Warrant Financing Transaction on November 8, 2011 gave rise to derivative financial instruments. We entered into a Series G
Convertible Preferred Stock and Warrant Financing Transaction and the Series G Convertible Preferred Stock and Warrant Settlement Transaction on October 11, 2010 and April 14, 2011, respectively. Instruments related to these transactions
have since expired. The Series G Convertible Preferred Stock embodied certain terms and features that both possessed all of the conditions of derivative financial instruments and were not clearly and closely related to the host preferred contract in
terms of economic risks and characteristics. These terms and features consist of the embedded conversion option and the related down-round anti-dilution protection provision, the Companys redemption privilege and the holders redemption
privilege. Each of the redemption features also embodies the redemption premium payments. Warrants issued with this transaction and the subsequent Settlement Transaction embodied down-round anti-dilution protection and, accordingly, were not
afforded equity classification.
As more fully discussed in NOTE I, we entered into the Senior Convertible Note and Warrant Financing
Transactions on November 8, 2011 and May 10, 2012. The Senior Convertible Notes embodied certain terms and conditions that were not clearly and closely related to the host debt agreement in terms of economic risks and characteristics.
These terms and features consist of the embedded conversion options, certain redemption features and a conversion price reset feature. Warrants issued with this transaction embodied reset price protection and, accordingly, were not afforded equity
classification.
19
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 selected the Monte Carlo Simulations valuation technique to fair value the compound embedded derivative because we believed this technique was 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 technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to
observable market indicators.
During the six months ended June 30, 2014, the compound embedded derivatives were converted. As of
June 30, 2014, no compound embedded derivatives were present. Significant inputs and results arising from the Monte Carlo Simulations process are as follows for the compound embedded derivative that has been bifurcated from our Senior
Convertible Note and classified in liabilities as of December 31, 2013:
|
|
|
|
|
December 31,
2013
|
Quoted market price on valuation date
|
|
$2.02
|
Contractual conversion rate
|
|
$3.17
|
Range of effective contractual conversion rates
|
|
|
Contractual term to maturity
|
|
0.33 Years
|
Implied expected term to maturity
|
|
0.33 Years
|
Market volatility:
|
|
|
Range of volatilities
|
|
47.4% - 91.2%
|
Range of equivalent volatilities
|
|
59.9% - 69.9%
|
Contractual interest rate
|
|
8.0 - 9.0%
|
Range of equivalent market risk adjusted interest rates
|
|
8.08% - 9.08%
|
Range of equivalent credit risk adjusted yields
|
|
0.67%
|
Risk-free rates
|
|
0.01% - 0.07%
|
The following table reflects the issuances of compound embedded derivatives, redemptions and changes in fair
value inputs and assumptions related to the compound embedded derivatives during the six months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Balances at January 1
|
|
$
|
47,243
|
|
|
$
|
1,529,583
|
|
Issuances
|
|
|
|
|
|
|
|
|
Expirations from redemptions of host contracts reflected in income
|
|
|
|
|
|
|
(633,351
|
)
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
(47,243
|
)
|
|
|
(42,268
|
)
|
|
|
|
|
|
|
|
|
|
Balances at June 30
|
|
$
|
|
|
|
$
|
853,964
|
|
|
|
|
|
|
|
|
|
|
The fair value of the compound embedded derivative is significantly influenced by our trading market price,
the price volatility in trading and the interest components of the Monte Carlo Simulation technique.
On October 11, 2010, we also
issued warrants to acquire 1,800,000 of our common shares in connection with the Series G Convertible Preferred Stock Financing. During April 4-8, 2011, we issued warrants to acquire 525,000 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 1,302,083 of our common shares in connection with the Senior Convertible Note Financing Transaction. These warrants
required liability classification as derivative financial instruments because certain down-round anti-dilution protection or price protection features included in the warrant agreements are not consistent with the concept of equity. We applied the
Binomial Lattice valuation technique in estimating the fair value of the warrants because we believe that this technique is most appropriate and reflects all of the assumptions that market participants would likely consider in transactions involving
the warrants, including the potential incremental value associated with the down-round anti-dilution protections.
The Binomial Lattice
technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators. All remaining warrants linked to 1,725,000 shares of common stock were exercised on
October 11, 2013. Therefore, the warrants linked to 1,725,000 shares of common stock were not outstanding as of June 30, 2014 and December 31, 2013. Significant assumptions and utilized in the Binomial Lattice process are as follows
for the warrants linked to 1,725,000 shares of common stock as of June 30, 2013:
20
|
|
|
|
|
June 30,
2013
|
Linked common shares
|
|
1,725,000
|
Quoted market price on valuation date
|
|
$2.96
|
Contractual exercise rate
|
|
$2.4648
|
Term (years)
|
|
0.28
|
Range of market volatilities
|
|
17.3% - 53.6%
|
Risk free rates using zero coupon US Treasury Security rates
|
|
0.02% - 0.04%
|
All remaining warrants linked to 525,000 shares of common stock expired unexercised on April 13, 2014.
Therefore, the warrants linked to 525,000 shares of common stock were not outstanding as of June 30, 2014. Significant assumptions utilized in the Binomial Lattice process are as follows for the warrants linked to 525,000 shares of common stock
as of June 30, 2013 and December 31, 2013:
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2013
|
|
2013
|
Linked common shares
|
|
525,000
|
|
525,000
|
Quoted market price on valuation date
|
|
$2.96
|
|
$2.02
|
Contractual exercise rate
|
|
$2.4648
|
|
$2.3793
|
Term (years)
|
|
0.79
|
|
0.28
|
Range of market volatilities
|
|
31.7% - 53.5%
|
|
50.1% - 88.3%
|
Risk free rates using zero coupon US Treasury Security rates
|
|
0.02% - 0.10%
|
|
0.01% - 0.07%
|
Significant assumptions and utilized in the Binomial Lattice process are as follows for the warrants linked to
1,562,500 shares of common stock as of June 30, 2014, June 30, 2013 and December 31, 2013:
|
|
|
|
|
|
|
|
|
June, 30
|
|
December 31,
|
|
|
2014
|
|
2013
|
|
2013
|
Linked common shares
|
|
1,562,500
|
|
1,562,500
|
|
1,562,500
|
Quoted market price on valuation date
|
|
$1.68
|
|
$2.96
|
|
$2.02
|
Contractual exercise rate
|
|
$3.60
|
|
$3.60
|
|
$3.60
|
Term (years)
|
|
2.86
|
|
3.86
|
|
3.35
|
Range of market volatilities
|
|
55.0% - 87.2%
|
|
44.3% - 62.3%
|
|
51.1% - 78.2%
|
Risk free rates using zero coupon US Treasury Security rates
|
|
0.04% - 0.47%
|
|
0.04% - 0.66%
|
|
0.07% - 0.78%
|
Custom lattice variable: Probability of exercisability (434,027 linked common shares)
|
|
|
|
|
|
|
Of the 1,302,083 common shares accessible from the warrant issued on November 8, 2011, 434,027 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 434,027 of common
shares became accessible. Warrants indexed to an additional 260,417 were issued in conjunction with the additional financing.
The
following table reflects the issuances of derivative warrants and changes in fair value inputs and assumptions related to the derivative warrants during the six months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Balances at January 1
|
|
$
|
923,580
|
|
|
$
|
3,826,619
|
|
Changes in fair value inputs and assumptions reflected in income
|
|
|
(323,736
|
)
|
|
|
(660,569
|
)
|
|
|
|
|
|
|
|
|
|
Balances at June 30
|
|
$
|
599,844
|
|
|
$
|
3,166,050
|
|
|
|
|
|
|
|
|
|
|
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.
21
NOTE MDEFERRED INCOME AND REVENUE PARTICIPATION RIGHTS
The Companys participating revenue rights and deferred revenue consisted of the following at June 30, 2014 and
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Cambridge
project
|
|
$
|
825,000
|
|
|
$
|
825,000
|
|
Republic
(now
Seattle
) project
|
|
|
62,500
|
|
|
|
62,500
|
|
Galt Resources, LLC (HMS
Victory
)
|
|
|
3,756,250
|
|
|
|
3,756,250
|
|
Marine services projects
|
|
|
1,840,404
|
|
|
|
1,840,404
|
|
|
|
|
|
|
|
|
|
|
Total deferred income and participating revenue rights
|
|
$
|
6,484,154
|
|
|
$
|
6,484,154
|
|
|
|
|
|
|
|
|
|
|
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 now referred to as the HMS
Sussex
shipwreck project. We also sold RPCs related to a project formerly called the
Republic
project which we now call the
Seattle
project. The
Seattle
project refers to a shipwreck which we have not yet located. 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 $435 million, and
12.375% of gross revenue above $35 million generated by the project.
Seattle
project
In a private placement that closed in September 2000, we sold units consisting of
Republic
Revenue Participation
Certificates and Common Stock. Each $50,000 unit entitled the holder to 1% of the gross revenue generated by the
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
Republic
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 was paid in full in the amount of $12,506,755 during the first quarter of 2013 for their remaining share of the
Gairsoppa
project investment. There are no future payments remaining to Galt for
the
Gairsoppa
project nor will they receive or have they received any further distributions from the
Gairsoppa
project proceeds. 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
million).
Marine service projects
Since 2009, we entered into several marine search services contracts associated with the Robert Frasier Marine, Ltd. projects. For each
contract, revenue is recognized over the contractual period when services are performed as defined by the contract. The period of time a search project remains active varies but usually extends over several months and may be accelerated or extended
depending upon operational factors. At June 30, 2014, we have a $1,840,404 service obligation on one service contract that will be recognized as revenue over the period of time the contractual services are provided. At December 31, 2013,
we had the same service obligation of $1,840,404.
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