NOTE R – ASSET SALE AND LOAN RESTRUCTURING

Acquisition Agreement

On December 10, 2015, we entered into an acquisition agreement (the “Acquisition Agreement”) with Monaco Financial, LLC (“Monaco”), and certain affiliates of Monaco pursuant to which, among other things, we sold certain assets to Monaco and its affiliates, and Monaco (a) repaid our indebtedness for borrowed money owed to a bank, (b) reduced the amount of indebtedness owed by us to Monaco and agreed to certain modifications regarding the remaining indebtedness, and (c) applied the amount of advances previously made by Monaco to us, as well as additional cash, to the consideration paid to us for the transaction.

In conjunction with the transactions contemplated by the Acquisition Agreement, one of Monaco’s affiliates, Magellan Offshore Services Ltd (“Magellan”) agreed to pay us an amount equal to 21.25% of the difference between (x) the monetized proceeds to Magellan or its affiliates from sales of valuable trade cargo from covered shipwrecks, minus (y) the recovery costs incurred by Magellan or its affiliates related to such covered shipwreck. The covered shipwrecks consist of the shipwrecks included in the proprietary shipwreck database and research library referenced in the paragraph immediately below and any other shipwrecks discovered or identified by or presented to us or Magellan and its affiliates during the five-year period after the date of the Acquisition Agreement.

The assets sold by us pursuant to the Acquisition Agreement include (i) our rights to receive proceeds from a specified shipwreck project, (ii) gold and silver coins and bullion (primarily recovered from the SS Republic shipwreck), (iii) the land and building in Tampa, Florida used as our headquarters, (iv) subject to specified exclusions, our proprietary shipwreck database and research library, and our rights to any shipwreck projects derived therefrom, (v) artifacts recovered from shipwrecks, (vi) an artifact database, (vii) the SHIPWRECK! Pirates and Treasure traveling exhibit and all other shipwreck exhibits owned by us, (viii) various photographs, video, and graphics owned by us, (ix) side scan data, re-navigation analyses and search data from previous shipwreck searches, (x) internet and social media content and software platforms, and communities related to shipwrecks, (xi) shipwreck publications, (xii) certain merchandise in inventory, (xiii) one-half of the shares of Neptune Minerals, Inc. (“Neptune”) held by us, and (xiv) one-half of the receivables owed to us by Neptune. The fair values of the assets given up amounted to $19,195,131. Assets of ours excluded from the transaction include (x) our research vessel, equipment related thereto, and other operational assets, (y) HMS Victory and three other specified shipwreck projects (the “Excluded Projects”), and (z) assets, properties, and rights primarily used by us in our businesses other than the shipwreck business. Our indebtedness for borrowed money repaid by Monaco consisted of $11.7 million owed by us to Fifth Third Bank.

Accounting considerations

We analyzed the transaction under the guidance of ASC 470-60 Troubled Debt Restructuring to determine if the transaction qualified as a troubled debt restructuring. For a debt restructuring to be considered troubled, the debtor must be experiencing financial difficulty and the creditor must have granted a concession. We analyzed the Monaco Transaction under ASC 470-60 and determined that we met one or more of the definitions of a company experiencing financial difficulty, such as being under threat of being delisted from an exchange. Furthermore, we determined that the borrowing rate on the restructured debt is significantly less than the effective borrowing rate on the old debt and as such Monaco granted a concession on the debt. As a result, the debt restructuring falls into the troubled debt restructuring guidance.

This transaction is a combination of types including full satisfaction, partial satisfaction and modification of terms. In accordance with the guidance in ASC 470-60, the following steps are taken to determine the proper accounting treatment: (i) step1: the carrying amount of the loans is reduced by the fair value of the assets transferred, (ii) step 2: a gain or loss resulting from any disposition of assets (based on the difference between the fair value of assets disposed and their respective carrying amount) is recognized and (iii) step3: a gain on restructuring is recorded if the future undiscounted cash flows are less than the revised carrying value (carrying value less fair value of assets). If the future undiscounted cash flows are greater than the revised carrying value, no gain is recorded.

Prior to implementing step 1 (the carrying amount of the loans is reduced by the fair value of the assets transferred), we had to determine the fair value of the assets transferred. The fair value of the assets transferred was determined on a market based approach and using discounted cash flow models. We used historical transaction data, external valuations where available, and other relevant data to estimate the fair value of the assets which were sold. The group of assets consisted of both financial and non-financial assets. The net carrying book value of the assets sold was $13.5 million, comprised mainly of $6.3 million of accounts receivable, $2.1 million of building and land, and $5.1 million of short and long term inventory. The fair value assigned to these assets and the other items sold that had no net carrying book value was $19.1 million. The estimated fair market value of the sold assets exceeded the carrying book value of the assets due to the use of US generally accepted accounting principles that did not allow us to write-up the carrying value of some assets or capitalize items that were not fully measurable or collectible at the balance sheet date.

The approach used in calculating the fair value of financial assets was the discounted cash flow approach. Inputs used in the modeling consisted of carrying value, expected term, discount rate based on effective rate of new debt and adjustments for various risk factors. These inputs consisted of a combination of level 2 and level 3 inputs as defined in ASC 820 and detailed in our Note A.

The approach used in calculating the fair value of non-financial assets was the market approach. This approach consisting of observable market prices of same or similar nature as well as discounts based on condition of the asset and expected term to convert to cash. This asset category and these inputs are deemed to be level 3 inputs as defined in ASC 820 and detailed in our Note A.

Step1: We reduced the carrying amount of the loans by the fair value of the assets given up as follows:

The combined carrying value of the all loans (associated with the transaction) on December 10, 2015 prior to the transaction taking effect:


Loan Description	Reduction in Carrying Amount*
Monaco advance/loan	$	2,000,000
Monaco Loan (Tranche 1 – August 14, 2014)**		5,000,000
Fifth Third term		3,000,000
Fifth Third SSCA project loan		7,684,514
Fifth Third Laurel mortgage		1,001,000
Term loan interest paid by Monaco		12,559
Mortgage interest paid by Monaco		3,182
SSCA project loan interest paid by Monaco		36,614
Monaco Loan (Tranche 2 – October 1, 2014)		387,262

Fair value of assets given up and assigned to debt extinguished	$	19,125,131

*	Represents the reduction in carrying amount of each of the loans by the fair value of the assets. The reduction is to equate to the fair value of the assets.

In accordance with the asset purchase agreement, the $5,000,000 loan balance is reduced by (i) the cash or other value received by Monaco from the SSCA, or (ii) If the proceeds received by Monaco from the SSCA project are insufficient to have paid off the loan balance of $5,000,000 by December 31, 2017, then Monaco can seek repayment of the remaining outstanding balance on the loan by withholding our 21.25% “additional consideration” in new shipwreck projects done with Monaco. Management believes that there is a 100% chance that the cash or other value will be received by Monaco from the SSCA. Because there is a 100% likelihood that cash or other value will be received by Monaco from the SSCA, there is also 100% likelihood of the $5,000,000 Note being extinguished. As such this analysis includes the $5,000,000 as debt being extinguished.

Step 2: We recognized a gain resulting from the disposition of assets (based on the difference between the fair value of assets disposed and their respective carrying amount).

The fair value of the assets given up ($19,125,131) was compared to the carrying value of the assets given up ($13,513,223). The excess of the fair value over the carrying value amounted to $5,611,908. Accordingly, we recorded a $5,611,907 gain on the exchange of assets (extinguishment). While the guidance in ASC 470-580-40-2 states that extinguishment transactions between related parties may be in essence capital transactions, there is no guidance that suggests a gain on the sale of assets between related parties is treated as capital transactions. As such, this gain is recorded in the statement of operations.

Step 3: We determined if the future undiscounted cash flows are greater or less than the revised carrying value.


Future Cash Flows:	Amount
Monaco Loan (Tranche 2 – October 1, 2014)	$	300,000
Tranche 2 accrued interest		7,534
Tranche 2 future interest		67,989

Total Tranche 2 debt		375,523

Monaco Loan (Tranche 3 – December 1, 2014)		2,500,000
Tranche 3 accrued interest		7,534
T3 future interest		566,575

Total Tranche 3 debt		3,074,109

Undiscounted future cash flows	$	3,449,632

Revised Carrying Value
Carrying value of all combined loans		23,466,108
Reduced by fair value of assets		(19,125,131	)

Revised carrying value*	$	4,340,977

Gain on restructure (difference between revised carrying amount and undiscounted future cash flows)	$	891,345

*Calculation of revised carrying value


Combined loans	Note carrying values
Monaco advance/loan	$	2,000,000
Monaco Loan (Tranche 1 – August 14, 2014)		5,000,000
Monaco Loan (Tranche 2 – October 1, 2014)		2,470,703
Tranche 2 accrued interest		7,534
Monaco Loan (Tranche 3 – December 1, 2014)		2,242,468
Tranche 3 accrued interest		7,534
Fifth Third term		3,000,000
Fifth Third SSCA project loan		7,684,514
Fifth Third Laurel mortgage		1,001,000
Term loan interest paid by Monaco		12,559
Mortgage interest paid by Monaco		3,182
SSCA project loan interest paid by Monaco*		36,614

Total carrying value of all notes combined	$	23,466,108
Fair value of assets transferred		(19,125,131	)

Excess debt carrying value of fair asset value	$	4,340,977

Since the future undiscounted cash flows are less than the revised carrying value, a gain on restructuring for the difference is recorded. However, the guidance in ASC 470-580-40-2 suggests that if the debt holders are considered a related party, the debt restructuring typically would be considered a capital transaction. Since Monaco is considered a related party, the gain on restructuring has been recorded in equity. See NOTE M for further discussion on related parties. The gain of $891,345 adjusted the carrying value of the remaining notes to the undiscounted future cash flow amount of $3,449,632. No interest expense is recorded going forward. All future interest payments reduce the carrying value.