ITEM
1: FINANCIAL STATEMENTS
OMAGINE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
11,739
|
|
|
$
|
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
|
|
|
15,000
|
|
|
|
1,859
|
|
|
|
|
|
|
|
|
|
|
15% equity interest in Omagine LLC to be acquired pursuant to April 3, 2017 exercise of OMAG Options (Notes 1 and 11)
|
|
|
58,500
|
|
|
|
-
|
|
Total Current Assets
|
|
|
490,898,602
|
|
|
|
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
|
|
|
(155,330
|
)
|
|
|
(153,738
|
)
|
Total Property and Equipment
|
|
|
227,805,309
|
|
|
|
227,806,901
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
4,057
|
|
|
|
4,057
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
718,707,968
|
|
|
$
|
718,855,408
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible notes payable and accrued interest (less unamortized discount of $0 and $13,904, respectively)
|
|
$
|
604,736
|
|
|
$
|
526,372
|
|
Note payable and accrued interest - YA II PN, Ltd. (less unamortized discount of $31,250 and $68,750, respectively)
|
|
|
437,965
|
|
|
|
686,387
|
|
Note payable - St. George Investments LLC (less unamortized Original Issue Discount of $0 and $22,500 respectively)
|
|
|
185,000
|
|
|
|
162,500
|
|
Note payable and accrued interest - JSJ Investments Inc.
|
|
|
101,677
|
|
|
|
-
|
|
Accounts payable
|
|
|
660,682
|
|
|
|
663,913
|
|
Accrued officers’ payroll
|
|
|
463,076
|
|
|
|
419,626
|
|
Accrued expenses and other current liabilities
|
|
|
181,259
|
|
|
|
209,192
|
|
Amount due to CCC-Panama and CCC-Oman pursuant to the April 3, 2017 exercise of OMAG Options (Notes 1 and 11)
|
|
|
58,500
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
2,692,895
|
|
|
|
2,667,990
|
|
Long Term Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
2,692,895
|
|
|
|
2,667,990
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: 22,152,350 shares in 2017 and 20,432,648 in 2016
|
|
|
22,152
|
|
|
|
20,432
|
|
Capital in excess of par value
|
|
|
471,144,693
|
|
|
|
470,350,815
|
|
Deficit
|
|
|
(42,231,846
|
)
|
|
|
(41,273,266
|
)
|
Total Omagine, Inc. stockholders’ equity
|
|
|
428,934,999
|
|
|
|
429,097,981
|
|
Noncontrolling interests in Omagine LLC
|
|
|
287,080,074
|
|
|
|
287,089,437
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
716,015,073
|
|
|
|
716,187,418
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
718,707,968
|
|
|
$
|
718,855,408
|
|
See
accompanying notes to consolidated financial statements.
OMAGINE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers and directors compensation (including stock-based compensation of $37,635, $75,135, $301,520 and $301,520, respectively)
|
|
|
113,885
|
|
|
|
112,385
|
|
|
|
454,020
|
|
|
|
464,353
|
|
Professional fees
|
|
|
41,045
|
|
|
|
31,875
|
|
|
|
44,620
|
|
|
|
76,481
|
|
Consulting fees
|
|
|
40,620
|
|
|
|
359,957
|
|
|
|
67,371
|
|
|
|
437,793
|
|
Commitment fees
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
Travel
|
|
|
59,686
|
|
|
|
124,764
|
|
|
|
135,673
|
|
|
|
274,599
|
|
Occupancy
|
|
|
12,983
|
|
|
|
14,451
|
|
|
|
29,389
|
|
|
|
30,967
|
|
Other selling general and administrative (including stock-based compensation of $7,500, $0, $15,000 and $0 respectively)
|
|
|
47,723
|
|
|
|
87,428
|
|
|
|
110,098
|
|
|
|
153,221
|
|
Total Costs and Expenses
|
|
|
325,942
|
|
|
|
730,860
|
|
|
|
851,171
|
|
|
|
1,437,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(325,942
|
)
|
|
|
(730,860
|
)
|
|
|
(851,171
|
)
|
|
|
(1,437,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discounts
|
|
|
(28,005
|
)
|
|
|
(15,000
|
)
|
|
|
(73,904
|
)
|
|
|
(38,333
|
)
|
Interest expense
|
|
|
(19,658
|
)
|
|
|
(19,709
|
)
|
|
|
(42,868
|
)
|
|
|
(33,370
|
)
|
Total Other Expense
|
|
|
(47,663
|
)
|
|
|
(34,709
|
)
|
|
|
(116,772
|
)
|
|
|
(71,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(373,605
|
)
|
|
|
(765,569
|
)
|
|
|
(967,943
|
)
|
|
|
(1,509,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add net loss attributable to noncontrolling interests in Omagine LLC
|
|
|
4,227
|
|
|
|
3,838
|
|
|
|
9,363
|
|
|
|
26,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTABLE TO OMAGINE, INC.
|
|
$
|
(369,378
|
)
|
|
$
|
(761,731
|
)
|
|
|
(958,580
|
)
|
|
$
|
(1,482,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER SHARE - BASIC AND DILUTED
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.08
|
)
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
22,042,077
|
|
|
|
19,669,797
|
|
|
|
21,624,814
|
|
|
|
19,272,712
|
|
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
|
|
|
639,948
|
|
|
|
640
|
|
|
|
232,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
233,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock under SEDA
|
|
|
132,275
|
|
|
|
132
|
|
|
|
49,868
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option expense
|
|
|
-
|
|
|
|
-
|
|
|
|
270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to noncontrolling interests in Omagine LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,363
|
)
|
|
|
(9,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(958,580
|
)
|
|
|
-
|
|
|
|
(958,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2017 (Unaudited)
|
|
|
22,152,350
|
|
|
$
|
22,152
|
|
|
$
|
471,144,693
|
|
|
$
|
(42,231,846
|
)
|
|
$
|
287,080,074
|
|
|
$
|
716,015,073
|
|
See
accompanying notes to consolidated financial statements.
OMAGINE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Omagine, Inc.
|
|
$
|
(958,580
|
)
|
|
$
|
(1,482,832
|
)
|
Adjustments to reconcile net loss to net cash flows used
by operating activities:
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests in Omagine LLC
|
|
|
(9,363
|
)
|
|
|
(26,285
|
)
|
Depreciation and amortization of property and equipment
|
|
|
1,592
|
|
|
|
2,422
|
|
Stock-based compensation related to stock options
|
|
|
270
|
|
|
|
270
|
|
Issuance of Common Stock for Stockholder Relations Agent
|
|
|
15,000
|
|
|
|
-
|
|
Issuance of Common Stock for 401(k) Plan contributions
|
|
|
76,250
|
|
|
|
76,250
|
|
Issuance of Common Stock for Directors’ fees
|
|
|
225,000
|
|
|
|
225,000
|
|
Amortization of debt discounts
|
|
|
73,904
|
|
|
|
38,333
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets and other assets
|
|
|
1,859
|
|
|
|
27,958
|
|
Accrued interest on notes payable
|
|
|
20,215
|
|
|
|
10,047
|
|
Accounts payable
|
|
|
101,769
|
|
|
|
140,272
|
|
Accrued officers’ payroll
|
|
|
119,450
|
|
|
|
(23,426
|
)
|
Accrued expenses and other current liabilities
|
|
|
(27,933
|
)
|
|
|
4,745
|
|
Net cash flows used by operating activities
|
|
|
(360,567
|
)
|
|
|
(1,007,246
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
283,078
|
|
|
|
529,000
|
|
Principal payments on 2015 note payable to YA II PN, Ltd.
|
|
|
-
|
|
|
|
(225,000
|
)
|
Proceeds from exercise of stock options
|
|
|
-
|
|
|
|
1,700
|
|
Proceeds of issuance of March 2016 note payable to YA II PN, Ltd. net of $60,000 commitment fee
|
|
|
-
|
|
|
|
540,000
|
|
Principal payments on March 2016 $600,000 note payable to YA II PN, Ltd.
|
|
|
-
|
|
|
|
(170,000
|
)
|
Proceeds of issuance of June 2016 note payable to YA II PN, Ltd. net of $40,000 commitment fee
|
|
|
-
|
|
|
|
360,000
|
|
Principal payments on December 2016 $750,000 note payable to YA II PN, Ltd.
|
|
|
(290,000
|
)
|
|
|
-
|
|
Proceeds from the issuance of
convertible Notes Payable
|
|
|
150,000
|
|
|
|
-
|
|
Net cash flows provided by (used by) financing activities
|
|
|
143,078
|
|
|
|
1,035,700
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(217,489
|
)
|
|
|
28,454
|
|
|
|
|
|
|
|
|
|
|
CASH BEGINNING OF PERIOD
|
|
|
229,228
|
|
|
|
324,703
|
|
|
|
|
|
|
|
|
|
|
CASH END OF PERIOD
|
|
$
|
11,739
|
|
|
$
|
353,157
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,260
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
22,653
|
|
|
$
|
23,323
|
|
|
|
|
|
|
|
|
|
|
NON - CASH FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock to Executive Officers in payment of salaries payable
|
|
$
|
76,000
|
|
|
$
|
50,400
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock in satisfaction of convertible note payable ($15,000) and accrued interest ($15,984)
|
|
|
|
|
|
$
|
30,984
|
|
|
|
|
|
|
|
|
|
|
Amount due to CCC-Panama and CCC-Oman pursuant to April 3, 2017 exercise of OMAG Options for 15% equity interest in Omagine LLC to be acquired
|
|
$
|
58,500
|
|
|
$
|
-
|
|
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” or the
“Registrant”) 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 majority owned subsidiary Omagine LLC, a
limited liability company incorporated under the laws of the Sultanate of Oman (“LLC”). 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”. 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 (the “Al Rayan Bank Loan”) to finance the first phase of the Omagine Project
consisting of design, development and initial construction activities. The Al Rayan Bank Loan, which was subject to the 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. A condition precedent to closing the Al Rayan Bank Loan was that it be secured
by a $25 million cash deposit in an LLC account at Masraf Al Rayan Bank. This $25 million cash deposit was to be provided pursuant
to the terms of the Shareholder Agreement but upon CCC’s default thereunder, it did not occur and the Masraf Al Rayan Bank
loan will not now be utilized by LLC. Contingent upon the closing of an investment into LLC to replace CCC, commencement of the
Omagine Project’s first phase activities are expected to begin promptly thereafter. (See Note 11 – “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 June 30, 2017 and December 31, 2016, cash included approximately $400 and $2,100 respectively in an Oman bank account
not covered by FDIC insurance.
Inventory
– Inventory is stated
at cost. At June 30, 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 OMAG’s independent auditor are in agreement with and have consented to the accounting indicated in the consolidated financial
statements for the year ended December 31, 2015. (See: Note 2 – “Inventory and Property”).
Revenue Recognition
- The Registrant
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 Registrant 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 six months ended June
30, 2017 and 2016 were $270 and $270, respectively. (See Note 9).
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 six month periods ended June 30,
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
|
|
|
549,204
|
|
|
|
150,090
|
|
Stock Options
|
|
|
3,107,000
|
|
|
|
3,269,000
|
|
Stock Appreciation Rights
|
|
|
1,455,000
|
|
|
|
1,455,000
|
|
Warrants
|
|
|
6,672,124
|
|
|
|
6,422,124
|
|
Total Common Shares Issuable
|
|
|
11,783,328
|
|
|
|
11,296,214
|
|
Non-controlling Interests in Omagine
LLC
- As of the date of this report (and subject to the closing of the exercise of the OMAG Options) LLC is owned 75% by OMAG.
In May 2011, OMAG’s 100% ownership of LLC was reduced to 60% pursuant to a shareholders’ agreement (the “Shareholder
Agreement”) signed by OMAG, JOL, the Office of Royal Court Affairs, an Omani organization representing the personal interests
of His Majesty Sultan Qaboos bin Said, the ruler of Oman (“RCA”), and two subsidiaries of Consolidated Contractors
International Company, SAL: “CCC-Panama” and “CCC-Oman” (collectively, “CCC”).
CCC has defaulted on its investment obligation
under the Shareholder Agreement and OMAG exercised its options under the Shareholder Agreement (the “OMAG Options”)
on April 3, 2017 to purchase all of LLC shares owned by CCC. Subsequent to the closing of this transaction CCC will no longer be
a shareholder of LLC and the registered LLC shareholders with the Government of Oman will be so amended. As of the date hereof,
the ownership percentages of LLC as registered with the Government of Oman are as follows:
LLC Shareholder
|
|
Percent
Ownership
|
|
OMAG
|
|
|
60
|
%
|
RCA
|
|
|
25
|
%
|
CCC-Panama
|
|
|
10
|
%
|
CCC-Oman
|
|
|
5
|
%
|
Total:
|
|
|
100
|
%
|
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 Registrant 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 six months ended June 30, 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 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, OMAG’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 11 (See: “the Omagine LLC Shareholder Agreement section of Note 11), 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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepaid rent (New York office)
|
|
$
|
|
|
|
$
|
1,859
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued to investor relations vendor for services to be
rendered from July 1, 2017 to December 31, 2017
|
|
|
15,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,000
|
|
|
$
|
1,859
|
|
NOTE 4 – CONVERTIBLE NOTES PAYABLE AND ACCRUED INTEREST
Convertible notes payable and accrued interest
thereon consist of:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Due to a director of Omagine, 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
|
|
|
101,206
|
|
|
|
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
|
|
|
43,769
|
|
|
|
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
|
|
|
20,501
|
|
|
|
18,021
|
|
|
|
|
|
|
|
|
|
|
Due to entity owned by two Directors of Omagine, 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
|
|
|
4,260
|
|
|
|
1,781
|
|
|
|
|
|
|
|
|
|
|
Due to an investor, interest at 0% per annum, due on September 12, 2017, convertible into Common Stock at a conversion price of $0.40 per Common Share (as modified on April 13, 2017 from a $50,000 note payable bearing interest at 5% per annum due on April 13, 2017 and convertible at a conversion price of $0.65 per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized Debt Discount
|
|
|
-
|
|
|
|
(13,904
|
)
|
|
|
|
|
|
|
|
|
|
Accrued Interest
|
|
|
-
|
|
|
|
541
|
|
Total
|
|
$
|
604,736
|
|
|
$
|
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:
|
|
June 30,
|
|
|
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 to June 2017, $55,000 monthly July 2017 to October 2017, $50,000 in November 2017 and $60,000 in December 2017.)
|
|
|
460,000
|
|
|
|
750,000
|
|
Less: Unamortized debt discount at June 30, 2017 and December 31, 2016
|
|
|
(31,250
|
)
|
|
|
(68,750
|
)
|
Principal, net
|
|
|
428,750
|
|
|
|
681,250
|
|
Accrued interest
|
|
|
9,215
|
|
|
|
5,137
|
|
Total
|
|
$
|
437,965
|
|
|
$
|
686,387
|
|
NOTE 6 – NOTE PAYABLE –
ST. GEORGE INVESTMENTS LLC
On November 14, 2016, the Registrant 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 Registrant’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 OMAG’s Common Stock during the twenty trading days
immediately preceding the Conversion. OMAG 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 Registrant received net proceeds of $150,000 on November
16, 2016. On May 10, 2017 OMAG and St. George executed an Amendment to Convertible Promissory Note extending the maturity date
to July 17, 2017 in consideration of a $10,000 extension fee paid to St. George. (See: Exhibits 10.42 and 10.43, the Note Purchase
Agreement and the Securities Purchase Agreement and Exhibit 10.50, the Amendment to the Convertible Promissory Note). The maturity
date of the Convertible Promissory Note was subsequently further extended to September 17, 2017 (See Note 13 – Subsequent
Events).
NOTE 7 – NOTE PAYABLE - JSJ
INVESTMENTS INC.
On May 8, 2017, the Registrant entered
into a Convertible Promissory Note with JSJ Investments Inc., an accredited investor, for the principal amount of $100,000 with
interest at 12% per annum, due February 7, 2018 and convertible into OMAG’s Common Stock after 180 days from the 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. The Registrant may prepay the Note in full together with any accrued interest before the Prepayment Date which occurs
180 days after the Issuance Date with a cash redemption premium of 125% (in the case of prepayments within 90 days of the Issuance
Date), 135% (in the case of prepayments 91 to 120 days after the Issuance Date) and 140% (in case of prepayments 121 to 180 days
after the Issuance Date). (See: Exhibit 10.49, the Convertible Promissory Note).
NOTE 8 – COMMON STOCK
With respect to the issuances of the Common
Shares listed below:
|
1.
|
see Note 11 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 Registrant’s three independent directors
based on the $0.616 closing price of the Registrant’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
Registrant 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
OMAG directors each purchased 94,340 restricted Common Shares and OMAG’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, OMAG 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 April 4, 2017, OMAG sold 266,667 restricted
Common Shares to a non-U.S. person who is an accredited investor for proceeds of $80,000.
On April 17, 2017, pursuant to the SEDA,
OMAG sold 132,275 Common Shares to YA for proceeds of $50,000.
On May 30, 2017, OMAG sold 25,253 restricted
Common Shares to an accredited investor for proceeds of $7,500.
On June 6, 2017, OMAG sold 64,977 restricted
Common Shares to an accredited investor for proceeds of $10,000.
On June 7, 2017, OMAG sold 20,000 restricted
Common Shares to an accredited investor for proceeds of $3,078.
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
Registrant 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 Registrant by the $50,400 reduction in the accrued salary and
expenses owed by the Registrant to its president.
On April 6, 2016, the three independent
directors of the Registrant 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
OMAG by the $25,000 reduction in accrued director’s fees owed by the Registrant to each of the independent directors.
On April 12, 2016, OMAG 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 Registrant 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 Registrant’s Common Stock at a conversion price of $0.65 per Common Share.
On October 17, 2016, the Registrant 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 Registrant 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 Registrant 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 Registrant’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 Registrant’s Common Stock during the twenty trading days immediately preceding
the Conversion. OMAG 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, OMAG 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 OMAG by the cancellation and payment
in full of the Registrant’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 OMAG 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, 2015
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 9 – 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
June 30, 2017, there were 2,117,000 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 June 30, 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 June 30, 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
|
|
Exercised Q2 2016
|
|
|
(2,000
|
)
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
Expired Q2 2016
|
|
|
(2,000
|
)
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
|
4,724,000
|
|
|
$
|
1.98
|
|
|
|
0.91
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2016
|
|
|
4,724,000
|
|
|
$
|
1.98
|
|
|
|
0.91
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
4,724,000
|
|
|
$
|
1.98
|
|
|
|
1.02
|
|
|
|
-
|
|
Expired Q1 2017
|
|
|
(160,000
|
)
|
|
$
|
1.25
|
|
|
|
-
|
|
|
|
-
|
|
Expired Q2 2017
|
|
|
(2,000
|
)
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
|
4,562,000
|
|
|
$
|
2.00
|
|
|
|
0.55
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
4,562,000
|
|
|
$
|
2.00
|
|
|
|
0.55
|
|
|
|
-
|
|
Of
the 4,562,000 Stock Options
and SARs outstanding at June
30, 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 Registrant. Of the 3,107,000 Stock Options outstanding at June 30, 2017, 192,000
of such Stock Options are not Strategic Options.
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 OMAG
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 of 2014 was extended 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 June 30, 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
|
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
|
|
|
4,562,000
|
|
|
|
4,562,000
|
|
|
|
|
|
|
|
A summary of information about
Stock Options and SARs outstanding at June 30, 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
|
|
|
3,462,000
|
|
|
|
1.83
|
|
|
|
0.53
|
|
|
|
3,462,000
|
|
|
|
1.83
|
|
$ 2.01 - $3.00
|
|
|
1,100,000
|
|
|
|
2.56
|
|
|
|
0.61
|
|
|
|
1,100,000
|
|
|
|
2.56
|
|
Totals
|
|
|
4,562,000
|
|
|
$
|
2.00
|
|
|
|
0.55
|
|
|
|
4,562,000
|
|
|
$
|
2.00
|
|
As of June 30, 2017, there was $270 of
unrecognized compensation costs relating to unexpired Stock Options, that is expected to be recognized in 2017.
Warrants
As of June 30, 2017, OMAG had 6,672,124
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.
Adjustable 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 “Adjustable Warrants”). On April 13, 2017, the Registrant
issued a non-interest bearing $100,000 convertible promissory note to an accredited investor due October 12, 2017. In connection
with the six month Note the Registrant issued 100,000 Adjustable Warrants to the accredited investor. The Adjustable 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 Registrant 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 10 – U.S. INCOME TAXES
Deferred U.S. tax assets are comprised
of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
U.S. federal net operating loss carry forwards
|
|
$
|
6,529,000
|
|
|
$
|
6,333,000
|
|
U.S. state and city net operating loss carry forwards, net of U.S. federal tax benefit
|
|
|
2,073,000
|
|
|
|
2,011,000
|
|
|
|
|
8,602,000
|
|
|
|
8,344,000
|
|
Less: Valuation allowance
|
|
|
(8,602,000
|
)
|
|
|
(8,344,000
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
Management has determined, based on the
Registrant’s current condition, that a full valuation allowance is appropriate at June 30, 2017. At June 30, 2017, the Registrant
had U.S. federal net operating loss carry forwards of approximately $20,727,000 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 Registrant believes that it has no
uncertain tax positions and no unrecognized tax benefits at June 30, 2017 and December 31, 2016.
NOTE 11 – 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 Registrant’s rent expense for the six month periods ended June 30,
2017 and 2016 was $29,389 and $30,967, respectively.
Employment Agreements
The Registrant 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 Registrant
continued to accrue salary payable to Mr. Drohan on the basis of an annual salary of $125,000. On May 1, 2015 the Registrant paid
its President $87,781 of accrued officer’s payroll and on May 16, 2015 the Registrant 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 Registrant 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 Registrant paid its
President $55,601 of accrued officer’s payroll. On February 1, 2017 the Registrant 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 June 30, 2017 and December 31, 2016, OMAG had unpaid accrued officer’s compensation due to its President of $99,905
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 Registrant 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 Registrant 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 Registrant 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 June 30, 2017 and
December 31, 2016, OMAG had unpaid accrued officer’s compensation due to its Vice-President of $141,072 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
Registrant paid its Controller $25,000 of accrued officer’s payroll. On December 9, 2016 the Registrant paid the Controller
$7,500 of accrued officer’s payroll. At June 30, 2017 and December 31, 2016, OMAG had unpaid accrued officer’s compensation
due to its Controller of $222,100 and $182,100, respectively.
Equity Financing Agreements
Omagine, Inc. 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 Registrant 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 8).
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 majority 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. The Ministry of Tourism has not further extended the Operative Date. Company management has had
informal discussions with the concerned government officials and assuming LLC succeeds in closing an equity transaction with RCA
per the Shareholder Agreement or to replace CCC as an LLC investor, management expects LLC 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 Registrant 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, RCA
and CCC 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 June 30,
2017, 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,
RCA and CCC 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). As of the date
hereof, CCC has defaulted on its obligation to make its Deferred Cash Investment into LLC and OMAG has exercised the OMAG Options
to purchase all of the LLC shares owned by CCC. RCA has not yet made its Deferred Cash Investment into LLC which was due by July
17, 2016. OMAG and RCA anticipate agreement to an “Amended and Restated Shareholder Agreement” pursuant to which RCA
will make its OR 7,640,625 [$19,865,625] Deferred Cash Investment. (See: Note 1).
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 OMAG 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 an option in favor of Omagine, Inc. (the “OMAG Option”) to purchase
all LLC Shares presently owned by CCC at any time of OMAG’s choosing prior to July 1, 2017 at a price equal to CCC’s
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 Omagine,
Inc., or to a purchaser designated by Omagine, Inc., in a sale made pursuant to the exercise of the OMAG Option. On April 3, 2017
OMAG exercised its option to purchase all of the shares of LLC owned by CCC-Oman and CCC-Panama. After the closing of the option
purchase LLC will then have only two shareholders – OMAG and RCA.
Although RCA and OMAG are presently negotiating
with an investor to replace CCC as an LLC investor, there is no assurance that it will happen. If agreement is not reached by RCA
and OMAG on the matters presently under discussion with such investor, 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 Registrant’s Consolidated Balance Sheet at June 30, 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.
NOTE 12 – RELATED PARTY TRANSACTIONS
At June 30, 2017 and December 31, 2016,
respectively, OMAG’s accounts payable included $17,576 and $88,800 due to its officers and directors.
For the six months ended June 30, 2017
and 2016, OMAG expensed a total of $5,000 and $84,000, respectively, for consulting fees paid to an entity controlled by the Deputy
Managing Director of LLC.
In April 2016, OMAG paid a $300,000 sponsorship
fee to the same such entity controlled by the Deputy Managing Director of Omagine LLC for the Registrant 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, 2016 to May 23, 2016.
NOTE 13 – SUBSEQUENT EVENTS
On July 3, 2017, the Registrant issued
a non-interest bearing $25,000 convertible promissory note to an accredited investor due January 2, 2018. The Conversion Price
of the convertible promissory note is $0.15 per Common Share. On August 14, 2017, the note holder invested an additional $10,000
increasing the July 3, 2017 convertible promissory note to $35,000 according to the terms of the original note.
On July 7, 2017 (the “Grant Date”),
the Registrant granted the aggregate of 1,950,000 stock options (the “July Strategic Options”) to three officers, three
independent directors and two consultants pursuant to a Board of Directors resolution. All such July Strategic Options are exercisable
for the purchase of one share of the Registrant’s Common Stock at an exercise price of fifteen cents ($0.15) per share in
cash or via a “cashless exercise feature” which exercise price is in excess of 115% of the closing sale price for a
share of OMAG’s Common Stock on the trading day immediately prior to the Grant Date. All July Strategic Options are fully
vested and are exercisable as of the Grant Date and all shall expire at 5pm Eastern Time on June 30, 2018. The eight individuals
receiving grants of the July Strategic Options are: Frank J. Drohan, President, 500,000; Charles P. Kuczynski, VP and Secretary,
200,000; William Hanley, Controller, 100,000; 50,000 to each of three independent directors, Louis J. Lombardo, Jack A. Smith,
and Alan M. Matus; Sam Hamdan, Consultant and Deputy Managing Director of Omagine LLC, 500,000 and Agron Telaku, consultant, 500,000.
On July 12, 2017, the Registrant and St.
George Investments LLC executed a second amendment to the $185,000 Convertible Promissory Note dated November 14, 2016 extending
the Maturity Date to August 17, 2017. In consideration of the extension, the Registrant paid $8,000 to St. George Investments LLC.
On August 14, 2017, the Registrant and St. George Investments LLC executed a third amendment extending the Maturity Date to September
17, 2017. In consideration of the third extension, the Registrant paid $8,000 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 third such fund which is active in real-estate investments in the MENA Region.
LLC accelerated its efforts with non-GCC investors (who are value-oriented and less discount-oriented than local investors) and
presently LLC is in final discussions with one of the two European investment funds.
During July and August 2017 and continuing
up to the date hereof multifaceted discussions and correspondence between and among management, MOT and RCA occurred with respect
to, among other things, the 13 month past due obligation of RCA to invest its $20 million equity investment into LLC (which was
due & payable to LLC in July 2016), the status of the new investor to replace CCC, the timelines for completion of the Omagine
Project and the possibility that the DA may be amended, replaced or terminated by MOT. These complex discussions continue as of
the date hereof and involve at least two government ministries as well as other governmental entities and authorities. The outcome
of these multifaceted discussions is not yet concluded but in all such similar prior events, RCA has fulfilled its obligations
and MOT has granted the reasonable requests of the Company for the time extensions required to perform certain tasks such as the
closing of either the past due RCA $20 million equity investment obligation and/or the new investor to replace CCC.
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
and if RCA fulfills is past due $20 million investment obligation or an investment transaction with one of LLC’s present
investment prospects closes (which has not happened yet although we anticipated it would occur at the end of July 2017), LLC will
begin the masterplanning and development of the Omagine Project. LLC management is presently in continuing intense discussions
with:
|
i.
|
RCA about RCA’s long past due obligation to invest its $20 million equity investment into
LLC, and
|
|
ii.
|
with one of the two European investment funds to replace CCC as an investor.
|
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 $1.6 billion. A present estimate therefore of the portion of that projected
cash flow allocable to OMAG would be in excess of $1 billion USD at OMAG’s present 60% to 75% ownership of LLC and this
amount would be the approximate expected damages to OMAG in the event of any untoward circumstances (which no one presently
expects to occur) arising from CCC’s default or from RCA’s failure to fulfill its past due $20 million investment
obligation pursuant to the legally binding Shareholder Agreement to which it is a party.
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 generally 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 (“Land Rights”)
given in exchange for such stock. The acquisition of the land rights by LLC in exchange for LLC stock was negotiated by OMAG on
behalf of LLC and 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 OMAG’s negotiating and arranging for the aforementioned
$720 million of Land Rights to be added to LLC’s 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.
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 memorialized
the land acquisition and 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 much longer
than expected but ultimately the foregoing Pre-DA strategic objectives - including the land acquisition - 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 less complicated 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, and
|
|
iii.
|
reimburse OMAG for its $18 million of Pre-DA expenses.
|
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. Since the DA was signed, OMAG has in fact
single-handedly kept LLC and the Omagine Project viable via its continued financing of LLC’s operations.
|
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 closing an approximately $20
million equity investment in LLC.
A long past due $20 million RCA equity
investment obligation is already in place. Pursuant to the Shareholder Agreement, approximately one year ago in July 2016, RCA
became obligated to invest $20 million into LLC. LLC has in a timely manner given RCA frequent written and verbal notices of this
obligation but as of the date hereof RCA has not fulfilled this investment obligation. LLC management is also attempting to close
a new investor to replace the CCC investment.
This process has been ongoing now for many
months and is well advanced. We expected to close a new LLC investment with a Swiss fund in July 2017 but that did not happen and
discussions with that fund are presently ongoing. Management expects, but cannot guarantee, that its ongoing discussions with the
Swiss Fund will be successfully concluded.
Discussions with RCA regarding its $20
million equity investment obligation which became due under the Shareholder Agreement in July 2016 are also ongoing and are bound
up with the complex negotiations mentioned above between and among LLC, OMAG, RCA and MOT.
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 one of them.
Although often beset by byzantine delays,
the present state of affairs with respect to the Omagine Project is quite straightforward. LLC will begin the masterplanning and
development of the Omagine Project when either:
|
i.
|
RCA fulfills its obligation pursuant to the Shareholder Agreement to invest its $20 million equity
investment into LLC, or
|
|
ii.
|
The closing of an equity investment with a new LLC investor to replace CCC occurs (which has not
yet occurred although we previously expected it to occur by the end of July 2017).
|
Ongoing discussions and negotiations with
the new investor and separately between and among the several parties involved (including RCA, MOT, OMAG and other relevant
government officials) are expected to resolve the RCA investment impasse and the new investor closing but management is unable
at this time to predict when this will occur.
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 have experienced considerable
delays to date.
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 22,152,350 shares of its Common Stock issued and outstanding
as of June 30, 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 originally 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 and business conditions for
CCIC in the MENA Region (See: “Market Conditions” below). CCC-Panama and CCC-Oman are sometimes referred to collectively
in this report as “CCC”.
As previously disclosed, all our prior
efforts to conclude the CCC Contract and CCC’s required investment under the Shareholder Agreement were unsuccessful. On
April 3, 2017 OMAG exercised its option 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 however 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 have lost much valuable time and no longer
believe it will occur in the time frame we and the Ministry of Tourism require. 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 one of such two European investment funds and although we had expected to close an investment with this fund by the end of
July that did not happen. Discussions continue with this fund and separately with RCA to close either the RCA $20 million equity
investment obligation and/or the new investor to replace CCC. 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, 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.
Although LLC is presently negotiating (i)
with RCA with respect to its $20 million equity investment obligation which is past due pursuant to the provisions of the Shareholder
Agreement, and (ii) with an investor to replace CCC as an LLC investor, there is no assurance that either of these investments
will happen until they actually do happen. If agreement is not reached by LLC and/or RCA and/or the new investor on the matters
presently under discussion, or if alternative financing is not obtained for both LLC and OMAG, LLC may not be able to complete
the Omagine Project, the Company may not be able to continue operations, and LLC may not be able to recover the $718,614,000 value
of the Land Rights included in the Registrant’s Consolidated Balance Sheet at June 30, 2017 and December 31, 2016. 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, CCC-Panama and RCA 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 June 30, 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 December 31, 2016 and the date hereof.
|
|
|
OR 300,000
|
|
|
$
|
780,000
|
|
|
|
OR 37,500
|
|
|
$
|
97,500
|
|
|
|
OR 22,500
|
|
|
$
|
58,500
|
|
As of June 30, 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 June 30, 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 Omagine LLC financially afloat after the October 2, 2014 DA signing date by expending an additional $12.6 million (as of June 30, 2017) on behalf of the Omagine Project via cash loans from Omagine, Inc. to Omagine LLC (“Loans”) and the direct payment by Omagine, Inc. of Omagine LLC liabilities and accounts payable (“Advances”) consisting of $5.2 million of cash and $7.4 million of non-cash items, neither of which Loans nor Advances Omagine, Inc. had any obligation whatsoever to do pursuant to the SHA.
|
All $12.6 million of such Loans and Advances
are liabilities of LLC to OMAG and due on demand. All $17.9 million of such Pre-Development Expenses will be liabilities of LLC,
reimbursable to Omagine, Inc. 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 June 30, 2017, below.
Table E - Pre-Development Expenses, Loans
and Advances
summary
|
|
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 6/30/2017 (incurred on or after the October 2, 2014 DA signing date)
|
|
$
|
5,244,542
|
|
|
$
|
7,395,335
|
|
|
$
|
12,639,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total - (Due to OMAG from LLC)
|
|
$
|
18,856,493
|
|
|
$
|
11,703,498
|
|
|
$
|
30,559,991
|
|
The foregoing 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 the start date to complete. Due to CCC’s default on
its investment and construction contract obligations pursuant to the Shareholder Agreement and to RCA’s delay in making its
$20 million investment into LLC as required by 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 majority owned subsidiary,
LLC 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 MOT has not further extended the Operative Date but MOT has previously agreed that we should seek
a new investor to replace CCC and then come back to MOT for the appropriate DA extensions as needed. Assuming LLC succeeds in closing
the $20 million equity transaction with RCA specified in the Shareholder Agreement (or LLC replaces CCC with a new investor which
was expected to happen in July but did not yet happen), we expect the Operative Date to be extended. No assurance however can be
given that such an equity transaction will be closed or that the Operative Date will actually be extended until such events actually
occur.
During July and August 2017 and continuing
up to the date hereof multifaceted discussions and correspondence between and among MOT, RCA, LLC and OMAG occurred with respect
to the obligation of RCA to invest its $20 million equity investment into LLC, the status of the new investor to replace CCC under
separate discussion with LLC and the possibility that the DA might be amended, replaced or terminated by MOT. These complex discussions
continue as of the date hereof and involve at least two government ministries as well as other governmental entities and authorities.
The outcome of these multifaceted discussions is not yet clear to the several parties involved. This is not the first time such
discussions have taken place and in all such similar prior events, the Government has granted the reasonable requests of the Company
for extensions of the time required to perform certain tasks and/or to close either the RCA $20 million equity investment obligation
and/or the new investor to replace CCC.
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 RCA’s
delay in making its required $20 million equity investment into LLC and we have been assured in the past by Government officials
that the Operative Date will be extended by MOT provided we are able to close the RCA $20 million equity investment into LLC and/or
the replacement investor for CCC in a timely fashion. We understand from these government officials that MOT is losing patience
with LLC with regard to the continued delays and as a result the abovementioned complex discussions and negotiations between and
among MOT, RCA, LLC and OMAG with respect to, among other things, the obligation of RCA to invest its $20 million equity investment
into LLC are now taking place. No assurances can be given at this time however that LLC’s failure to meet certain milestone
achievement dates will continue to be waived by MOT or that the Operative Date will be extended until these actions are actually
done so in writing by MOT.
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 CCC’s default, RCA’s investment obligation, our efforts to finalize the Amended and Restated
Shareholder Agreement with the estate of our proposed new investor, our proposed European investment funds who may be replacement
investors for CCC, 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 can be made until
RCA invests its past due $20 million equity investment obligation into LLC or/and until we close an investment transaction with
a replacement investor for CCC, as noted above MOT is losing patience with LLC with regard to the continued delays and management
is highly focused on convincing RCA to meet its $20 million investment obligation under the DA and on closing an equity investment
for LLC with the new investor as soon as possible and then getting the Operative Date extended by MOT and the development of the
Omagine Project started in earnest. No assurance can be given however to what extent, if any, that such an investment will be closed
by LLC and RCA and/or an investor or 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. It will be necessary for MOT to extend the Operative Date (and in turn, the MBO Completion Date) as they have previously
agreed to do subject to LLC securing the necessary equity investments outlined above in order for LLC to be able to meet the DA’s
construction deadline for the Minimum Build Obligation.
OMAG 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 to utilize the $25 million Al-Rayan Loan 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 LLC’s 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 as planned and as required for the fast-track development strategy and as management had planned; and they did not begin in
July 2016 as would have been possible had RCA met its obligation to invest its $20 million into LLC in July 2016; and they have
not yet begun. (See: “Initial Activities” and “Pre-Development Expenses and Loans and Advances to LLC”,
below). The design, development and construction of the Omagine Project may still benefit from these Initial Activities having
been undertaken but certainly 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 (i) RCA fulfilling its $20 million equity investment obligation under the Shareholder Agreement, and (ii) securing a replacement
investor for CCC, and the economic conditions in Oman. As of the date hereof intense and multifaceted discussions and correspondence
between and among management, MOT and RCA continue with respect to the obligation of RCA to invest its $20 million equity investment
into LLC, the status of the new investor to replace CCC under separate discussion with LLC and the possibility that the DA might
be amended, replaced or terminated by MOT. These complex discussions involve at least two government ministries as well as other
governmental entities and authorities. If such discussions are not resolved favorably to LLC or if the Operative Date and DA timelines
are not extended or if either the past due $20 million equity investment by RCA or the equity investment by the new investor is
not soon received by LLC, then the Company may not be able to complete the Omagine Project or continue operations and may not
be able to recover the $718,614,000 value of the Land Rights recorded in its financial statements. 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. Also pursuant to US GAAP 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 such as the Land Rights 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.
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 June 30, 2017) an additional $ 12,639,877 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)
|
|
$
|
5,244,542
|
|
|
$
|
7,395,335
|
|
|
$
|
12,639,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Due to OMAG from LLC
|
|
$
|
18,856,493
|
|
|
$
|
11,703,498
|
|
|
$
|
30,559,991
|
|
All $12,639,877 of such Loans and Advances
are liabilities of LLC to OMAG and are payable on demand. All $17,920,114 of such Pre-Development Expenses will be liabilities
of LLC to OMAG and 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.
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, 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 were the subject matter of numerous and virtually continuous discussions, negotiations and agreed changes
(subsequently defaulted on by CCC) from 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 were 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 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 $12,639,877 of Loans and Advances (as
of June 30, 2017) are payable to Omagine, Inc. by LLC on demand (but as a practical matter, not until LLC has the financial capacity
to do so and Omagine has no 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 Omagine, Inc. 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 reluctantly
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.
In light of the First Financing Agreement
Date having already occurred with no associated Draw Date, an Amended and Restated Shareholder Agreement (assuming it is agreed
and executed) is expected among other things, to address, restate and formalize more precisely the terms of repayment by LLC to
OMAG of the Pre-Development Expense Amount and the Success Fee but the manner, terms and conditions to be agreed relative thereto
is uncertain at this time. As stated above however, the Loans and Advances are current liabilities of LLC and are payable by LLC
to OMAG upon OMAG’s first simple demand. 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 RCA or with one or
both of the European investment funds (or other investor), it is OMAG management’s present intention to demand repayment
from LLC of all or a large part of the Loans & Advances then due and owing from LLC to OMAG.
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 OMAG
having made its OR 210,000 ($560,000) Deferred Cash Investment into LLC, LLC is presently obligated to issue and register a further
2,100,000 LLC Shares to OMAG.
RCA has made its OR 276,666,667 ($718,614,000)
non-cash PIK Investment of the Land Rights into LLC but has not yet made its OR 7,640,625 [$19,865,625] Deferred Cash Investment
into LLC in July 2016 as required by the Shareholder Agreement. In all likelihood OMAG and RCA will agree to an Amended & Restated
Shareholder Agreement (including an Amended RCA Subscription Agreement) pursuant to which LLC will issue a further 663,750 LLC
Shares to RCA in exchange for the Land Rights (which right to receive such 663,750 LLC Shares is waived by RCA pursuant to the
present Shareholder Agreement because of RCA’s failure to make its OR 7,640,625 [$19,865,625] Deferred Cash Investment into
LLC as required by the Shareholder Agreement.
As of the date hereof, CCC has defaulted
on its obligation to make its Deferred Cash Investment into LLC and to negotiate in good faith and sign the CCC Contract and RCA
has not yet made its Deferred Cash Investment into LLC in July 2016 as required by the Shareholder Agreement but is expected to
do so pursuant to an Amended & Restated Shareholder Agreement which will include an Amended & Restated RCA Subscription
Agreement.
As of the date hereof, the ownership percentages
of LLC
as registered
at the 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, depending upon the outcome of currently ongoing
discussions, the timing and payment of such RCA Deferred Cash Investment may or may not 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 (the “Al Rayan Loan 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 consisting of design,
development and initial construction activities. The Al Rayan Bank Loan, which was subject to the 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 was 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 of the Shareholder Agreement but CCC reneged on its agreement to do so and this did not occur. As a result, this Al
Rayan Bank Loan facility was not and will not be utilized. The Al Rayan Loan Agreement and the Al Rayan Bank Loan will not be utilized
by LLC due to CCC’s default and failure to make its required OR 18,987,500 [$49,367,500] Deferred Investment into LLC pursuant
to the Shareholder Agreement.
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, Europe and Asia with potential LLC equity investors
and high net-worth individuals. Several of these investors expressed interest in becoming shareholders of LLC and 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. Since approximately one year ago, (July 2016) RCA remains obligated to invest its $20 million equity
investment into LLC.
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 which was financed entirely by OMAG included:
1.
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the DA was Ratified by the Government;
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2.
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the UA was signed and registered with the Government;
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3.
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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;
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4.
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three separate valuation studies and reports were commissioned and the valuation of the Land Rights was completed;
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5.
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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;
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6.
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LLC booked 276,666,667 Omani Rials of new equity which is also reflected in the Company’s consolidated financial statements;
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7.
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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;
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8.
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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;
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9.
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an independent third party update to our feasibility study was commissioned and completed;
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10.
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an update of LLC’s internal financial model by specialist real estate investment bankers and advisers was commissioned and completed;
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11.
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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;
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12.
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the “Brand Identity” and associated brand pillar components and uniform brand messaging platform we intend to implement for Omagine, LLC and the Omagine Project were created;
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13.
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LLC’s strategic plan was completed;
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14.
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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;
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15.
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candidates for senior LLC executive positions have been recruited, interviewed and selected;
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16.
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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 three such investors;
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17.
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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;
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18.
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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
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19.
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several other initial drafts of contracts for mission-critical consultants were prepared,
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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, because of CCC’s
default, it was never utilized. LLC must now close an equity investment transaction with RCA or a new investor to replace CCC.
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 and
in our prior quarterly and annual reports filed with the SEC. 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 RCA fulfills its $20 million investment obligation pursuant to the Shareholder Agreement or 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.
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with respect to LLC Equity Sales, with several potential equity investors and developers interested in becoming shareholders of LLC, including investment funds, regional developers, and high net-worth individuals from Europe and several MENA Region countries, and
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ii.
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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
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iii.
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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
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iv.
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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.
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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 financing 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)
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an updated feasibility study of the Omagine Project by an independent third party which is a professional real estate, tourism and marketing consultant, and
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(ii)
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an updated LLC internal financial model for the Omagine Project by unaffiliated third parties who are expert financial, investment banking and real estate consultants.
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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 for its Pre-Development Expenses are now likely to be delayed and/or possibly altered
by the terms of an Amended and Restated Shareholder Agreement (which will not affect the on-demand repayment terms of the Loans
and Advances) [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 $47/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 LLC
is a private company.
Crude oil prices “seem” to
have recently stabilized around the mid to high $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 RCA fulfills its past due $20 million
investment obligation or after LLC 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 the timing of the closing of the aforementioned
investment transaction with RCA or the new investor (which management is unable to presently estimate). 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 the Omagine Project (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 the Omagine
Project’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 Loans and Advances 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
Report 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 June 30, 2017 unaudited
financial statements, that expression of concern has been removed.
In the first six months of 2017, OMAG sold
(a) an aggregate of 639,948 restricted Common Shares to an investors for aggregate proceeds to OMAG of $233,078 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.
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 RCA with respect to its past due $20 million equity investment into LLC, 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.
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 JUNE 30, 2017 vs.
THREE MONTHS ENDED JUNE 30, 2016
The Registrant did not generate any revenue
or incur any cost of sales during the three month periods ended June 30, 2017 and 2016. The Registrant is relying on Omagine LLC’s
operations for the Registrant’s future revenue generation. Management is presently examining other possible sources of revenue
for the Registrant which may be added to the Registrant’s operations.
Total selling, marketing, general and administrative
operating expenses (“SG&A Expenses”) were $325,942 during the three months ended June 30, 2017 compared to $730,860
during the three months ended June 30, 2016. This $404,918 (55%) decrease in SG&A Expenses was attributable to the following
expense categories: consulting fees including stock-based compensation ($319,337), travel ($65,078), occupancy ($1,468) and other
selling, general and administrative costs ($39,705) offset by increases in officers’ and directors’ compensation including
stock-based compensation ($1,500), professional fees ($9,170) and commitment fees ($10,000).
The Registrant sustained a net loss of
$369,378 for the three months ended June 30, 2017 compared to a net loss of $761,731 for the three months ended June 30, 2016.
This $392,353 (52%) decrease in the Registrant's net loss for the three months ended June 30, 2017 compared to the prior period
was principally attributable to the $404,918 decrease in SG&A Expenses mentioned above and an increase in amortization of debt
discounts ($13,005), decrease in interest expense ($51) and an increase in net loss attributable to non-controlling interests in
LLC ($389).
SIX MONTHS ENDED JUNE 30, 2017 vs.
SIX MONTHS ENDED JUNE 30, 2016
The Registrant did not generate any revenue
or incur any cost of sales for the six month periods ended June 30, 2017 and 2016.
Total SG&A Expenses were $851,171 during
the six month period ended June 30, 2017 compared to $1,437,414 for the six months ended June 30, 2016. This $586,243 (41%) decrease
was attributable to the following expense categories: officers’ and directors’ compensation including stock-based compensation
($10,333), consulting fees including stock-based compensation ($370,422), professional fees ($31,861), travel ($138,926), occupancy
($1,578) and other selling, general and administrative costs ($43,123) offset by increase in commitment fees ($10,000).
The Registrant sustained a net loss of
$958,580 for the six months ended June 30, 2017 compared to a net loss of $1,482,832 for the six months ended June 30, 2016. This
$524,252 (35%) decrease in the Registrant's net loss for the six months ended June 30, 2017 compared to the prior period was principally
attributable to the $586,243 decrease in SG&A Expenses mentioned above and increases in amortization of debt discounts ($35,571),
increase in interest expense ($9,498) and a decrease in net loss attributable to non-controlling interests in LLC ($16,922).
Liquidity and Capital Resources
The Registrant incurred net losses of $958,580
and $1,482,832 during the six months ended June 30, 2017 and 2016, respectively. During the six months ended June 30, 2017, the
Registrant had a decrease in cash of $217,489 resulting from the positive cash flow of $143,078 from financing activities offset
by a negative cash flow of $360,567 from operating activities. Financing activities for the six months ended June 30, 2017 consisted
of proceeds from the sale of Common Stock of $283,078, proceeds of $150,000 from convertible notes payable offset by payment of
four monthly installments totaling $290,000 for the “December 2016 YA Loan”.
The Registrant had $0 in capital expenditures
for the six months ended June 30, 2017.
At June 30, 2017, the Registrant had $490,898,602
in current assets, consisting of $490,813,363 of land under development held for sale (See Note 2 to the Registrant’s consolidated
financial statements), $15,000 prepaid expenses and other current assets, $58,500 of 15% equity interest in Omagine LLC and $11,739
of cash. The Registrant's current liabilities at June 30, 2017 totaled $2,692,895 consisting of $891,413 of convertible notes payable
and accrued interest, $437,965 of notes payable and accrued interest, $900,441 of accounts payable and accrued expenses and $463,076
of accrued officers’ payroll. At June 30, 2017, the Registrant had working capital of $488,205,707 compared to working capital
of $488,376,460 at December 31, 2016. Thirty-one percent (31%) of the $2,692,895 of current liabilities at June 30, 2017 ($841,775)
is due and owing to officers and or directors of the Registrant.
The $170,753 decrease in the Registrant's
working capital at June 30, 2017 compared to December 31, 2016 is attributable to the increase in current liabilities ($24,905)
and a decrease in cash ($217,489), offset by the increase in prepaid expenses and other current assets ($13,141) and 15% interest
in Omagine LLC ($58,500). The Registrant’s liabilities at June 30, 2017 increased compared to December 31, 2016 due to increases
in accounts payable, accrued expenses and other current liabilities ($27,336), increases in accrued officers’ payroll ($43,450)
and convertible notes payable and accrued interest ($202,541, offset by decreases in notes payable and accrued interest ($248,422).
Warrants
As of June 30, 2017, OMAG has 6,672,124 Common
Stock purchase warrants (“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) 250,000 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 (“Adjustable Warrants”).
Management is hopeful that the 6,672,124
outstanding Warrants will eventually become “in the money” and will be exercised which 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 August
12, 2015, the expiration date of all Strategic Warrants was extended from December 31, 2015 to December 31, 2016 and pursuant to
a Board of Directors resolution dated December 9, 2016, the Strategic Warrants were again 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 the date of this Report there were no Tempest Warrants issued or outstanding.
Adjustable 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 Adjustable Warrants to Rural Concepts. On April 13, 2017, in connection with a non-interest bearing $100,000
convertible promissory note in favor of an accredited investor, OMAG issued 100,000 Adjustable Warrants to such accredited investor.
JSJ Investments
On May 8, 2017, the Company entered into
a Convertible Promissory Note with JSJ Investments, Inc., 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 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.
The Company may prepay the Note in full together with any accrued interest before the Prepayment Date which occurs 180 days after
the Issuance Date with a premium sliding cash redemption scale: the Company may prepay the Note in full until the 90
th
day after the Issuance Date at a cash redemption premium of 125% in addition to outstanding interest; from the 91
st
day to the 120
th
day after the Issuance Date, the prepayment premium is 135%, and from the 121
st
day to the
Prepayment Date of November 7, 2017, the prepayment premium is 140%. (See: Exhibit 10.49, the Convertible Promissory Note).
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 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. On
January 8, 2015, OMAG filed an amendment to that Registration Statement and such amendment to the 2014 SEDA Registration Statement
was declared effective by the SEC on January 22, 2015. Post-Effective Amendments No. 1 and No. 2 to the SEDA 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. The Company plans to file a post-effective amendment with
the SEC to reinstate the effectiveness of the SEDA Registration which expired on October 9, 2016. 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 is filing this Post-Effective Amendment
No. 6 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.
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.
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.
There can be no assurance given that OMAG
will be able to successfully utilize the Warrants or the 2014 SEDA to secure the interim 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
16, 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. (See: Exhibits 10.42 and 10.43, the Note
Purchase Agreement and the Securities Purchase Agreement). 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. (See: Exhibit 10.50,
Amendment to Convertible Promissory Note). In July 2017, the Company and St. George Investments LLC again extended the Maturity
Date of the Note to August 17, 2017 and in August 2017, the Company and St. George Investments LLC again extended the Maturity
Date of the Note to September 17, 2017. (See: Exhibits 10.52 and 10.53)
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.
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a further OMR 130,000 [$338,000] cash investment was made by the LLC Shareholders, and
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ii.
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a further OMR 210,000 [$546,000] cash investment was made by OMAG, and
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iii.
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a further OMR 276,666,667 [$718,614,000] non-cash investment was made by RCA.
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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 obligation 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).
The continuation of LLC’s business
to date has been financed by OMAG.
LLC will have to arrange for the RCA and
new investor equity investments mentioned above and for a significant amount of 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, other
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 arrange the bridge financing
necessary to sustain operations until an equity investment transaction is closed by LLC and a portion of the Loans & Advances
are repaid to OMAG and/or the failure by LLC to ultimately secure project financing via the closing of a Financing Agreement would
have a materially significant adverse 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 2017. We expect, assuming we are able to close one or more of the debt or equity 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.
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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 Advances and Loans, and
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ii.
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at LLC through a combination of invested capital, Equity Sales, bank loans and project finance Debt Facilities (See: “Business - The Shareholder Agreement / LLC Capital Structure,” and “Master planning/Equity Sales/Debt Facilities/Project Financing”).
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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.