ITEM
1: FINANCIAL STATEMENTS
OMAGINE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
4,684
|
|
|
$
|
229,228
|
|
Inventory (Note 2)
|
|
|
|
|
|
|
|
|
Land under development
|
|
|
490,813,363
|
|
|
|
490,813,363
|
|
Total inventory held for sale
|
|
|
490,813,363
|
|
|
|
490,813,363
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
68,970
|
|
|
|
1,859
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
490,887,017
|
|
|
|
491,044,450
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Real estate held for investment (Note 2)
|
|
|
|
|
|
|
|
|
Total investment in real estate
|
|
|
227,800,637
|
|
|
|
227,800,637
|
|
Office and computer equipment
|
|
|
160,002
|
|
|
|
160,002
|
|
Less accumulated depreciation and amortization
|
|
|
(154,534
|
)
|
|
|
(153,738
|
)
|
Total Property and Equipment
|
|
|
227,806,105
|
|
|
|
227,806,901
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
4,057
|
|
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
718,697,179
|
|
|
$
|
718,855,408
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable and accrued interest (less unamortized discount of $1,755 and $13,904, respectively)
|
|
$
|
546,596
|
|
|
$
|
526,372
|
|
Note payable and accrued interest - YA II PN, Ltd. (less
unamortized discount of $50,000 and $68,750, respectively)
|
|
|
558,055
|
|
|
|
686,387
|
|
Note payable - St. George Investments LLC (less unamortized Original Issue Discount of $7,500 and $22,500 respectively)
|
|
|
177,500
|
|
|
|
162,500
|
|
Accounts payable
|
|
|
589,987
|
|
|
|
663,913
|
|
Accrued officers' payroll
|
|
|
409,527
|
|
|
|
419,626
|
|
Accrued expenses and other current liabilities
|
|
|
177,549
|
|
|
|
209,192
|
|
Total Current Liabilities
|
|
|
2,459,214
|
|
|
|
2,667,990
|
|
Long Term Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
2,459,214
|
|
|
|
2,667,990
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock: $0.001 par value Authorized:
850,000 shares Issued and outstanding: - none
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value Authorized: 50,000,000 shares Issued and outstanding: 21,643,178 shares in 2017 and 20,432,648 in 2016
|
|
|
21,643
|
|
|
|
20,432
|
|
Capital in excess of par value
|
|
|
470,994,489
|
|
|
|
470,350,815
|
|
Deficit
|
|
|
(41,862,468
|
)
|
|
|
(41,273,266
|
)
|
Total Omagine, Inc. stockholders' equity
|
|
|
429,153,664
|
|
|
|
429,097,981
|
|
Noncontrolling interests in Omagine LLC
|
|
|
287,084,301
|
|
|
|
287,089,437
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
716,237,965
|
|
|
|
716,187,418
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
718,697,179
|
|
|
$
|
718,855,408
|
|
See
accompanying notes to consolidated financial statements.
OMAGINE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUE:
|
|
|
|
|
|
|
Total revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers and directors’ compensation (including
stock-based compensation of $263,885 and $226,385, respectively)
|
|
|
340,135
|
|
|
|
351,968
|
|
Professional fees
|
|
|
3,575
|
|
|
|
44,606
|
|
Consulting fees
|
|
|
26,750
|
|
|
|
77,836
|
|
Travel
|
|
|
75,988
|
|
|
|
149,835
|
|
Occupancy
|
|
|
16,406
|
|
|
|
16,516
|
|
Other selling general and administrative (including stock-based compensation of $7,500 and $0 respectively)
|
|
|
62,375
|
|
|
|
65,793
|
|
Total Costs and Expenses
|
|
|
525,229
|
|
|
|
706,554
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(525,229
|
)
|
|
|
(706,554
|
)
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE
|
|
|
|
|
|
|
|
|
Amortization of debt discounts
|
|
|
(45,899
|
)
|
|
|
(23,333
|
)
|
Interest expense
|
|
|
(23,210
|
)
|
|
|
(13,660
|
)
|
Total Other Expense
|
|
|
(69,109
|
)
|
|
|
(36,993
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(594,338
|
)
|
|
|
(743,547
|
)
|
|
|
|
|
|
|
|
|
|
Add net loss attributable to noncontrolling interests in Omagine LLC
|
|
|
5,136
|
|
|
|
22,447
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO OMAGINE, INC.
|
|
$
|
(589,202
|
)
|
|
$
|
(721,100
|
)
|
|
|
|
|
|
|
|
|
|
LOSS PER SHARE - BASIC AND DILUTED
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
- BASIC AND DILUTED
|
|
|
21,207,550
|
|
|
|
18,875,626
|
|
See
accompanying notes to consolidated financial statements.
OMAGINE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
and Outstanding
|
|
|
Capital
in
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
|
|
|
$0.001
Par
|
|
|
Excess
of
|
|
|
|
|
|
Interests
in
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Par
Value
|
|
|
Deficit
|
|
|
Omagine
LLC
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2014
|
|
|
16,878,119
|
|
|
$
|
16,878
|
|
|
$
|
32,252,954
|
|
|
$
|
(32,669,399
|
)
|
|
$
|
(79,621
|
)
|
|
$
|
(479,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for 401(k) Plan contribution
|
|
|
36,483
|
|
|
|
37
|
|
|
|
76,213
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
grant to consultant for services rendered
|
|
|
5,000
|
|
|
|
5
|
|
|
|
9,445
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for cash
|
|
|
206,281
|
|
|
|
206
|
|
|
|
219,794
|
|
|
|
-
|
|
|
|
-
|
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to an Executive Officer in payment of salaries payable
|
|
|
100,000
|
|
|
|
100
|
|
|
|
119,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options exercised by former Director
|
|
|
2,000
|
|
|
|
2
|
|
|
|
1,018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of Tempest Warrants
|
|
|
160,603
|
|
|
|
161
|
|
|
|
252,879
|
|
|
|
-
|
|
|
|
-
|
|
|
|
253,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for finders' fees on restricted Common Stock sales
|
|
|
41,245
|
|
|
|
41
|
|
|
|
72,459
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Directors' Compensation for services September 1, 2015 to December 31, 2015
|
|
|
50,000
|
|
|
|
50
|
|
|
|
99,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock under SEDA
|
|
|
17,696
|
|
|
|
18
|
|
|
|
24,982
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted Common Stock for cash
|
|
|
1,230,886
|
|
|
|
1,230
|
|
|
|
1,238,470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,239,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense
|
|
|
-
|
|
|
|
-
|
|
|
|
4,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense - Extension of 1,965,000 Strategic Options to December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
915,493
|
|
|
|
-
|
|
|
|
-
|
|
|
|
915,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense - Extension of 950,000 Strategic Options to December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
541,215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
541,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense - Stock Appreciation Rights (1,455,000 expiring December 31, 2017)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,654,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,654,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment-in-Kind
capital contribution of land by noncontrolling interest in Omagine LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
431,168,400
|
|
|
|
-
|
|
|
|
287,445,600
|
|
|
|
718,614,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to noncontrolling interests in Omagine LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(195,879
|
)
|
|
|
(195,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,673,293
|
)
|
|
|
-
|
|
|
|
(5,673,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2015
|
|
|
18,728,313
|
|
|
|
18,728
|
|
|
|
468,651,654
|
|
|
|
(38,342,692
|
)
|
|
|
287,170,100
|
|
|
|
717,497,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for 401(k) Plan contribution
|
|
|
61,001
|
|
|
|
61
|
|
|
|
76,189
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Directors' Stock Compensation for services January 1, 2016 to December 31, 2016
|
|
|
115,386
|
|
|
|
116
|
|
|
|
149,884
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense
|
|
|
-
|
|
|
|
-
|
|
|
|
540
|
|
|
|
-
|
|
|
|
-
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to an Executive Officer in payment of salaries payable
|
|
|
56,000
|
|
|
|
56
|
|
|
|
50,344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Directors' Cash Compensation for services January 1, 2016 to June 30, 2016
|
|
|
83,334
|
|
|
|
83
|
|
|
|
74,917
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted Common Stock for cash
|
|
|
1,139,488
|
|
|
|
1,140
|
|
|
|
742,860
|
|
|
|
-
|
|
|
|
-
|
|
|
|
744,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Convertible Note payable liability into Common Stock
|
|
|
24,207
|
|
|
|
24
|
|
|
|
30,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to a Director for the exercise of Stock Options
|
|
|
2,000
|
|
|
|
2
|
|
|
|
1,698
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock under SEDA
|
|
|
31,289
|
|
|
|
31
|
|
|
|
24,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to consultant for services
|
|
|
30,340
|
|
|
|
30
|
|
|
|
24,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for SEDA commitment fees
|
|
|
161,290
|
|
|
|
161
|
|
|
|
149,839
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense - Extension of 1,965,000 Strategic Options to December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
232,263
|
|
|
|
-
|
|
|
|
-
|
|
|
|
232,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense - Extension of 950,000 Strategic Options to December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
59,660
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of 150,000 warrants issued to lender in connection with $75,000 loan
|
|
|
-
|
|
|
|
-
|
|
|
|
61,530
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of convertible note issued to lender in connection with $50,000 loan
|
|
|
-
|
|
|
|
-
|
|
|
|
18,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to noncontrolling interests in Omagine LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(80,663
|
)
|
|
|
(80,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,930,574
|
)
|
|
|
-
|
|
|
|
(2,930,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2016
|
|
|
20,432,648
|
|
|
|
20,432
|
|
|
|
470,350,815
|
|
|
|
(41,273,266
|
)
|
|
|
287,089,437
|
|
|
|
716,187,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for 401(k) Plan contribution
|
|
|
123,782
|
|
|
|
124
|
|
|
|
76,126
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Directors' Stock Compensation for services January 1, 2017 to December 31, 2017
|
|
|
243,507
|
|
|
|
244
|
|
|
|
149,756
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted Common Stock for cash
|
|
|
263,051
|
|
|
|
263
|
|
|
|
132,237
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to two Executive Officers in payment of salaries payable
|
|
|
147,170
|
|
|
|
147
|
|
|
|
75,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for 3 Directors' Cash Compensation for services from July 1, 2016 to June 30, 2017
|
|
|
283,020
|
|
|
$
|
283
|
|
|
$
|
149,717
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Restricted Common Stock to Stockholder relations Agent for Services rendered from January 1, 2016 to March 31, 2017
|
|
|
93,750
|
|
|
$
|
94
|
|
|
$
|
37,406
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Restricted Common Stock to Stockholder relations Agent in advance for services to be rendered April 1, 2017 to December 31, 2017
|
|
|
56,250
|
|
|
|
56
|
|
|
|
22,444
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Option expense
|
|
|
-
|
|
|
|
0
|
|
|
|
135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to noncontrolling interests in Omagine LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,136
|
)
|
|
|
(5,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(589,202
|
)
|
|
|
-
|
|
|
|
(589,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at March 31, 2017 (Unaudited)
|
|
|
21,643,178
|
|
|
$
|
21,643
|
|
|
$
|
470,994,489
|
|
|
$
|
(41,862,468
|
)
|
|
$
|
287,084,301
|
|
|
$
|
716,237,965
|
|
See
accompanying notes to consolidated financial statements.
OMAGINE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Omagine, Inc.
|
|
$
|
(589,202
|
)
|
|
$
|
(721,100
|
)
|
Adjustments to reconcile net loss to net cash flows used by operating activities:
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests in Omagine LLC
|
|
|
(5,136
|
)
|
|
|
(22,447
|
)
|
Depreciation and amortization of property and equipment
|
|
|
796
|
|
|
|
1,211
|
|
Stock-based compensation related to stock options
|
|
|
135
|
|
|
|
135
|
|
Issuance of Common Stock for Stockholder Relations Agent
|
|
|
7,500
|
|
|
|
-
|
|
Issuance of Common Stock for 401(k) Plan contributions
|
|
|
76,250
|
|
|
|
76,250
|
|
Issuance of Common Stock for Directors' fees
|
|
|
187,500
|
|
|
|
150,000
|
|
Amortization of debt discounts
|
|
|
45,899
|
|
|
|
23,333
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets and other assets
|
|
|
(7,111
|
)
|
|
|
20,930
|
|
Accrued interest on notes payable
|
|
|
10,992
|
|
|
|
4,651
|
|
Accounts payable
|
|
|
31,075
|
|
|
|
133,870
|
|
Accrued officers' payroll
|
|
|
65,901
|
|
|
|
16,442
|
|
Accrued expenses and other current liabilities
|
|
|
(31,643
|
)
|
|
|
(1,081
|
)
|
Net cash flows used by operating activities
|
|
|
(207,044
|
)
|
|
|
(317,806
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
-
|
|
|
|
-
|
|
Net cash flows used by investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of Common Stock
|
|
|
132,500
|
|
|
|
-
|
|
Principal payments on 2015 note payable to YA II PN, Ltd.
|
|
|
-
|
|
|
|
(225,000
|
)
|
Proceeds of issuance of 2016 note payable to YA II PN, Ltd. net of $60,000 commitment fee
|
|
|
-
|
|
|
|
540,000
|
|
Principal payments on 2016 note payable to YA II PN, Ltd.
|
|
|
(150,000
|
)
|
|
|
-
|
|
Net cash flows provided by (used by) financing activities
|
|
|
(17,500
|
)
|
|
|
315,000
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(224,544
|
)
|
|
|
(2,806
|
)
|
|
|
|
|
|
|
|
|
|
CASH BEGINNING OF PERIOD
|
|
|
229,228
|
|
|
|
324,703
|
|
|
|
|
|
|
|
|
|
|
CASH END OF PERIOD
|
|
$
|
4,684
|
|
|
$
|
321,897
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
14,103
|
|
|
$
|
8,996
|
|
|
|
|
|
|
|
|
|
|
NON - CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock to two Executive Officers in payment of salaries payable
|
|
$
|
76,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock to Directors in payment of accounts payable ($75,000) and prepaid fees for services for the quarter ended June 30, 2017 ($37,500)
|
|
$
|
112,500
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock to Stockholders Relations
Agent in payment of accounts payable ($30,000) and prepaid fees for the period April 1, 2017 to December 31, 2017
($22,500)
|
|
$
|
52,500
|
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
OMAGINE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of the Business
Omagine, Inc. (“OMAG”) is
a holding company incorporated in Delaware in October 2004 which operates through its wholly owned subsidiary, Journey of Light,
Inc., a New York corporation (“JOL”) and its 60% owned subsidiary Omagine LLC, a limited liability company incorporated
under the laws of the Sultanate of Oman (“LLC”). OMAG, JOL and LLC are collectively referred to herein as the “Company”.
JOL was acquired by OMAG in October 2005. LLC is the Omani real estate development company organized by OMAG to do business in
Oman.
The Company is focused on entertainment,
hospitality and real-estate development opportunities in the Middle East and North Africa (the “MENA Region”). On
October 2, 2014, LLC signed a Development Agreement with the Government of Oman (the “Government”) for the development
of the Omagine Project. On July 2, 2015, a usufruct over one million square meters of beachfront land (the “Land Rights”)
was registered in LLC’s name with the Government. On November 29, 2015, LLC executed a Murabaha Facility Agreement with
Masraf Al Rayan Bank (Qatar) for a $25 million loan to finance the first phase of the Omagine Project consisting of design, development
and initial construction activities. The loan, which is subject to satisfaction of certain conditions precedent to closing, would
bear interest at an annual rate equal to the 12 month LIBOR rate plus 1% and would be payable one year from the closing date.
One condition precedent to closing is that the loan be secured by a $25,000,000 cash deposit in an LLC account at the Qatari bank.
Such security deposit was expected to be provided by CCC pursuant to the terms of the Shareholder Agreement but this did not occur
and it is presently unlikely that this loan facility will be utilized. Contingent upon the closing of such loan and/or contingent
upon the conclusion of final discussions with several potential LLC investors, including one such investor with whom LLC has a
preliminary written investment agreement, commencement of these first phase activities is expected to begin promptly thereafter.
(See Note 9 – “Omagine Project”).
Interim Financial Statements
The consolidated balance sheet for
the Company at the end of the preceding fiscal year has been derived from the audited balance sheet and notes thereto contained
in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016 and is presented herein for comparative
purposes. All other financial statements are unaudited. In the opinion of management, all adjustments, which include only normal
recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for all periods
presented, have been made. The results of operations for the interim periods presented are not necessarily indicative of the operating
results for the respective full years.
Certain footnote disclosures normally
included in the financial statements prepared in accordance with accounting principles generally accepted in the United States
(“US GAAP”) have been omitted in accordance with the published rules and regulations of the Securities and Exchange
Commission (“SEC”). These financial statements should be read in conjunction with the financial statements and notes
thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016 filed with the
SEC on April 14, 2017.
Summary
of Significant Accounting Policies
Principles
of Consolidation
- The consolidated financial statements include the accounts of OMAG, JOL and LLC. LLC is an Omani limited
liability company organized under the laws of the Sultanate of Oman. All inter-company transactions have been eliminated in consolidation.
Financial
Instruments
- Financial instruments include cash, convertible notes payable and accrued interest, notes payable and accrued
interest, accounts payable, accrued officers’ payroll and accrued expenses and other current liabilities. The amounts reported
for financial instruments are considered to be reasonable approximations of their fair values, based on market information available
to management.
Cash
and Cash Equivalents
– The Company considers all highly liquid instruments with a maturity of three months or less at
the time of issuance to be cash equivalents. At March 31, 2017 and December 31, 2016, cash included approximately $1,600 and $2,100
respectively in an Oman bank account not covered by FDIC insurance.
Inventory
– Inventory is stated at cost. At March 31, 2017 and December 31, 2016, inventory consists only of the land under development
acquired on July 2, 2015 (which was costed at the fair value of the property at the date of acquisition). (See: Note 2 –
“Inventory and Property”).
Property,
Plant and Equipment
- Property, plant and equipment (“PP&E”) are stated at cost. PP&E consists of land
under development which is held for investment; furniture and fixtures; and office machinery and equipment. PP&E (including
buildings and structures after they are completed and put into service) are depreciated on a straight-line basis over their respective
useful service lives. (See: Note 2 – “Inventory and Property”).
Impairment
of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable
market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change
that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held
and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash
flows and measures the impairment loss based on the difference between the carrying amount and the estimated fair value.
Stockholders’
Equity
- Stockholders’ equity consists of common stock, capital in excess of par value, deficit, and non-controlling
interests in LLC. The Company’s consolidated financial statements for the year ended December 31, 2015 reflect an increase
of $718,614,000 in stockholders’ equity resulting from LLC’s July 2, 2015 acquisition of the Land Rights (a $431,168,400
increase in OMAG stockholders’ equity and a $287,445,600 increase in non-controlling interests in LLC). (See: Note 2
– “Inventory and Property”).
Estimates
and Uncertainties
- The preparation of financial statements in conformity with accounting principles generally accepted in
the United States (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results as determined at a later date could differ
from those estimates. In recording $718,614,000 in the accompanying consolidated financial statements for the year ended December
31, 2015 as the value of the non-cash consideration received by LLC as Land Rights, management relied to a great extent upon the
written opinions of three expert valuation firms engaged by LLC to value such Land Rights. Furthermore, in allocating such Land
Value to inventory and land under development, management relied to a great extent upon the written opinion of an expert independent
accounting firm engaged by LLC to advise it on the proper accounting to record the Land Value in LLC’s financial statements.
Both LLC’s independent auditor and the Company’s independent auditor are in agreement with and have consented to the
accounting indicated in the accompanying consolidated financial statements for the year ended December 31, 2015. (See: Note 2
– “Inventory and Property”).
Revenue
Recognition
- The Company follows the guidelines of SEC Staff Accounting Bulletin No. 101, ”Revenue Recognition in Financial
Statements” (SAB101). LLC signed a development agreement for the Omagine Project with the Government of Oman in October
2014, and will recognize revenue ratably over the development period of the Omagine Project measured by methods appropriate to
the services or products provided.
Income
Taxes
- OMAG and JOL are subject to United States (“U.S.”) income taxes at both the federal and state level
and LLC is subject to income taxes in Oman. Separate state income tax returns are filed with each state in the U.S. in which OMAG
or any subsidiary of OMAG is incorporated or qualified as a foreign corporation. LLC files an income tax return in Oman. Other
than with respect to LLC, the Company is not presently subject to income taxes in any foreign country. The Company reports interest
and penalties as income tax expense. Deferred tax assets and liabilities are recognized based on differences between the book
and tax bases of assets and liabilities using presently enacted income tax rates. The Company establishes a provision for U.S.
income taxes by applying the provisions of the applicable enacted tax laws to taxable income, if any, for the relevant period.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Stock-based
Compensation
- Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification
718, “Compensation – Stock Compensation” (“ASC 718”). For stock options granted, OMAG has recognized
compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For such stock
option awards, OMAG has recognized compensation expense using a straight-line amortization method over the requisite service
period. ASC 718 requires that stock-based compensation expense be based on awards that are ultimately expected to vest. Stock
option expense for the three months ended March 31, 2017 and 2016 were $135 and $135, respectively. (See Note 8).
Earnings
(Loss) Per Share
- Basic earnings (loss) per share of OMAG’s $0.001 par value common stock (“Common Stock”)
is based upon the weighted-average number of shares of Common Stock (“Common Shares”) outstanding during the relevant
period. Diluted earnings (loss) per share is based upon the weighted-average number of Common Shares and dilutive securities (stock
options, warrants, stock appreciation rights and convertible notes) outstanding during the relevant period. Dilutive securities
having an anti-dilutive effect on diluted earnings (loss) per share are excluded from the calculation.
For
the three month period ended March 31, 2017 and 2016, the Common Shares underlying the following dilutive securities were excluded
from the calculation of diluted shares outstanding as the effect of their inclusion would be anti-dilutive:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
|
373,728
|
|
|
|
159,913
|
|
Stock Options
|
|
|
3,109,000
|
|
|
|
3,273,000
|
|
Stock Appreciation Rights
|
|
|
1,455,000
|
|
|
|
1,455,000
|
|
Warrants
|
|
|
6,572,124
|
|
|
|
6,771,521
|
|
Total Common Shares Issuable
|
|
|
11,509,852
|
|
|
|
11,659,434
|
|
Non-controlling
Interests in Omagine LLC
- In May 2011, OMAG, JOL and three
new investors (the “New Investors”) entered into a shareholders’ agreement (the “Shareholder Agreement”)
pursuant to which OMAG’s 100% ownership of LLC was reduced to 60%.
The
New Investors were:
i.
|
The Office of Royal Court Affairs (“RCA”), an Omani organization, and
|
|
|
ii.
|
Two subsidiaries of Consolidated Contractors International Company, SAL (“CCIC”). CCIC is a 65 year old Lebanese multi-national company headquartered in Athens, Greece having worldwide, and operating subsidiaries in among other places, every country in the Middle East. The two CCIC subsidiaries which are LLC shareholders are:
|
|
|
|
1.
|
Consolidated Contracting Company S.A. (“CCC-Panama”), a wholly owned subsidiary of CCIC and is its investment arm, and
|
|
|
|
|
2.
|
Consolidated Contractors (Oman) Company LLC, CCIC’s operating subsidiary in Oman which is a construction company.
|
As
of the date hereof, the shareholders of LLC and their associated ownership percentages as registered with the Government of Oman
are as follows:
LLC Shareholder
|
|
Percent
|
|
OMAG*
|
|
|
60
|
%
|
RCA
|
|
|
25
|
%
|
CCC-Panama
|
|
|
10
|
%
|
CCC-Oman
|
|
|
5
|
%
|
Total:
|
|
|
100
|
%
|
* In April 2017, OMAG exercised its options
to purchase all of the LLC shares owned by both CCC-Oman and CCC-Panama. See Note 11 – Subsequent Events.
Recent
Accounting Pronouncements
On
August 27, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 provides guidance on
determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard
requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one
year of the date of issuance of the entity's financial statements (or within one year after the date on which the financial statements
are available to be issued, when applicable). Further, an entity must provide certain disclosures if there is “substantial
doubt about the entity's ability to continue as a going concern.” The FASB believes that requiring management to perform
the assessment will enhance the timeliness, clarity and consistency of related disclosures and improve convergence with IFRS (which
emphasize management's responsibility for performing the going concern assessment). However, the time horizon for the assessment
(look-forward period) and the disclosure thresholds under U.S. GAAP and IFRS will continue to differ. This ASU 2014-15 is effective
for annual periods ending after December 16, 2016, and interim periods thereafter. The Company does not believe that this
pronouncement has had or will have a material impact on our financial statement disclosures.
Certain
other accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective
and therefore have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations
from adoption of these standards is not expected to be material.
NOTE
2 – INVENTORY AND PROPERTY
The
Company’s consolidated financial statements for the three months ended March 31, 2017 reflect $718,614,000 of land
under development which the Company has allocated to inventory ($490,813,363) and property ($227,800,637). This $718,614,000
of land under development was purchased by LLC on July 2, 2015 pursuant to the terms of the Shareholder Agreement whereby an
LLC shareholder agreed to transfer the Land Rights over one million square meters of beachfront land (the “Omagine
Site”) to LLC in exchange for the issuance to such shareholder of 663,750 Omagine LLC shares (the
“LLC Shares”). Since the Land Rights represented a non-cash payment for the LLC Shares, it was necessary to value
the Land Rights.
Three
expert real estate valuation companies were engaged by LLC to independently value the Land Rights in accordance with the professional
standards specified by the Royal Institution of Chartered Surveyors (“RICS”) and International Financial Reporting
Standards (“IFRS”). The average of the three Land Rights valuations was 276,666,667 Omani Rials ($718,614,000).
LLC
engaged the services of PricewaterhouseCoopers LLP (“PwC”) as its IFRS accounting consultant to definitively determine
the correct method of recording the $718,614,000 average value of its Land Rights in its IFRS compliant financial statements.
After receiving PwC’s written opinion, LLC then consulted with its independent auditor, Deloitte & Touche (M.E.) &
Co. LLC (“Deloitte”) with respect to the matter and received Deloitte’s written opinion agreeing with the PwC
opinion. Both PwC and Deloitte independently concluded that the Land Rights should be recorded as capital, work-in-process (inventory)
and land on LLC’s financial statements. With respect to the Company’s consolidated financial statements, the Company’s
independent auditor in the U.S. has likewise concurred that, pursuant to US GAAP, the Land Rights should also be recorded as capital,
inventory and land.
In
determining the allocations to inventory and to land, LLC followed the advice of Deloitte by computing the percentage (x) calculated
by dividing (y) the area of the land LLC definitively knew it intended to sell, by (z) the total area of land constituting the
Omagine Site, and then multiplying that percentage (x) by $718,614,000 to get the correct number (N) for inventory. The correct
number for land was then calculated by subtracting N from $718,614,000. Using its detailed internal financial model, management
calculated (x) to be equal to 68.3%, thereby making the inventory number $490,813,363 and the land number $227,800,637. In its
consolidated financial statements therefore, the Company has divided the Land Rights between land under development which is held
for sale (inventory) and land under development which is held for investment (PP&E). These percentage allocations may be modified
over time as the more precise land uses become apparent during and after the master planning and construction processes.
As
more fully described in Note 1 and in Note 9 (See: “the Omagine LLC Shareholder Agreement section of Note 9), financing
for the Omagine Project has not yet been secured. If such financing is not obtained, LLC may not be able to complete the Omagine
Project and may not be able to recover the $718,614,000 value of the land under development described above.
NOTE
3 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consist of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepaid rent (New York office)
|
|
$
|
-
|
|
|
$
|
1,859
|
|
|
|
|
|
|
|
|
|
|
Prepaid rent (Muscat, Oman office)
|
|
|
8,970
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued to three independent directors for services
to be rendered from April 1, 2017 to June 30, 2017
|
|
|
37,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued to investor relations vendor for services to
be rendered from April 1, 2017 to December 31, 2017
|
|
|
22,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68,970
|
|
|
$
|
1,859
|
|
NOTE
4 – CONVERTIBLE NOTES PAYABLE AND ACCRUED INTEREST
Convertible
notes payable and accrued interest thereon consist of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Due to a director of OMAG, interest at 10% per annum, due on demand, convertible into Common Stock at a conversion price of $2.50 per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Accrued Interest
|
|
|
97,466
|
|
|
|
93,768
|
|
|
|
|
|
|
|
|
|
|
Due to investors, interest at 15% per annum, due on demand, convertible into Common Stock at a conversion price of $2.50 per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
Accrued Interest
|
|
|
42,460
|
|
|
|
41,165
|
|
|
|
|
|
|
|
|
|
|
Due to investors, interest at 10% per annum, due on demand, convertible into Common Stock at a conversion price of $2.50 per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Accrued Interest
|
|
|
19,253
|
|
|
|
18,021
|
|
|
|
|
|
|
|
|
|
|
Due to entity owned by two directors of OMAG, interest at 5% per annum,
due on December 24, 2016, convertible into Common Stock at a conversion price of $0.75 per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Accrued Interest
|
|
|
3,014
|
|
|
|
1,781
|
|
|
|
|
|
|
|
|
|
|
Due to an investor, interest at 5% per annum, due on April 13, 2017, convertible into Common Stock at a conversion price of $0.65 per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized Debt Discount
|
|
|
(1,755
|
)
|
|
|
(13,904
|
)
|
|
|
|
|
|
|
|
|
|
Accrued Interest
|
|
|
1,158
|
|
|
|
541
|
|
Total
|
|
$
|
546,596
|
|
|
$
|
526,372
|
|
NOTE
5 – NOTES PAYABLE AND ACCRUED INTEREST – YA II PN, LTD. (p/k/a YA GLOBAL MASTER SPV, LTD
.)
In July 2013, OMAG borrowed $200,000
from YA II PN, Ltd. (“YA”) (p/k/a YA Global Master SPV, Ltd.) via an unsecured loan (the “2013 YA Loan”)
and on April 23, 2014 OMAG paid the 2013 YA Loan balance and accrued interest thereon due at April 23, 2014 in full and borrowed
an additional $500,000 from YA via a second unsecured loan (the “2014 YA Loan”) and on April 22, 2015 OMAG paid the
2014 YA Loan balance and the accrued interest thereon in full. On May 20, 2015, OMAG borrowed an additional $500,000 from YA via
a third unsecured loan (the “2015 YA Loan”). On March 15, 2016 OMAG paid the 2015 Loan balance and the accrued interest
thereon in full and borrowed an additional $600,000 from YA via a fourth unsecured loan (the “March 2016 YA Loan”)
and on June 22, 2016, OMAG borrowed an additional $400,000 from YA via a fifth unsecured loan (the “June 2016 YA Loan”).
OMAG paid both the March 2016 Loan and the June 2016 Loan balances and accrued interest thereon in full. On December 7, 2016 OMAG
borrowed an additional $750,000 from YA via a sixth unsecured loan (the “December 2016 YA Loan”).
Notes
payable and accrued interest thereon due to YA consist of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
December 2016 YA Loan - interest at 10% per annum, due in 12 monthly installments of principal ($75,000 monthly January 2017 to March 2017, $65,000 monthly April 2017 to June 2017, $55,000 monthly July 2017 to October 2017, $50,000 in November 2017 and $60,000 in December 2017.)
|
|
|
600,000
|
|
|
|
750,000
|
|
Less: Unamortized debt discount at March 31, 2017 and December 31, 2016
|
|
|
(50,000
|
)
|
|
|
(68,750
|
)
|
Principal, net
|
|
|
550,000
|
|
|
|
681,250
|
|
Accrued interest
|
|
|
8,055
|
|
|
|
5,137
|
|
Total
|
|
$
|
558,055
|
|
|
$
|
686,387
|
|
NOTE
6 – NOTE PAYABLE – ST. GEORGE INVESTMENTS LLC
On
November 14, 2016, the Company entered into an interest free six month Convertible Promissory Note with an accredited investor
for the principal amount of $185,000 due on May 13, 2017, convertible into the Company’s Common Stock only in the case of
an Event of Default at a Conversion Price equal to 60% of the three lowest daily Volume Weighted Average Prices for the Company’s
Common Stock during the twenty trading days immediately preceding the Conversion. The Company may prepay the Note in whole or
in part at any time without penalty. After deduction of a $30,000 original issue discount (OID) and legal fees of $5,000, the
Company received net proceeds of $150,000 on November 16, 2016. (See: Exhibits 10.42 and 10.43, the Note Purchase Agreement and
the Securities Purchase Agreement). See Note 11 – Subsequent Events.
NOTE
7 – COMMON STOCK
With
respect to the issuances of the Common Shares listed below:
|
1.
|
see
Note 9 under ”Equity Finance Agreements” with respect to sales of Common Shares made to YA II PN, Ltd. (p/n/a
YA Global Master SPV, Ltd.) (”YA”) pursuant to the Standby Equity Distribution Agreement (“2014 SEDA”).
|
|
|
|
|
2.
|
where
issuances of restricted Common Shares occurred at non-discounted valuations, it is so noted and all such non-discounted valuations
were based on the closing price of a Common Share on the relevant date.
|
|
|
|
|
3.
|
where
issuances of restricted Common Shares occurred at discounted valuations, it is so noted and all such discounted valuations
were calculated using the Finnerty Method based on the closing price of a Common Share on the relevant date less a restricted
stock discount.
|
|
|
|
|
4.
|
where
issuances of restricted Common Shares occurred at agreed upon negotiated prices, the sale proceeds or value of services rendered
are so noted.
|
On
January 4, 2017, OMAG contributed 123,782 restricted Common Shares at a non-discounted valuation of $76,250 to all eligible
employees of Omagine Inc. 401(k) Plan.
On
January 4, 2017, OMAG issued 81,169 restricted Common Shares at a non-discounted valuation of $50,000 to each of the Corporation’s
three independent directors based on the $0.616 closing price of the Corporation’s Common Stock on December 30, 2016 for
the 50% non-cash payment of the $100,000 annual retainer due them.
On
January 13, 2017, OMAG sold 18,051 restricted Common Shares to an accredited investor for proceeds of $10,000.
On
January 20, 2017, OMAG sold 25,000 restricted Common Shares to an accredited investor for proceeds of $12,500.
On
January 25, 2017, OMAG sold 20,000 restricted Common Shares to an accredited investor for proceeds of $10,000.
On
February 1, 2017, the President of the Company purchased 100,000 restricted Common Shares based on the $0.62 closing price of
OMAG’s Common Stock on January 31, 2017 minus the Finnerty discount of 18% for proceeds of $51,000.
On
February 2, 2017, the three independent Company directors each purchased 94,340 restricted Common Shares and the Company’s
Vice President purchased 47,170 restricted Common Shares based on the $0.6414 closing price of OMAG’s Common Shares on
February 1, 2017 minus the Finnerty discount of 18% for aggregate proceeds of $175,000.
On
February 21, 2017, OMAG sold 200,000 restricted Common Shares to a non-U.S. person who is an accredited investor for proceeds
of $100,000.
On
March 31, 2017, the Company issued 93,750 restricted shares of Common Stock to its investor relations vendor as payment in full
for $37,500 of services rendered for the period January 1, 2016 through March 31, 2017, and issued an additional 56,250 restricted
shares of Common Stock to the same vendor as payment in full for $22,500 of services to be rendered for the period April 1, 2017
through December 31, 2017.
On
January 16, 2016, OMAG contributed an aggregate of 61,001 restricted Common Shares at the non-discounted valuation of $76,250
to all eligible employees of the Omagine, Inc. 401(k) Plan.
On
January 16, 2016, OMAG issued 38,462 restricted Common Shares to each of three independent directors for services to be rendered
from January 1, 2016 to December 31, 2016 for an aggregate value of $150,000.
On
April 5, 2016, the president of the Company purchased 56,000 restricted Common Shares based on the $0.90 closing price of OMAG’s
Common Stock on such date of purchase. The total purchase price of $50,400 was paid to the Company by the $50,400 reduction in
the accrued salary and expenses owed by the Company to the president.
On
April 6, 2016, the three independent directors of the Company each purchased 27,778 restricted Common Shares based on the $0.90
closing price of OMAG’s Common Stock on April 5, 2016 for an aggregate of 83,334 Common Shares purchased. The aggregate
purchase price of $75,000 was paid to the Company by the $25,000 reduction in accrued director’s fees owed by the Company
to each of the independent directors.
On
April 12, 2016, the Company sold 700,000 restricted Common Shares to a non-U.S. person who is an accredited investor for proceeds
of $504,000.
On
April 22, 2016, the holders of a Convertible Note converted $30,984 of principal and accrued interest into 24,207 shares of Common
Stock.
On
May 17, 2016, an Independent Director exercised Stock Options at $0.85 to purchase 2,000 shares of Common Stock.
On
June 15, 2016, pursuant to the SEDA, OMAG sold 31,289 Common Shares to YA for proceeds of $25,000.
On
July 29, 2016, OMAG sold 10,684 restricted Common shares to an accredited investor for proceeds of $10,000.
On
August 19, 2016, OMAG sold 13,245 restricted Common Shares to an accredited investor for proceeds of $10,000.
On
August 30, 2016, OMAG sold 11,312 restricted Common Shares to an accredited investor for proceeds of $10,000.
On
September 16, 2016, OMAG sold 34,247 restricted Common Shares to an accredited investor for proceeds of $25,000.
On
September 19, 2016 OMAG paid a consultant 30,340 restricted Common Shares at a value of $25,000.
On
September 21, 2016, OMAG issued 161,290 restricted Common Shares to YA in satisfaction of a $150,000 commitment fee due in
connection with the extension of the 2014 SEDA to February 1, 2019.
On
October 14, 2016, the Company entered into a Convertible Promissory Note with an accredited investor for the principal amount
of $50,000 with interest at 5% per annum, due on April 14, 2017 and convertible into the Company’s Common Stock at a conversion
price of $0.65 per Common Share.
On
October 17, 2016, the Company entered into an Interest Free Promissory Note with an accredited investor for the principal amount
of $75,000, due on December 13, 2016, and in lieu of any interest due and payable on the principal amount of the Note, the Company
issued to the Note Holder 150,000 Common Stock Purchase Warrants exercisable at the greater of (a) $0.50, or (b) 80% of the Market
Price on the Trading Day immediately preceding the relevant Exercise Date. On December 5, 2016, the $75,000 note was satisfied
(see sixth succeeding paragraph below).
On
November 1, 2016, OMAG sold 20,000 restricted Common Shares to an accredited investor for proceeds of $10,000 and also sold
10,000 restricted Common Shares to an independent director who is also an accredited investor for proceeds of $5,000.
On
November 4, 2016, OMAG sold 10,000 restricted Common Shares to an accredited investor for proceeds of $5,000.
On
November 8, 2016, OMAG sold an aggregate of 20,000 restricted Common Shares to two accredited investors for aggregate proceeds
of 10,000.
On
November 14, 2016, OMAG sold 10,000 restricted Common Shares to an accredited investor for proceeds of $5,000.
On
November 14, 2016, the Company entered into an interest free Convertible Promissory Note with St. George Investments LLC, an accredited
investor, for the principal amount of $185,000 due on May 15, 2017, six months from the funding date of November 16, 2016, convertible
into the Company’s Common Stock only in the case of non-payment or in the Event of Default at a Conversion Price equal to
60% of the three lowest daily Volume Weighted Average Prices for the Company’s Common Stock during the twenty trading days
immediately preceding the Conversion. The Company may prepay the Note in whole or in part at any time without penalty. After deduction
of a $30,000 original issue discount (OID) and legal fees of $5,000, the Company received net proceeds of $150,000 on November
16, 2016.
On
December 5, 2016, OMAG sold 300,000 restricted Common Shares to an accredited investor for proceeds of $150,000 which was paid
to the Company by the cancellation and payment in full of the Company’s $75,000 Promissory Note dated October 17, 2016 (see
sixth preceding paragraph above) and the remaining $75,000 of the purchase price was paid to the Company in cash.
On
January 5, 2015, OMAG contributed an aggregate of 36,483 restricted Common Shares at the discounted valuation of $76,250 to
all eligible employees of the Omagine, Inc. 401(k) Plan.
On
February 23, 2015, OMAG paid a consultant 5,000 restricted Common Shares at the discounted valuation of $9,450.
On
March 26, 2015, OMAG sold 6,281 restricted Common Shares to an accredited investor for proceeds of $10,000.
On
March 26, 2015, OMAG sold 200,000 restricted Common Shares to a non-U.S. person who is an accredited investor for proceeds
of $210,000.
On
May 16, 2015, OMAG sold 100,000 restricted Common Shares to an officer and director for proceeds of $120,000.
On
June 29, 2015, the Non-US investor (described below in connection with a June 24, 2014 transaction) exercised 158,228 Tempest
Warrants at an exercise price of $1.58 for proceeds of $250,000.
On
June 29, 2015, OMAG paid a finder’s fee to a non-U.S. Finder in connection with the aforementioned sale of 158,228 restricted
Common Shares. Such finder’s fee was satisfied by issuing such non-U.S. Finder 7,911 restricted Common Shares valued at
$12,500.
On
June 30, 2015, a former director exercised 2,000 stock options for proceeds of $1,020.
On September 1, 2015, two new Directors
were each issued 25,000 restricted Common Shares at a value of $50,000 each for services to be rendered from September 1 to December
31, 2015.
On September 3, 2015, pursuant to the
SEDA, OMAG sold 17,696 Common Shares to YA for proceeds of $25,000.
On September 14, 2015, OMAG sold 10,000
restricted Common Shares to an accredited investor for proceeds of $14,700.
On October 8, 2015, 2,375 Tempest Warrants
were transferred to an affiliate of the Non-U.S. Investor, a “Non-U.S. Affiliate”. On October 8, 2015, such Non-U.S.
Affiliate exercised such 2,375 Tempest Warrants at an exercise price of $1.28 per Common Share for proceeds to OMAG of $3,040.
On October 26, 2015, OMAG sold an aggregate
of 1,200,000 restricted Common Shares to three non-U.S. persons who are accredited investors (500,000 restricted Common Shares
each to two investors and 200,000 restricted Common Shares to one investor) for aggregate proceeds to OMAG of $1,200,000.
On November 16, 2015, OMAG paid a finder’s
fee to a non-U.S. Finder in connection with the October 26, 2015 aforementioned sale of 1,200,000 restricted Common Shares. Such
finder’s fee was satisfied by issuing such non-U.S. Finder 33,334 restricted Common Shares valued at the discounted valuation
of $60,000.
On November 16, 2015, OMAG sold 20,886
restricted Common Shares to an accredited investor for proceeds to OMAG of $25,000.
NOTE
8 – STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND WARRANTS
Stock
Options/Stock Appreciation Rights
OMAG’s shareholders approved the
reservation by OMAG of 2,500,000 Common Shares for issuance under the 2003 Omagine, Inc. Stock Option Plan (the “2003 Plan”).
The 2003 Plan expired on August 31, 2013. On March 6, 2014, the Board of Directors approved the adoption of the 2014 Omagine, Inc.
Stock Option Plan (the “2014 Plan”).
Both the 2003 Plan and the 2014 Plan
are designed to attract, retain and motivate employees, directors, consultants and other professional advisors of OMAG and its
subsidiaries (collectively, the “Recipients”) by giving such Recipients the opportunity to acquire stock ownership
in OMAG through the issuance of stock options (“Stock Options”) to purchase Common Shares.
OMAG has registered for resale the 2.5
million Common Shares reserved for issuance under the 2003 Plan by filing a registration statement with the SEC on Form S-8. At
March 31, 2017, there were 2,119,000 unexpired Stock Options issued but unexercised under the 2003 Plan and all such Stock Options
remain valid until the earlier of their exercise date or expiration date.
Pursuant to the 2014 Plan, 3,000,000
Common Shares were reserved for issuance. The 2014 Plan was amended to increase the reservation of 3,000,000 Common Shares for
issuance to 5,000,000 Common Shares and to permit issuance of stock appreciation rights (“The Amended 2014 Plan”).
OMAG intends to seek its shareholders’ ratification of the adoption by OMAG of the Amended 2014 Plan. At March 31, 2017,
there were 990,000 unexpired Stock Options and 1,455,000 Stock Appreciation Rights (“SARs”) issued but unexercised
under the Amended 2014 Plan.
A
summary of Stock Option and SARs activity for the periods ended March 31, 2017 and 2016 pursuant to both the 2003 Plan and the
Amended 2014 Plan is as follows:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at January 1, 2016
|
|
|
4,728,000
|
|
|
$
|
1.98
|
|
|
|
1.41
|
|
|
$
|
26,240
|
|
Outstanding March 31, 2016
|
|
|
4,728,000
|
|
|
$
|
1.98
|
|
|
|
1.16
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
4,728,000
|
|
|
$
|
1.98
|
|
|
|
1.16
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
4,724,000
|
|
|
$
|
1.98
|
|
|
|
1.02
|
|
|
$
|
-
|
|
Expired Q1 2017
|
|
|
(160,000
|
)
|
|
$
|
1.25
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2017
|
|
|
4,564,000
|
|
|
$
|
2.00
|
|
|
|
0.80
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
4,564,000
|
|
|
$
|
2.00
|
|
|
|
0.80
|
|
|
$
|
-
|
|
Of
the 4,564,000 Stock Options outstanding at March 31, 2017, 2,915,000 of such Stock Options were issued by OMAG in January 2012
and December 2014 as “Strategic Options” to officers, directors and consultants of OMAG whose continued service was
deemed by the Board of Directors to be particularly crucial to attaining LLC’s then strategic goal of signing the Development
Agreement (“DA”) with the Government of Oman and in recognition of those efforts during 2014 and beyond. The Strategic
Options are fully vested, provide for a cashless exercise feature and currently expire on December 31, 2017; 1,965,000 of the
Strategic Options are exercisable at $1.70 and 950,000 are exercisable at $2.55. To continue to incentivize the retention and
sustained service to the Company of its mission-critical employees and consultants, the expiration date of the 1,965,000 Strategic
Options issued in January 2012 was extended by OMAG in December 2012 to December 31, 2013 (the “First Extension“)
and in December 2013 to December 31, 2014 (the “Second Extension”) and in December 2014 to December 31, 2015 (the
“Third Extension”) and on August 12, 2015 to December 31, 2016 (the “Fourth Extension”) and on December
9, 2016 to December 31, 2017 (the “Fifth Extension”). The December 31, 2015 expiration date of the 950,000 Strategic
Options issued December 29, 2014 was extended on August 12, 2015 to December 31, 2016 (“First Extension”) and on December
9, 2016 to December 31, 2017 (the “Second Extension”).
Of the 2,915,000 Strategic Options,
an aggregate of 1,685,000 were granted to OMAG’s three officers, an aggregate of 125,000 were granted to OMAG’s independent
directors and 1,000,000 were granted to the Deputy Managing Director of LLC who, pursuant to a March 2007 consulting agreement
expiring on December 31, 2017, is also a consultant to the Company.
Of the 1,455,000 Stock Appreciation
Rights, an aggregate of 750,000 were granted to three officers of OMAG, 15,000 were granted to one independent director and 675,000
were granted to the Deputy Managing Director of LLC.
On August 12, 2015, the expiration date
of the 1,965,000 Strategic Options issued in January 2012 was extended from December 31, 2015 to December 31, 2016 (the “Fourth
Extension”). The $915,493 estimated fair value of the Fourth Extension was calculated using the Black Scholes option pricing
model and the following assumptions: (i) $1.91 share price, (ii) 507 day term, (iii) 147% expected volatility, (iv) 0.32% (507
day term) risk free interest rate and was expensed in full in the quarterly period ended September 30, 2015.
On August 12, 2015, the expiration date
of the 950,000 Strategic Options issued in December of 2014 was extended from December 31, 2015 to December 31, 2016 (the “First
Extension”). The $541,215 estimated fair value of the First Extension was calculated using the Black Scholes option pricing
model and the following assumptions: (i) $1.91 share price, (ii) 507 day term, (iii) 147% expected volatility, (iv) 0.32% (507
day term) risk free interest rate and was expensed in full in the quarterly period ended September 30, 2015.
On June 30, 2015, a former OMAG director
exercised 2,000 stock options at $0.51 per share.
On August 31, 2015, OMAG granted an
aggregate of 1,455,000 Stock Appreciation Rights (“SARs”) to six persons exercisable at $2.00 per share and expiring
on December 31, 2017. Of the 1,455,000 SARs, an aggregate of 750,000 were granted to three officers of OMAG, 15,000 were granted
to one independent director and 675,000 were granted to the Deputy Managing Director of LLC. The $1,654,481 estimated fair value
of the SARs was calculated using the Black Scholes option pricing model and the following assumptions: (i) $1.60 share price, (ii)
854 day term, (iii) 147% expected volatility, (iv) 0.28% (854 day term) risk free interest rate and was expensed in full in the
quarterly period ended September 30, 2015.
On December 9, 2016, the expiration
date of the 1,965,000 Strategic Options issued in January of 2012 was extended from December 31, 2016 to December 31, 2017 (the
“Fifth Extension”). The $232,263 estimated value of the Fifth Extension was calculated using the Black Scholes option
pricing model and the following assumptions: (i) $0.78 share price, (ii) 387 day term, (iii) 91.45% expected volatility, (iv) 0.85%
(387 day term) risk free interest rate and was expensed in full in the quarterly period ended December 31, 2016.
On December 9, 2016, the expiration
date of the 950,000 Strategic options issued in December 31, 2014 from December 31, 2016 to December 31, 2017 (the “Second
Extension”). The $59,660 estimated value of the Second Extension was calculated using the Black Scholes option pricing model
and the following assumptions: (i) $0.78 share price, (ii) 387 day term, (iii) 91.45% expected volatility, (iv) 0.85% (387 day
term) risk free interest rate and was expensed in full in the quarterly period ended December 31, 2016.
Issued
and outstanding Stock Options and SAR’s (all non-qualified) as of March 31, 2017 are as follows:
Year Granted
|
|
|
Number Outstanding
|
|
|
Number Exercisable
|
|
|
Exercise Price
|
|
|
Expiration Date
|
2008
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
$
|
2.60
|
|
|
September 23, 2018
|
2012
|
|
|
|
1,965,000
|
|
|
|
1,965,000
|
|
|
$
|
1.70
|
|
|
December 31, 2017
|
2012
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
1.70
|
|
|
April 12, 2017
|
2013
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
$
|
1.38
|
|
|
January 14, 2018
|
2014
|
|
|
|
40,000
|
|
|
|
40,000
|
|
|
$
|
1.80
|
|
|
March 27, 2019
|
2014
|
|
|
|
950,000
|
|
|
|
950,000
|
|
|
$
|
2.55
|
|
|
December 31, 2017
|
2015
|
|
|
|
1,455,000
|
|
|
|
1,455,000
|
|
|
$
|
2.00
|
|
|
December 31, 2017
|
Totals
|
|
|
|
4,564,000
|
|
|
|
4,564,000
|
|
|
|
|
|
|
|
A
summary of information about Stock Options and SARs outstanding at March 31, 2017 is as follows:
|
|
Stock Options Outstanding
|
|
|
Exercisable
|
|
Range of Exercise Prices
|
|
|
Number of Shares
|
|
|
|
Weighted Average Exercise Price
|
|
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
|
|
Number of Shares
|
|
|
|
Weighted Average Exercise Price
|
|
$ 1.01 - $2.00
|
|
|
3,464,000
|
|
|
|
1.83
|
|
|
|
0.78
|
|
|
|
3,464,000
|
|
|
|
1.83
|
|
$ 2.01 - $3.00
|
|
|
1,100,000
|
|
|
|
2.56
|
|
|
|
0.86
|
|
|
|
1,100,000
|
|
|
|
2.56
|
|
Totals
|
|
|
4,564,000
|
|
|
$
|
2.00
|
|
|
|
1.02
|
|
|
|
4,564,000
|
|
|
$
|
2.00
|
|
As
of March 31, 2017, there was $405 of unrecognized compensation costs relating to unexpired Stock Options, that is expected to
be recognized in 2017.
Warrants
As
of March 31, 2017, OMAG had 6,572,124 Common Stock purchase warrants (“Warrants”) issued and outstanding. The Warrants
do not contain any price protection provisions that would require them to be classified as liabilities (subject to re-measurement
at fair value each time a balance sheet is presented) rather than presented as a component of stockholders’ equity.
The
Tempest Warrants
On
June 24, 2014, in connection with the sale of 362,308 restricted Common Shares to an investor, OMAG issued 1,000,000 Warrants
to such investor, each of which were exercisable for the purchase of one restricted Common Share at a per Common Share exercise
price equal to the greater of: (a) $1.00 per Common Share, or (b) 80% of the closing sale price for a Common Share on the trading
day immediately preceding the relevant exercise date (the “Tempest Warrants”). Prior to their expiration, a total
of 650,603 Tempest Warrants were exercised for aggregate proceeds to OMAG of $916,540. The remaining 349,397 Tempest Warrants
expired unexercised on June 23, 2016. As of the date of this report there were no Tempest Warrants issued or outstanding.
Rural
Concepts Warrants
On
October 14, 2016, in connection with a non-interest bearing convertible promissory note in favor of Rural Concepts LLC, a British
corporation (“Rural Concepts”), OMAG issued 150,000 Warrants to Rural Concepts, each of which is exercisable for
the purchase of one restricted Common Share at a per Common Share purchase price equal to the greater of (a) $0.50 per Common
Share, or (b) 80% of the Market Price on the Trading Day immediately preceding the relevant Exercise Date (the “Rural Concepts
Warrants”). The Warrants expire on December 31, 2017.
The
Strategic Warrants
OMAG
has 6,422,124 Warrants outstanding, 3,211,062 of which are exercisable for the purchase of one Common Share at a per Common Share
exercise price of $5.00 and 3,211,062 of which are exercisable for the purchase of one Common Share at a per Common Share exercise
price of $10.00 (collectively, the “Strategic Warrants”).
OMAG filed a post-effective amendment
to its registration statement on Form S-1 (Commission File No. 333-183852) whereby the Strategic Warrants and the 6,422,124 Common
Shares underlying the Strategic Warrants were registered by OMAG (the “Warrant Registration”). The Warrant Registration
was declared effective by the SEC and its effective status expired. OMAG filed another post-effective amendment to the Warrant
Registration on February 11, 2015 which was declared effective by the SEC on February 13, 2015 and its effective status expired.
OMAG filed another post-effective amendment to the Warrant Registration on January 14, 2016 which was declared effective by the
SEC on January 25, 2016 (the “Updated Warrant Registration”). As of the date hereof, the effective status of the Updated
Warrant Registration expired and the Company intends to file a post-effective amendment to such Registration Statement with the
SEC in order to again register the Common Shares issuable upon the exercise of the Strategic Warrants. Neither the exercise prices
of the Strategic Warrants nor the number of Common Shares issuable upon exercise of the Strategic Warrants are subject to adjustment
in the event of a stock split, combination or subdivision of the Common Stock, or a dividend, reclassification, reorganization,
or spinoff.
On August 18, 2014, pursuant to a resolution
of the Board of Directors, the expiration date for all Strategic Warrants was extended for a third time to June 30, 2015 and again
on January 5, 2015, pursuant to a resolution of the Board of Directors, the expiration date for all Strategic Warrants was extended
to December 31, 2015. On August 12, 2015, pursuant to a resolution of the Board of Directors, the expiration date for all Strategic
Warrants was again extended to December 31, 2016 and on December 9, 2016, pursuant to a resolution of the Board of Directors,
the expiration date for all Strategic Warrants was again extended to December 31, 2017. All other terms and conditions of the
Strategic Warrants remained the same. All Strategic Warrants expire on December 31, 2017 unless redeemed earlier by OMAG upon
30 days prior written notice to the Strategic Warrant holders.
NOTE
9 – U.S. INCOME TAXES
Deferred
U.S. tax assets are comprised of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2015
|
|
|
|
|
|
|
|
|
U.S. federal net operating loss carry forwards
|
|
$
|
6,431,000
|
|
|
$
|
6,333,000
|
|
U.S. state and city net operating loss carry forwards, net of U.S. federal tax benefit
|
|
|
2,042,000
|
|
|
|
2,011,000
|
|
|
|
|
8,473,000
|
|
|
|
8,344,000
|
|
Less: Valuation allowance
|
|
|
(8,473,000
|
)
|
|
|
(8,344,000
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
Management
has determined, based on the Company's current condition, that a full valuation allowance is appropriate at March 31, 2017. At
March 31, 2017, the Company had U.S. federal net operating loss carry forwards of approximately $20,416,000 expiring in various
amounts from fiscal year 2017 to fiscal year 2037.
Current
U.S. income tax law limits the amount of loss available to offset against future taxable income when a substantial change in ownership
occurs.
The
Company believes that it has no uncertain tax positions and no unrecognized tax benefits at March 31, 2017 and December 31, 2016.
NOTE
9 – COMMITMENTS
Leases
OMAG
maintains its corporate offices at 136 Madison Avenue, 5th Floor, New York, NY 10016. The premises are leased by OMAG under
a month to month lease from an unaffiliated third party. LLC leases premises in Muscat, Oman from an unaffiliated third party
under a one year lease which commenced in January 2017 which provides for an annual rental of $35,880. The Company’s rent
expense for the three month periods ended March 31, 2017 and 2016 was $16,406 and $16,516, respectively
Employment
Agreements
The
Company presently has no employment agreements with any person.
Pursuant to a prior employment agreement,
OMAG was obligated to employ its President and Chief Executive Officer at an annual base salary of $125,000 plus an additional
amount based on a combination of net sales and earnings before taxes. OMAG plans to enter into a new employment agreement with
its President although the terms of such employment agreement have not yet been determined. OMAG has from time to time fully or
partially suspended and accrued salary payments due to its President. For the years ended December 31, 2015 and 2016 the Company
continued to accrue salary payable to Mr. Drohan on the basis of an annual salary of $125,000. On May 1, 2015 the Company paid
its President $87,781 of accrued officer’s payroll and on May 16, 2015 the Company applied $120,000 of accrued officer’s
payroll in exchange for the purchase of 100,000 restricted Common Shares of Omagine, Inc. stock at a purchase price of $1.20 per
share. On April 5, 2016 the Company applied $50,400 of accrued officer’s payroll in exchange for the purchase of 56,000 restricted
Common Shares of Omagine Inc. stock at a purchase price of $0.90 per share. On June 14, 2016 the Company paid its President $55,601
of accrued officer’s payroll. On February 1, 2017 the Company applied $51,000 of accrued officer’s payroll in exchange
for the purchase of 100,000 restricted Common Shares of Omagine, Inc. stock at a purchase price of $0.51 per share. At March 31,
2017 and December 31, 2016, OMAG had unpaid accrued officer’s compensation due to its President of $68,655 and $88,405, respectively.
Pursuant to a prior employment agreement,
OMAG was obligated to employ its Vice-President and Secretary at an annual base salary of $100,000. OMAG plans to enter into a
new employment agreement with its Vice-President although the terms of such employment agreement have not yet been determined.
OMAG has from time to time fully or partially suspended and accrued salary payments due to its Vice-President on the basis of an
annual salary of $100,000. During 2015 the Company paid Mr. Kuczynski accrued officer’s payroll of $33,000 on March 26, $2,000
on September 9, $3,200 on October 2, and $2,500 on December 7, 2015. During 2016 the Company paid its Vice President accrued officer’s
payroll of $32,000 on June 23, $2,700 on July 28, $1,000 on October 20, $6,000 on November 4, and $10,000 on December 9, 2016.
On February 2, 2017 the Company applied $25,000 of accrued officer’s payroll in exchange for the purchase of 47,170 restricted
Common Shares of Omagine, Inc. stock at a purchase price of $0.53 per share. At March 31, 2017 and December 31, 2016, OMAG had
unpaid accrued officer’s compensation due to its Vice-President of $138,772 and $149,121, respectively.
OMAG has from time to time fully or
partially suspended and accrued salary payments due to its Controller on the basis of an annual salary of $80,000. On January 14,
2015 the Company paid its Controller $25,000 of accrued officer’s payroll. On December 9, 2016 the Company paid the Controller
$7,500 of accrued officer’s payroll. At March 31, 2017 and December 31, 2016, OMAG had unpaid accrued officer’s compensation
due to its Controller of $202,100 and $182,100, respectively.
Equity Financing Agreements
OMAG and YA were parties to a Stand-By
Equity Distribution Agreement (the “2011 SEDA”) which was due to expire on September 1, 2014. On July 21, 2014, the
2011 SEDA was terminated by the mutual consent of OMAG and YA.
On April 22, 2014, OMAG and YA entered
into a new Standby Equity Distribution Agreement on generally the same terms and conditions as the 2011 SEDA (the ”2014 SEDA“).
Unless earlier terminated in accordance with its terms, the 2014 SEDA was to terminate automatically on the earlier of (i) the
first day of the month next following the 24-month anniversary of the “Effective Date” (as hereinafter defined) (i.e.
February 1, 2017), or (ii) the date on which YA shall have made payment to OMAG of Advances pursuant to the 2014 SEDA in the aggregate
amount of $5,000,000. On September 20, 2016, the Company and YA entered into an agreement amending the SEDA extending the term
of the 2014 SEDA to February 1, 2019 or to such date on which YA shall have made payment to OMAG of Advances pursuant to the 2014
SEDA in the aggregate amount of $5,000,000 (the “Second SEDA Amendment”). On April 22, 2014, in satisfaction of a $150,000
commitment fee due pursuant to the 2014 SEDA, OMAG issued 85,822 restricted Common Shares to YA Global II SPV, LLC, which is an
affiliate of YA (the “Affiliate”). On September 21, 2016 in satisfaction of a $150,000 commitment fee due pursuant
to the Second SEDA Amendment, OMAG issued 161,290 restricted Common shares to the YA Affiliate. (See Note 7).
Pursuant to the terms of the 2014 SEDA,
OMAG may in its sole discretion, and upon giving written notice to YA (an ”Advance Notice”), periodically sell Common
Shares to YA (“Shares”) at a per Share price (“Purchase Price”) equal to 95% of the lowest daily volume
weighted average price (the “VWAP”) for a Common Share as quoted by Bloomberg, L.P. during the five (5) consecutive
Trading Days (as such term is defined in the 2014 SEDA) immediately subsequent to the date of the relevant Advance Notice (the
“Pricing Period”).
OMAG is not obligated to sell any Shares
to YA but may, over the term of the 2014 SEDA and in its sole discretion, sell to YA that number of Shares valued at the Purchase
Price from time to time in effect that equals up to five million dollars ($5,000,000) in the aggregate. YA is obligated under
the 2014 SEDA to purchase such Shares from OMAG subject to certain conditions including (i) OMAG filing a registration statement
with the SEC to register the resale by YA of the Shares sold to YA under the 2014 SEDA (“Registration Statement”),
(ii) the SEC declaring such Registration Statement effective (the date of such declaration by the SEC being the “Effective
Date”), (iii) OMAG certifying to YA at the time of each Advance Notice that OMAG has performed all covenants and agreements
to be performed and has complied with all obligations and conditions contained in the 2014 SEDA, (iv) periodic sales of Shares
to YA must be separated by a time period of at least five Trading Days, and (v) the dollar value of any individual periodic sale
of Shares designated by OMAG in any Advance Notice may not exceed the greater of (a) two hundred thousand dollars ($200,000),
or (b) the average of the ”Daily Value Traded” for each of the five (5) Trading Days immediately preceding the date
of the relevant Advance Notice, where Daily Value Traded is the product obtained by multiplying the number representing the daily
trading volume of Common Shares for such Trading Day by the VWAP for a Common Share on such Trading Day.
Omagine
Project
The
Omagine Project is planned to be developed on one million square meters (equal to approximately 245 acres) of beachfront land
facing the Gulf of Oman just west of the capital city of Muscat and nearby Muscat International Airport (the “Omagine Site”).
LLC has signed a Development Agreement (“DA”) and a Usufruct Agreement (“UA”) for the Omagine Project
with the Government of Oman. (See “Development Agreement and Usufruct Agreement” below). The Omagine Project is planned
to be an integration of cultural, heritage, entertainment and residential components including a high-culture theme park and associated
buildings, shopping and retail establishments, restaurants and approximately 2,100 residences.
Development
Agreement and Usufruct Agreement
OMAG’s
60% owned subsidiary, LLC, signed a DA with the Government of Oman in October 2014 for the development in Oman by LLC of the Omagine
Project. The legal effectiveness of the DA was conditional upon its ratification by Oman’s Ministry of Finance, which Ratification
occurred in March 2015. On July 1, 2015 (the “Operative Date”), the Government and LLC entered into the UA with respect
to the land constituting the Omagine Site.
The
Land Rights give LLC extensive rights over the land constituting the Omagine Site including the right to sell such land on a freehold
basis. On July 2, 2015, the UA was registered by the Government and a Land Rights registration fee of 20,250 Omani Rials ($52,650)
was paid by LLC to the Government (and expensed in the consolidated statements of operations for the three months ended September
30, 2015), which registration legally perfected LLC’s ownership of the Land Rights.
The
five year period commencing on the Operative Date is a rent free period and thereafter LLC will pay annual rent to the Government
based on only the built but unsold commercial area of the Omagine Project (approximately 150,000 square meters) or approximately
45,000 Omani Rials ($117,000) per year based on the current annual per square meter fee of 0.300 Omani Rials ($0.78). The term
of the DA is 20 years and the term of the UA is 50 years (renewable) commencing from the Operative Date. The UA and the DA provisions
relevant to the UA survive the expiration of the term of the DA.
The
Operative Date of July 1, 2015 is the date from which all time periods for the execution by LLC of various tasks enumerated in
the DA are to be measured. The continued legal effectiveness of the DA subsequent to the Operative Date is dependent upon the
following milestone dates being achieved (any or all of which may be extended or waived by the Government): (1) LLC’s delivery
to the Government within twelve months from the Operative Date of a term sheet with lenders for the financing of the first phase,
any other phase or all of the Project, (2) LLC’s submission to the Ministry of Tourism of a social impact assessment within
8 months of the Operative Date and the Government’s approval thereof within 12 months of the Operative Date, (3) the Government’s
approval within 12 months of the Operative Date of the development control plan for the Omagine Project, and (4) the transformation
of LLC into a joint stock company within 12 months of the Operative Date. Company management has had informal discussions with
the concerned government officials and management is confident that given the present economic conditions in the region (of which
the Government is keenly aware), the Company will be granted an extension of time on many of such due dates similar to the extension
of the Operative Date to July 1. 2015 already previously granted by the Government.
Pursuant
to the DA, LLC must substantially complete the construction of the seven Pearl buildings and one hotel (the “Minimum Build
Obligation” or “MBO”) within 5 years of the Operative Date. Any material breach by LLC of its obligation to
perform the MBO would constitute an event of default under the DA. The DA specifies that the principal construction contracts
should be executed within one year of the Operative Date. LLC is required to provide written notice to the Government in certain
circumstances, such as LLC’s change in an anticipated milestone date that would result in a substantial achievement of work
to occur later than 60 days after such milestone date. The DA provides that the Government is required to grant reasonable requests
for the extension of the terms of the DA in such circumstances.
The
foregoing discussion of the terms of the DA and UA is not meant to be definitive or complete and is qualified in its entirety
by reference to the complete texts of the DA and UA as filed by the Company with the SEC.
Omagine
LLC Shareholder Agreement
OMAG
and JOL organized LLC in Oman and capitalized it with an initial investment of twenty thousand (20,000) Omani Rials ($52,000).
On April 20, 2011, OMAG, JOL and the New Investors entered into a shareholder agreement relating to LLC (the “Shareholder
Agreement”).
Pursuant to the Shareholder Agreement,
OMAG invested an additional 70,000 Omani Rials ($182,000) into LLC and agreed to make a further additional investment into LLC
of 210,000 Omani Rials ($546,000) after the execution of the DA (the “OMAG Final Equity Investment”). As of December
31, 2015, OMAG had invested 300,000 Omani Rials ($780,000) into LLC. Pursuant to the Shareholder Agreement, RCA invested the value
of the Land Rights as a non-cash “payment-in-kind” capital contribution to LLC on July 2, 2015.
Further
pursuant to the Shareholder Agreement, the New Investors invested an aggregate of 60,000 Omani Rials ($156,000) into LLC and agreed,
subject to certain conditions precedent, to make further additional investments into LLC in the aggregate amount of 26,628,125
Omani Rials ($69,233,125).
The
CCC Deferred Investment Obligation and the OMAG Options
The conditions precedent to CCC and
RCA being required to make their agreed $69,233,125 aggregate additional investments (their “Deferred Equity Investments”)
into LLC include (1) the execution of a construction contract on or before July 1, 2016 between LLC and CCC-Oman (the “CCC-Contract”)
and (2) execution of a legally binding agreement between LLC and a lender pursuant to which such lender agrees to provide Debt
Financing for the first phase or any or all phases of the Omagine Project in an amount sufficient to finance the first phase of
the Omagine Project’s construction plus the installment payments due to OMAG for its Success Fee and Pre-Development Expense
Amount.(the “First Financing Agreement Date”).
The First Financing Agreement Date occurred
on November 29, 2015 but the CCC-Contract was not executed on or before July 1, 2016 nor will it be executed and RCA and Omagine,
Inc. are presently in negotiations with investors which may lead to an “Amended and Restated Shareholder Agreement”.
The failure to execute the CCC-Contract
by July 1, 2016 does not relieve RCA of its continuing obligation under the Shareholder Agreement (irrespective of such CCC-Contract
failure) to make RCA’s approximately $20 million Deferred Investment into LLC; but it may (under certain conditions) relieve
CCC of its obligation under the Shareholder Agreement to make its approximately $49 million Deferred Investment into LLC.
Additionally pursuant to the Shareholder
Agreement, such failure of the CCC-Contract to occur on or before July 1, 2016 automatically and without any further action required
by any party, triggered and activated on July 2, 2016 two options in favor of OMAG (the “OMAG Options”) to purchase
all LLC Shares presently owned by CCC-Oman and CCC-Panama at any time of OMAG’s choosing prior to July 1, 2017 at a price
equal to the aggregate original purchase price of 22,500 Omani Rials ($58,500). Furthermore pursuant to the Shareholder Agreement,
neither CCC-Oman nor CCC-Panama is permitted to sell any of such LLC Shares presently owned by them prior to July 2, 2017 to any
Person other than OMAG, or to a purchaser designated by OMAG, in a sale made pursuant to the exercise of the OMAG Options.
See
Note 11 – Subsequent Events.
Although the LLC Shareholders are presently
negotiating an Amended and Restated Shareholder Agreement, there is no assurance that it will happen. If agreement is not reached
by the LLC Shareholders on the matters presently under discussion, or if alternative financing is not obtained, or if alternative
shareholder arrangements are not agreed, LLC may not be able to complete the Omagine Project and may not be able to recover the
$718,614,000 value of the Land Rights included in the Company’s Consolidated Balance Sheet at March 31, 2017 and December
31, 2016 (See Note 2).
Further
pursuant to the Shareholder Agreement, LLC is required to pay OMAG a Success Fee of $10,000,000 in five equal annual
installments beginning on or within 10 days after the Draw Date and a Pre-Development Expense Amount to be determined
(presently estimated at $17,920,114) payable 50% on or within 10 days after the Draw Date and 50% in five equal annual
installments beginning on the first anniversary of the Draw Date. The Draw Date is defined as “the date upon which LLC
draws and receives the first amount of Debt Financing pursuant to a Financing Agreement”. It is possible that the
payment terms for the Pre-Development Expense Amount and the Success Fee may be modified if and only if the LLC Shareholders
agree to an Amended and Restated Shareholder Agreement.
NOTE
10 – RELATED PARTY TRANSACTIONS
At
March 31, 2017 and December 31, 2016, respectively, OMAG’s accounts payable included $15,675 and $42,800 due to its officers
and directors.
For
the three months ended March 31, 2017 and 2016, the Company expensed a total of $0 and $84,000, respectively, for consulting fees
paid to an entity controlled by the Deputy Managing Director of LLC.
In
April 2016, the Company paid a $300,000 sponsorship fee to the same such entity controlled by the Deputy Managing Director of
Omagine LLC for the Company to serve as the Title Sponsor Partner of the 2016 World Summit on Innovation and Entrepreneurship
hosted by the United Nations at UN headquarters in New York City from May 19 to May 23, 2016.
NOTE
11 – SUBSEQUENT EVENT
S
On April 3, 2017, OMAG exercised
its OMAG Options to purchase all of the shares of LLC owned by CCC-Oman and CCC-Panama thereby leaving OMAG and RCA as LLC’s
two remaining shareholders. After the closing of the option purchase, the registered shareholders at the Ministry of Commerce
& Industry in Oman will be amended to reflect the fact that CCC is no longer an LLC shareholder.
On
April 4, 2017, the Company sold 266,667 restricted Common Shares to an accredited investor for proceeds of $80,000.
On
April 11, 2017, the Company sold 132,275 Common Shares pursuant to the 2014 SEDA for proceeds of $50,000.
On April 13, 2017,
the Company issued a non-interest bearing $100,000 convertible promissory note to an accredited investor due October 12, 2017
in exchange for cash of $50,000 and for the cancellation of a $50,000 convertible promissory note due April 13, 2017 and accrued
interest (See Note 4). The Conversion Price of the convertible promissory note is $0.40 per share. In connection with the six
month Note the Company issued 100,000 Warrants to the accredited investor, each of which is exercisable for the purchase of one
restricted Common Share at the greater of (a) $0.50 or (b) eighty percent (80%) of the Market Price on the Trading Day immediately
preceding the relevant Exercise Date. The Warrants expire on December 31, 2017.
On May 8, 2017, the Company issued a convertible
promissory note to an accredited investor for the principal amount of $100,000 with interest at 12% per annum, due February 7,
2018 and convertible into the Company’s Common Stock after 180 days from the Note Issuance Date at a conversion price equal
to 60% of the lowest trading price of the Common Stock during the twenty day period prior to the conversion.
On May 10, 2017, the Company and St. George
Investments LLC executed an amendment to the $185,000 Convertible Promissory Note dated November 14, 2016 extending the May 16,
2017 Maturity Date to July 17, 2017. In consideration of the extension, the Company paid $10,000 to St. George Investments LLC.
Item
2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary
The development of the Omagine
Project has been delayed. Neither we nor RCA expected that a $5 Billion company like CCC would default on their investment obligation
– but they did. CCC has now been removed as an LLC shareholder and is being replaced by a new financial investor.
In
addition to the written Investment Agreement from the estate of our proposed new local investor mentioned below, we
have verbal commitments from two European investment funds and are expecting a letter of intent shortly from one of them
which is active as a real-estate investor in the Middle East and in Oman. LLC accelerated its efforts with non-MENA Region
investors (who are value-oriented and less indecisive and discount-oriented than local investors) and presently LLC is in
final discussions with two European investment funds.
The
OMAG Common Stock is, and always has been, a proxy for the performance of LLC and the project delays to date have put
downward pressure on the OMAG Common Stock. When any of the three new LLC investment prospects close (which we presently
expect will occur in or before July), LLC will begin the masterplanning and development of the Omagine Project.
Management presently estimates that the total net positive cash flow from the development of the Omagine Project will be
approximately $3 billion and the net present value of that cash flow is approximately $1.55 billion.
The financing and execution framework
for real estate development projects are usually quite similar. They generally move from concept design; to feasibility studies;
to land acquisition; to masterplanning; to detailed design; to debt financing for construction; to construction; and then finally
to revenue generating sales and/or operations.
The financial architecture of
real estate projects generally requires that the developer (in our case, LLC) finance and pay for all organizational costs (legal,
accounting, administrative, etc.), concept design, land acquisition (i.e. purchasing the land for the project), initial feasibility
and market studies, masterplanning, detailed design, financial advisory fees and/or other engineering & development consultancy
costs (collectively, the “Soft Costs”). The Soft Costs are all financed from the developer’s (in our case LLC’s)
own cash resources provided by its shareholders (in our case OMAG, RCA and CCC). The cost of construction (the “Hard Costs”)
are financed via bank loans (“Project Finance”).
Most Soft Costs are not capitalized
as assets on the developer’s balance sheet but are written off as operating expenses. Land however (like buildings, machinery
or equipment) is a long-lived asset that is capitalized as an asset on the developer’s balance sheet and recorded at the
purchase price paid for it by the developer. Like any asset therefore, it becomes a component of the developer’s shareholder
equity.
As specifically memorialized
by the Shareholder Agreement, LLC did not purchase the land rights with cash – but with shares of LLC stock. Therefore the
consideration paid by RCA for the purchase of such shares of LLC stock was the approximately $720 million value of the land given
in exchange for such stock. The acquisition of the land rights by LLC in exchange for LLC stock resulted in a $720 million increase
in LLC’s shareholder equity with no cash outlay by LLC.
After the Soft Costs have been incurred by the developer, a project’s construction is then generally
financed via a combination of bank debt and the developer’s cash (from equity or property sales), Bank debt is typically
restricted by the bank assuring itself that there is an acceptable ratio of debt to equity on the developer’s balance sheet
(a typical ratio being 70% debt vs 30% equity) and requiring a portion of that equity to be cash equity.
For
example using the 70/30 ratio, a developer wishing to construct a $330 million project (or a $330 million phase of a project)
would need approximately $100 million of shareholder equity on its balance sheet in order to borrow the full $330 million. Such
borrowings may of course be further supported or reduced by the developer utilizing the receipt of deposits, installment payments
and final payments from property sales made by the developer during the construction of the project (or phase of the project)
or by utilizing a portion of its own cash reserves.
One can readily see therefore the significant borrowing power advantage and
financial leverage afforded to LLC by the aforementioned $720 million addition to its shareholder equity. Only after the
developer (LLC) completes the land acquisition, the necessary engineering & development consultancy studies and the
project masterplanning (all of which are Soft Cost tasks to be paid for by LLC), can LLC approach banks to arrange the debt
facilities needed to finance the Hard Costs of construction. In the case of the Omagine Project, management estimates that
such Soft Cost expenses will be approximately $25 million USD.
21
The 2011 LLC Shareholder Agreement
among OMAG, RCA and CCC as well as OMAG’s 2012 Strategic Warrant distribution to its shareholders and other capital raising
activities (including the SEDA with YA and other private placement stock sales) foresaw, foreshadowed and accommodated the various
future Omagine Project’s development stages. Management had a clear-eyed pre-DA and Post-DA view of its multiple strategic
objectives.
OMAG conceptualized the project
and executed and financed all Pre-DA efforts including the following strategic objectives (i) signing a Shareholder Agreement
that assembled an unassailably credible and financially strong shareholder structure for LLC (RCA and CCC); (ii) arranging a world-class
construction contractor with proven capability & financial capacity (CCC); (iii) demonstrating the project’s desirability
and viability to the Government (getting the DA signed). Delays in signing the DA were longer than expected but ultimately the
foregoing Pre-DA strategic objectives were achieved.
OMAG had financed its support of LLC and the Omagine Project during this Pre-DA time with private placement
sales of its Common Stock, the YA SEDA and via a rights offering to its shareholders. Management viewed its Post-DA tasks as more
uncomplicated since the financial and operational roadmap had been put in place. The Shareholder Agreement was specifically structured
to, among other things: (i) have LLC assume the ongoing financial burdens of carrying out the project in the Post-DA period, (ii)
increase LLC’s shareholder equity by $700 million to $1 billion via the land rights thereby greatly supporting LLC’s
Project Finance bank loan requirements, (iii) reimburse OMAG for its $18 million of Pre-DA expenses. Moreover, OMAG had put in
place the 2012 Strategic Warrant distribution to its shareholders as a back-up capital raising measure on the theory that the OMAG
Common Stock would be positively affected by success at LLC.
Per the Shareholder Agreement
which was purposefully structured to align the financial needs of the project’s development with the financial resources
required to execute it:
|
1)
|
Pre-DA,
OMAG financed the $18 million of pre-development expenses;
|
|
2)
|
Pre-DA,
the 3 shareholders made initial token investments totaling $390,000. ($234,000 by OMAG;
$97,500 by RCA; $58,500 by CCC);
|
|
3)
|
Post-DA,
OMAG invested an additional $546,000;
|
|
4)
|
Post-DA,
RCA invested the land valued at $718 million;
|
|
5)
|
Post-DA
and after the 1
st
Financing Agreement Date & signing of the construction
contract, CCC was obligated to invest $50 million;
|
|
6)
|
Post-DA,
RCA would also be obligated to invest an additional $20 million.
|
Up until the DA was signed all
LLC expenses were paid via OMAG’s $18 million of pre-development expenses and the above $390,000 of LLC cash equity.
After the DA was signed, LLC’s
shareholder equity was increased by OMAG’s additional investment of $546,000 and RCA’s additional non-cash land investment
of $718 million.
After
the 1
st
Financing Agreement Date and Contract Date, CCC would be obligated to invest $50 million and RCA would
invest $20 million – which investments would more than suffice to cover
the $25+ million of budgeted Soft Costs
mentioned above,
the completion of which were a necessary precondition to any serious construction activities.
Unfortunately CCC defaulted on
its obligations under the Shareholder Agreement to invest its $50 million.
For the next 17 months (Dec 2015
thru April 2017) - and although the 1
st
Financing Agreement Date had occurred on November 29,2015 - and although CCC
and LLC had agreed on several iterations of the construction contract, - CCC essentially strung LLC along with multiple promises
and agreements to invest and to sign the construction contract – all of which false promises and agreements were ultimately
dishonored by CCC.
Fortunately, the Shareholder
Agreement also granted OMAG an option to purchase CCC’s 15% ownership of LLC in the event of such a default by CCC. OMAG
exercised this option in April 2017 and OMAG now owns 75% of LLC and RCA owns 25% of LLC. The foregoing described default by CCC
(whether purposeful or otherwise) had several effects on LLC & OMAG:
|
1)
|
Valuable
time was lost in beginning the project development because the critical Soft Cost tasks
of masterplanning and engineering studies could not be undertaken absent funding for
the approximately $25 million Soft Cost budget mentioned above;
|
|
2)
|
Someone
had to continue to finance LLC’s and the Omagine Project’s existence Post-DA
until either
|
|
a.
|
the
CCC matter could be favorably resolved and CCC’s investment received, or
|
|
b.
|
until
CCC was replaced with an alternate investor.
|
Only OMAG stepped forward
to do this. OMAG has incurred approximately $13 million in such Post -DA expenses to date. OMAG has in fact single-handedly
kept LLC and the Omagine Project viable for the past 18 months via its continued financing of LLC’s operations.
22
|
3)
|
The
OMAG Common Stock is, and always has been, a proxy for the performance of OMAG’S subsidiary, LLC.
The aforementioned delays and financial strains put downward pressure on the OMAG stock
thus inhibiting management’s ability to utilize the SEDA or to arrange private
placements of its Common Stock without unduly diluting its shareholders.
|
|
4)
|
OMAG’s
continued financing of LLC’s Post-DA expenses severely strained OMAG’s resources
and caused it to incur debt which management of OMAG previously had studiously avoided.
|
Nevertheless, now that the long
drama / spectacle with CCC is over, the only matter preventing forward progress on the Omagine Project is securing an agreement
with an investor to replace the CCC investment. That process has been ongoing now for many months, is well advanced, and we presently
expect to close a new LLC investment in July 2017 after which the masterplanning and development of the Omagine Project will begin.
LLC has a signed written agreement
(an “Investment Agreement”) with one such local investor. This binding Investment Agreement was signed by LLC and
the investor in November 2016 and contemplated the funding of the investment in January 2017. Subsequent to entering into this
Investment Agreement, the investor unexpectedly passed away. The investor’s heirs have acknowledged the validity of the
Investment Agreement and we are awaiting the settlement of the investor’s estate (which we understand to be quite substantial
and complicated).
LLC has accelerated its efforts with
two European investment funds and presently is in final discussions with them.
Although often beset by byzantine
delays, the present state of affairs with respect to the Omagine Project is quite straightforward. When any of the three new LLC
investment prospects (1 local and 2 international) close (which we presently expect will occur in July 2017), LLC will begin the
masterplanning and development of the Omagine Project.
Notwithstanding
the foregoing, shareholders and investors are again cautioned that until an equity investment transaction as generally described
above actually closes LLC will not have the funding sufficient to begin design, masterplanning and initial site work on the Omagine
Project and no assurance can be given at this time that any such investment transaction will be finally consummated.
Overview
Omagine,
Inc. (“OMAG” or the “Registrant”) was incorporated in Delaware in October 2004 and is a holding company
which conducts substantially all its operations through its majority owned subsidiary Omagine LLC, an Omani limited liability
corporation (“LLC”) and its wholly-owned subsidiary Journey of Light, Inc., a New York corporation (“JOL”).
The Registrant and JOL are sometimes collectively referred to herein as “OMAG” and the Registrant, JOL and LLC are
collectively referred to herein as the “Company”.
The Company is focused on entertainment,
hospitality and real estate development opportunities in the Middle East and North Africa (the “MENA Region”) and on
the design and development of distinctive tourism destinations. The Company presently concentrates the majority of its efforts
on the business of LLC and specifically on the Omagine Project. OMAG has 22,042,120 shares of its Common Stock issued and outstanding
as of May 9, 2017.
In November 2009, OMAG organized LLC
as a wholly owned subsidiary under the laws of the Sultanate of Oman (“Oman”) to design, develop, own and operate our
initial project – a mixed-use tourism and real estate project named the “Omagine Project” (See “The Omagine
Project” below). OMAG initially capitalized LLC at Omani Rials (“OR”) 20,000 [$52,000]. In October 2014, LLC
and the Government of Oman (the “Government”) signed an agreement (the “Development Agreement” or “DA”)
for the development in Oman by LLC of the Omagine Project (See: Exhibits 10.7 and 99.1 and “The Development Agreement and
the Usufruct Agreement”, below). On July 2, 2015, after the Usufruct Agreement (“UA”) was registered by the Government
legally perfecting LLC’s ownership of the Land Rights, the Government and LLC agreed that July 1, 2015 (the “Operative
Date”) was the date from which time periods for the execution by LLC of certain tasks enumerated in the DA were to be measured.
In 2011 OMAG’s 100% ownership
of LLC was reduced to 60% pursuant to a shareholders’ agreement (the “Shareholder Agreement”) signed by OMAG,
JOL and three new LLC minority investors (See: Exhibit 10.6 and “The Shareholder Agreement” below).
As of the date hereof, the shareholders of LLC as registered
in Oman at the Ministry of Commerce & Industry (the “Registered Shareholders”) are:
i.
|
Omagine, Inc. and
|
ii.
|
Royal Court Affairs (“RCA”), an organization representing the personal interests of His Majesty Sultan Qaboos bin Said, the ruler of Oman, and
|
iii.
|
Two subsidiaries of Consolidated Contractors International Company, SAL (“CCIC”) which are:
|
|
a.
|
Consolidated Contracting Company S.A. (“CCC-Panama”), a wholly owned subsidiary of CCIC, and
|
|
b.
|
Consolidated Contractors Oman Company LLC (“CCC-Oman”), CCIC’s operating subsidiary in Oman.
|
CCIC is a 65 year old Lebanese multi-national
company headquartered in Athens, Greece having worldwide and operating subsidiaries in among other places, every country in the
MENA Region. In its fiscal years immediately prior to 2016, CCIC had approximately five (5) billion U.S. dollars in annual revenue
and one hundred thirty thousand (130,000) employees but management’s best information at this time is that both CCIC’s
revenue and number of employees have since been dramatically reduced as a result of adverse economic conditions in the MENA Region
(See: “Market Conditions” below). CCC-Panama and CCC-Oman are sometimes referred to collectively in this report as
“CCC”.
23
As previously disclosed, all our
prior efforts to conclude CCC’s required investment under the Shareholder Agreement and the CCC-Contract were unsuccessful.
On April 3, 2017 OMAG exercised its option (the “OMAG Options”) to purchase all of the shares of LLC owned by CCC-Oman
and CCC-Panama, thereby leaving OMAG and RCA as LLC’s two remaining shareholders. After the closing of the option purchase
the registered shareholders at the Ministry of Commerce & Industry in Oman will be amended to reflect the fact that CCC is
no longer an LLC shareholder.
As previously reported, management has
a signed written agreement (an “Investment Agreement”) with one such investor. The Investment Agreement is for an amount
in excess of the aggregate investment which was to be made by CCC-Oman and CCC-Panama. This binding Investment Agreement was signed
by LLC and the investor in November 2016 and contemplated the funding of the investment in January 2017. Subsequent to entering
into this Investment Agreement, the investor unfortunately and unexpectedly passed away.
The investor’s heirs have acknowledged
the validity of the Investment Agreement and have agreed to fulfil their father’s commitment pursuant to it as soon as his
estate (which we understand to be quite substantial and complicated) is settled. LLC management has been dealing with the investor’s
heirs since December 2016 and our understanding from them is that their father’s estate will be settled “soon”.
We have concluded that we can no longer rely on their assurances of an imminent conclusion as the heirs have frequently indicated
to us that the estate settlement was imminent – but delays have continued to date. Management has not abandoned its efforts
to close the investment transaction memorialized by the Investment Agreement but we no longer believe it will occur in the time
frame we require and no assurance can be given to investors and shareholders that such investment transaction will actually occur
until it actually does occur.
Since exercising the OMAG Options, we have accelerated our efforts with the two European investment funds
with whom we have, as previously disclosed, been holding discussions in parallel. We are no longer relying on the prompt conclusion
of the estate settlement mentioned above and we are in final discussions with such two European investment funds. When the estate
does settle, we will entertain an investment from the heirs.
LLC will not have the approximately
$20 to $25 million of funding sufficient to begin the serious design, masterplanning and initial site activities on the Omagine
Project until we close a transaction with a replacement investor for CCC. These Soft Costs are typically paid for by the developer
(LLC) out of equity as opposed to the much greater project finance costs which are typically paid for by the developer (LLC) via
bank loans arranged by the developer. Management has also been conducting parallel project finance discussions with a bank and
we expect a successful conclusion to that discussion to occur soon after we close an equity investment with a new investor.
Notwithstanding the foregoing, shareholders
and investors are again cautioned that until an equity investment transaction as generally described above actually closes LLC
will not have the funding sufficient to begin design, masterplanning and initial site work on the Omagine Project and no assurance
can be given at this time that any such investment transaction will be finally consummated.
We intend to amend the Shareholder Agreement
as necessary to memorialize any such new investment by a new investor when and if it occurs (an “Amended and Restated Shareholder
Agreement”). Serious design, masterplanning, development and construction activities on the Omagine Project can begin only
after such investment transaction closes.
As these matters unfold, management
will report all material developments and agreements to its shareholders in a timely manner.
Management cautions that future events
rarely develop exactly as forecast and the best estimates routinely require adjustment. Investors and shareholders are cautioned
not to place undue reliance on any forward-looking statement or forecast, which speaks only as of the date hereof.
The Shareholder Agreement
Upon organizing Omagine LLC in 2009,
OMAG made an initial cash investment into LLC of OR 20,000 [$52,000] in consideration for the issuance to OMAG of 200,000 LLC
Shares.
Pursuant
to the Shareholder Agreement:
i.
|
Before
the DA was signed and after the execution of the Shareholder Agreement, the LLC Shareholders purchased an aggregate of 1,300,000
LLC Shares for an aggregate cash investment of OR 130,000 [$338,000], as follows:
|
|
a)
|
OMAG
purchased an additional 700,000 LLC Shares for OR 70,000 [$182,000] in cash, and
|
|
|
|
|
b)
|
RCA
purchased 375,000 LLC Shares for OR 37,500 [$97,500] in cash, and
|
|
|
|
|
c)
|
CCC-Panama
purchased 150,000 LLC Shares for OR 15,000 [$39,000] in cash, and CCC-Oman purchased 75,000 LLC Shares for OR 7,500 [$19,500]
in cash (collectively, the “225,000 Initial CCC Shares”).
|
ii.
|
After
the DA was signed on October 2, 2014, OMAG purchased an additional 2,100,000 LLC Shares for an additional investment by
OMAG of OR 210,000 [$546,000] in cash, and
|
iii.
|
On
July 2, 2015, RCA purchased an additional 663,750 LLC Shares in consideration for the non-cash investment by RCA of the Land
Rights valued at OR 276,666,667 [$718,614,000].
|
The
construction contract with CCC-OMAN was not signed and the investments required pursuant to the Shareholder Agreement from CCC-Oman
and CCC-Panama were not received by LLC. Pursuant to the terms and conditions of the Shareholder Agreement, OMAG was granted the
OMAG Options to purchase the 225,000 Initial CCC Shares from CCC for 22,500 Omani Rials ($58,500) in the event of a default by
CCC. (See: the Shareholder Agreement attached hereto as Exhibit 10.6). On April 3, 2017 OMAG exercised the OMAG Options to purchase
all of the shares of LLC owned by CCC.
As
of March 31, 2017 and the date hereof
the LLC shareholders have made cash investments
into LLC as indicated in the following
Table A:
Table
A - LLC Shareholders’ Cash Equity Investments into Omagine LLC
|
|
Omagine,
Inc.
|
|
|
Royal
Court Affairs
|
|
|
Consolidated
Contractors
|
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
cash equity investment at inception
|
|
OR
|
20,000
|
|
|
$
|
52,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
cash equity investment at signing of Shareholder Agreement (the “SHA”)
|
|
OR
|
70,000
|
|
|
$
|
182,000
|
|
|
OR
|
37,500
|
|
|
$
|
97,500
|
|
|
OR
|
22,500
|
|
|
$
|
58,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
OMAG Deferred Cash Equity Investment due under the SHA before the first Financing Agreement Date **
|
|
OR
|
210,000
|
|
|
$
|
546,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cash Equity Investments made by each of the LLC Shareholders into LLC as of March 31, 2017 and the date hereof.
|
|
OR
|
300,000
|
|
|
$
|
780,000
|
|
|
OR
|
37,500
|
|
|
$
|
97,500
|
|
|
OR
|
22,500
|
|
|
$
|
58,500
|
|
As
of March 31, 2017 and the date hereof
RCA has made a non-cash payment-in-kind investment into LLC
as indicated in the following
Table B:
Table
B - RCA’s Non-Cash Equity Investment into Omagine LLC
|
|
Omagine,
Inc.
|
|
|
Royal
Court Affairs
|
|
|
Consolidated
Contractors
|
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
non-cash equity investment of Land Rights on registration of the Usufruct Agreement
|
|
|
0
|
|
|
|
0
|
|
|
OR
|
276,666,667
|
|
|
$
|
718,614,000
|
|
|
|
0
|
|
|
|
0
|
|
As
of July 1, 2016 and the date hereof
RCA is obligated to make an additional Deferred Cash Investment into LLC
as indicated
in the following Table C:
Table
C - RCA Deferred Cash Equity Investment into Omagine LLC
|
|
Omagine,
Inc.
|
|
|
Royal
Court Affairs
|
|
|
Consolidated
Contractors
|
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
RCA Deferred Cash Investment which is now due under the SHA
|
|
|
0
|
|
|
|
0
|
|
|
OR
|
7,640,625
|
|
|
$
|
19,865,625
|
|
|
|
0
|
|
|
|
0
|
|
As
of June 30, 2016 CCC was obligated to make additional Deferred Cash Investments into LLC as indicated in the
following Table D, however that did not occur:
Table
D - CCC Deferred Cash Equity Investments into Omagine LLC
|
|
Omagine,
Inc.
|
|
|
Royal
Court Affairs
|
|
|
Consolidated
Contractors
|
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
OR
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Deferred Cash Investments which may be due under the SHA
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
OR
|
18,987,500
|
|
|
$
|
49,367,500
|
|
*
|
All
conversions of Omani Rials to U.S. Dollars in this Report are calculated at an exchange rate of one (1) Omani Rial being equivalent
to $2.60 except for the land valuation which is calculated at an exchange rate of one (1) Omani Rial being equivalent to $2.5974.
See: “The Land Rights” and “Critical Accounting Policies”, below.
|
In
order to bring the Omagine Project to its present state, OMAG (as of March 31, 2017), has:
|
(i)
|
invested
300,000 Omani Rials ($780,000) in cash into LLC, and
|
|
(ii)
|
expended
$17.9 million of Pre-Development Expenses on behalf of the Omagine Project through the October 2, 2014 DA signing date consisting
of both cash and non-cash expense items as OMAG had promised to do pursuant to the SHA, and
|
|
(iii)
|
single-handedly kept the Omagine Project and LLC financially afloat after the October 2, 2014 DA signing date
by expending an additional $12.2 million (as of March 31, 2017) on behalf of the Omagine Project via cash loans from OMAG to LLC
(“Loans”) and the direct payment by OMAG of LLC liabilities and accounts payable consisting of both cash and non-cash
items (“Advances”), neither of which Loans nor Advances OMAG had any obligation whatsoever to do pursuant to the SHA.
|
All
such Loans and Advances are liabilities of LLC to OMAG and all such Pre-Development Expenses will be liabilities of LLC to OMAG;
reimbursable to OMAG in accordance with the terms of the Shareholder Agreement (as may be amended).
See: the following Table E, and “Pre-Development
Expenses and Loans and Advances to LLC” as of March 31, 2017.
Table
E - Pre-Development Expenses, Loans and Advances
Pre-Development Expenses, Loans and Advances
|
|
Cash Items
|
|
|
Non-Cash Items (Depreciation; Amortization; Stock Option Expense)
|
|
|
Total
|
|
Pre-Development Expense Amount (incurred prior to the October 2, 2014 DA signing date)
|
|
$
|
13,611,951
|
|
|
$
|
4,308,163
|
|
|
$
|
17,920,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans & Advances as of 3/31/2017 (incurred on or after the October 2, 2014 DA signing date)
|
|
$
|
4,884,437
|
|
|
$
|
7,394,404
|
|
|
$
|
12,278,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total - (Due to OMAG from LLC)
|
|
$
|
18,496,388
|
|
|
$
|
11,702,567
|
|
|
$
|
30,198,955
|
|
The
foregoing is a summary of some of the terms of the Shareholder Agreement and does not purport to be complete and it is
qualified in its entirety by reference to the full text of the SHA. The full text of the SHA is attached hereto as Exhibit
10.6. RCA and OMAG are presently in negotiations with investors which may lead to an Amended and Restated Shareholder
Agreement.
The
Omagine Project
The Omagine Project is a mixed-use tourism and residential real estate project. Subject to normal
and customary scheduling changes during its development and construction the Omagine Project is expected to take approximately
five years from its start date to complete. Due to CCC’s default on its investment obligation pursuant to the Shareholder
Agreement, the project’s start date has been significantly delayed and has not yet occurred. The Omagine Project is being
developed on one million square meters (equal to 100 hectares or approximately 245 acres) of beachfront land (the “Existing
Land”) facing the Gulf of Oman just west of Oman’s capital city of Muscat and approximately six miles from Muscat
International Airport. Present development plans envision the creation of approximately a net additional 106,000 square meters
of “Reclaimed Land” which together with the Existing Land will comprise approximately 1,106,000 square meters of land
(the “Project Land”). The Omagine Project will require substantial Project Finance to complete (See: “The Shareholder
Agreement”, above and “Financial Advisor”, below).
The
Omagine Project is planned to be an elegant integration of cultural, scientific, heritage, entertainment and residential components,
including seven pearl shaped (20 meter diameter) buildings (the “Pearls”) located along an open boardwalk with associated
entertainment exhibitions; an amphitheater and stage; green landscaped spaces; a canal; an enclosed harbor and marina; boat slips
and docking facilities; retail shops; a variety of restaurants, cafes and entertainment venues; a five-star resort hotel; a four-star
hotel; and possibly an additional three or four-star hotel; shopping and retail establishments integrated with the hotels; commercial
office buildings; and more than two thousand elegant residences to be developed for sale by LLC. The ethos of the project is elegant
but relaxed entertainment and the Company expects that the Pearls will become “the Landmark” for the Sultanate of
Oman.
Pursuant
to Omani Law, non-Omani persons are not permitted to purchase land in Oman unless such land is located within an Integrated Tourism
Project (“ITC”) such as the Omagine Project. The Government has designated the Omagine Project as an ITC and has issued
a license to LLC (an “ITC License”) thereby permitting the sale by LLC of the freehold title to the Project Land and
to properties developed on the Project Land to any person, including any non-Omani person. Since the Omagine Project will contain
significant hospitality (hotels), retail, commercial, and entertainment elements, LLC’s business operations are expected
over time to encompass real estate development, hospitality, entertainment and property management.
The
Development Agreement and the Usufruct Agreement
OMAG’s 60% owned subsidiary, LLC (75% after the closing
of the OMAG Options transaction), signed a Development Agreement (“DA”) with the Government of Oman in October 2014
for the development in Oman by LLC of the Omagine Project. The legal effectiveness of the DA was conditional upon its ratification
by Oman’s Ministry of Finance which Ratification occurred in March 2015. On July 1, 2015, the Government and LLC entered
into a Usufruct Agreement (“UA”) with respect to the Land Rights over the Existing Land and the DA and UA extend such
Land Rights to all of the Project Land.
On July 2, 2015, after the UA was registered
by the Government legally perfecting LLC’s ownership of the Land Rights, the Ministry of Tourism (“MOT”) of
the Government and LLC agreed in writing that July 1, 2015 would be the Operative Date from which time periods for the execution
by LLC of certain tasks enumerated in the DA are to be measured. The MOT states in relevant part in writing to LLC that:
“We
ask you to receive the land and begin procedures for executing the project as per the development agreement entered into with
you, keeping in mind that the effective commencement date of the development agreement is 1 July 2015”.
(See Exhibits
10.8 and 99.2).
The
DA and UA are the contracts that govern the design, development, construction, management and ownership of the Omagine Project,
the use and sale by LLC of the Project Land, and the Government’s and LLC’s rights and obligations with respect to
the Omagine Project. In the event of any conflict between the terms and conditions of the DA and the terms and conditions of the
UA, the terms and conditions of the DA control (See Exhibits 10.7, 99.1, 10.8 and 99.2). The term of the DA is 20 years and the
term of the UA is 50 years (renewable) commencing from the Operative Date. The UA and those DA provisions relevant to the UA survive
the expiration of the term of the DA.
The
Land Rights owned by LLC give it extensive rights over the Project Land including the right to sell such Project Land on a freehold
basis. LLC may use, control, develop, retain, operate and/or sell the approximately 1.1 million square meters of Project Land
to itself or to third parties. The DA obligates LLC to pay the Government twenty-five (25) Omani Rials ($65) for each square meter
of Project Land purchased directly by LLC or sold by LLC to any third party (the “Land Price”). The average valuation
for the Land Rights (net of such Land Price is OR 276,666,667 ($718,614,000) (See: “The Land Rights”, below).
The
five year period commencing on the Operative Date is a rent free period (the “Rent Free Period”) and thereafter LLC
will pay annual rent to the Government (the “Land Rent”) based on only the built but unsold commercial area (excluding
the residential area) of the Omagine Project (approximately 150,000 sq. meters) or approximately OR 45,000 ($117,000) per year
based on the current annual per square meter fee of OR 0.300 ($0.78). No Land Rent is due or owing during the Rent Free Period
and no Land Rent is ever due or owing with respect to plots of Project Land (i) on which there is a residential building, or (ii)
on which there is not a substantially completed non-residential building (i.e. Project Land that is open space, roads, non-residential
building work-in-progress, etc. are rent-free).
The
continued legal effectiveness of the DA subsequent to the Operative Date is dependent upon certain milestone dates being
achieved (any or all of which may be extended or waived by the Government), including: (1) LLC’s delivery to the
Government by June 30, 2016 of a term sheet with lenders for the financing of the first or any other phase of the Project,
[this milestone date was achieved by the term sheet and financing agreement which LLC received from the Qatari Bank in
November 2015], (2) LLC’s submission to the Ministry of Tourism of a social impact assessment by March 31, 2016 and the
Government’s approval thereof by June 30, 2016, (3) the Government’s approval by June 30, 2016 of the development
control plan for the Omagine Project, and (4) the transformation of LLC into a joint stock company by June 30, 2016 (these
milestone dates 2, 3 and 4 are not yet achieved and are expected to be extended as mentioned above if and when the Operative
Date is extended). LLC has suffered many delays as a result of the CCC default and we are presently assured by Government
officials that the Operative Date will be extended by MOT provided we are able to close the necessary investment with a
replacement investor for CCC. No assurance can be given at this time however that the Operative Date will be so
extended.
LLC
management and RCA have met with and spoken to the staff at the Ministry of Tourism and with the Minister several times during
the period from December 2016 to the date hereof in regard to our efforts to finalize the Amended and Restated Shareholder Agreement
with the estate of our proposed new investor as well as in regard to the delays encountered to date by LLC in meeting certain
DA milestone dates as measured from the Operative Date. The MOT (and all Government Ministries) are also acutely aware of the
unusual fiscal strains imposed on the present banking and economic environments in the region. While no conclusive extension of
the Operative Date has yet been made, as noted above we have continued to keep both the Minister and the staff updated and LLC
management and RCA presently expect that the Operative Date will be extended once we finalize our ongoing negotiations and agreements
with a new investor. No assurance can be given however to what extent, if any, that the Operative Date will in fact be extended
by MOT.
Pursuant to the DA, LLC must substantially
complete the construction of the seven Pearl buildings and one hotel (the “Minimum Build Obligation” or “MBO”)
by June 30, 2020 (the “MBO Completion Date”), as such date may be amended or extended per the DA as indicated above.
The DA imposes no performance timelines on LLC with respect to completing the development or construction of elements of the Omagine
Project other than the MBO but the completion of the MBO will require LLC to obtain the necessary Project Finance to do so. Any
material breach by LLC of its obligation to perform the MBO would constitute an event of default under the DA. The DA specifies
that the principal construction contract should be executed by June 30, 2016. This (i.e. the CCC Contract) did not happen as indicated
above. LLC is required to provide written notice to the Government in certain circumstances, such as LLC’s change in an
anticipated milestone date that would result in a substantial achievement of work to occur later than 60 days after such milestone
date. Such notice has been communicated both verbally and in writing to the appropriate government officials in recent communications
with them.
The Company undertook and financed many development activities on behalf of LLC subsequent to the DA signing (the “Initial
Activities”) in an effort to fast-track the Omagine Project’s development. The fast-track advantages sought to be
gained thereby however have not materialized due to CCC’s default which resulted in LLC’s failure to utilize the $25
million Al-Rayan Loan to finance the Initial Activities and LLC’s ongoing operations in Oman (See: our previous disclosures
in prior reports filed with the SEC). The cause of such failure was CCC’s failure to make its Deferred Cash Investment into
LLC as required after the November 2015 Financing Agreement Date after initially agreeing to do so and the extended and much drawn
out and ultimately futile negotiations with CCC relevant to the CCC-Oman construction contract (to which CCC often initially agreed
to various versions and later reneged on their prior agreements).
Because of these delays therefore,
the more serious and substantial design, masterplanning and construction activities for the Omagine Project did not begin in December
2015 (and have not yet begun) as required for the fast-track development strategy and as management had planned. (See: “Initial
Activities” and “Pre-Development Expenses and Loans and Advances to LLC”, below). The design, development and
construction of the Omagine Project will still benefit from these Initial Activities having been undertaken but not to the extent
envisioned by our planned fast-track development approach.
Non-Omani
persons (such as expatriates living and working in Oman) are not permitted by Omani law to purchase land or residences in Oman
outside of an ITC. The Government’s designation and licensing of the Omagine Project as an ITC therefore permits LLC to
sell the freehold title to Project Land and properties which are developed on Project Land to any Omani or non-Omani individual
or juristic person worldwide. Properties within an ITC enjoy a premium price relative to properties not in an ITC. Any Project
Land or buildings remaining unsold at the expiration of the 50 year Usufruct Term will revert to the Government. LLC does not
anticipate that there will be any such unsold properties at the expiration of the 50 year Usufruct Term.
The
foregoing summary of some of the terms of the DA and of the UA does not purport to be complete and it is qualified in its entirety
by reference to the full texts of such agreements. The full text of the Development Agreement is attached hereto as Exhibits 10.7
and 99.1. The full text of the Usufruct Agreement is attached hereto as Exhibits 10.8 and 99.2 and also contained in Schedule
2A of the Development Agreement.
The
Land Rights
The
value of the Project Land has been determined in 2015 by three highly experienced professional valuation firms in accordance
with the requirements and procedures specified for such a valuation by (i) the Royal Institution of Chartered
Surveyors (“RICS”) of London, England, and (ii) International Financial Reporting Standards (“IFRS”).
Each of the three firms has a worldwide brand in the real estate valuation business.
|
●
|
In
November 2014, LLC engaged the Oman office of Savills (http://www.savills.com/ (“Savills”) operating as Arabian
Real Estate LLC (http://www.savills.om). Savills provides real estate services from over 600 offices worldwide, is listed
on the London Stock Exchange, and is a FTSE 250 Index company.
|
|
|
|
|
●
|
In
December 2014, LLC engaged DTZ International Ltd., a Dubai, UAE firm (now:
Cushman & Wakefield
International Limited) with extensive experience in Oman (http://www.cushmanwakefield.com/) (“C&W”). C&W is
one of the top global commercial real estate service companies
.
|
|
|
|
|
●
|
In
January 2015, LLC engaged Jones Lang LaSalle, UAE Limited, Dubai Branch (http://www.jll-mena.com/mena/en-gb/locations/Our-locations-in-MENA/dubai)
(“JLL”). JLL has 53,000 employees operating across more than 230 offices in 80 countries.
|
The
Savills and C&W final valuation reports were received by LLC in January 2015. The JLL final valuation report was received by LLC
in July 2015. The Company is of the opinion that JLL’s valuation is flawed and most probably represents a statistical outlier.
In an abundance of caution however, management has nevertheless determined to include the JLL valuation in its calculation of
the average value of LLC’s Land Rights. The Land Rights valuations by the three aforementioned firms are summarized in the
table below:
Land
Rights Valuation
|
|
|
|
|
Valuation
Firm
|
|
Omani
Rials
|
|
Savills
|
|
OR
|
295,000,000
|
|
C&W
|
|
OR
|
385,000,000
|
|
JLL
|
|
OR
|
150,000,000
|
|
|
|
|
|
|
Average
|
|
OR
|
276,666,667
|
|
In
view of the changing economic conditions in the MENA Region due to the fall in oil prices, LLC may commission an updated land
valuation in the coming months.
The
Accounting Treatment for the Land Rights
OMAG
and JOL prepare their financial statements in accordance with accounting principles generally accepted in the United States (“US
GAAP”) and the Company prepares its consolidated financial statements in accordance with US GAAP. LLC’s financial
statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).
LLC
has land under development valued at 276,666,667 Omani Rials. Based on a $2.5974 per 1 Omani Rial exchange rate, the Company recorded
this land under development in its financial statements at $718,614,000 and the Company has allocated this amount as follows:
188,963,334 Omani Rials ($490,813,363 based on a $2.5974 per 1 Omani Rial exchange rate) to inventory; and 87,703,333 Omani Rials
($227,800,637 based on a $2.5974 per 1 Omani Rial exchange rate) to property. This land under development was purchased by LLC
on July 2, 2015 pursuant to the terms of the Shareholder Agreement whereby an LLC shareholder subscribed for 663,750 LLC Shares
at a purchase price equal to the value of the Land Rights. Since the Land Rights represented a non-cash payment-in-kind for the
LLC Shares, it was necessary to value the Land Rights.
Three
expert real estate valuation companies were engaged by LLC to independently value the Land Rights in accordance with the professional
standards specified by RICS and IFRS. The average of the three Land Rights valuations was OR 276,666,667. (See: “The Land
Rights”, above and Exhibits 99.4, 99.5 and 99.6).
Since
the 276,666,667 Omani Rial value of the Land Rights is substantial, LLC retained the services of PricewaterhouseCoopers LLP (“PwC”)
to provide its written analysis and report to LLC with respect to the correct IFRS accounting method LLC should use to record
the 276,666,667 Omani Rial Land Rights value in its IFRS compliant financial statements. PwC did not advise on the valuation of
the Land Rights (as determined by Savills, C&W and JLL), but only on the correct accounting LLC should use to record such Land
Rights valuation in LLC’s financial statements in accordance with IFRS. PwC’s written report was received by LLC in
August 2015. Promptly thereafter, LLC consulted with its independent auditor, Deloitte & Touche (M.E.) & Co. LLC (“Deloitte”)
with respect to the matter, and Deloitte’s written technical analysis report (which agreed with PwC’s analysis) was
received by LLC in November 2015.
The
Land Rights over the Project Land are extensive, are closely akin to ownership rights and include the right to sell such land
on a freehold basis. The Land Rights are virtually equivalent to ownership rights and like any asset, if its value were to become
impaired for any reason (including any contractual reason pursuant to the DA requirements), a reserve for such impairment would
need to be established at such time. Although it is not required to do so, in view of the unsettled economic environment in Oman
and the greater MENA Region and because of the inordinate delays in resolving the CCC matters and obtaining a replacement investor
for CCC, LLC plans to update its land valuation when it has the resources to do so to verify if any material changes in the value
of the Project Land may have occurred since the above three valuation reports were completed. Consideration of the foregoing concerns
may possibly require the establishment of such a reserve for impairment. Management’s decision as to whether or not to undertake
such updated reports and/or whether or not to establish such a reserve will depend to a large extent upon management’s assessment
at the time of the likelihood of securing a replacement investor for CCC and the economic conditions in Oman. Both PwC and Deloitte
independently concluded that the Land Rights should be recorded as capital and as tangible assets (work-in-process inventory and
land) on LLC’s financial statements. With respect to the Company’s consolidated financial statements, the Company’s
independent auditor in the U.S. has likewise concurred that pursuant to US GAAP, the Land Rights should be recorded as capital,
inventory and land.
In
determining the proper amounts to be allocated to inventory and to land, LLC calculated the percentage (x) by dividing (y) the
area of the land LLC presently plans definitively to sell, by (z) the total area of the Project Land, and then multiplying that
percentage (x) by 276,666,667 Omani Rials to get the number (N) for inventory. The amount to be allocated to property was then
calculated by subtracting N from 276,666,667 Omani Rials. Using its detailed internal financial model, management calculated (x)
to be equal to 68.3%, thereby making the inventory number (N) equal to 188,963,334 Omani Rials ($490,813,363 based on a $2.5974
per 1 Omani Rial exchange rate) and the property number equal to 87,703,333 Omani Rials ($227,800,637 based on a $2.5974 per 1
Omani Rial exchange rate). In its consolidated financial statements therefore, the Company has allocated the value of the Land
Rights between (i) land under development which is held for sale (inventory), and (ii) land under development which is held for
investment (PP&E). As more precise land use percentages emerge during and after the masterplanning and construction of the
Omagine Project, the percentage allocations for the value of the Land Rights may be reclassified to distinguish between the land
underlying properties that we will own and operate and those which we will own and lease.
Pre-Development
Expenses and Loans and Advances to LLC
Prior
to the DA being signed, OMAG incurred significant costs related to marketing, planning, concept design, re-design,
feasibility studies, engineering, financing, promotions, capital raising, travel, legal fees, consulting and professional
fees, other general and administrative activities and similar such activities including preparing and making presentations to
the Government and to potential investors and all other activities and matters associated with the negotiation and conclusion
of the DA with the Government (collectively, the “Pre-Development Expenses”). The Shareholder Agreement defines
the “Pre-Development Expense Amount” as the total amount of such Pre-Development Expenses incurred before the DA
was signed by the Government and LLC on October 2, 2014.
OMAG
expended $17,920,114 to pay for 100% of the Pre-Development Expense Amount.
Subsequent to the October 2, 2014 DA signing
date, OMAG has voluntarily - and without any obligation to do so - single-handedly kept LLC and the Omagine Project financially
afloat by expending (as of March 31, 2017) an additional $12,278,841 million on behalf of LLC and the Omagine Project via Loans
and Advances from OMAG to LLC.
A
summary of the Pre-Development Expense Amount and of the Loans and Advances is detailed in the following table:
Pre-Development
Expenses, Loans and Advances
|
|
Cash
Items
|
|
|
Non-Cash Items
|
|
|
Total
|
|
Pre-Development Expense Amount (incurred prior to the October 2, 2014 DA signing date)
|
|
$
|
13,611,951
|
|
|
$
|
4,308,163
|
|
|
$
|
17,920,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans & Advances (incurred on or after the October 2, 2014 DA signing date)
|
|
$
|
4,884,437
|
|
|
$
|
7,394,404
|
|
|
$
|
12,278,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Due to OMAG from LLC
|
|
$
|
18,496,388
|
|
|
$
|
11,702,567
|
|
|
$
|
30,198,955
|
|
The
Loans and Advances are liabilities of LLC to OMAG; reimbursable to OMAG on demand. The Pre-Development Expense Amount will be
a liability of LLC to OMAG reimbursable to OMAG in accordance with the terms of the Shareholder Agreement. The terms and conditions
of an Amended and Restated Shareholder Agreement may change the presently existing terms and conditions of the existing Shareholder
Agreement with respect to the payment of the Pre-Development Expense Amount and/or the Loans and Advances.
The
Pre-Development Expense Amount
Pursuant
to the Shareholder Agreement as presently in effect, the date subsequent to the first Financing Agreement Date when LLC draws
down the first amount of debt financing is defined as the “Draw Date”.
The first Financing Agreement Date
occurred on November 29, 2015 when LLC and Masraf Al Rayan signed a Financing Agreement. A Draw Date pursuant to that Financing
Agreement never occurred however because CCC (represented by CCIC executive management), after first agreeing in December 2015
to promptly (i) finalize the negotiation of the CCC-Oman construction contract (“CCC-Contract”) which in December
2015 was in an advanced stage of completion, (ii) sign the CCC-Contract, and (iii) invest their Deferred Cash Investments immediately
after the CCC-Contract was signed – subsequently – and on several different occasions – defaulted on all of
these commitments and on its obligations under the Shareholder Agreement. Consequently, these matters have been the subject matter
of numerous and virtually continuous discussions, negotiations and agreed changes (subsequently defaulted on by CCC) since December
2015 through March 2017 with many and varied interim “agreed agreements”, all of which were “agreed” and
then later forsaken by CCC. The CCC-Contract negotiations were ultimately abandoned by management (See: “The CCC-Contract”,
below) and the OMAG Options was exercised by OMAG in April 2017.
Further
pursuant to the Shareholder Agreement as presently in effect:
|
1)
|
the
liability for the Pre-Development Expense Amount shall be recorded on LLC’s financial records on the Draw Date and in
accordance with the International Financial Reporting Standards (“IFRS”), and
|
|
2)
|
fifty
percent (50%) of the Pre-Development Expense Amount will be paid to OMAG on or within ten (10) days after the Draw
Date, and
|
|
3)
|
the
remaining fifty percent (50%) of the Pre-Development Expense Amount will be paid to OMAG in five equal annual installments
beginning on the first anniversary of the Draw Date.
|
The
Loans and Advances to LLC
The $12,278,841 of Loans and Advances (as
of March 31, 2017) are payable to OMAG by LLC on demand (but as a practical matter, not until LLC has the financial capacity to
do so and OMAG has no present intention of demanding immediate payment of the Loans and Advances until LLC has such financial
capacity).
The
Success Fee
The
Shareholder Agreement defines the Success Fee as being equal to ten (10) million dollars. Pursuant to the terms of the Shareholder
Agreement as presently in effect:
|
1)
|
the
liability for the Success Fee shall be recorded on LLC’s financial records on the Draw Date and in accordance with the
IFRS, and
|
|
2)
|
the
Success Fee will be paid to OMAG in five annual two (2) million dollar installments beginning on or within ten (10)
days after the Draw Date.
|
OMAG, may at its sole
option, not enforce the aforementioned payment schedules for the Pre-Development Expense Amount and/or the Success Fee as agreed
in the Shareholder Agreement and may agree to a different schedule for such payments and OMAG may likewise, at its sole option,
refrain from demanding payment of the Loans and Advances until LLC is in a financial position to make such payment.
As of the date hereof, OMAG continues
to make Loans and Advances to and on behalf of LLC for the activities being undertaken by or on behalf of LLC for the Omagine Project
and expects to do so for only a short time further or until the closing of an equity investment into LLC occurs.
The Amended and Restated Shareholder
Agreement (assuming it is agreed and executed) is expected to, among other things, address, restate and formalize the terms of
repayment by LLC to OMAG of the Pre-Development Expense Amount, the Loans and Advances and the Success Fee but the manner, terms
and conditions to be agreed relative thereto is uncertain at this time. Management’s primary goal continues to be the launch
of serious design and construction activities for the Omagine Project and management does not object to any reasonable resolution
of these and other matters preventing that goal from being accomplished. Notwithstanding the foregoing, if and when LLC closes
an equity investment as or similar to the equity investment mentioned above and herein with respect to the Investment Agreement
or with one or both of the European investment funds (or other investor), it is management’s present intention to demand
repayment from LLC to OMAG of all or a large part of the Loans & Advances then due and outstanding.
LLC Capital Structure
As
of the date hereof the Registered Shareholders have made:
|
(i)
|
cash
investments totaling OR 360,000 [$936,000] (of which OR 300,000 [$780,000] was invested by OMAG), and
|
|
|
|
|
(ii)
|
a
non-cash investment of the Land Rights valued at OR 276,666,667 ($718,614,000), for a total investment to date of OR 277,026,667
($720,269,334).
|
LLC
is presently capitalized as follows:
Shareholder
|
|
Omani
Rials
|
|
|
US
Dollars
|
|
OMAG
|
|
OR
|
300,000
|
|
|
$
|
780,000
|
|
RCA
|
|
OR
|
276,704,167
|
|
|
$
|
718,711,500
|
|
CCC-Panama
|
|
OR
|
15,000
|
|
|
$
|
39,000
|
|
CCC-Oman
|
|
OR
|
7,500
|
|
|
$
|
19,500
|
|
Total
|
|
OR
|
77,026,667
|
|
|
$
|
719,550,000
|
|
As of the date hereof, as a result of (i) OMAG having made its
OR 210,000 ($560,000) Deferred Cash Investment into LLC, and (ii) RCA having made its OR 276,666,667 ($718,614,000) non-cash PIK
Investment of the Land Rights into LLC, LLC is presently obligated to issue and register a further 2,100,000 LLC Shares to OMAG
and a further 663,750 LLC Shares to RCA. As of the date hereof, RCA has not yet made its Deferred Cash Investment into LLC but
is expected to do so pursuant to an Amended & Restated Shareholder Agreement and CCC has defaulted on its obligation to make
its Deferred Cash Investment into LLC.
As
of the date hereof, the ownership percentages of LLC as registered at Oman Ministry of Commerce & Industry are as follows:
LLC Shareholder
|
|
% Ownership
|
|
OMAG
|
|
|
60
|
%
|
RCA
|
|
|
25
|
%
|
CCC-Panama
|
|
|
10
|
%
|
CCC-Oman
|
|
|
5
|
%
|
Total:
|
|
|
100
|
%
|
On
April 3, 2017 OMAG exercised the OMAG Options to purchase all of the shares of LLC owned by CCC-Oman and CCC-Panama. RCA continues
to be obligated to make its further cash investment into LLC in the aggregate amount of OR 7,640,625 [$19,865,625] but the timing
and payment of such RCA Deferred Cash Investment may change from that memorialized in the Shareholder Agreement presently in effect
to that which may be agreed in an Amended and Restated Shareholder Agreement. CCC has indicated to management that it will default
and not make its Deferred Cash Investment into LLC in the aggregate amount of OR 18,987,500 [$ 49,367,500].
The
Transformation
At
some time subsequent to the execution of the Amended and Restated Shareholder Agreement, LLC intends to transform its corporate
structure from a limited liability company into a joint-stock company (the “Transformation”).
The
Shareholder Agreement also specifies, among other things, the corporate governance and management policies of LLC and it provides
for the LLC shares presently owned by JOL to be transferred to OMAG subsequent to the signing of the DA. We presently expect
this share transfer to occur at the time of the Transformation of LLC into a joint stock company or at the time of the execution
of the Amended and Restated Shareholder Agreement.
The
foregoing summary of the terms of the Shareholder Agreement does not purport to be complete and is qualified in its entirety by
reference to the full text of the Shareholder Agreement attached hereto as Exhibit 10.6.
Banks,
Investors and Contractors
The
Al Rayan Bank
As previously reported, on November 29, 2015,
LLC executed a Murabaha Facility Agreement with Masraf Al Rayan Bank (Qatar) for a $25 million loan (the “Al Rayan Bank
Loan”) to finance the first phase of the Omagine Project (the “Al Rayan Loan Agreement”) consisting of design,
development and initial construction activities. The loan, which is subject to satisfaction of certain conditions precedent to
closing, would bear interest at an annual rate equal to the 12 month LIBOR rate plus 1% and would be payable one year from the
closing date. One condition precedent to closing is that the loan be secured by a $25,000,000 cash deposit in an LLC account at
Masraf Al Rayan Bank (Qatar). Such security deposit was expected (and agreed by CCC) to be provided by CCC pursuant to the terms
pf the Shareholder Agreement but this did not occur and it is presently unlikely that this loan facility will be utilized. The
Al Rayan Loan Agreement and the Al Rayan Bank Loan will not be utilized by LLC due to CCC’s default under the Shareholder
Agreement and its failure to make its required OR 18,987,500 [$ 49,367,500] Deferred Investment into LLC.
Management
remains optimistic that its ongoing discussions with an alternative bank can be concluded when and if our new investor to
replace CCC becomes an LLC shareholder.
Other
Investors and Contractors
During 2015, 2016 and to date, management has conducted a multitude of investor presentations
across the MENA Region with potential LLC equity investors and high net-worth individuals. Several of these investors expressed
interest in becoming shareholders of LLC but in all such cases to date except one, management concluded that the percentage of
LLC equity required by such investors was exorbitantly excessive and much too dilutive to the LLC Shareholders (and indirectly
dilutive to our OMAG shareholders via OMAG’s ownership of LLC). LLC management is presently focused on the estate of the
abovementioned investor with whom it has a written Investment Agreement) and on two European investment funds as investors.
Given the present liquidity issues
at local banks, the matter of construction debt financing (“Project Finance”) is an issue at the top of all developer’s
and contractor’s agendas. As mentioned above, the required Project Finance for the Omagine Project – or any project
– is not really needed until after the masterplanning and design phase is complete or near complete.
Design,
Development & Construction:
The
design, development and construction of the Omagine Project will be divided into various phases (each, a “Phase”).
Since the CCC Contract has not and will not be signed, neither CCC nor any other contractor is presently expected to be the General
Contractor for the entire Omagine Project. The various construction Phases are now expected to be put out to bid to various contractors
and this competitive bidding process (especially given the present economic environment for contractors in the MENA Region) is
expected to garner substantial cost savings for LLC.
Initial
Activities
The Post-DA Period is the time period between the DA signing and the date hereof. The execution of many
initial activities during this period by LLC required the parallel launching by LLC management of many diverse efforts and processes
on multiple fronts immediately after the DA Execution Date of October 2, 2014 and continuing through the date hereof. This early
initiative fast track strategy (financed entirely by OMAG) benefited LLC to date in many ways, among which are:
1.
|
the
DA was Ratified by the Government;
|
|
|
2.
|
the
UA was signed and registered with the Government;
|
|
|
3.
|
the
Operative Date of July 1, 2015 replaced both the Execution Date of October 2, 2014 and the Effective Date of March 11, 2015
referenced in the DA;
|
4.
|
three
separate valuation studies and reports were commissioned and the valuation of the Land Rights was completed;
|
|
|
5.
|
expert
accounting analyses and reports were received from PwC, Deloitte and the Company’s independent auditor regarding LLC’s
purchase of the Land Rights and the recording thereof in LLC’s and the Company’s financial statements;
|
|
|
6.
|
LLC
booked 276,666,667 Omani Rials of new equity which is also reflected in the Company’s consolidated financial statements;
|
|
|
7.
|
a
cost accounting budgetary framework to be used during the development, construction and marketing of the Omagine Project was
created by an independent accounting and finance consultant;
|
|
|
8.
|
an
expert IT consultant was selected to architect and install the IT framework and solutions we intend to implement across LLC
and the Company and across the Omagine Project’s “smart city” environment;
|
|
|
9.
|
an
independent third party update to our feasibility study was commissioned and completed;
|
|
|
10.
|
an
update of LLC’s internal financial model by specialist real estate investment bankers and advisers was commissioned
and completed;
|
|
|
11.
|
confirmation
from banks in Oman (but not from banks outside of Oman) that the value of the Land Rights can be used as collateral to support
the Syndicated Bank Financing was received;
|
|
|
12.
|
the
“Brand Identity” and associated brand pillar components and uniform brand messaging platform we intend to implement
for OMAG, LLC and the Omagine Project were created;
|
|
|
13.
|
LLC’s
strategic plan was completed;
|
14.
|
multiple
meetings with, and multiple iterations of proposals and presentations from major mission-critical project consultants (architects,
designers, master planners, engineers, program managers, quantity surveyors, real estate advisers, hospitality advisers, hotel
management companies, financial advisers and others) have been received, reviewed and analyzed by management and selections
of many consultants have been made by management;
|
|
|
15.
|
candidates
for senior LLC executive positions have been recruited, interviewed and selected;
|
|
|
16.
|
extensive
and multiple presentations and meetings with potential LLC equity investors in six MENA Region countries, Europe, Asia and
the U.S. were conducted and while most offers were declined by LLC, negotiations with several selected strategic investors
are still ongoing with a present focus on one such investor;
|
|
|
17.
|
extensive
and multiple presentations and meetings with local, regional and international banks in Oman, the MENA Region and Europe with
respect to the provision of Syndicated Bank Financing have occurred with a present focus on one such bank;
|
|
|
18.
|
Multiple
drafts of the CCC Contract were created (most recently in May 2016) but the final attempt to close this transaction ended
unsuccessfully after many delays, and
|
|
|
19.
|
several
other contracts for mission-critical consultants are presently being prepared,
|
The
CCC Contract / The CCC Phases
The CCC-Contract was not and will not
be signed with CCC-Oman. Management was previously optimistic and positively inclined to believe that a beneficial conclusion for
all parties concerned would be forthcoming but no conclusion occurred and management concluded that no amount of further negotiations
would result in a definitive conclusion of these matters with CCC.
The Omagine Project will however still
be developed in Phases but the previously described and disclosed description of phases will be altered as we go forward. Discussions
with CCC have ceased and OMAG has exercised its option to purchase all of the shares of LLC owned by CCC-Oman and CCC-Panama.
It is presently expected that several
building contractors will be involved in the project as the various Phases of the work is designed and specified and then put out
to bid by local contractors after the design is substantially completed. As part of the masterplanning, we will develop a phasing
program for the entire project and as the design and/or specifications of any Phase is sufficiently completed such that LLC can
tender it for competitive bidding it will do so. CCC-Oman will be welcome to bid on any such Phase if it so desires.
Any new construction contracts with
potential contractors will be modeled after the early draft CCC-Contract as envisioned by LLC and will be based on internationally
accepted contracting standards promulgated by the International Federation of Consulting Engineers (“FIDIC”) and will
contain a set of industry standard performance parameters, incentives and penalties to ensure LLC’s interests are protected
and that value is delivered.
LLC
will manage the bidding and competitive process by which the various contractors will be chosen. There is an ample supply of qualified
contractors in Oman and the MENA region.
The contractor will only commence construction
activities on a Phase or section of a Phase after the design therefore is substantially completed and after the competitive bids
therefore are examined and a contract award is made by LLC.
It is anticipated that several Phases will be under construction simultaneously
in an overlapping manner as the various designs and specifications for the various Phases are sequentially completed. Construction
on Phases will continue until the conclusion of all Permanent Works constituting the Omagine Project are completed.
LLC
plans to maintain a robust control of the design of the entire project and of each Phase through to completion.
Development
Phases / Construction Phases / Project Financing / Masterplanning
It
is anticipated that the Omagine Project will be developed in several phases and each such phase will likely include one or more
Sections of construction. It is expected therefore that several tranches of project financing from banks or other financial institutions
will occur and several Financing Agreements will likely be executed during the course of the project’s phased development
and construction. The first Financing Agreement Date occurred on November 29, 2015 with the signing of the Al Rayan Loan agreement
but as stated above it was never utilized. Until other Financing Agreements are actually executed by the relevant parties however,
no assurance can be given that they actually will be so executed or that Project Financing will be available to LLC. Each such
further Financing Agreement, if any, is expected to coincide approximately with the beginning of a new development and construction
phase, all of which phases will include design, marketing and one or more new Sections of construction activities. The closing
of a tranche of Project Finance whether from banks, investors, financial institutions or from Syndicated Bank Financing will each
be memorialized by a separate Financing Agreement.
The
November 29, 2015 execution date of the first such Financing Agreement with Masraf Al Rayan is defined in the Shareholder Agreement
as the “Financing Agreement Date”. The earlier that the Financing Agreement Date occurred, the better it was expected
to be for LLC, the Omagine Project, and all concerned for a variety of reasons but this was ultimately complicated by the CCC-Contract
delays described herein. The present liquidity squeeze in GCC banks may continue to have a negative impact on our Project Finance
efforts. Notwithstanding the foregoing sentence, the bank with which we are presently negotiating a project finance package does
not have such liquidity issues.
No
assurance however can be given at this time as to whether the Company will be successful in arranging either Equity Sales or Debt
Facilities or in closing the financing facility for the Omagine Project until such events actually happen.
Any
reference in this report to a term or condition of the Development Agreement, the Usufruct Agreement and/or the Shareholders Agreement
does not purport to be complete and is qualified in its entirety by reference to the full texts of such agreements. The full text
of the Development Agreement is attached hereto as Exhibits 10.7 and 99.1. The full text of the Usufruct Agreement is attached
hereto as Exhibits 10.8 and 99.2. The full text of the Shareholder Agreement is attached hereto as Exhibit 10.6.
The masterplanning of the Omagine Project
will not begin until a new investor to replace CCC is secured. No further feasibility study is presently required or planned for
the project as our financial model adequately demonstrates the project’s financial feasibility. We may however commission
a further feasibility study or an update to the present one depending on future circumstances and/or requirements of lenders.
It is presently planned that in parallel with the masterplanning effort we will engage the hospitality, real estate, insurance
and marketing consultants to execute various professional studies which will inform the masterplanning process and our business
plan. These consultants and advisers all contribute to and inform the masterplanning and final design process for the Omagine
Project.
The preliminary master plan along with the various studies and our fleshed-out business plan (which in turn is informed
by our now completed Strategic Plan) is expected to be utilized by the financial adviser to drive the Syndicated Bank Financing
effort.
During
the masterplanning process, exact sizes, shapes and placement of the various project elements (residential, hotels, entertainment,
landscape, etc.) are determined and as the master plan evolves and takes shape, the various follow-on Phases of development and
construction will also naturally evolve. Simultaneously with these processes, the Financial Adviser will be updating the Omagine
Project’s financial model to reflect the precise and final constituent project elements along with their projected costs
and associated projected revenue streams. Finally, all of the foregoing data and other marketing, sales and strategic planning
studies created by or on behalf of LLC are assembled into an “LLC Business Plan”. With the LLC Business Plan in hand
and with the LLC Financial Adviser in the lead, LLC and the Financial Adviser and other select consultants set about the business
of making final presentations to the various banks, with which we are now and will continue to be in touch, with the objective
of arranging the Syndicated Bank Financing.
Notwithstanding
anything contained in this report regarding possible, proposed or planned (i) sales of equity by OMAG and/or LLC (“Equity
Sales”), or (ii) debt facilities with banks, financial institutions or other persons or sale of debt securities by LLC (collectively,
“Debt Facilities”), or (iii) Syndicated Bank Financing or Project Finance, no assurance can be given at this time
as to whether the Company or LLC will be able to obtain the significant amount of financing and Project Finance necessary over
time to execute the development of the Omagine Project.
Over
the past many months, we have conducted, and continue to conduct, numerous meetings:
i.
|
with respect to LLC Equity Sales, with several potential equity investors interested in becoming shareholders
of LLC, including investment funds and high net-worth individuals from Europe and several MENA Region countries, and
|
|
|
ii.
|
with
respect to OMAG Equity Sales, with investment funds and high net-worth investors in the U.S., Europe and the MENA Region
interested in becoming shareholders of OMAG, and
|
|
|
iii.
|
with
respect to Debt Facilities for LLC other than Syndicated Bank Financing, with several banks and other potential investors
in the U.S., Europe, the GCC countries and Oman, and
|
|
|
iv.
|
with
respect to major local, regional and international banks in Oman and the GCC there appeared to be a significant amount of
banking liquidity in 2015, but presently the banking liquidity levels are modestly rebounding after being under severe pressure
in 2016 primarily as a result of the worldwide drop in the price of crude oil and resulting decrease in deposits into these
banks by governments. The large appetite we witnessed in 2015 at such banks for providing Syndicated Bank Financing and Debt
Facilities to LLC cooled in 2016 but appear to be easing in 2017. Notwithstanding the foregoing, the bank with which we are
presently negotiating a project finance package does not have such liquidity issues.
|
LLC
management and financial executives have held numerous meetings and discussions over the past numerous months with many major
local and international banks, the purpose of which, among other things, was to discuss the prospects for such banks providing
the Syndicated Bank Financing which is expected to be composed primarily of debt financing from banks. This is a crucial matter
to address and accomplish in order to make the Omagine Project a reality. Based on present assumptions, we estimate that LLC’s
peak Syndicated Bank Financing requirements will be approximately $350 to $400 million during the multi-year development cycle
of the Omagine Project.
The
process of obtaining project financing is not a trivial exercise. It is a time-consuming and complicated process which, when successful,
culminates in an event known as a “Financial Close” – usually several Financial Close events - as projects of
the size and scope of the Omagine Project are almost always developed in phases. With respect to any proposed Syndicated Bank
Financing requirements, the question of whether or not LLC’s Land Rights can or will be used by the various banks as collateral
to support such Syndicated Bank Financing is therefore of considerable importance. At present LLC management is confident that
banks within Oman will use LLC’s Land Rights as collateral for bank debt facilities for LLC but we are unclear as to the
position of many of the regional and international banks outside of Oman in this regard. We will fully engage in this project
finance process after the masterplanning effort is well underway.
The
DA addresses this matter in considerable length and clearly contemplates that LLC - as the registered owner of the Land Rights
will be granting a security interest in its Land Rights to banks and lenders to the project. The DA further obliges the Government
- as the registered owner of the land - to consent to any such grant of a security interest by LLC. (See: Exhibits 10.7 and 99.1,
and Clause 22 of the DA - Lenders Security Interests). The DA states in relevant part:
“…
the Government shall enter into Direct Agreements with Lenders acknowledging their rights by way of Security Interests over certain
assets of the Project Company including an assignment to the Lenders of the Development Agreement, the Usufruct Agreement, other
related agreements, and the Project Assets …”
(See: Exhibits 10.7 and 99.1, Schedule 20 to the DA - Principles
of Direct Agreement).
The
major Omani banks with which LLC management has met - and with whom we continue to meet and update - have indicated that LLC’s
Land Rights will be considered by such Omani banks as collateral to support bank financing debt facilities for the Project Finance
for the Omagine Project but other non-Omani regional and international banks (including their branches in Oman) have been less
forthcoming with definitive answers until they see more details about the nature and extent of LLC’s Land Rights.
LLC
management is presently confident that the OR 276,666,667 ($718,614,000) value of its Land Rights will be considered by the Omani
banks as collateral for the Syndicated Bank Financing for the Omagine Project but it remains unclear at this stage whether or
not banks other than Omani banks will do likewise. Notwithstanding the foregoing statement however, it is not possible at this
time to predict with certainty what future events may alter LLC’s present assessment of its ability to use its Land Rights
to collateralize any bank debt financing including any Syndicated Bank Financing.
Updated
Studies
In
addition to the valuation studies and reports with respect to the Land Rights (See: “The Land Rights”, above), management
also commissioned:
(i)
|
an
updated feasibility study of the Omagine Project by an independent third party which is a professional real estate, tourism
and marketing consultant, and
|
|
|
(ii)
|
an
updated LLC internal financial model for the Omagine Project by unaffiliated third parties who are expert financial, investment
banking and real estate consultants.
|
Both
the updated feasibility study and the financial model have been completed (and may be further updated as and if required) and
they will be utilized by LLC to fine tune its development plans, and ultimately by LLC’s designated Financial Adviser for
the balance of the project in arranging the Syndicated Bank Financing and other financing for LLC as may be required.
OMAG LLC’s internal financial
model is updated, modified and adjusted from time to time in order to capture what management believes are the then present market
realities and projected trends. The financial model is organized to show best case, worst case and probable case scenarios. The
most recently updated probable case scenario forecasts substantial net positive cash flows for OMAG LLC over the seven year period
subsequent to the signing of the DA and a net present value (“NPV”) of the Omagine Project of approximately $1.5 billion
dollars. Management believes its financial model assumptions are reasonable but cautions that they may change as new facts and
information become available, as the development program and design process unfolds and as market conditions require. It is virtually
certain that the various components of the financial model - and therefore the estimates of total cash flow and NPV - will change
from time to time in line with market fluctuations and as the project unfolds.
The sale of residential and commercial
properties is a large revenue driver supporting OMAG LLC’s internal financial projections. The OR 276,666,667 average valuation
of the Land Rights has had a positive effect on projected revenue at LLC.
Management
cautions that investors should not place undue reliance on the aforementioned financial model projections or on estimates by market
participants mentioned herein as all such projections, estimates and forecasts are subject to significant uncertainties and contingencies,
many of which are beyond the Company’s control, and no assurance can be given that the projections will be realized or that
the estimates or forecasts will prove to be accurate. Potential investors are cautioned not to place undue reliance on any such
forward-looking statement or forecast, which, unless otherwise noted to the contrary, speaks only as of the date hereof.
Off
Plan Sales and Land Price Payments
As
is present practice in Oman, LLC anticipates that sales contracts with third party purchasers of residential or commercial properties
that are purchased “off plan” (i.e. purchased before the construction thereof), will stipulate the payment to LLC
by such purchasers of (i) a deposit on signing of such sales contract, and (ii) progress payments during the construction period
of the relevant property covered by such sales contract. Since the aggregate of such deposit and progress payments before and
during the construction of the relevant property is expected to be approximately 85% of the sales price of the relevant property
stipulated in such sales contract, LLC anticipates that (i) the construction costs for properties that are sold “off plan”
will be substantially “owner-financed” by the relevant purchaser, and (ii) it will likely be unnecessary therefore
for LLC to utilize any or very much Syndicated Bank Financing in order to pay for the construction costs of properties which are
sold pursuant to “off plan” sales contracts. Management expects that this commonly accepted sales contract and payment
process will significantly benefit LLC by reducing its aggregate requirements for Syndicated Bank Financing from its banks. The
consumer appetite for such “off plan” sales is less today than it was in recent years. (See “Market Conditions”
below).
Furthermore,
Land Price Payments to the Government are not due or owing from LLC until such time as LLC legally transfers the freehold title
to land to a purchaser at the time of the closing of the sale of such land. Such closings will only occur after LLC has received
final payment of the relevant sales contract amount from the purchaser. LLC’s financing profile is therefore further enhanced
since it is not obligated to make any Land Price Payments to the Government until after it has already received 100% of the contracted
sales price amount from the relevant purchaser at the closing when the freehold title to such land and property is transferred
to the purchaser.
Consolidated
Results
The
financial results of LLC are included in the consolidated financial results of the Company in accordance with accounting principles
generally accepted in the United States. The Company experienced a substantial increase in capital on July 2, 2015 when the Land
Rights were registered in LLC’s name and later recorded in LLC’s and the Company’s financial statements. The
Company will experience another substantial increase in capital, if and when further capital increases from RCA and a new investor
occur at LLC and the then appropriate percentage representing OMAG’s ownership interest in LLC is recorded in the Company’s
consolidated financial statements. LLC’s ongoing financial results will be included in the consolidated financial statements
of the Company as appropriate for as long as OMAG remains a shareholder of LLC.
In
addition to the activities mentioned above, the Company’s preparations for its future business activities also include,
but are not limited to: (i) negotiating various agreements with other major vendors, contractors, consultants and employees proposed
to be involved in the Omagine Project, (ii) arranging the appropriate and required legal, accounting, tax and other professional
services both in Oman and the U.S., (iii) reviewing and complying (to the extent we are presently able) with the listing requirements
of various stock exchanges so we may be prepared to apply for such listing(s) as soon as we are eligible, (iv) examining various
other matters we believe will enhance shareholder value, and (v) examining other potential Company revenue streams which are ancillary
to, and derivative of, the Omagine Project.
The
Company plans to enter businesses other than real estate development - and ancillary to, and derivative of, the Omagine Project
- and the Company presently expects to generate ongoing revenue streams from such businesses, but no projections of the amount
of such revenue, if any, can be made at this time.
Although
the Company had expected to generate revenue in the medium term as LLC (i) began reimbursing OMAG for its Pre-Development Expenses,
and (ii) begins paying the Success Fee installments to OMAG, such reimbursements are now likely to be delayed and/or possibly
altered by the terms of an Amended and Restated Shareholder Agreement (See: “Pre-Development Expenses and Loans and Advances
to LLC” and “Success Fee” above). The Company is not expected to generate revenue from sales or operations of
properties within the Omagine Project until the development and construction of the Omagine Project is substantially underway.
The masterplanning, development and construction of the Omagine Project is not expected to begin in earnest until the matter of
a replacement investor for CCC is settled.
Financial
Adviser
LLC’s
financial adviser (“Financial Adviser”) for the Omagine Project is expected to be a bank or other professional financial
consulting company. As such the Financial Adviser will arrange the syndication among several banks of the debt financing (“Syndicated
Bank Financing”) for the Omagine Project.
We
are presently in discussions with a bank which has already given LLC a “soft commitment” with respect to the provision
by it of the debt financing required for the Omagine Project.
Importantly,
given the present liquidity issues at local and MENA Region banks, the matter of Project Finance is an issue that has now moved
to the forefront of LLC’s agenda. While the required Project Finance for the Omagine Project (estimated at approximately
$400 million) – or any project – is not usually needed until after the masterplanning and design phase is complete
or near complete, given present economic strains both developers and contractors are well advised to seek to lock up a Project
Finance commitment early on rather than waiting to start a syndication at a later date.
LLC’s
Financial Adviser will advise on capital structure and lead the arrangement and placement of the Syndicated Bank Financing. LLC
will then work together with its Financial Advisor to appoint lead arrangers for such Syndicated Bank Financing which may include
the Financial Advisor itself.
The
amount of Syndicated Bank Financing owed at any one time by LLC to its Lenders is expected to fluctuate over the
development and construction cycle of the Omagine Project and will be greatly influenced by (i) any additional Equity Sales
at LLC, and (ii) the pace and tempo of LLC’s receipt of proceeds from its planned sales of real estate to third parties.
The capital of LLC, proceeds from Equity Sales if any, Syndicated Bank Financing and the proceeds from sales of its
residential and commercial properties, are expected to be utilized by LLC to develop the Omagine Project.
The
maximum amount of such Syndicated Bank Financing presently expected to be outstanding at any one time during the development and
construction cycle of the Omagine Project is presently estimated by management to be between $350 million and $400 million.
We
have had extensive discussions with a number of MENA Region financial institutions with respect to such Syndicated Bank Financing
and while they remain interested in discussing the Project Finance for the Omagine Project, almost all such banks confirmed the
tightening of bank liquidity due to the current economic climate resulting from the sharply reduced price for crude oil. We are
presently in discussions with a bank which is not experiencing such liquidity issues and which has already given LLC a “soft
commitment” with respect to the provision by it of the debt financing required for the Omagine Project. With LLC’s
Financial Adviser leading this effort, management remains hopeful with respect to LLC’s prospects for arranging the Syndicated
Bank Financing for the Omagine Project but recognizes that given present economic and market conditions, it is not a trivial task
and will be challenging. These discussions are ongoing and cannot be concluded until after the masterplanning of the Omagine Project
is well underway and no assurances can be given at this time regarding the outcome, if any, from such discussions. The DA recognizes
and addresses this issue when it states, in relevant part:
“The
Government recognizes that the Project Company intends to raise limited recourse financing in relation to the Project and that
Lenders may expect to be afforded certain rights in relation to it. Accordingly, the Project Company will by or before the completion
of twelve (12) months from the Execution Date
[now the Operative Date of July 1, 2015; see Exhibits 10.7, 99.1, 10.8 and 99.2]
enter into a written term sheet with the Lenders for the financing of the First Phase, any other phase or all of the Project
(a “Term Sheet”). If the Project Company has not delivered a copy of such Term Sheet to the Government by or before
the expiry of the twelve (12) month period referred to above, this Development Agreement then shall have no further effect.”
(See Exhibits 10.7 and 99.1).
The
condition referred to above was fulfilled on November 9, 2015 when LLC entered into a written term sheet with Masraf Al Rayan
with respect to the financing of the then planned first phase of the Omagine Project. Unfortunately due to CCC’s failure
to fulfil its investment obligations under the Shareholder Agreement such financing was never utilized.
MENA
Region banks and financial institutions continue to maintain adequate levels of liquidity but the rapid fall in world oil prices
is a challenge to those banks whose liquidity relies to a great deal on government deposits resulting from the sale of crude oil.
Such new and large government borrowings from commercial banking institutions tend to crowd out commercial borrowing capacity
for private companies. The largest banks of course are weathering this storm more handily then the mid-size or smaller banks.
The
project financing environment in Oman and the MENA Region continues to remain cautious after the rapid decline of worldwide oil
prices which led to the rapid decline of bank deposits being received from governments. LLC management regularly meets with several
internationally recognized Financial Advisers, all of whom have deep and wide-ranging expertise in the MENA Region project financing
markets and as part of their normal business activities are in regular contact with MENA Region banks and international financial
institutions regarding the status of and conditions prevailing in the project finance marketplace. The Company is now cautiously
optimistic (but less confident then it had been before the 2015 sudden drop in oil prices) that LLC and its yet to be designated
Financial Adviser will be able to arrange the necessary project financing for the Omagine Project. Management believes that all
the Financial Advisers and banks with whom it has recently met concur that there is currently still a reasonable degree of liquidity
and appetite among MENA Region banks and financial institutions for lending to, and investing in, sound development projects in
the MENA Region. Most such persons and institutions however are more cautious than they were over a year ago because of the recent
rapid fall in oil prices and the continuation of the unsettled military activities ongoing in Syria, Iraq, Yemen and Libya.
Notwithstanding
the fact that LLC has already received a “soft commitment” with respect to the provision of the debt financing required
for the Omagine Project from a bank without the aforementioned liquidity issues, no assurance can be given at this time that LLC
will be able to obtain any, or a sufficient amount of, the project financing required to develop, build and complete the Omagine
Project. If such a circumstance were to occur, it would have a material adverse effect on our business and operations.
Market
Conditions
As
previously disclosed and as has been and continues to be widely reported by local and international media and press, the worldwide
price of crude oil fell very suddenly and dramatically in 2014 and 2015 (from over $100 per barrel to about $25/$30 per barrel)
as robust production in the U.S. and elsewhere created a global glut of crude oil. Presently the price of crude oil is about $50/bbl.
Almost all countries in the MENA Region are dependent on the sale of crude oil to support their economies and their government
spending programs.
Although
MENA Region governments had 100s of billions of dollars of savings in sovereign reserve funds, this oil price shock ushered in
an extremely challenging environment for the MENA Region governments and for the companies of all types – including developers
and contractors – operating in the MENA region. In reaction to the large, rapid and unexpected drop in crude oil prices,
government budgets were slashed across the region; contractors’ payments were delayed; and many government sponsored projects
were postponed, delayed or cancelled. Payment delays and stalled government projects off the back of the decline in oil prices
have severely impacted the entire construction industry in the MENA Region – including in Oman. The Omagine Project however
is not a government sponsored project and OMAG LLC is a private company.
Crude
oil prices “seem” to have recently stabilized around the mid-$40s per barrel price and a rebalancing of the market
“seems to be” is in progress but the knock-on effects of the lower government spending and the delayed payments by
MENA Region governments to contractors has had a severe economic impact on local economies and contractors.
Almost
all local banking institutions in the MENA Region are dependent on large deposits from oil and gas sales by governments in order
to provide the normally excess liquidity apparent in the local banking system prior to this recent dramatic worldwide drop in
oil prices. With the sudden fall in deposits from oil sales, bank liquidity at local banking institutions in the GCC and wider
MENA Region were under immense pressure as deposits fell dramatically while simultaneously governments became large borrowers
where they were not before. Even now some of the largest contractors are experiencing difficulties.
We
expect that this sudden business cycle change will eventually right itself as all market participants adapt to the new realities
but we are of the present opinion, provided our Investment Agreement with our proposed new investor or with one of the European
funds with which we are presently in discussions results in the closing of an investment transaction to replace CCC, that the
Company will succeed in creatively making a path where none had apparently previously existed. Because of the significant delays
in developing the Omagine Project to date however, tensions are high both in the local market and the Government and no assurance
can presently be given that our present plans will succeed. Also, should the current negative economic conditions caused by the
GCC-wide liquidity squeeze at banks continue unabated, a knock-on effect in the real estate markets resulting in slower or fewer
sales and lower selling prices could occur.
The
market intelligence garnered by management indicates that local bankers and market participants believe that both transaction
volume and pricing in the Omani real estate market are stable and are expected to improve during 2017 relative to performance
in 2015 and 2016. We are presently unsure what the impact on transaction volume and pricing will be from the fall in crude oil
prices but we expect some softness in the market as all participants adjust to the “new normal” of $40 to $50 crude
oil prices. From a timing perspective, LLC plans to now launch residential and commercial sales at the Omagine Project within
the first 12 months after we close an investment transaction to replace CCC’s now defaulted investment.
Trends
in the Omani market during the past few years have indicated a reduced presence of speculative buyers and a reduced consumer appetite
for pre-sales of residence units (“off-plan” sales) as buyers now frequently demand a finished product before entering
into sales contracts with developers. Although, many societal disorders, military activities and terrorism continue in other parts
of the MENA Region, as long as the politically stable and quite safe conditions existing at present in Oman persist then, market
conditions should favorably impact LLC’s future operations.
Nearby
Dubai is experiencing softness in its residential sales and leasing market but in general Dubai’s economy (a regional barometer)
remains relatively strong and, in certain areas, quite robust. Raw material and labor prices remain somewhat volatile in Oman
having recently experienced both downward and upward swings over the past year – but overall construction costs are sharply
down due to the severe competition presently in the market among building contractors.
In
Iraq, Syria, Yemen and Libya, among other countries, daily violent military clashes and terrorism are now commonplace. Other Arab
countries in the MENA Region have experienced and are experiencing demonstrations of discontent with the rule of their heads of
state and in some cases these demonstrations are being met with violent pushback by some MENA Region governments but this was
not and is not the case in politically and economically stable Oman. Anxiety over the health of His Majesty, the much beloved
Sultan Qaboos, and what effect, if any, that will have on Oman’s political stability and leadership succession seems to
have abated and His Majesty seen to be actively managing state affairs.
Construction
material costs and property selling prices in Oman and the surrounding region remain somewhat volatile and undue reliance on present
forecasts should be avoided. Management cautions that future events rarely develop exactly as forecast and the best estimates
routinely require adjustment. Management fully expects that its cost estimates for the Omagine Project (and therefore, its financial
model) will require adjustment – possibly significant adjustment – as future events unfold. Investors and shareholders
are cautioned not to place undue reliance on any such forward-looking statement or forecast, which speaks only as of the date
hereof.
Nearby
Dubai leads the way for the Gulf tourism market and this is likely to be the case for the foreseeable future, given its existing
visitor market, attractions, its impressive future capital development and marketing investment programs, and especially given
its recent selection as the host for EXPO 2020 which is expected to attract over 25 million visitors.
Sales
and Marketing
After
it closes an investment transaction to replace CCC as an investor and shareholder, LLC plans to undertake several wide ranging
and continuous marketing, advertising, branding and public relations campaigns to establish its brand identity prior to LLC’s
launch of residential and commercial properties for sale and to advertise and promote its forthcoming entertainment, hospitality
and retail offerings.
As
we move forward we plan to construct and operate a sales showroom at the Omagine Site. The sales office/showroom will be staffed
with experienced real estate sales personnel and will contain large scale models of the Omagine Project and its various components
as well as associated collateral sales and marketing materials.
The
anticipated launch date for residential and commercial sales was previously planned to be in the first or second quarter of 2018
but the unexpected death of our proposed new investor in LLC has now delayed this launch date further and it is now contingent
on closing the aforementioned investment transaction. Management expects that the continuing stability of local real estate markets
as well as the Government’s continuing improvements to Oman’s infrastructure (Muscat International Airport, roads,
regional airports, etc.) will contribute positively to LLC’s future sales prospects. The impact of the recent fall in crude
oil prices and the knock-on economic effects on consumers and government projects is unknown and difficult to predict at this
time.
Management
expects the Omagine Project to benefit from Dubai’s hosting of EXPO 2020, and similarly from nearby Qatar’s hosting
of the World Cup Games in 2022. Both of these events are expected to attract a huge amount of visitors and tourists. The Omagine
Project will be conveniently located one hour from Dubai and Qatar by air and is easily accessible by a fine roadway system in
both Oman and the U.A.E. A visit to the Omagine Project will be a natural and logical addition to a Dubai or Qatar visit.
Sale
prices and rental rates for housing in other integrated tourism projects in the Muscat area of Oman have remained
relatively stable during 2016 and 2017 and as of the date of this report. The inventory of unsold housing in the secondary
(re-sale) market (both outside of and within ITCs) has diminished due to recent, albeit quite price-sensitive, sales
activity. New housing inventory, especially smaller apartments designed to hit perceived market price-points, has continued
to come onto the local Muscat area market and the market absorption rates (number of market transactions) for such new
residential housing is strong. The DA allows for sales and pre-sales of any of the residential or commercial buildings that
will be developed and built on the Omagine Site.
The
DA stipulates the obligation of the Government to issue such Licenses and Permits as may be required for the development of the
Omagine Project, including but not limited to issuing an Integrated Tourism Complex License (“ITC License”) designating
the Omagine Project as an ITC. On June 26, 2014, the Government issued an ITC License to LLC designating the Omagine Project as
an ITC.
Non-Omani
persons (including expatriates living and working in Oman) are forbidden by Omani law to purchase land, residences or commercial
properties in Oman
unless such land, residences or commercial properties are located within an ITC
. Because it is now licensed
as an ITC, the land, residences and commercial properties within the Omagine Project may be sold to any buyer worldwide - including
any non-Omani buyer - and the freehold title to such land, residences and commercial properties may be transferred to such buyers.
Residences in ITCs are viewed to be highly desirable by purchasers (by both investors and owner-occupiers) and ITC residences
therefore enjoy a premium selling price relative to non-ITC residences. Purchasers of residences within OMAG (or any ITC) are
entitled by Omani Law to be issued a resident visa (for themselves and their immediate family).
The
excellent location of the Omagine Site is recognized by local market participants and the significance of the provision of the
Omagine Site to LLC is substantial. The increase in the value over the last several years of the land constituting the Omagine
Site has had a positive effect on the valuation of the Land Rights and is expected to have a positive effect on LLC’s revenue
from the sale of residential and commercial properties. The value of the land constituting the Omagine Site is expected to be
a primary driver of future LLC and Company revenue and the benefits accruing to LLC and the Company pursuant to LLC’s Land
Rights over the Project Land is expected to be material and significant.
Pursuant
to the DA and UA, LLC will pay the Government OR 25 ($65) per square meter for the Project Land it sells to third party purchasers.
The average valuation for the Land Rights (net of such Land Price) is OR 276,666,667 ($718,614,000) (See: “The Land Rights”,
above).
Design,
Engineering, Construction, Program Management, Content Development
The Company does not presently own
or directly operate any design, engineering, content development or construction companies or facilities. With assistance from
OMAG via the Loans and Advances, LLC has undertaken many critical tasks as indicated above, but for LLC to fully accomplish its
objectives and undertake and finance the Omagine Project, it will have to close an Equity Sale transaction. The failure to date
to accomplish these matters with CCC has delayed the Omagine Project and the masterplanning process.
Subject
to the approval of its shareholders and to negotiating and agreeing to a contract, LLC intends to hire a design firm, an engineering
firm, a program management firm, a construction management firm and a quantity surveying/cost consultant firm.
The
interpretive design, entertainment content, and visitor experience design candidates to be hired by LLC have been narrowed to
a short list of professional companies. One or more of such companies (”Content Developers”) will be engaged by LLC
to design the transformation of OMAG’s high level strategic vision for the content of the Pearl structures and surrounding
areas into physical places offering emotional, intellectual and physical experiences and interactions. Each of the prospective
Content Developers has serviced a diverse client base, including theme parks, museums, zoos, aquariums and other such complex
entertainment centers around the world, including in the MENA Region, and each continues to regularly produce world class attractions
globally of the size and scope of the Omagine Project.
LLC
presently intends to hire various local Omani contractors for the construction of the Omagine Project.
To
date, OMAG has generally conceived the development concepts and defined the “scope of work” and then, as required,
contracted with various designers, architects, contractors and consultants in the United States, Europe and the Middle East to
perform those tasks. LLC will engage various firms as its consultants (master planner, engineers, real estate and hospitality
consultants, etc.) who will together with management finalize the design for the entire Omagine Project. There are many such consultants
available with competitive pricing and the Company does not believe that the loss or inability to perform of any such consultant
which it has selected would have a material, adverse impact on its business or operations. The Company believes it maintains a
good working business relationship with its consultants. As presently planned, all copyrights to all material documents, designs
and drawings executed by such independent designers, architects, contractors and consultants are, or will be, the property of
either LLC or OMAG.
Results
of Operations
:
Overview
The
Company is expected to generate revenue as LLC begins reimbursing OMAG for its Pre-Development Expenses and begins paying the
Success Fee installments (See: “Pre-Development Expenses and Loans and Advances to LLC” and the “Success Fee”,
above) but is not expected to generate revenue from operations in the near term until the development of the Omagine Project is
substantially underway. The Company will need to generate sustainable operating revenue in order to attain its objectives and
sustain its operations going forward.
As
the development program for the Omagine Project becomes more detailed and as the planning and design processes progress, the estimates
of construction and development costs have and will become proportionately more accurate. LLC presently expects, based on the
current assumptions underlying its updated development program, that the development costs (including the costs for design, construction,
program management and construction management) for the Omagine Project will be between $2.1 and $2.5 billion dollars.
The
costs of labor and materials as well as the selling prices and market absorption rates of new residential and commercial properties
remain somewhat volatile in Oman and accurate forecasts for such future costs, selling prices or market absorption rates cannot
be made at this time. (See “Market Conditions” and “Sales and Marketing”, above).
LLC
nevertheless presently expects, based on current assumptions and market activity that such residential selling prices during the
Omagine Project’s planned multiple sales releases will be at least equal to the prices that are presently budgeted by LLC
and that total construction costs will be lower.
Beginning
in the Company’s September 30, 2015 consolidated financial statements and continuing to date, the Company’s consolidated
financial statements reflect a substantial increase in capital resulting from the inclusion therein as of July 2, 2015 of the
value of the Land Rights purchased by LLC. The opinion of our independent auditors in our fiscal year 2016 (and 2015) audited
financial statements included in this Prospectus does not contain any expression of concern about our ability to continue as a
going concern. In their opinion on our fiscal year 2014 audited financial statements, our auditors expressed substantial doubt
about our ability to continue as a going concern but beginning in our September 30, 2015 unaudited quarterly financial statements
and continuing through to our fiscal year 2016 audited financial statements included in this Prospectus, that expression of concern
has been removed.
In
the first quarter of 2017, OMAG sold (a) an aggregate of 263,051 restricted Common Shares to an investor for aggregate proceeds
to OMAG of $132,500 and (b) an aggregate of 430,190 restricted Common Shares to the Company’s president, vice president
and three independent directors for aggregate proceeds to OMAG of $226,000. In November and December 2016, OMAG sold an
aggregate of 370,000 restricted Common Shares to investors for aggregate proceeds to OMAG of $185,000.
The
Development Agreement was signed by LLC and the Government of Oman on October 2, 2014. Thereafter the DA was ratified
by the Government, the UA was signed by and registered with the Government and LLC’s Land Rights were valued by three outside
independent experts at an average valuation of seven hundred eighteen million six hundred fourteen thousand dollars ($718,614,000).
The
Company is presently holding discussions with the estate of a deceased investor with whom LLC has a signed Investment Agreement
and with two European investment funds with respect to equity sales at LLC at equity valuations which management considers to
be reasonable.
Investors
and shareholders should be aware that the execution of the Omagine Project over the multi-year schedule contemplated by the Company
will require significant amounts of project financing which is planned to be arranged in several tranches in parallel with the
development cycle of the project and no assurance can be given that any or all of such required project financing, including the
proposed debt financing with a regional bank, will be able to be obtained by LLC.
Forecasts,
projections and assumptions contained and expressed herein were reasonably based on information available to the Company at the
time so furnished and as of the date hereof. All such forecasts, projections and assumptions are subject to significant uncertainties
and contingencies, many of which are beyond the Company's control, and no assurance can be given that such forecasts, projections
or assumptions will be realized. No assurances can be given regarding the achievement of future results, as our actual results
may differ materially from our projected future results as a result of the risks we face, and actual future events may differ
from anticipated future events because of the assumptions underlying the statements that have been made regarding such anticipated
events.
THREE
MONTHS ENDED MARCH 31, 2017 vs.
THREE
MONTHS ENDED MARCH 31, 2016
The
Company did not generate any revenue or incur any cost of sales during the three month periods ended March 31, 2017 and 2016.
The Company is relying on LLC’s operations for the Company’s future revenue generation. Management is presently
examining other possible sources of revenue for the Company which may be added to the Company’s operations.
Total
SG&A Expenses were $525,229 during the three month period ended March 31, 2017 compared to $706,554 for the period ended March
31, 2016. This $181,325 (26%) decrease was attributable to decreases in the following expense categories: officers and directors’
compensation including stock based compensation ($11,833), professional fees ($41,031), consulting fees ($51,086), travel ($73,847)
occupancy ($110) and other selling general and administrative costs including stock-based compensation ($3,418).
The
Company sustained a net loss of $589,202 for the period ended March 31, 2017 compared to a net loss of $721,100 for the period
ended March 31, 2016. This $131,898 (18%) decrease in the Company's net loss for the period ended March 31, 2017 compared to the
prior period was principally attributable to the $181,325 decrease in SG&A Expenses mentioned above and an increase in amortization
of debt discounts ($22,566), increase in interest expense ($9,550) and a decrease in net loss attributable to non-controlling
interests in LLC ($17,311).
Liquidity
and Capital Resources
The
Company incurred net losses of $589,202 and $721,100 during the periods ended March 31, 2017 and 2016, respectively. During the
three month period ended March 31, 2017, the Company had a decrease in cash of $224,544 resulting from the negative cash flow
of $17,500 from financing activities and by a negative cash flow of $207,044 from operating activities. Financing activities for
the year three month period March 31, 2017 consisted of proceeds from the sale of Common Stock of $132,500 offset by two payments
totaling $150,000 against the YA II PN, Ltd. (December 2016 YA Loan).
The
Company had $0 in capital expenditures for the period ended March 31, 2017.
At
March 31, 2017, the Company had $490,887,017 in current assets, consisting of $490,813,363 of land under development held for
sale (See: Note 2 to the Company’s audited consolidated financial statements), $4,684 of cash and $68,970 in prepaid expenses
and other current assets. The Company's current liabilities at December 31, 2016 totaled $2,459,214 consisting of $546,596 of
convertible notes payable and accrued interest, $478,452 of notes payable and accrued interest, $177,500 note payable net of unamortized
original issue discount, $847,139 of accounts payable and accrued expenses and $409,527 of accrued officers’ payroll. At
March 31, 2017, the Company had working capital of $488,427,803 compared to working capital of $488,376,460 at March 31, 2017.
Twenty nine percent (29%) of the $2,659,214 of current liabilities at March 31, 2017 ($783,628) is due and owing to officers and/or
directors of OMAG.
The
$51,343 increase in the Company's working capital at March 31, 2017 compared to December 31, 2016 is attributable to the decrease
in current liabilities ($208,776) and a decrease in cash ($224,544) offset by an increase in prepaid expenses and other current
assets ($67,111). The Company’s liabilities at March 31, 2017 decreased compared to December 31, 2016 due to decreases in
notes payable and accrued interest ($207,935), accrued officers’ payroll ($10,099), accounts payable, accrued expenses and
other current liabilities ($25,966) offset by increases to note payable ($15,000), convertible notes payable and accrued interest
($20,224).
Warrants
As
of March 31, 2017, OMAG has 6,572,124 Warrants issued and outstanding, (a) 3,211,062 of which are exercisable for the purchase
of one Common Share at a per Common Share exercise price of $5.00 [the “$5 Warrants”]; (b) 3,211,062 of which are
exercisable for the purchase of one Common Share at a per Common Share exercise price of $10.00 [the “$10 Warrants”]
(collectively (a) and (b) being, the “Strategic Warrants”) and (c) 150,000 of which are exercisable for the purchase
of one Common Share at a per Common Share exercise price equal to the greater of: (i) $0.50, or (ii) eighty percent (80%) of the
Market Price on the Trading Day immediately preceding the relevant Exercise Date [(c) being, 150,000 “Rural Concepts Warrants”].
Management
is hopeful that the 6,422,124 outstanding Strategic Warrants will eventually become “in the money” and will be exercised.
In accordance with their terms, the Rural Concepts Warrants are by definition always “in the money”. No assurance
can be given that any of the 150,000 outstanding Rural Concepts Warrants will be exercised.
Management
is hopeful that the Warrants will provide a future source of additional financing for OMAG.
Strategic
Warrants
Of
the 6,422,124 Strategic Warrants distributed, 3,211,062 are exercisable at $5 per Common Share and 3,211,062 are exercisable at
$10 per Common Share. On January 14, 2016, OMAG filed a Post-Effective Amendment on Form S-1 (Commission File No. 333-183852)
to update the previous registration of all 6,422,124 then issued and outstanding Strategic Warrants and the 6,422,124 Common Shares
underlying such Strategic Warrants (the “Updated Warrant Registration”). The SEC declared the Updated Warrant Registration
effective January 25, 2016. The effective status of the Updated Warrant Registration expired on October 21, 2016 and the Company
intends to file an updated post-effective amendment to maintain the warrants effective status of such registration statement.
Pursuant to a Board of Directors resolution dated December 9, 2016, the Strategic Warrants were extended from December 31, 2016
to December 31, 2017. All other terms and conditions of the Strategic Warrants remained unchanged.
Tempest
Warrants
On
June 24, 2014, OMAG issued the 1,000,000 Tempest Warrants to an investor each of which were exercisable for the purchase of
one restricted Common Share at a per Common Share exercise price equal to the greater of: (a) $1.00 per Common Share, or (b) 80%
of the closing sale price for a Common Share on the Trading Day immediately preceding the relevant exercise date (See: Exhibit
4.4). Prior to their expiration date, a total of 650,603 Tempest Warrants were exercised for aggregate proceeds to OMAG of
$916,540. The remaining 349,397 Tempest Warrants expired unexercised on June 23, 2016. As of May 9, 2017 there were no Tempest
Warrants issued or outstanding.
Rural
Concepts Warrants
On
October 14, 2016, in connection with a non-interest bearing $75,000 convertible promissory note in favor of Rural Concepts LLC,
a British corporation (“Rural Concepts”), OMAG issued 150,000 Warrants to Rural Concepts, each of which was exercisable
for the purchase of one restricted Common Share at a per Common Share exercise price equal to the greater of (a) $0.50 per Common
Share, or (b) 80% of the Market Price on the Trading Day immediately preceding the relevant Exercise Date.
Standby
Equity Distribution Agreements
Between
2009 and 2011, OMAG had a Stand-By Equity Distribution Agreement with an affiliate of YA (the “2009 SEDA”).
OMAG and YA were parties to a second Stand-By Equity Distribution Agreement (the “2011 SEDA”) which was
terminated on July 21, 2014. The 2009 SEDA and the 2011 SEDA are collectively referred to herein as the “Prior
SEDAs”.
On
April 22, 2014, OMAG and YA entered into a new Standby Equity Distribution Agreement which was amended on October 10, 2014
(the “2014 SEDA”). The 2014 SEDA is generally on the same terms as the 2011 SEDA.
Any
use by OMAG of the 2014 SEDA will be guided by several factors, including but not limited to: (i) the availability and cost
of alternative financing, (ii) our ability to rapidly access required financing, (iii) the liquidity and market price of our Common
Stock, (iv) the exercise, if any, of Warrants, (v) the likelihood (or actuality) of the success of our present efforts to arrange
(a) new equity investments into OMAG and (b) new debt and/or equity investments into LLC, (vi) the likelihood (or actuality)
of LLC having the financial capacity to pay OMAG the $10 million Success Fee and the Pre-Development Expense Amount and Loans
and Advances in excess of $30.1 million. (See: “Financial Advisor”, and “The Shareholder Agreement”, “LLC
Capital Structure”, “Pre-Development Expenses / Post-DA Pre-Development Expenses”, above), and (vii) our then
current cash requirements.
Because
the market for our Common Stock has historically exhibited low liquidity levels, we may not be able to take full advantage of
the 2014 SEDA if such liquidity levels do not improve. If the market for our Common Shares is exhibiting low liquidity levels
at the time we give YA an Advance Notice (a “Put”) and if YA sells Common Shares into the public market during the
five Trading Day Pricing Period subsequent to our Put (as is YA’s customary practice), it is likely that the price of our
Common Shares will decline. Any such price decline will immediately increase the number of Common Shares we would otherwise be
required absent such price decline to deliver to YA subsequent to the Pricing Period in satisfaction of such Put. If this pattern
continued to happen with subsequent Puts by us, it is likely that we would issue and sell to YA the maximum 3,000,000 shares available
under the 2014 SEDA before reaching the aggregate sales price of $5 million available under the 2014 SEDA.
LLC
is now obligated to design, develop and construct the $2.5 billion Omagine Project. Given the size and scope of the Omagine Project,
it is expected that LLC will require a minimum of $300 million (possibly up to $500 million) of debt financing / project financing
(including the Construction Financing) over various times during the next 4 to 5 years. This Construction Financing requirement
will not be addressed by utilizing the 2014 SEDA. Notwithstanding that fact, the Company expects to have substantial and rapidly
forthcoming working capital requirements other than the Construction Financing for a portion of which it plans to utilize the
2014 SEDA but no assurance can be given that the Company will be able to obtain the necessary working capital.
Given
the considerable resources we will be required to bring to bear to execute the Omagine Project, we presently expect that we will
fully utilize the entire $5 million amount available to us under the 2014 SEDA. Such use of the 2014 SEDA will of course be guided
by the price, liquidity and volatility of our Common Stock as we move forward. We cannot presently predict what other future sources
of financing might become available to us to cause us to utilize less than the full $5 million available under the 2014 SEDA and
our present assessment is that, we will surely need the full $5 million available under the 2014 SEDA. The Prior SEDAs indisputably
provided the Company the lifeline needed to achieve the DA signing and the 2014 SEDA will likely provide some of the supplementary
working capital the Company will need going forward.
Prior
SEDAs
The 2009 SEDA expired in 2011. The 2011 SEDA was due to expire on September 1, 2014 but was terminated on
July 21, 2014 by the mutual consent of the parties (See: Exhibit 10.19).
In connection with the 2011 SEDA, OMAG
filed with the SEC a registration statement (the “2011 SEDA Registration Statement”) on Form S-1 (Commission File
No. 333-175168) pursuant to which 3,244,216 Common Shares were registered (including 244,216 Common Shares issued to YA in May
and June 2011 in satisfaction of the $300,000 commitment fees due under the 2011 SEDA). Between August 24, 2011 and May 6, 2014,
YA purchased 561,690 Common Shares from OMAG under the 2011 SEDA for an aggregate Purchase Price of $835,000 and YA did not thereafter
purchase any Common Shares from OMAG under the 2011 SEDA. On July 21, 2014 OMAG filed a post-effective amendment to the 2011 SEDA
Registration Statement de-registering the previously registered 2,438,310 Common Shares which were not issued or sold to YA pursuant
to the 2011 SEDA. Such post-effective amendment to the 2011 SEDA Registration Statement was declared effective by the SEC on July
25, 2014.
The
2014 SEDA
On April 22, 2014, OMAG and YA entered into a new Standby Equity Distribution Agreement which was amended
on October 10, 2014 and thereafter amended again on September 20, 2016 to extend the term of the SEDA (the “2014 SEDA”).
The 2014 SEDA is generally on the same terms as the 2011 SEDA. Unless earlier terminated in accordance with its terms, the 2014
SEDA shall automatically expire on the earlier of (i) February 1, 2019, or (ii) the date on which YA shall have made payment of
Advances pursuant to the 2014 SEDA in the aggregate amount of $5,000,000. In satisfaction of a $150,000 commitment fee due pursuant
to the 2014 SEDA, OMAG issued 85,822 restricted Common Shares (the “Commitment Fee Shares”) to YA Global II SPV, LLC
which is an affiliate of YA (the “Affiliate”). In satisfaction of a $150,000 commitment fee pursuant to the “Second
SEDA Amendment” in September 2016, the Company issued 161,290 restricted shares to the Affiliate.
Pursuant to the terms of the 2014 SEDA,
OMAG may in its sole discretion, and upon giving written notice to YA (an “Advance Notice”), periodically sell Common
Shares to YA (“Shares”) at a per Share price (“Purchase Price”) equal to 95% of the lowest daily volume
weighted average price (the “VWAP”) for a Common Share as quoted by Bloomberg, L.P. during the five (5) consecutive
Trading Days (as such term is defined in the 2014 SEDA) immediately subsequent to the date of the relevant Advance Notice (the
“Pricing Period”).
OMAG is not obligated to sell any Shares to
YA but may, over the term of the 2014 SEDA and in its sole discretion, sell to YA that number of Shares valued at the Purchase
Price from time to time in effect that equals up to five million dollars ($5,000,000) in the aggregate. YA is obligated under
the 2014 SEDA to purchase such Shares from OMAG subject to certain conditions including (i) OMAG filing a registration statement
with the SEC to register the resale by YA of the Shares sold to YA under the 2014 SEDA (“Registration Statement”),
(ii) the SEC declaring such Registration Statement effective (the date of such declaration by the SEC being the “Registration
Effective Date”), (iii) OMAG certifying to YA at the time of each Advance Notice that OMAG has performed all covenants and
agreements to be performed and has complied with all obligations and conditions contained in the 2014 SEDA, (iv) periodic sales
of Shares to YA must be separated by a time period of at least five Trading Days, and (v) the dollar value of any individual periodic
sale of Shares designated by OMAG in any Advance Notice may not exceed the greater of (a) two hundred thousand dollars ($200,000),
or (b) the average of the "Daily Value Traded" for each of the five (5) Trading Days immediately preceding the date
of the relevant Advance Notice where Daily Value Traded is the product obtained by multiplying the number representing the daily
trading volume of Common Shares for such Trading Day by the VWAP for Common Share on such Trading Day.
Pursuant to the 2014 SEDA in no event
shall the number of Common Shares issuable to YA pursuant to an Advance cause the aggregate number of Common Shares beneficially
owned (as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended), by YA and its affiliates to
exceed 9.99% of the then outstanding common stock of the Company. In addition this 9.99% ownership cap may not be waived by YA
or OMAG and since such ownership cap includes all Common Shares owned by any YA affiliate, such cap cannot be avoided by transferring
Common Shares to an affiliate of YA.
In connection with the 2014 SEDA, on
October 15, 2014 OMAG filed the Registration Statement on Form S-1 to register the 3,085,822 Common Shares covered by the 2014
SEDA and on January 8, 2015, OMAG filed an amendment to the Registration Statement and the Registration Statement was declared
effective by the SEC on January 22, 2015. Post-Effective Amendment No. 1 was filed with the SEC on December 21, 2015 and subsequently
declared effective by the SEC. Post-Effective Amendment No. 1 and No. 2 to the Registration Statement were filed with the SEC on
December 21, 2015 and January 6, 2016, respectively, to maintain the effectiveness of the SEDA Registration. On January 13, 2016,
the SEC declared the SEDA Registration effective and such effectiveness expired. Post-Effective Amendment No. 3, No. 4 and No.
5 to the SEDA Registration Statement were filed with the SEC on January 10, 2017, February 6, 2017 and February 13, 2017, respectively,
to maintain the effectiveness of the SEDA Registration and as of February 13, 2017, the SEC declared the SEDA Registration effective
and such effectiveness expired on April 30, 2017. The Company plans to file a Post-Effective Amendment to maintain the effectiveness
of the SEDA Registration.
The foregoing summaries of the terms
of the Prior SEDAs and of the 2014 SEDA do not purport to be complete and are qualified in their entirety by reference to the full
texts of the Prior SEDAs and the 2014 SEDA, copies of which are attached hereto as Exhibits 10.14, 10.15 and 10.18.
Sales of Common Shares to YA pursuant
to the Prior SEDAs totaled 561,690 Common Shares for an aggregate Purchase Price of $835,000. Management believes that it has been
judicious and conservative in its use to date of the Prior SEDAs, but nonetheless our periodic sales of Common Shares to YA or
its affiliate pursuant to the Prior SEDAs have been dilutive to all shareholders and the subsequent resales by YA of such Common
Shares into the public market have from time to time inflicted downward pressure on our stock price. OMAG intends to utilize the
2014 SEDA to fund its ongoing operations as and if necessary and as of the date of this Report, the Company has sold 181,260 shares
of its Common Shares pursuant to the 2014 SEDA for proceeds of $100,000.
The YA Loan Agreements
OMAG and YA, the investment fund which
is a party with OMAG to the 2014 SEDA, entered into an unsecured loan agreement dated July 26, 2013 (the “2013 YA Loan Agreement”).
Pursuant to the 2013 YA Loan Agreement, OMAG borrowed two hundred thousand dollars ($200,000) from YA (the “2013 YA Loan”)
for a term of one year at an annual interest rate of 10%. The 2013 YA Loan Agreement called for a 10% monitoring and management
fee equal to $20,000 to be escrowed and paid to Yorkville Advisors thereby making the net proceeds from the 2013 YA Loan to OMAG
equal to $180,000. Such $180,000 of proceeds was received by OMAG on September 3, 2013. The 2013 YA Loan Agreement also extended
the expiration date of the 2011 SEDA. The foregoing summary of the terms of the 2013 YA Loan does not purport to be complete and
is qualified in its entirety by reference to the full text of the 2013 YA Loan Agreement attached hereto as Exhibit 10.21.
On April 22, 2014, OMAG and YA entered
into another unsecured loan agreement (the “2014 YA Loan Agreement”) whereby OMAG borrowed five hundred thousand dollars
($500,000) from YA (the “2014 YA Loan”) for a term of one year at an annual interest rate of 10%. Pursuant to the
2014 YA Loan Agreement, on April 22, 2014, through deduction from the $500,000 principal balance of the 2014 YA Loan, OMAG (i)
paid the $110,680 balance then due under the 2013 YA Loan Agreement, (ii) paid a $39,000 commitment fee with respect to the 2014
YA Loan, and (iii) prepaid the $1,096 of interest due on the 2014 YA Loan for the period April 23, 2014 through April 30, 2014.
The $349,224 net proceeds of the 2014 YA Loan was received by OMAG on April 23, 2014. The foregoing summary of the terms of the
2014 YA Loan does not purport to be complete and is qualified in its entirety by reference to the full text of the YA Note Purchase
Agreement, the YA Note and the YA Closing Statement attached hereto as Exhibits 10.22; 10.23; and 10.24 respectively. OMAG repaid
the 2014 YA Loan pursuant to its terms.
On May 20, 2015,
the Company and YA entered into a third loan agreement (the “2015 YA Loan Agreement”). Pursuant to the 2015 YA Loan
Agreement, the Company borrowed five hundred thousand dollars ($500,000) from YA (the “2015 YA Loan”) for a term of
one year at an annual interest rate of 10%. Pursuant to the 2015 YA Loan Agreement the Company agreed to pay a $50,000 commitment
fee with respect to the 2015 YA Loan to YA Global II SPV LLC, an affiliate of YA (the “Affiliate”). The $500,000 proceeds
of the 2015 YA Loan was received by the Company on May 21, 2015 and the $50,000 commitment fee was paid to the Affiliate. The
foregoing summary of the terms of the 2015 YA Loan does not purport to be complete and is qualified in its entirety by reference
to the full text of the YA Note Purchase Agreement, the YA Note and the YA Closing Statement attached hereto as Exhibits 10.25;
10.26; and 10.27 respectively.
In
2016, the Company and YA entered into two additional loans. On March 15, 2016, the Company and YA entered into a loan agreement
(the “March 2016 YA Loan Agreement”). Pursuant to the March 2016 YA Loan Agreement, the Company borrowed six hundred
thousand dollars ($600,000) from YA (now named YA II PN, Ltd.) (the “March 2016 YA Loan”) for a term of one year at
an annual interest rate of 10%. Pursuant to the March 2016 YA Loan Agreement the Company agreed to pay off the $150,575 balance
due as of March 15, 2016 under the 2015 YA Loan Agreement and to pay a $60,000 commitment fee with respect to the March 2016 YA
Loan to YA Global II SPV LLC, the Affiliate. At the closing on March 15, 2016 of the March 2016 YA Loan, the appropriate amounts
representing the balance due under the 2015 YA Loan Agreement and the commitment fee for the March 2016 YA Loan were deducted
from the $600,000 principal balance of the March 2016 YA Loan and paid to YA and the Affiliate. The $349,425 proceeds of the March
2016 YA Loan were received by the Company on March 15, 2016. The foregoing summary of the terms of the March 2016 YA Loan does
not purport to be complete and is qualified in its entirety by reference to the full text of the YA Note Purchase Agreement, the
YA Note and the YA Closing Statement attached hereto as Exhibits 10.28; 10.29; and 10.30 respectively.
On
June 22, 2016, the Company and YA entered into another loan agreement (the “June 2016 YA Loan Agreement”). Pursuant
to the June 2016 YA Loan Agreement, the Company borrowed four hundred thousand dollars ($400,000) from YA (the “June 2016
YA Loan”) for a term of one year at an annual interest rate of 10%. Pursuant to the June 2016 YA Loan Agreement the Company
agreed to pay a $40,000 commitment fee with respect to the June 2016 YA Loan to the Affiliate. At the closing on June 22, 2016
of the June 2016 YA Loan, the commitment fee for the June 2016 YA Loan was deducted from the $400,000 principal balance of the
June 2016 YA Loan and paid to the Affiliate. The $360,000 proceeds of the June 2016 YA Loan was received by the Company on June
22, 2016. The foregoing summary of the terms of the June 2016 YA Loan does not purport to be complete and is qualified in its
entirety by reference to the full text of the YA Note Purchase Agreement, the YA Note and the YA Closing Statement attached hereto
as Exhibits 10.38; 10.39; and 10.40 respectively. OMAG presently anticipates that the March 2016 YA Loan and the June 2016
YA Loan will be repaid from proceeds of sales of Common Shares made pursuant to (a) private placement transactions, (b) the exercise
of Warrants, or (c) the 2014 SEDA, or a combination thereof.
On
December 7, 2016, the Company and YA entered into another loan agreement (the “December 2016 YA Loan Agreement”).
Pursuant to the December 2016 YA Loan Agreement, the Company borrowed seven hundred fifty thousand dollars ($750,000) from YA
(the “December 2016 YA Loan”) for a term of one year at an annual interest rate of 10%. Pursuant to the December 2016
YA Loan Agreement the Company agreed to pay off the aggregate of the $432,710 balance due as of December 7, 2016 under the March
2016 Loan Agreement and the June 2016 Loan Agreement and to pay a $75,000 commitment fee with respect to the December 2016 YA
Loan to YA Global II SPV LLC, an affiliate of YA (the “Affiliate”). At the closing on December 7, 2016 of the December
2016 YA Loan, the appropriate amounts representing the balances due under the March 2016 YA Loan and the June 2016 YA Loan and
the commitment fee for the December 2016 YA Loan were deducted from the $750,000 principal balance of the December 2016 YA Loan
and paid to YA and the Affiliate. The $242,290 proceeds of the December 2016 YA Loan were received by the Company on December
7, 2016.
The
foregoing summary of the terms of the December 2016 YA Loan does not purport to be complete and is qualified in its entirety by
reference to the full text of the YA Note Purchase Agreement, the YA Note and the YA Closing Statement attached hereto as Exhibits
10.45; 10.46; and 10.47 respectively.
There
can be no assurance given that OMAG will be able to successfully utilize the Warrants or the 2014 SEDA to secure the significant
amount of financing necessary for it to execute its business plan as presently conceived or that we will be able to repay the
December 2016 YA Loan.
The
St. George Investments LLC Loan Agreement
On
November 14, 2016, the Company entered into an interest free Convertible Promissory Note with St. George Investments LLC for the
principal amount of $185,000 due on May 17, 2017, convertible into the Company’s Common Stock only in the case of non-payment
or in the Event of Default at a Conversion Price equal to 60% of the three lowest daily Volume Weighted Average Prices for the
Company’s Common Stock during the twenty trading days immediately preceding the Conversion. The Company may prepay the Note
in whole or in part at any time without penalty. After deduction of a $30,000 original issue discount (OID) and legal fees of
$5,000, the Company received net proceeds of $150,000 on November 16, 2016. (See: Exhibits 10.42 and 10.43, the Note Purchase
Agreement and the Securities Purchase Agreement).
Omagine
LLC
LLC
presently has limited and strained resources.
OMAG
invested the OMR 20,000 cash [$52,000] OMAG Initial Equity Investment into LLC upon its organization and pursuant to the Shareholder
Agreement the following additional investments have been made to date into LLC:
i.
|
a
further OMR 130,000 [$338,000] cash investment was made by the LLC Shareholders, and
|
ii.
|
a further OMR 210,000 [$546,000] cash investment was made by OMAG in advance of when OMAG was obligated to
do so in order to maintain LLC’s liquidity, and
|
iii.
|
a
further OMR 276,666,667 [$718,614,000] non-cash investment was made by RCA.
|
LLC
is presently capitalized at OMR 277,026,667 [$719,550,000]. Notwithstanding the foregoing, LLC presently has limited cash resources
because expenses incurred to date have depleted LLC’s limited cash capital.
As of the date hereof OMAG has satisfied
in full its investment obligations pursuant to the Shareholder Agreement.
RCA
is presently obligated to make its Deferred Cash Investment into LLC in the aggregate amount of OR 7,640,625 [$19,865,625]. However
it is possible that the Amended and Restated Shareholder Agreement will modify when such Deferred Cash Investment will be made
by RCA.
The
OMR 276,666,667 [$718,614,000] investment of the Land Rights into LLC by RCA was perfected on July 2, 2015 concurrent with the
registration of the Usufruct Agreement with the Oman Ministry of Housing (See: “The Land Rights”, above).
CCC
has defaulted on its investment obligations under the Shareholder Agreement.
The continuation of LLC’s business
to date has been financed by OMAG.
LLC
will have to arrange a significant amount of additional project financing, including most probably Syndicated Bank Financing,
in order to execute its plan to develop the Omagine Project.
Until Financing Agreements with respect to such additional
financing are actually executed by the parties, no assurance can be given that they actually will be so executed or that such
project financing will be available to LLC
. (See “Financial Advisor”, above). The Company is relying for revenue
growth upon the future business of LLC.
Omagine
Inc.
In
order to generate the cash needed to sustain the Company’s ongoing operations, OMAG has over the past many years relied
on the proceeds from the YA Loans and from sales of Common Shares made pursuant to the Prior SEDAs and the 2012 rights offering
as well as from sales of restricted Common Shares and notes made pursuant to private placements. Management is hopeful that the
Warrants will provide a future source of additional financing but it is not possible to predict if any of our Warrants will ever
be exercised.
Subject
to the necessary financial resources being available to it, OMAG may make a secured loan to LLC in order to finance its operations.
Such a loan from OMAG, if it were to be made, would be memorialized by a Financing Agreement like any other Debt Facility.
Investors
and shareholders should be aware that we have had no revenue for the past several years and we do not expect to generate any revenue
until after the development of the Omagine Project is well underway.
The
failure to ultimately secure project financing via the closing of a Syndicated Financing Agreement will have a materially significant
negative effect on the Company’s ability to continue operations.
Capital
Expenditures and Construction Financing
The
Company did not incur any capital expenditures in the first three months of 2016. We expect, assuming we are able to close one
or more of the debt facilities we are presently working on, that in the near term (i) the Company will incur significant expenses
related to capital expenditures, and (ii) LLC will incur substantial debt associated with project financing for the Omagine Project.
We
presently expect that such capital expenditures will be largely concentrated at LLC and will largely comprise the purchase by
LLC and OMAG of the quantities of office equipment, furniture, vehicles, computer hardware and software and telecommunications
equipment which will be necessary to service the expanded staff and offices required at both LLC and OMAG to manage the ramping
up of our business operations in Oman and the U.S.
We
presently expect that such capital expenditures will be financed:
i.
|
at
OMAG via the proceeds from sales of Common Shares via the 2014 SEDA, the exercise of Warrants, private placement sales
of restricted Common Shares, and the payments received from LLC with respect to the Success Fee, the Pre-Development Expense
Amount, and the Post-DA Pre-Development Expenses, and
|
|
|
ii.
|
at
LLC through a combination of invested capital, Equity Sales, bank loans and project finance Debt Facilities (including possibly,
the Al Rayan Bank Loan) (See: “Business - The Shareholder Agreement / LLC Capital Structure,” “The First
Phase” and “Masterplanning/Equity Sales/Debt Facilities/Project Financing”).
|
No
assurance can be given that such financing will be available to the Company at either OMAG or LLC.
We
presently expect that any future project financing requirements (including any Syndicated Bank Financing) for LLC will be placed
with regional and international banks as arranged by LLC with the assistance of its Financial Adviser. LLC’s requirement
for project financing is expected to be reduced by its ability to pre-sell residence and commercial units by entering into sales
contracts with third party purchasers and receiving deposits and progress payments during the construction of such units. Recent
trends in the Omani market however have indicated a reduced consumer appetite for pre-sales of residence units as many more buyers
are now demanding a finished product before entering into sales contracts with developers. (See: “Financial Advisor”
and “Market Conditions” and “Sales & Marketing”).
Off-Balance
Sheet Arrangements
We
have not entered into and have no present intention of entering into any off-balance sheet financing arrangements. We have not
formed and have no present intention of forming any special purpose entities.