NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
Note 1 - Organization and summary of significant accounting policies:
Following is a summary of our organization and significant accounting policies:
Organization and nature of business –
Octagon 88 Resources, Inc. (identified in these footnotes as “we” or the Company) is a Nevada corporation incorporated on June 9, 2008. We are currently based in Switzerland. We intend to operate oil and gas assets in the U.S. and Canada. We use June 30 as a fiscal year for financial reporting purposes.
The Company incorporated Octagon 88 Resources (Schweiz) AG on May 8, 2013, in the country of Switzerland as a wholly-owned subsidiary.
We are a natural resource exploration stage company in the business of acquiring, exploring, and developing natural resource assets. We have a mineral rights agreement over certain oil and gas leases whereby we have the right to earn an interest by undertaking exploration on the leases. We also hold, by way of a share ownership, an interest in CEC North Star Energy Ltd.(NorthStar), a company with oil and gas operations. NorthStar, Zentrum Energie Trust AG (“Zentrum”), who is our controlling stockholder, and our Company have a common director, Mr. Hilekes. The CEO of NorthStar is an advisor to Zentrum, who is also the financing partner for both NorthStar and our Company. Our Secretary and a member of our board of directors is also an advisor to Zentrum.
We are currently negotiating funding for operations and we are assisting in sourcing funding for the oil and gas company in which we hold an interest. In the current exploration stage, we anticipate incurring operating losses as we implement our business plan.
Basis of presentation -
These consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The consolidated financial statements of the Company include the Company and its wholly-owned subsidiary,
Octagon 88 Resources (Schweiz) AG
. All material intercompany balances and transactions have been eliminated in consolidation.
Use of estimates -
The preparation of financial statements in conformity with generally accepted accounting principles 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents -
For purposes of the statement of cash flows, we consider all cash in banks, money market funds, and certificates of deposit with a maturity of less than three months to be cash equivalents.
Fair value of financial instruments and derivative financial instruments
- The carrying amounts of cash and current liabilities approximate fair value because of the short maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. We do not hold or issue financial instruments for trading purposes, nor do we utilize derivative instruments in the management of our foreign exchange, commodity price or interest rate market risks.
The FASB Codification clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
Note 1 - Organization and summary of significant accounting policies: (continued)
Fair value of financial instruments and derivative financial instruments (continued)
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities.
|
|
Level 2:
|
Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement
Oil and gas properties
– We use the successful efforts method of accounting for oil and gas properties. Under that method:
|
a.
|
Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are charged to expense when incurred since they do not result in the acquisition of assets.
|
|
b.
|
Costs incurred to drill exploratory wells and exploratory-type stratigraphic test wells that do not find proved reserves are charged to expense when it is determined that the wells have not found proved reserves.
|
|
c.
|
Costs incurred to acquire properties and drill development-type stratigraphic test wells, successful exploratory wells, and successful exploratory-type stratigraphic wells are capitalized.
|
|
d.
|
Capitalized costs of wells and related equipment are amortized, depleted, or depreciated using the unit-of-production method.
|
|
e.
|
Costs of unproved properties are assessed periodically to determine if an impairment loss should be recognized.
|
Equity Investments
– Our equity investments are included in other long-term assets. Equity investments through which we exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee's activities are accounted for using the
Equity Method (APB No. 18)
. Our current equity investments have been initially recorded at cost consisting of the market value of shares issued for the investment multiplied by the number of shares issued, as of the date of issue.
Other long-lived assets –
Property and equipment are stated at cost less accumulated depreciation computed principally using accelerated methods over the estimated useful lives of the assets. Repairs are charged to expense as incurred. Impairment of long-lived assets is recognized when the fair value of a long-lived asset is less than its carrying value. No impairments of long-lived assets occurred during the three month period ended September 30, 2013 and 2012.
Federal income taxes
- Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes in accordance with applicable FASB Codification regarding
Accounting for Income Taxes
, which require the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides deferred taxes for the estimated future tax effects attributable to temporary differences and carryforwards when realization is more likely than not.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
Note 1 - Organization and summary of significant accounting policies: (continued)
Federal income taxes
(continued)
-We have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We are not currently under examination by the Internal Revenue Service or any other jurisdiction. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material adverse effect on our financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
Net income per share of common stock
– We have adopted applicable FASB Codification regarding
Earnings per Share
, which require presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. At September 30, 2013 and 2012, there were no variances between the basic and diluted loss per share as there were no potentially dilutive securities outstanding.
Note 2 – Going concern:
As at September 30, 2013, we hold a Mineral Rights Agreement (see note 4) which gives us the rights to certain oil and gas exploration leases and we are an active investor in an operating oil and gas company by virtue of our shared board member and management team. . We continue to seek other oil and gas acquisitions that we can operate. While we have acquired an interest in certain mineral properties (Note 4) we expect to incur exploration stage operating losses until revenue generating operations commence, and for a period of time thereafter. We rely on our officers and directors to perform essential functions without compensation until we have raised sufficient funding for operations. We have entered into an agreement for funding of up to $2,500,000CDN ($2,424,430 USD) by way of an equity placement and a credit facility. We have drawn limited funds as yet on the first tranche of $500,000 (Note 5), which amount will be converted to shares of our common stock once fully utilized. There can be no assurance that funds will be available from the credit facility if and when needed.
From inception through September 30, 2013, we have incurred operating losses of approximately $924,554, of which approximately $209,366 represents actual cash losses. At September 30, 2013, our cash on hand was $59,736.
These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 3 – Investment in CEC North Star Energy Ltd.:
On October 15, 2012, we entered into a share purchase agreement with Zentrum Energie Trust AG (“Zentrum”) (the “Share Purchase Agreement”), which closed on December 24, 2012 whereby we acquired a total of 3,100,000 common shares in the capital stock of CEC North Star Energy Ltd. (“North Star”) from Zentrum, representing approximately 22% of the issued and outstanding shares of North Star. Our President and Director, Mr. Guido Hilekes is also a member of the Board of Directors of both North Star and our controlling stockholder, Zentrum, and Feliciano Tighe, our Secretary and a member of our Board of Directors is an administrative consultant to North Star. The CEO of North Star is an advisor to Zentrum, and Zentrum provides financing for both our Company and NorthStar.
Pursuant to the requirements for closing, on December 21, 2012, the Company issued a total of 14,000,000 restricted shares of the Company to Zentrum based on the market price of our stock on the date of issue at $3.15 per share, for a total investment cost of $44,100,000.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
Note 3 – Investment in CEC North Star Energy Ltd.: (continued)
Further, to close the transaction, the Company was required to negotiate terms with its controlling shareholder, Kenmore International S.A. (“Kenmore”) for the return to treasury of no less than 31,942,000 shares of the common stock of the Company controlled by Kenmore. On December 21, 2012, the Company returned to the transfer agent for cancellation effective December 24, 2012, a total of 31,942,000 shares of the Company, at par value, issued in the name of 888333333 Holdings Ltd., a company of which Kenmore was the sole shareholder. Kenmore retained a total of 100,000 shares of the Company after the transaction.
On January 24, 2013, the Company entered into a further share purchase agreement with three independent shareholders of North Star whereby the Company acquired 1,410,000 common shares in the capital stock of North Star (the “Share Purchase Agreement”). Under the terms of the Share Purchase Agreement, the Company issued a total of 5,310,000 shares of the Company’s common stock at a deemed price of $3.30 per share, which was the lowest bid price of the Company’s stock on the date of issuance, for a total investment cost of $17,523,000 in exchange for the 1,410,000 common shares of North Star.
The Company currently holds 32% of the shares of North Star after this acquisition. We account for this investment applying the
Equity Method (APB No. 18)
.
|
|
September 30,
2013
|
|
|
June 30,
2013
|
Investment in North Star
|
|
$
|
60,986,051
|
|
|
$
|
61,089,642-
|
|
The changes in the fair value of these investments were as follows:
Balance as of June 30, 2012
|
|
$
|
-
|
|
Contributions:
|
|
|
|
|
Issue 14,000,000 restricted shares of the Company at market value
|
|
|
44,100,000
|
|
Issue 5,310,000 restricted shares of the Company at market value
|
|
|
17,523,000
|
|
Total
|
|
|
61,623,000
|
|
Equity (loss) income on long-term investment in North Star accounted for under the equity method
|
|
|
(533,358
|
)
|
Balance as of June 30, 2013
|
|
|
61,089,642
|
|
Equity (loss) income on long-term investment in North Star accounted for under the equity method
|
|
|
(103,591
|
)
|
Balance as of September 30, 2013
|
|
$
|
60,986,051
|
|
Note 4 – Mineral rights agreement
On January 22, 2013, the Company entered into an acquisition of mineral rights agreement with Zentrum (the “Mineral Rights Agreement”). Under the terms of the Mineral Rights Agreement the Company has the right to acquire the Mineral Rights known as the Trout Properties. The Trout Properties are comprised of certain oil and gas leases as detailed below:
Section 9 -89 R3W5
|
Alberta Crown P&NG
Expiry: August, 2016
|
|
|
Sections 3,4,5 89R3W5
|
Alberta Crown Oil Sands Development Lease No. 7408100382
Expiry: July, 2017
|
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
Note 4 – Mineral rights agreement (continued)
The Mineral Rights Agreement contains the following terms, amongst others:
|
·
|
An 8% Royalty of Gross Monthly Production to be paid to Zentrum;
|
|
·
|
On or before December 31, 2013, the Company shall have drilled a minimum of one (1) Exploration Well to Contract Depth at locations to be provided by Zentrum and agreed to by the Company on Section 9 89 R3W5 of the Trout Property;
|
|
·
|
On or before June 30, 2014, unless otherwise mutually agreed to, the Company shall perform a 3D seismic program on Sections 4,5, 6 89 R3W5 of the Trout Property. A copy and rights to the seismic data shall be provided to the Vendor within 60 days of the completion of the project;
|
|
·
|
On or before December 31, 2014, unless otherwise mutually agreed to, the Company shall have drilled a minimum of one (1) Exploration Well at a location to be mutually determined based on the 3D seismic above;
|
|
·
|
Any default in the terms above will terminate the Mineral Rights Agreement and the Company shall return the Trout Property to Zentrum.
|
The Company has received a preliminary budget for the drilling of the initial exploration well on the Trout property with costs estimated to be $1,500,000 Canadian dollars (USD $1,504,920), plus or minus 20 percent for seasonal adjustments including weather, rig and crew availability. We anticipate making a drawdown of funds under the financing agreement as more particularly described in Note 5 below in order to finance costs associated with this initial well.
During the three month period ended September 30, 2013, the Company expended $29,066 on the Trout property.
Note 5 – Financing agreement:
On October 3, 2012, the Company entered in to a letter agreement for a Financing Commitment and Credit Facility (the “Financing Agreement”) for the Company with Zentrum, whereby Zentrum will provide both debt and equity funds of up to CAD$2,500,000 (USD$2,424,430) to the Company for investments in assets owned by private operating oil companies.
Under the terms of the Financing Agreement, the first draw is to be an equity placement into the Company by Zentrum of US$500,000 by way of the issuance of 200,000 units, each unit consisting of one share of common stock at US$2.50 per share, a one year warrant to purchase an additional 200,000 shares of common stock at an exercise price of US$3.00 per share on or before October 3, 2013 and a three year warrant to purchase 200,000 shares of common stock at an exercise price of US$3.00 per share. The second warrant will have an expiry date of 3 years after closing of the first draw under this agreement.
Further funds may be by way of debt or equity. Any funds drawn down as debt under the credit facility will have a first security charge on the investments acquired with such funds. At September 30, 2013 all funds obtained under the terms of this agreement have been allocated to the initial US$500,000 tranche discussed above which, upon funded in full, will be converted to equity.
Fees of 8% for equity placements and 3% for debt placements will be deducted on funding. For any debt converted to equity, a further fee of 5% will be paid by the Company at conversion.
Zentrum has agreed that the Company may allocate up to 10% of the funds from debt or equity for general and administrative costs and due diligence costs and any other costs they may approve from time to time.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
Note 5 – Financing agreement (continued)
Zentrum shall further have a first right of refusal on all financings for a period of two years from the execution of the formal agreement. The final agreement shall provide for registration rights. The formal agreements in regard to the initial letter agreement were to be prepared for execution, however as of September 30, 2013 they have not be prepared therefor the Company will rely on the terms of the letter agreement until such time as a formal agreement is finalized.
As of September 30, 2013, Zentrum provided $167,876 (June 30, 2013 - $122,978) to the Company under the financing agreement. We have recorded the initial draw down of funds as investor deposits on the Company’s balance sheets until such time as the first tranche, less any commission payable, is fully funded.
Note 6 – Related party transactions:
On August 27, 2012, the Company negotiated debt settlements whereby they agreed to settle cumulative debt outstanding in the amount of $35,473 with Kenmore International S.A., our then controlling shareholder, at a price of $1.00 per share for a total share issuance of 35,473 shares of common stock.
On December 21, 2012, the Company returned to the transfer agent for cancellation effective December 24, 2012, a total of 31,942,000 shares of the Company issued in the name of 888333333 Holdings Ltd., a company of which Kenmore was the sole shareholder. Kenmore retained a total of 100,000 shares of the Company. Effective upon the cancelation of the shares Kenmore ceased to be a related party to the Company.
On January 29, 2013, the Board appointed Mr. Guido Hilekes and Mr. Gordon E. Taylor as Directors of the Corporation. On January 29, 2013, Mr. Feliciano Tighe tendered his resignation as President of the Company. Mr. Tighe remains Corporate Secretary and a director of the Company, and also provides consulting services to NorthStar. On January 29, 2013, the Board appointed Mr. Guido Hilekes as President of the Company. Mr. Guido Hilekes is also a member of the board of directors of both NorthStar and Zentrum, our controlling shareholder.
Zentrum has provided a line of credit to the Company (Note 5) and has also provided financing to CEC North Star Energy Ltd. by way of a $1,500,000 (CAD) convertible debenture. Zentrum is also a minority shareholder of CEC North Star Energy Ltd. and the controlling shareholder of our Company. The CEO of NorthStar is also an advisor to Zentrum. The mineral rights agreement for our oil and gas asset was entered into between the Company and Zentrum.
Note 7 – Advances:
As of September 30, 2013and June 30, 2013, total advances from shareholders of the Company were $19,167. The advances are on demand and bear no interest.
Note 8 – Issuance of shares:
On August 27, 2012, the Company negotiated debt settlements whereby they agreed to settle debt in the amount of $35,473 with Kenmore International S.A. at a price of $1.00 per share for a total share issuance of 35,473 shares of common stock. These shares were issued on September 24, 2012.
On December 21, 2012, the Company returned to the transfer agent for cancellation effective December 24, 2012, a total of 31,942,000 shares of the Company issued in the name of 888333333 Holdings Ltd., a company of which Kenmore was the sole shareholder. On December 21, 2012, the Company issued a total of 14,000,000 restricted shares of the Company to Zentrum valued at $3.15 per share, which was the market value of the shares on the date of the transaction, for a total acquisition cost of $44,100,000.
On January 24, 2013, the Company issued a total of 5,310,000 restricted shares of the Company to three independent shareholders of North Star valued at $3.30 per share, which was the market value of the shares based on the bid price of the shares on the date of the transaction, for a total acquisition cost of $17,523,000.
As of September 30, 2013, there were a total of 26,545,473 shares issued and outstanding.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
Note 9 – Income taxes:
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
Operating loss carry-forwards generated during the period from June 9, 2008 (date of inception) through September 30, 2013 of approximately $911,182, will begin to expire in 2028. The Company applies a statutory income tax rate of 34%. Accordingly, deferred tax assets related to net operating loss carry-forwards total approximately $309,800 at September 30, 2013. For the three month periods ended September 30, 2013 and 2012, the valuation allowance increased by approximately $71,380 and $3,720, respectively.
The Company has no tax positions at September 30, 2013, or June 30, 2013, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accruals for interest and penalties since inception.
The tax returns for the years from inception to September 30, 2013 are subject to examination by the Internal Revenue Service.
Note 10 - New accounting pronouncements:
The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that there are no new accounting standards are applicable to the Company.
Note 11 – Subsequent events:
On October 3, 2013, the Company provided through the Zentrum AG financing agreement (ref Note 5), the amount of $483,639 ($500,000CDN) to NorthStar. Zentrum AG completed a subscription agreement whereby they finalized the initial US$500,000 equity draw down and concurrently delivered notice of warrant exercise for a total of $151,515 which was the remaining portion of the funds currently reflected on the balance sheet of the Company as investor deposits, after the application of $16,361 to the equity draw down to complete the placement. The Company will be required to issue a total of 200,000 shares under the equity draw down and a total of 50,505 shares pursuant to the warrant exercise. The remaining 149,495 warrants under first warrant attached to the financing agreement expired at the close of business on October 3, 2013 and therefore they are forfeited. Zentrum AG continues to hold a total of 200,000 warrants exercisable at $3.00 per share for a period of three years from October 3, 2013, expiring on October 3, 2016, if not prior exercised.
The Company has not yet issued the shares pursuant to the equity placement or the exercise of the warrants.
Further, under the terms of the financing agreement, the Company is required to pay fees of 8% or $40,000 related to funds received on the equity draw down which will be booked as accounts payable on the balance sheet of the Company and paid out as further financing is provided.