10-Q 1 f10q0317_omagineinc.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: March 31, 2017

 

Commission File Number: 0-17264

 

Omagine, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   20-2876380
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

 

136 Madison Avenue, 5th Floor, New York, NY 10016

(Address of principal executive offices)

 

(212) 563-4141

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

As of May 9, 2017, the Registrant had outstanding 22,042,120 shares of common stock, par value $.001 per share (“Common Stock”).

 

 

 

 
 

 

    Page
  FORWARD LOOKING STATEMENTS  
     
PART I - FINANCIAL INFORMATION  
     
ITEM 1: FINANCIAL STATEMENTS 1
     
  CONSOLIDATED BALANCE SHEETS: MARCH 31, 2017 AND DECEMBER 31, 2016 1
     
  CONSOLIDATED STATEMENTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 2
     
  CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY 3
     
  CONSOLIDATED STATEMENTS OF CASH FLOWS: THREE MONTHS ENDED MARCH 31, 2017 AND MARCH 31, 2016 4
     
  NOTES TO FINANCIAL STATEMENTS 5
     
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
     
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54
     
ITEM 4: CONTROLS AND PROCEDURES 54
     
PART II - OTHER INFORMATION  
     
ITEM 1: LEGAL PROCEEDINGS 55
     
ITEM 1A: RISK FACTORS 55
     
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 55
   
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 55
     
ITEM 4: MINE SAFETY DISCLOSURES 55
     
ITEM 5: OTHER INFORMATION 55
     
ITEM 6: EXHIBITS 56
     
  SIGNATURES 59

 

 
 

 

FORWARD-LOOKING STATEMENTS

 

Some of the statements contained in this report that are not statements of historical facts constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, notwithstanding that such statements are not specifically identified as such. These forward-looking statements are based on current expectations and projections about future events. The words “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions, or the negative or other variations thereof, as well as discussions of strategy that involve risks and uncertainties (such as the potential new investor or investors in LLC or the potential financing with MENA region banks), are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Examples of forward-looking statements include but are not limited to statements about or relating to: (i) future revenues, expenses, income or loss, cash flow, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items, (ii) plans, objectives and expectations of Omagine, Inc. (“OMAG”) or its subsidiary Omagine LLC (“LLC”) or the managements or Boards of Directors thereof, (iii) the Company’s business plans, products or services, (iv) future economic or financial performance, and (v) assumptions underlying such statements. We urge you to be cautious of the forward-looking statements and other similar forecasts and statements of expectations since such statements (i) reflect our current beliefs with respect to future events, (ii) involve, and are subject to, known and unknown risks, uncertainties and other factors affecting our operations and growth strategy, and (iii) could cause the Company’s actual results, financial or operating performance or achievements to differ from future results, financial or operating performance, or achievements expressed or implied by such forward-looking statements. 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 of this report. 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 forward-looking statements that have been made regarding such anticipated events.

 

Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:

 

the uncertainty associated with political events in the Middle East and North Africa (the “MENA Region”) in general, including the ongoing civil disorder and military activities in the MENA Region;
   
the success or failure of OMAG’s and LLC’s efforts to secure additional financing, including project financing for the Omagine Project;
   
oversupply of residential and/or commercial property inventory in the Oman real estate market or other adverse conditions in such market;
   

the impact of MENA Region or international economies and/or future events (including natural disasters) on the Oman economy, on LLC’s business or operations, on tourism within or into Oman, on the oil and natural gas businesses in Oman and on other major industries operating within the Omani market;

   
deterioration or malaise in economic conditions, including the continuing destabilizing factors associated with the recent rapid decline in the price of crude oil on international markets;
   
inflation, interest rates, movements in interest rates, securities market and monetary fluctuations;
   
threatened and ongoing acts of war, civil or political unrest, terrorism or political instability in the MENA Region; or
   
the ability to attract and retain skilled employees.

 

Potential investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

 
 

 

ITEM 1: FINANCIAL STATEMENTS

 

OMAGINE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   March 31,   December 31, 
   2017   2016 
   (Unaudited)     
ASSETS        
         
CURRENT ASSETS:        
Cash  $4,684   $229,228 
Inventory (Note 2)          
Land under development   490,813,363    490,813,363 
Total inventory held for sale   490,813,363    490,813,363 
           
Prepaid expenses and other current assets   68,970    1,859 
           
Total Current Assets   490,887,017    491,044,450 
           
PROPERTY AND EQUIPMENT:          
Real estate held for investment (Note 2)          
Total investment in real estate   227,800,637    227,800,637 
Office and computer equipment   160,002    160,002 
Less accumulated depreciation and amortization   (154,534)   (153,738)
Total Property and Equipment   227,806,105    227,806,901 
           
OTHER ASSETS   4,057    4,057 
           
TOTAL ASSETS  $718,697,179   $718,855,408 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
           
Convertible notes payable and accrued interest (less unamortized discount of $1,755 and $13,904, respectively)  $546,596   $526,372 
Note payable and accrued interest - YA II PN, Ltd. (less unamortized discount of $50,000 and $68,750, respectively)   558,055    686,387 
Note payable - St. George Investments LLC (less unamortized Original Issue Discount of $7,500 and $22,500 respectively)   177,500    162,500 
Accounts payable   589,987    663,913 
Accrued officers' payroll   409,527    419,626 
Accrued expenses and other current liabilities   177,549    209,192 
Total Current Liabilities   2,459,214    2,667,990 
Long Term Liabilities   -    - 
           
TOTAL LIABILITIES   2,459,214    2,667,990 
           
STOCKHOLDERS' EQUITY (DEFICIT)          
           
Preferred stock:  $0.001 par value Authorized: 850,000 shares Issued and outstanding: - none   -    - 
           
Common stock: $0.001 par value Authorized: 50,000,000 shares Issued and outstanding: 21,643,178 shares in 2017 and 20,432,648 in 2016   21,643    20,432 
Capital in excess of par value   470,994,489    470,350,815 
Deficit   (41,862,468)   (41,273,266)
Total Omagine, Inc. stockholders' equity   429,153,664    429,097,981 
Noncontrolling interests in Omagine LLC   287,084,301    287,089,437 
           
Total Stockholders' Equity   716,237,965    716,187,418 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $718,697,179   $718,855,408 

 

See accompanying notes to consolidated financial statements.

 

 1 
 

 

OMAGINE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended
March 31,
 
   2017   2016 
REVENUE:        
Total revenue  $-   $- 
           
OPERATING EXPENSES:          
           

Officers and directors’ compensation (including stock-based compensation of $263,885 and $226,385, respectively)

   340,135    351,968 
Professional fees   3,575    44,606 
Consulting fees   26,750    77,836 
Travel   75,988    149,835 
Occupancy   16,406    16,516 
Other selling general and administrative (including stock-based compensation of $7,500 and $0 respectively)   62,375    65,793 
Total Costs and Expenses   525,229    706,554 
           
OPERATING LOSS   (525,229)   (706,554)
           
OTHER EXPENSE          
Amortization of debt discounts   (45,899)   (23,333)
Interest expense   (23,210)   (13,660)
Total Other Expense   (69,109)   (36,993)
           
NET LOSS   (594,338)   (743,547)
           
Add net loss attributable to noncontrolling interests in Omagine LLC   5,136    22,447 
           
NET LOSS ATTRIBUTABLE TO OMAGINE, INC.  $(589,202)  $(721,100)
           
LOSS PER SHARE - BASIC AND DILUTED  $(0.03)  $(0.04)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING          
- BASIC AND DILUTED   21,207,550    18,875,626 

 

See accompanying notes to consolidated financial statements.

 

 2 
 

 

OMAGINE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

 

   Common Stock                 
   Issued and Outstanding   Capital in       Noncontrolling     
       $0.001 Par   Excess of       Interests in     
   Shares   Value   Par Value   Deficit   Omagine LLC   Total 
                         
                         
Balances at December 31, 2014   16,878,119   $16,878   $32,252,954   $(32,669,399)  $(79,621)  $(479,188)
                               
Issuance of Common Stock for 401(k) Plan contribution   36,483    37    76,213    -    -    76,250 
                               
Stock grant to consultant for services rendered   5,000    5    9,445    -    -    9,450 
                               
Issuance of Common Stock for cash   206,281    206    219,794    -    -    220,000 
                               
Issuance of Common Stock to an Executive Officer in payment of salaries payable   100,000    100    119,900    -    -    120,000 
                               
Stock Options exercised by former Director   2,000    2    1,018    -    -    1,020 
                               
Exercise of Tempest Warrants   160,603    161    252,879    -    -    253,040 
                               
Issuance of Common Stock for finders' fees on restricted Common Stock sales   41,245    41    72,459    -    -    72,500 
                               
Issuance of Common Stock for Directors' Compensation for services September 1, 2015 to December 31, 2015   50,000    50    99,950    -    -    100,000 
                               
Issuance of Common Stock under SEDA   17,696    18    24,982    -    -    25,000 
                               
Issuance of restricted Common Stock for cash   1,230,886    1,230    1,238,470    -    -    1,239,700 
                               
Stock Option expense   -    -    4,001    -    -    4,001 
                               
Stock Option expense - Extension of 1,965,000 Strategic Options to December 31, 2016   -    -    915,493    -    -    915,493 
                               
Stock Option expense - Extension of 950,000 Strategic Options to December 31, 2016   -    -    541,215    -    -    541,215 
                               
Stock Option expense - Stock Appreciation Rights (1,455,000 expiring December 31, 2017)   -    -    1,654,481    -    -    1,654,481 
                               
Payment-in-Kind capital contribution of land by noncontrolling interest in Omagine LLC   -    -    431,168,400    -    287,445,600    718,614,000 
                               
Adjustments to noncontrolling interests in Omagine LLC   -    -    -    -    (195,879)   (195,879)
                               
Net loss   -    -    -    (5,673,293)   -    (5,673,293)
                               
Balances at December 31, 2015   18,728,313    18,728    468,651,654    (38,342,692)   287,170,100    717,497,790 
                               
Issuance of Common Stock for 401(k) Plan contribution   61,001    61    76,189    -    -    76,250 
                               
Issuance of Common Stock for Directors' Stock Compensation for services January 1, 2016 to December 31, 2016   115,386    116    149,884    -    -    150,000 
                               
Stock Option expense   -    -    540    -    -    540 
                               
Issuance of Common Stock to an Executive Officer in payment of salaries payable   56,000    56    50,344    -    -    50,400 
                               
Issuance of Common Stock for Directors' Cash Compensation for services January 1, 2016 to June 30, 2016   83,334    83    74,917    -    -    75,000 
                               
Issuance of restricted Common Stock for cash   1,139,488    1,140    742,860    -    -    744,000 
                               
Conversion of Convertible Note payable liability into Common Stock   24,207    24    30,960    -    -    30,984 
                               
Issuance of Common Stock to a Director for the exercise of Stock Options   2,000    2    1,698    -    -    1,700 
                               
Issuance of Common Stock under SEDA   31,289    31    24,969    -    -    25,000 
                               
Issuance of Common Stock to consultant for services   30,340    30    24,970    -    -    25,000 
                               
Issuance of Common Stock for SEDA commitment fees   161,290    161    149,839    -    -    150,000 
                               
Stock Option expense - Extension of 1,965,000 Strategic Options to December 31, 2017   -    -    232,263    -    -    232,263 
                               
Stock Option expense - Extension of 950,000 Strategic Options to December 31, 2017   -    -    59,660    -    -    59,660 
                               
Fair value of 150,000 warrants issued to lender in connection with $75,000 loan   -    -    61,530    -    -    61,530 
                               
Beneficial conversion feature of convertible note issued to lender in connection with $50,000 loan   -    -    18,538    -    -    18,538 
                               
Adjustments to noncontrolling interests in Omagine LLC   -    -    -    -    (80,663)   (80,663)
                               
Net loss   -    -    -    (2,930,574)   -    (2,930,574)
                               
Balances at December 31, 2016   20,432,648    20,432    470,350,815    (41,273,266)   287,089,437    716,187,418 
                               
Issuance of Common Stock for 401(k) Plan contribution   123,782    124    76,126    -    -    76,250 
                               
Issuance of Common Stock for Directors' Stock Compensation for services January 1, 2017 to December 31, 2017   243,507    244    149,756    -    -    150,000 
                               
Issuance of restricted Common Stock for cash   263,051    263    132,237    -    -    132,500 
                               
Issuance of Common Stock to two Executive Officers in payment of salaries payable   147,170    147    75,853    -    -    76,000 
                               
Issuance of Common Stock for 3 Directors' Cash Compensation for services from July 1, 2016 to June 30, 2017   283,020   $283   $149,717    -    -    150,000 
                               
Issuance of Restricted Common Stock to Stockholder relations Agent for Services rendered from January 1, 2016 to March 31, 2017   93,750   $94   $37,406    -    -    37,500 
                               
Issuance of Restricted Common Stock to Stockholder relations Agent in advance for services to be rendered April 1, 2017 to December 31, 2017   56,250    56    22,444    -    -    22,500 
                               
Stock Option expense   -    0    135    -    -    135 
                               
Adjustments to noncontrolling interests in Omagine LLC   -    -    -    -    (5,136)   (5,136)
                               
Net loss   -    -    -    (589,202)   -    (589,202)
                               
Balances at March 31, 2017 (Unaudited)   21,643,178   $21,643   $470,994,489   $(41,862,468)  $287,084,301   $716,237,965 

 

See accompanying notes to consolidated financial statements.

 

 3 
 

 

OMAGINE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three Months Ended
March 31,
 
   2017   2016 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
         
Net loss attributable to Omagine, Inc.  $(589,202)  $(721,100)
Adjustments to reconcile net loss to net cash flows used by operating activities:          
Net loss attributable to noncontrolling interests in Omagine LLC   (5,136)   (22,447)
Depreciation and amortization of property and equipment   796    1,211 
Stock-based compensation related to stock options   135    135 
Issuance of Common Stock for Stockholder Relations Agent   7,500    - 
Issuance of Common Stock for 401(k) Plan contributions   76,250    76,250 
Issuance of Common Stock for Directors' fees   187,500    150,000 
Amortization of debt discounts   45,899    23,333 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets and other assets   (7,111)   20,930 
Accrued interest on notes payable   10,992    4,651 
Accounts payable   31,075    133,870 
Accrued officers' payroll   65,901    16,442 
Accrued expenses and other current liabilities   (31,643)   (1,081)
Net cash flows used by operating activities   (207,044)   (317,806)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of equipment   -    - 
Net cash flows used by investing activities   -    - 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from the sale of Common Stock   132,500    - 
Principal payments on 2015 note payable to YA II PN, Ltd.   -    (225,000)
Proceeds of issuance of 2016 note payable to YA II PN, Ltd. net of $60,000 commitment fee   -    540,000 
Principal payments on 2016 note payable to YA II PN, Ltd.   (150,000)   - 
Net cash flows provided by (used by) financing activities   (17,500)   315,000 
           
NET DECREASE IN CASH   (224,544)   (2,806)
           
CASH BEGINNING OF PERIOD   229,228    324,703 
           
CASH END OF PERIOD  $4,684   $321,897 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
           
Income taxes paid  $-   $300 
           
Interest paid  $14,103   $8,996 
           
NON - CASH FINANCING ACTIVITIES:          
           
Issuance of Common Stock to two Executive Officers in payment of salaries payable  $76,000   $- 
           
Issuance of Common Stock to Directors in payment of accounts payable ($75,000) and prepaid fees for services for the quarter ended June 30, 2017 ($37,500)  $112,500   $- 
           
Issuance of Common Stock to Stockholders Relations Agent in payment of accounts payable ($30,000) and prepaid fees for the period April 1, 2017 to December 31, 2017 ($22,500)  $52,500   $- 

  

See accompanying notes to consolidated financial statements.

 

 4 
 

 

OMAGINE, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

Nature of the Business

 

Omagine, Inc. (“OMAG”) is a holding company incorporated in Delaware in October 2004 which operates through its wholly owned subsidiary, Journey of Light, Inc., a New York corporation (“JOL”) and its 60% owned subsidiary Omagine LLC, a limited liability company incorporated under the laws of the Sultanate of Oman (“LLC”). OMAG, JOL and LLC are collectively referred to herein as the “Company”. JOL was acquired by OMAG in October 2005. LLC is the Omani real estate development company organized by OMAG to do business in Oman.

 

The Company is focused on entertainment, hospitality and real-estate development opportunities in the Middle East and North Africa (the “MENA Region”). On October 2, 2014, LLC signed a Development Agreement with the Government of Oman (the “Government”) for the development of the Omagine Project. On July 2, 2015, a usufruct over one million square meters of beachfront land (the “Land Rights”) was registered in LLC’s name with the Government. On November 29, 2015, LLC executed a Murabaha Facility Agreement with Masraf Al Rayan Bank (Qatar) for a $25 million loan to finance the first phase of the Omagine Project consisting of design, development and initial construction activities. The loan, which is subject to satisfaction of certain conditions precedent to closing, would bear interest at an annual rate equal to the 12 month LIBOR rate plus 1% and would be payable one year from the closing date. One condition precedent to closing is that the loan be secured by a $25,000,000 cash deposit in an LLC account at the Qatari bank. Such security deposit was expected to be provided by CCC pursuant to the terms of the Shareholder Agreement but this did not occur and it is presently unlikely that this loan facility will be utilized. Contingent upon the closing of such loan and/or contingent upon the conclusion of final discussions with several potential LLC investors, including one such investor with whom LLC has a preliminary written investment agreement, commencement of these first phase activities is expected to begin promptly thereafter. (See Note 9 – “Omagine Project”).

 

Interim Financial Statements

 

The consolidated balance sheet for the Company at the end of the preceding fiscal year has been derived from the audited balance sheet and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016 and is presented herein for comparative purposes. All other financial statements are unaudited. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for all periods presented, have been made. The results of operations for the interim periods presented are not necessarily indicative of the operating results for the respective full years.

Certain footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) have been omitted in accordance with the published rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on April 14, 2017.

 

Summary of Significant Accounting Policies

 

Principles of Consolidation - The consolidated financial statements include the accounts of OMAG, JOL and LLC. LLC is an Omani limited liability company organized under the laws of the Sultanate of Oman. All inter-company transactions have been eliminated in consolidation.

 

Financial Instruments - Financial instruments include cash, convertible notes payable and accrued interest, notes payable and accrued interest, accounts payable, accrued officers’ payroll and accrued expenses and other current liabilities. The amounts reported for financial instruments are considered to be reasonable approximations of their fair values, based on market information available to management.

 

Cash and Cash Equivalents – The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. At March 31, 2017 and December 31, 2016, cash included approximately $1,600 and $2,100 respectively in an Oman bank account not covered by FDIC insurance.

 

Inventory – Inventory is stated at cost. At March 31, 2017 and December 31, 2016, inventory consists only of the land under development acquired on July 2, 2015 (which was costed at the fair value of the property at the date of acquisition). (See: Note 2 – “Inventory and Property”).

 

Property, Plant and Equipment - Property, plant and equipment (“PP&E”) are stated at cost. PP&E consists of land under development which is held for investment; furniture and fixtures; and office machinery and equipment. PP&E (including buildings and structures after they are completed and put into service) are depreciated on a straight-line basis over their respective useful service lives. (See: Note 2 – “Inventory and Property”).

 

 5 
 

 

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and the estimated fair value.

 

Stockholders’ Equity - Stockholders’ equity consists of common stock, capital in excess of par value, deficit, and non-controlling interests in LLC. The Company’s consolidated financial statements for the year ended December 31, 2015 reflect an increase of $718,614,000 in stockholders’ equity resulting from LLC’s July 2, 2015 acquisition of the Land Rights (a $431,168,400 increase in OMAG stockholders’ equity and a $287,445,600 increase in non-controlling interests in LLC). (See: Note 2 – “Inventory and Property”).

 

Estimates and Uncertainties - The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results as determined at a later date could differ from those estimates. In recording $718,614,000 in the accompanying consolidated financial statements for the year ended December 31, 2015 as the value of the non-cash consideration received by LLC as Land Rights, management relied to a great extent upon the written opinions of three expert valuation firms engaged by LLC to value such Land Rights. Furthermore, in allocating such Land Value to inventory and land under development, management relied to a great extent upon the written opinion of an expert independent accounting firm engaged by LLC to advise it on the proper accounting to record the Land Value in LLC’s financial statements. Both LLC’s independent auditor and the Company’s independent auditor are in agreement with and have consented to the accounting indicated in the accompanying consolidated financial statements for the year ended December 31, 2015. (See: Note 2 – “Inventory and Property”).

 

Revenue Recognition - The Company follows the guidelines of SEC Staff Accounting Bulletin No. 101, ”Revenue Recognition in Financial Statements” (SAB101). LLC signed a development agreement for the Omagine Project with the Government of Oman in October 2014, and will recognize revenue ratably over the development period of the Omagine Project measured by methods appropriate to the services or products provided.

 

Income Taxes - OMAG and JOL are subject to United States (“U.S.”) income taxes at both the federal and state level and LLC is subject to income taxes in Oman. Separate state income tax returns are filed with each state in the U.S. in which OMAG or any subsidiary of OMAG is incorporated or qualified as a foreign corporation. LLC files an income tax return in Oman. Other than with respect to LLC, the Company is not presently subject to income taxes in any foreign country. The Company reports interest and penalties as income tax expense. Deferred tax assets and liabilities are recognized based on differences between the book and tax bases of assets and liabilities using presently enacted income tax rates. The Company establishes a provision for U.S. income taxes by applying the provisions of the applicable enacted tax laws to taxable income, if any, for the relevant period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

Stock-based Compensation - Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification 718, “Compensation – Stock Compensation” (“ASC 718”). For stock options granted, OMAG has recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For such stock option awards, OMAG has recognized compensation expense using a straight-line amortization method over the requisite service period. ASC 718 requires that stock-based compensation expense be based on awards that are ultimately expected to vest. Stock option expense for the three months ended March 31, 2017 and 2016 were $135 and $135, respectively. (See Note 8).

 

Earnings (Loss) Per Share - Basic earnings (loss) per share of OMAG’s $0.001 par value common stock (“Common Stock”) is based upon the weighted-average number of shares of Common Stock (“Common Shares”) outstanding during the relevant period. Diluted earnings (loss) per share is based upon the weighted-average number of Common Shares and dilutive securities (stock options, warrants, stock appreciation rights and convertible notes) outstanding during the relevant period. Dilutive securities having an anti-dilutive effect on diluted earnings (loss) per share are excluded from the calculation.

 

 6 
 

 

For the three month period ended March 31, 2017 and 2016, the Common Shares underlying the following dilutive securities were excluded from the calculation of diluted shares outstanding as the effect of their inclusion would be anti-dilutive:

 

   2017   2016 
         
Convertible Notes   373,728    159,913 
Stock Options   3,109,000    3,273,000 
Stock Appreciation Rights   1,455,000    1,455,000 
Warrants   6,572,124    6,771,521 
Total Common Shares Issuable   11,509,852    11,659,434 

 

Non-controlling Interests in Omagine LLC - In May 2011, OMAG, JOL and three new investors (the “New Investors”) entered into a shareholders’ agreement (the “Shareholder Agreement”) pursuant to which OMAG’s 100% ownership of LLC was reduced to 60%.

 

The New Investors were:

 

i. The Office of Royal Court Affairs (“RCA”), an Omani organization, and
   
ii.

Two subsidiaries of Consolidated Contractors International Company, SAL (“CCIC”). CCIC is a 65 year old Lebanese multi-national company headquartered in Athens, Greece having worldwide, and operating subsidiaries in among other places, every country in the Middle East. The two CCIC subsidiaries which are LLC shareholders are:

   
  1. Consolidated Contracting Company S.A. (“CCC-Panama”), a wholly owned subsidiary of CCIC and is its investment arm, and
     
  2. Consolidated Contractors (Oman) Company LLC, CCIC’s operating subsidiary in Oman which is a construction company.

 

As of the date hereof, the shareholders of LLC and their associated ownership percentages as registered with the Government of Oman are as follows:

 

LLC Shareholder   Percent  
OMAG*     60 %
RCA     25 %
CCC-Panama     10 %
CCC-Oman     5 %
Total:     100 %

 

* In April 2017, OMAG exercised its options to purchase all of the LLC shares owned by both CCC-Oman and CCC-Panama. See Note 11 – Subsequent Events.

 

Recent Accounting Pronouncements

 

On August 27, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date of issuance of the entity's financial statements (or within one year after the date on which the financial statements are available to be issued, when applicable). Further, an entity must provide certain disclosures if there is “substantial doubt about the entity's ability to continue as a going concern.” The FASB believes that requiring management to perform the assessment will enhance the timeliness, clarity and consistency of related disclosures and improve convergence with IFRS (which emphasize management's responsibility for performing the going concern assessment). However, the time horizon for the assessment (look-forward period) and the disclosure thresholds under U.S. GAAP and IFRS will continue to differ. This ASU 2014-15 is effective for annual periods ending after December 16, 2016, and interim periods thereafter. The Company does not believe that this pronouncement has had or will have a material impact on our financial statement disclosures.

 

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Certain other accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and therefore have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

 

NOTE 2 – INVENTORY AND PROPERTY

 

The Company’s consolidated financial statements for the three months ended March 31, 2017 reflect $718,614,000 of land under development which the Company has allocated to inventory ($490,813,363) and property ($227,800,637). This $718,614,000 of land under development was purchased by LLC on July 2, 2015 pursuant to the terms of the Shareholder Agreement whereby an LLC shareholder agreed to transfer the Land Rights over one million square meters of beachfront land (the “Omagine Site”) to LLC in exchange for the issuance to such shareholder of 663,750 Omagine LLC shares (the “LLC Shares”). Since the Land Rights represented a non-cash payment for the LLC Shares, it was necessary to value the Land Rights.

 

Three expert real estate valuation companies were engaged by LLC to independently value the Land Rights in accordance with the professional standards specified by the Royal Institution of Chartered Surveyors (“RICS”) and International Financial Reporting Standards (“IFRS”). The average of the three Land Rights valuations was 276,666,667 Omani Rials ($718,614,000).

 

LLC engaged the services of PricewaterhouseCoopers LLP (“PwC”) as its IFRS accounting consultant to definitively determine the correct method of recording the $718,614,000 average value of its Land Rights in its IFRS compliant financial statements. After receiving PwC’s written opinion, LLC then consulted with its independent auditor, Deloitte & Touche (M.E.) & Co. LLC (“Deloitte”) with respect to the matter and received Deloitte’s written opinion agreeing with the PwC opinion. Both PwC and Deloitte independently concluded that the Land Rights should be recorded as capital, work-in-process (inventory) and land on LLC’s financial statements. With respect to the Company’s consolidated financial statements, the Company’s independent auditor in the U.S. has likewise concurred that, pursuant to US GAAP, the Land Rights should also be recorded as capital, inventory and land.

 

In determining the allocations to inventory and to land, LLC followed the advice of Deloitte by computing the percentage (x) calculated by dividing (y) the area of the land LLC definitively knew it intended to sell, by (z) the total area of land constituting the Omagine Site, and then multiplying that percentage (x) by $718,614,000 to get the correct number (N) for inventory. The correct number for land was then calculated by subtracting N from $718,614,000. Using its detailed internal financial model, management calculated (x) to be equal to 68.3%, thereby making the inventory number $490,813,363 and the land number $227,800,637. In its consolidated financial statements therefore, the Company has divided the Land Rights between land under development which is held for sale (inventory) and land under development which is held for investment (PP&E). These percentage allocations may be modified over time as the more precise land uses become apparent during and after the master planning and construction processes.

 

As more fully described in Note 1 and in Note 9 (See: “the Omagine LLC Shareholder Agreement section of Note 9), financing for the Omagine Project has not yet been secured. If such financing is not obtained, LLC may not be able to complete the Omagine Project and may not be able to recover the $718,614,000 value of the land under development described above.

 

 8 
 

 

NOTE 3 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consist of:

 

   March 31,   December 31, 
   2017   2016 
         
Prepaid rent (New York office)  $-   $1,859 
           
Prepaid rent (Muscat, Oman office)   8,970    - 
           
Common Stock issued to three independent directors for services to be rendered from April 1, 2017 to June 30, 2017   37,500    - 
           
Common Stock issued to investor relations vendor for services to be rendered from April 1, 2017 to December 31, 2017   22,500    - 
           
Total  $68,970   $1,859 

 

NOTE 4 – CONVERTIBLE NOTES PAYABLE AND ACCRUED INTEREST

 

Convertible notes payable and accrued interest thereon consist of:

 

   March 31,   December 31, 
   2017   2016 
         
Due to a director of OMAG, interest at 10% per annum, due on demand, convertible into Common Stock at a conversion price of $2.50 per Common Share:        
           
Principal  $150,000   $150,000 
           
Accrued Interest   97,466    93,768 
           
Due to investors, interest at 15% per annum, due on demand, convertible into Common Stock at a conversion price of $2.50 per Common Share:          
           
Principal   35,000    35,000 
           
Accrued Interest   42,460    41,165 
           
Due to investors, interest at 10% per annum, due on demand, convertible into Common Stock at a conversion price of $2.50 per Common Share:          
           
Principal   50,000    50,000 
           
Accrued Interest   19,253    18,021 
           
Due to entity owned by two directors of OMAG, interest at 5% per annum, due on December 24, 2016, convertible into Common Stock at a conversion price of $0.75 per Common Share:          
           
Principal   100,000    100,000 
           
Accrued Interest   3,014    1,781 
           
Due to an investor, interest at 5% per annum, due on April 13, 2017, convertible into Common Stock at a conversion price of $0.65 per Common Share:          
           
Principal   50,000    50,000 
           
Unamortized Debt Discount   (1,755)   (13,904)
           
Accrued Interest   1,158    541 
Total  $546,596   $526,372 

 

 9 
 

 

NOTE 5 – NOTES PAYABLE AND ACCRUED INTEREST – YA II PN, LTD. (p/k/a YA GLOBAL MASTER SPV, LTD.)

 

In July 2013, OMAG borrowed $200,000 from YA II PN, Ltd. (“YA”) (p/k/a YA Global Master SPV, Ltd.) via an unsecured loan (the “2013 YA Loan”) and on April 23, 2014 OMAG paid the 2013 YA Loan balance and accrued interest thereon due at April 23, 2014 in full and borrowed an additional $500,000 from YA via a second unsecured loan (the “2014 YA Loan”) and on April 22, 2015 OMAG paid the 2014 YA Loan balance and the accrued interest thereon in full. On May 20, 2015, OMAG borrowed an additional $500,000 from YA via a third unsecured loan (the “2015 YA Loan”). On March 15, 2016 OMAG paid the 2015 Loan balance and the accrued interest thereon in full and borrowed an additional $600,000 from YA via a fourth unsecured loan (the “March 2016 YA Loan”) and on June 22, 2016, OMAG borrowed an additional $400,000 from YA via a fifth unsecured loan (the “June 2016 YA Loan”). OMAG paid both the March 2016 Loan and the June 2016 Loan balances and accrued interest thereon in full. On December 7, 2016 OMAG borrowed an additional $750,000 from YA via a sixth unsecured loan (the “December 2016 YA Loan”).

 

Notes payable and accrued interest thereon due to YA consist of:

 

   March 31,   December 31, 
   2017   2016 
         
December 2016 YA Loan - interest at 10% per annum, due in 12 monthly installments of principal ($75,000 monthly January 2017 to March 2017, $65,000 monthly April 2017 to June 2017, $55,000 monthly July 2017 to October 2017, $50,000 in November 2017 and $60,000 in December 2017.)   600,000    750,000 
Less:  Unamortized debt discount at March 31, 2017 and December 31, 2016   (50,000)   (68,750)
Principal, net   550,000    681,250 
Accrued interest   8,055    5,137 
Total  $558,055   $686,387 

 

NOTE 6 – NOTE PAYABLE – ST. GEORGE INVESTMENTS LLC

 

On November 14, 2016, the Company entered into an interest free six month Convertible Promissory Note with an accredited investor for the principal amount of $185,000 due on May 13, 2017, convertible into the Company’s Common Stock only in the case of an Event of Default at a Conversion Price equal to 60% of the three lowest daily Volume Weighted Average Prices for the Company’s Common Stock during the twenty trading days immediately preceding the Conversion. The Company may prepay the Note in whole or in part at any time without penalty. After deduction of a $30,000 original issue discount (OID) and legal fees of $5,000, the Company received net proceeds of $150,000 on November 16, 2016. (See: Exhibits 10.42 and 10.43, the Note Purchase Agreement and the Securities Purchase Agreement). See Note 11 – Subsequent Events.

 

NOTE 7 – COMMON STOCK

 

With respect to the issuances of the Common Shares listed below:

 

  1. see Note 9 under ”Equity Finance Agreements” with respect to sales of Common Shares made to YA II PN, Ltd. (p/n/a YA Global Master SPV, Ltd.) (”YA”) pursuant to the Standby Equity Distribution Agreement (“2014 SEDA”).  
     
  2. where issuances of restricted Common Shares occurred at non-discounted valuations, it is so noted and all such non-discounted valuations were based on the closing price of a Common Share on the relevant date.
     
  3. where issuances of restricted Common Shares occurred at discounted valuations, it is so noted and all such discounted valuations were calculated using the Finnerty Method based on the closing price of a Common Share on the relevant date less a restricted stock discount.
     
  4. where issuances of restricted Common Shares occurred at agreed upon negotiated prices, the sale proceeds or value of services rendered are so noted.

 

On January 4, 2017, OMAG contributed 123,782 restricted Common Shares at a non-discounted valuation of $76,250 to all eligible employees of Omagine Inc. 401(k) Plan.

 

On January 4, 2017, OMAG issued 81,169 restricted Common Shares at a non-discounted valuation of $50,000 to each of the Corporation’s three independent directors based on the $0.616 closing price of the Corporation’s Common Stock on December 30, 2016 for the 50% non-cash payment of the $100,000 annual retainer due them.

 

On January 13, 2017, OMAG sold 18,051 restricted Common Shares to an accredited investor for proceeds of $10,000.

 

 10 
 

 

On January 20, 2017, OMAG sold 25,000 restricted Common Shares to an accredited investor for proceeds of $12,500.

 

On January 25, 2017, OMAG sold 20,000 restricted Common Shares to an accredited investor for proceeds of $10,000.

 

On February 1, 2017, the President of the Company purchased 100,000 restricted Common Shares based on the $0.62 closing price of OMAG’s Common Stock on January 31, 2017 minus the Finnerty discount of 18% for proceeds of $51,000.

 

On February 2, 2017, the three independent Company directors each purchased 94,340 restricted Common Shares and the Company’s Vice President purchased 47,170 restricted Common Shares based on the $0.6414 closing price of OMAG’s Common Shares on February 1, 2017 minus the Finnerty discount of 18% for aggregate proceeds of $175,000.

 

On February 21, 2017, OMAG sold 200,000 restricted Common Shares to a non-U.S. person who is an accredited investor for proceeds of $100,000.

 

On March 31, 2017, the Company issued 93,750 restricted shares of Common Stock to its investor relations vendor as payment in full for $37,500 of services rendered for the period January 1, 2016 through March 31, 2017, and issued an additional 56,250 restricted shares of Common Stock to the same vendor as payment in full for $22,500 of services to be rendered for the period April 1, 2017 through December 31, 2017.

 

On January 16, 2016, OMAG contributed an aggregate of 61,001 restricted Common Shares at the non-discounted valuation of $76,250 to all eligible employees of the Omagine, Inc. 401(k) Plan.

 

On January 16, 2016, OMAG issued 38,462 restricted Common Shares to each of three independent directors for services to be rendered from January 1, 2016 to December 31, 2016 for an aggregate value of $150,000.

 

On April 5, 2016, the president of the Company purchased 56,000 restricted Common Shares based on the $0.90 closing price of OMAG’s Common Stock on such date of purchase. The total purchase price of $50,400 was paid to the Company by the $50,400 reduction in the accrued salary and expenses owed by the Company to the president.

 

On April 6, 2016, the three independent directors of the Company each purchased 27,778 restricted Common Shares based on the $0.90 closing price of OMAG’s Common Stock on April 5, 2016 for an aggregate of 83,334 Common Shares purchased. The aggregate purchase price of $75,000 was paid to the Company by the $25,000 reduction in accrued director’s fees owed by the Company to each of the independent directors.

 

On April 12, 2016, the Company sold 700,000 restricted Common Shares to a non-U.S. person who is an accredited investor for proceeds of $504,000.

 

On April 22, 2016, the holders of a Convertible Note converted $30,984 of principal and accrued interest into 24,207 shares of Common Stock.

 

On May 17, 2016, an Independent Director exercised Stock Options at $0.85 to purchase 2,000 shares of Common Stock.

 

On June 15, 2016, pursuant to the SEDA, OMAG sold 31,289 Common Shares to YA for proceeds of $25,000.

 

On July 29, 2016, OMAG sold 10,684 restricted Common shares to an accredited investor for proceeds of $10,000.

 

On August 19, 2016, OMAG sold 13,245 restricted Common Shares to an accredited investor for proceeds of $10,000.

 

On August 30, 2016, OMAG sold 11,312 restricted Common Shares to an accredited investor for proceeds of $10,000.

 

On September 16, 2016, OMAG sold 34,247 restricted Common Shares to an accredited investor for proceeds of $25,000.

 

On September 19, 2016 OMAG paid a consultant 30,340 restricted Common Shares at a value of $25,000.

 

 11 
 

 

On September 21, 2016, OMAG issued 161,290 restricted Common Shares to YA in satisfaction of a $150,000 commitment fee due in connection with the extension of the 2014 SEDA to February 1, 2019.

 

On October 14, 2016, the Company entered into a Convertible Promissory Note with an accredited investor for the principal amount of $50,000 with interest at 5% per annum, due on April 14, 2017 and convertible into the Company’s Common Stock at a conversion price of $0.65 per Common Share.

 

On October 17, 2016, the Company entered into an Interest Free Promissory Note with an accredited investor for the principal amount of $75,000, due on December 13, 2016, and in lieu of any interest due and payable on the principal amount of the Note, the Company issued to the Note Holder 150,000 Common Stock Purchase Warrants exercisable at the greater of (a) $0.50, or (b) 80% of the Market Price on the Trading Day immediately preceding the relevant Exercise Date. On December 5, 2016, the $75,000 note was satisfied (see sixth succeeding paragraph below).

 

On November 1, 2016, OMAG sold 20,000 restricted Common Shares to an accredited investor for proceeds of $10,000 and also sold 10,000 restricted Common Shares to an independent director who is also an accredited investor for proceeds of $5,000.

 

On November 4, 2016, OMAG sold 10,000 restricted Common Shares to an accredited investor for proceeds of $5,000.

 

On November 8, 2016, OMAG sold an aggregate of 20,000 restricted Common Shares to two accredited investors for aggregate proceeds of 10,000.

 

On November 14, 2016, OMAG sold 10,000 restricted Common Shares to an accredited investor for proceeds of $5,000.

 

On November 14, 2016, the Company entered into an interest free Convertible Promissory Note with St. George Investments LLC, an accredited investor, for the principal amount of $185,000 due on May 15, 2017, six months from the funding date of November 16, 2016, convertible into the Company’s Common Stock only in the case of non-payment or in the Event of Default at a Conversion Price equal to 60% of the three lowest daily Volume Weighted Average Prices for the Company’s Common Stock during the twenty trading days immediately preceding the Conversion. The Company may prepay the Note in whole or in part at any time without penalty. After deduction of a $30,000 original issue discount (OID) and legal fees of $5,000, the Company received net proceeds of $150,000 on November 16, 2016.

 

On December 5, 2016, OMAG sold 300,000 restricted Common Shares to an accredited investor for proceeds of $150,000 which was paid to the Company by the cancellation and payment in full of the Company’s $75,000 Promissory Note dated October 17, 2016 (see sixth preceding paragraph above) and the remaining $75,000 of the purchase price was paid to the Company in cash.

 

On January 5, 2015, OMAG contributed an aggregate of 36,483 restricted Common Shares at the discounted valuation of $76,250 to all eligible employees of the Omagine, Inc. 401(k) Plan.

 

On February 23, 2015, OMAG paid a consultant 5,000 restricted Common Shares at the discounted valuation of $9,450.

 

On March 26, 2015, OMAG sold 6,281 restricted Common Shares to an accredited investor for proceeds of $10,000.

 

On March 26, 2015, OMAG sold 200,000 restricted Common Shares to a non-U.S. person who is an accredited investor for proceeds of $210,000.

 

On May 16, 2015, OMAG sold 100,000 restricted Common Shares to an officer and director for proceeds of $120,000.

 

On June 29, 2015, the Non-US investor (described below in connection with a June 24, 2014 transaction) exercised 158,228 Tempest Warrants at an exercise price of $1.58 for proceeds of $250,000.

 

On June 29, 2015, OMAG paid a finder’s fee to a non-U.S. Finder in connection with the aforementioned sale of 158,228 restricted Common Shares. Such finder’s fee was satisfied by issuing such non-U.S. Finder 7,911 restricted Common Shares valued at $12,500.

 

On June 30, 2015, a former director exercised 2,000 stock options for proceeds of $1,020.

 

 12 
 

 

On September 1, 2015, two new Directors were each issued 25,000 restricted Common Shares at a value of $50,000 each for services to be rendered from September 1 to December 31, 2015.

 

On September 3, 2015, pursuant to the SEDA, OMAG sold 17,696 Common Shares to YA for proceeds of $25,000.

 

On September 14, 2015, OMAG sold 10,000 restricted Common Shares to an accredited investor for proceeds of $14,700.

 

On October 8, 2015, 2,375 Tempest Warrants were transferred to an affiliate of the Non-U.S. Investor, a “Non-U.S. Affiliate”. On October 8, 2015, such Non-U.S. Affiliate exercised such 2,375 Tempest Warrants at an exercise price of $1.28 per Common Share for proceeds to OMAG of $3,040.

 

On October 26, 2015, OMAG sold an aggregate of 1,200,000 restricted Common Shares to three non-U.S. persons who are accredited investors (500,000 restricted Common Shares each to two investors and 200,000 restricted Common Shares to one investor) for aggregate proceeds to OMAG of $1,200,000.

 

On November 16, 2015, OMAG paid a finder’s fee to a non-U.S. Finder in connection with the October 26, 2015 aforementioned sale of 1,200,000 restricted Common Shares. Such finder’s fee was satisfied by issuing such non-U.S. Finder 33,334 restricted Common Shares valued at the discounted valuation of $60,000.

 

On November 16, 2015, OMAG sold 20,886 restricted Common Shares to an accredited investor for proceeds to OMAG of $25,000.

 

NOTE 8 – STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND WARRANTS

 

Stock Options/Stock Appreciation Rights

 

OMAG’s shareholders approved the reservation by OMAG of 2,500,000 Common Shares for issuance under the 2003 Omagine, Inc. Stock Option Plan (the “2003 Plan”). The 2003 Plan expired on August 31, 2013. On March 6, 2014, the Board of Directors approved the adoption of the 2014 Omagine, Inc. Stock Option Plan (the “2014 Plan”).

 

Both the 2003 Plan and the 2014 Plan are designed to attract, retain and motivate employees, directors, consultants and other professional advisors of OMAG and its subsidiaries (collectively, the “Recipients”) by giving such Recipients the opportunity to acquire stock ownership in OMAG through the issuance of stock options (“Stock Options”) to purchase Common Shares.

 

OMAG has registered for resale the 2.5 million Common Shares reserved for issuance under the 2003 Plan by filing a registration statement with the SEC on Form S-8. At March 31, 2017, there were 2,119,000 unexpired Stock Options issued but unexercised under the 2003 Plan and all such Stock Options remain valid until the earlier of their exercise date or expiration date.

 

Pursuant to the 2014 Plan, 3,000,000 Common Shares were reserved for issuance. The 2014 Plan was amended to increase the reservation of 3,000,000 Common Shares for issuance to 5,000,000 Common Shares and to permit issuance of stock appreciation rights (“The Amended 2014 Plan”). OMAG intends to seek its shareholders’ ratification of the adoption by OMAG of the Amended 2014 Plan. At March 31, 2017, there were 990,000 unexpired Stock Options and 1,455,000 Stock Appreciation Rights (“SARs”) issued but unexercised under the Amended 2014 Plan.

 

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A summary of Stock Option and SARs activity for the periods ended March 31, 2017 and 2016 pursuant to both the 2003 Plan and the Amended 2014 Plan is as follows:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (in years)   Aggregate Intrinsic Value 
Outstanding at January 1, 2016   4,728,000   $1.98    1.41   $26,240 
Outstanding March 31, 2016   4,728,000   $1.98    1.16   $560 
                     
Exercisable at March 31, 2016   4,728,000   $1.98    1.16   $560 
                     
Outstanding at January 1, 2017   4,724,000   $1.98    1.02   $- 
Expired Q1 2017   (160,000)  $1.25    -   - 
Outstanding March 31, 2017   4,564,000   $2.00    0.80   $- 
                     
Exercisable at March 31, 2017   4,564,000   $2.00    0.80   $- 

 

Of the 4,564,000 Stock Options outstanding at March 31, 2017, 2,915,000 of such Stock Options were issued by OMAG in January 2012 and December 2014 as “Strategic Options” to officers, directors and consultants of OMAG whose continued service was deemed by the Board of Directors to be particularly crucial to attaining LLC’s then strategic goal of signing the Development Agreement (“DA”) with the Government of Oman and in recognition of those efforts during 2014 and beyond. The Strategic Options are fully vested, provide for a cashless exercise feature and currently expire on December 31, 2017; 1,965,000 of the Strategic Options are exercisable at $1.70 and 950,000 are exercisable at $2.55. To continue to incentivize the retention and sustained service to the Company of its mission-critical employees and consultants, the expiration date of the 1,965,000 Strategic Options issued in January 2012 was extended by OMAG in December 2012 to December 31, 2013 (the “First Extension“) and in December 2013 to December 31, 2014 (the “Second Extension”) and in December 2014 to December 31, 2015 (the “Third Extension”) and on August 12, 2015 to December 31, 2016 (the “Fourth Extension”) and on December 9, 2016 to December 31, 2017 (the “Fifth Extension”). The December 31, 2015 expiration date of the 950,000 Strategic Options issued December 29, 2014 was extended on August 12, 2015 to December 31, 2016 (“First Extension”) and on December 9, 2016 to December 31, 2017 (the “Second Extension”).

 

Of the 2,915,000 Strategic Options, an aggregate of 1,685,000 were granted to OMAG’s three officers, an aggregate of 125,000 were granted to OMAG’s independent directors and 1,000,000 were granted to the Deputy Managing Director of LLC who, pursuant to a March 2007 consulting agreement expiring on December 31, 2017, is also a consultant to the Company. 

 

Of the 1,455,000 Stock Appreciation Rights, an aggregate of 750,000 were granted to three officers of OMAG, 15,000 were granted to one independent director and 675,000 were granted to the Deputy Managing Director of LLC.

 

On August 12, 2015, the expiration date of the 1,965,000 Strategic Options issued in January 2012 was extended from December 31, 2015 to December 31, 2016 (the “Fourth Extension”). The $915,493 estimated fair value of the Fourth Extension was calculated using the Black Scholes option pricing model and the following assumptions: (i) $1.91 share price, (ii) 507 day term, (iii) 147% expected volatility, (iv) 0.32% (507 day term) risk free interest rate and was expensed in full in the quarterly period ended September 30, 2015.

 

On August 12, 2015, the expiration date of the 950,000 Strategic Options issued in December of 2014 was extended from December 31, 2015 to December 31, 2016 (the “First Extension”). The $541,215 estimated fair value of the First Extension was calculated using the Black Scholes option pricing model and the following assumptions: (i) $1.91 share price, (ii) 507 day term, (iii) 147% expected volatility, (iv) 0.32% (507 day term) risk free interest rate and was expensed in full in the quarterly period ended September 30, 2015.

 

On June 30, 2015, a former OMAG director exercised 2,000 stock options at $0.51 per share.

 

On August 31, 2015, OMAG granted an aggregate of 1,455,000 Stock Appreciation Rights (“SARs”) to six persons exercisable at $2.00 per share and expiring on December 31, 2017. Of the 1,455,000 SARs, an aggregate of 750,000 were granted to three officers of OMAG, 15,000 were granted to one independent director and 675,000 were granted to the Deputy Managing Director of LLC. The $1,654,481 estimated fair value of the SARs was calculated using the Black Scholes option pricing model and the following assumptions: (i) $1.60 share price, (ii) 854 day term, (iii) 147% expected volatility, (iv) 0.28% (854 day term) risk free interest rate and was expensed in full in the quarterly period ended September 30, 2015.

 

On December 9, 2016, the expiration date of the 1,965,000 Strategic Options issued in January of 2012 was extended from December 31, 2016 to December 31, 2017 (the “Fifth Extension”). The $232,263 estimated value of the Fifth Extension was calculated using the Black Scholes option pricing model and the following assumptions: (i) $0.78 share price, (ii) 387 day term, (iii) 91.45% expected volatility, (iv) 0.85% (387 day term) risk free interest rate and was expensed in full in the quarterly period ended December 31, 2016.

 

On December 9, 2016, the expiration date of the 950,000 Strategic options issued in December 31, 2014 from December 31, 2016 to December 31, 2017 (the “Second Extension”). The $59,660 estimated value of the Second Extension was calculated using the Black Scholes option pricing model and the following assumptions: (i) $0.78 share price, (ii) 387 day term, (iii) 91.45% expected volatility, (iv) 0.85% (387 day term) risk free interest rate and was expensed in full in the quarterly period ended December 31, 2016.

 

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Issued and outstanding Stock Options and SAR’s (all non-qualified) as of March 31, 2017 are as follows:

 

Year Granted   Number Outstanding   Number Exercisable   Exercise Price   Expiration Date
2008    150,000    150,000   $2.60   September 23, 2018
2012    1,965,000    1,965,000   $1.70   December 31, 2017
2012    2,000    2,000   $1.70   April 12, 2017
2013    2,000    2,000   $1.38   January 14, 2018
2014    40,000    40,000   $1.80     March 27, 2019
2014    950,000    950,000   $2.55   December 31, 2017
2015    1,455,000    1,455,000   $2.00   December 31, 2017
Totals    4,564,000    4,564,000         

 

A summary of information about Stock Options and SARs outstanding at March 31, 2017 is as follows:

 

   Stock Options Outstanding   Exercisable 
Range of Exercise Prices   Number of Shares    Weighted Average Exercise Price    Weighted Average Remaining Contractual Term (in years)    Number of Shares    Weighted Average Exercise Price 
$ 1.01 - $2.00   3,464,000    1.83    0.78    3,464,000    1.83 
$ 2.01 - $3.00   1,100,000    2.56    0.86    1,100,000    2.56 
Totals   4,564,000   $2.00    1.02    4,564,000   $2.00 

 

As of March 31, 2017, there was $405 of unrecognized compensation costs relating to unexpired Stock Options, that is expected to be recognized in 2017.

 

Warrants

 

As of March 31, 2017, OMAG had 6,572,124 Common Stock purchase warrants (“Warrants”) issued and outstanding. The Warrants do not contain any price protection provisions that would require them to be classified as liabilities (subject to re-measurement at fair value each time a balance sheet is presented) rather than presented as a component of stockholders’ equity.

 

The Tempest Warrants

 

On June 24, 2014, in connection with the sale of 362,308 restricted Common Shares to an investor, OMAG issued 1,000,000 Warrants to such investor, each of which were exercisable for the purchase of one restricted Common Share at a per Common Share exercise price equal to the greater of: (a) $1.00 per Common Share, or (b) 80% of the closing sale price for a Common Share on the trading day immediately preceding the relevant exercise date (the “Tempest Warrants”). Prior to their expiration, a total of 650,603 Tempest Warrants were exercised for aggregate proceeds to OMAG of $916,540. The remaining 349,397 Tempest Warrants expired unexercised on June 23, 2016. As of the date of this report there were no Tempest Warrants issued or outstanding.

 

Rural Concepts Warrants

 

On October 14, 2016, in connection with a non-interest bearing convertible promissory note in favor of Rural Concepts LLC, a British corporation (“Rural Concepts”), OMAG issued 150,000 Warrants to Rural Concepts, each of which is exercisable for the purchase of one restricted Common Share at a per Common Share purchase price equal to the greater of (a) $0.50 per Common Share, or (b) 80% of the Market Price on the Trading Day immediately preceding the relevant Exercise Date (the “Rural Concepts Warrants”). The Warrants expire on December 31, 2017.

 

The Strategic Warrants

 

OMAG has 6,422,124 Warrants outstanding, 3,211,062 of which are exercisable for the purchase of one Common Share at a per Common Share exercise price of $5.00 and 3,211,062 of which are exercisable for the purchase of one Common Share at a per Common Share exercise price of $10.00 (collectively, the “Strategic Warrants”).

 

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OMAG filed a post-effective amendment to its registration statement on Form S-1 (Commission File No. 333-183852) whereby the Strategic Warrants and the 6,422,124 Common Shares underlying the Strategic Warrants were registered by OMAG (the “Warrant Registration”). The Warrant Registration was declared effective by the SEC and its effective status expired. OMAG filed another post-effective amendment to the Warrant Registration on February 11, 2015 which was declared effective by the SEC on February 13, 2015 and its effective status expired. OMAG filed another post-effective amendment to the Warrant Registration on January 14, 2016 which was declared effective by the SEC on January 25, 2016 (the “Updated Warrant Registration”). As of the date hereof, the effective status of the Updated Warrant Registration expired and the Company intends to file a post-effective amendment to such Registration Statement with the SEC in order to again register the Common Shares issuable upon the exercise of the Strategic Warrants. Neither the exercise prices of the Strategic Warrants nor the number of Common Shares issuable upon exercise of the Strategic Warrants are subject to adjustment in the event of a stock split, combination or subdivision of the Common Stock, or a dividend, reclassification, reorganization, or spinoff.

 

On August 18, 2014, pursuant to a resolution of the Board of Directors, the expiration date for all Strategic Warrants was extended for a third time to June 30, 2015 and again on January 5, 2015, pursuant to a resolution of the Board of Directors, the expiration date for all Strategic Warrants was extended to December 31, 2015. On August 12, 2015, pursuant to a resolution of the Board of Directors, the expiration date for all Strategic Warrants was again extended to December 31, 2016 and on December 9, 2016, pursuant to a resolution of the Board of Directors, the expiration date for all Strategic Warrants was again extended to December 31, 2017. All other terms and conditions of the Strategic Warrants remained the same. All Strategic Warrants expire on December 31, 2017 unless redeemed earlier by OMAG upon 30 days prior written notice to the Strategic Warrant holders.

 

NOTE 9 – U.S. INCOME TAXES

 

Deferred U.S. tax assets are comprised of the following:

 

   March 31,   December 31, 
   2017   2015 
         
U.S. federal net operating loss carry forwards  $6,431,000   $6,333,000 
U.S. state and city net operating loss carry forwards, net of U.S. federal tax benefit   2,042,000    2,011,000 
    8,473,000    8,344,000 
Less: Valuation allowance   (8,473,000)   (8,344,000)
Total  $-   $- 

 

Management has determined, based on the Company's current condition, that a full valuation allowance is appropriate at March 31, 2017. At March 31, 2017, the Company had U.S. federal net operating loss carry forwards of approximately $20,416,000 expiring in various amounts from fiscal year 2017 to fiscal year 2037.

 

Current U.S. income tax law limits the amount of loss available to offset against future taxable income when a substantial change in ownership occurs. 

 

The Company believes that it has no uncertain tax positions and no unrecognized tax benefits at March 31, 2017 and December 31, 2016.

 

NOTE 9 – COMMITMENTS

 

Leases

 

OMAG maintains its corporate offices at 136 Madison Avenue, 5th Floor, New York, NY 10016. The premises are leased by OMAG under a month to month lease from an unaffiliated third party. LLC leases premises in Muscat, Oman from an unaffiliated third party under a one year lease which commenced in January 2017 which provides for an annual rental of $35,880. The Company’s rent expense for the three month periods ended March 31, 2017 and 2016 was $16,406 and $16,516, respectively

 

Employment Agreements

 

The Company presently has no employment agreements with any person.

 

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Pursuant to a prior employment agreement, OMAG was obligated to employ its President and Chief Executive Officer at an annual base salary of $125,000 plus an additional amount based on a combination of net sales and earnings before taxes. OMAG plans to enter into a new employment agreement with its President although the terms of such employment agreement have not yet been determined. OMAG has from time to time fully or partially suspended and accrued salary payments due to its President. For the years ended December 31, 2015 and 2016 the Company continued to accrue salary payable to Mr. Drohan on the basis of an annual salary of $125,000. On May 1, 2015 the Company paid its President $87,781 of accrued officer’s payroll and on May 16, 2015 the Company applied $120,000 of accrued officer’s payroll in exchange for the purchase of 100,000 restricted Common Shares of Omagine, Inc. stock at a purchase price of $1.20 per share. On April 5, 2016 the Company applied $50,400 of accrued officer’s payroll in exchange for the purchase of 56,000 restricted Common Shares of Omagine Inc. stock at a purchase price of $0.90 per share. On June 14, 2016 the Company paid its President $55,601 of accrued officer’s payroll. On February 1, 2017 the Company applied $51,000 of accrued officer’s payroll in exchange for the purchase of 100,000 restricted Common Shares of Omagine, Inc. stock at a purchase price of $0.51 per share. At March 31, 2017 and December 31, 2016, OMAG had unpaid accrued officer’s compensation due to its President of $68,655 and $88,405, respectively.

 

Pursuant to a prior employment agreement, OMAG was obligated to employ its Vice-President and Secretary at an annual base salary of $100,000. OMAG plans to enter into a new employment agreement with its Vice-President although the terms of such employment agreement have not yet been determined. OMAG has from time to time fully or partially suspended and accrued salary payments due to its Vice-President on the basis of an annual salary of $100,000. During 2015 the Company paid Mr. Kuczynski accrued officer’s payroll of $33,000 on March 26, $2,000 on September 9, $3,200 on October 2, and $2,500 on December 7, 2015. During 2016 the Company paid its Vice President accrued officer’s payroll of $32,000 on June 23, $2,700 on July 28, $1,000 on October 20, $6,000 on November 4, and $10,000 on December 9, 2016. On February 2, 2017 the Company applied $25,000 of accrued officer’s payroll in exchange for the purchase of 47,170 restricted Common Shares of Omagine, Inc. stock at a purchase price of $0.53 per share. At March 31, 2017 and December 31, 2016, OMAG had unpaid accrued officer’s compensation due to its Vice-President of $138,772 and $149,121, respectively.

 

OMAG has from time to time fully or partially suspended and accrued salary payments due to its Controller on the basis of an annual salary of $80,000. On January 14, 2015 the Company paid its Controller $25,000 of accrued officer’s payroll. On December 9, 2016 the Company paid the Controller $7,500 of accrued officer’s payroll. At March 31, 2017 and December 31, 2016, OMAG had unpaid accrued officer’s compensation due to its Controller of $202,100 and $182,100, respectively.

 

Equity Financing Agreements

 

OMAG and YA were parties to a Stand-By Equity Distribution Agreement (the “2011 SEDA”) which was due to expire on September 1, 2014. On July 21, 2014, the 2011 SEDA was terminated by the mutual consent of OMAG and YA.

 

On April 22, 2014, OMAG and YA entered into a new Standby Equity Distribution Agreement on generally the same terms and conditions as the 2011 SEDA (the ”2014 SEDA“). Unless earlier terminated in accordance with its terms, the 2014 SEDA was to terminate automatically on the earlier of (i) the first day of the month next following the 24-month anniversary of the “Effective Date” (as hereinafter defined) (i.e. February 1, 2017), or (ii) the date on which YA shall have made payment to OMAG of Advances pursuant to the 2014 SEDA in the aggregate amount of $5,000,000. On September 20, 2016, the Company and YA entered into an agreement amending the SEDA extending the term of the 2014 SEDA to February 1, 2019 or to such date on which YA shall have made payment to OMAG of Advances pursuant to the 2014 SEDA in the aggregate amount of $5,000,000 (the “Second SEDA Amendment”). On April 22, 2014, in satisfaction of a $150,000 commitment fee due pursuant to the 2014 SEDA, OMAG issued 85,822 restricted Common Shares to YA Global II SPV, LLC, which is an affiliate of YA (the “Affiliate”). On September 21, 2016 in satisfaction of a $150,000 commitment fee due pursuant to the Second SEDA Amendment, OMAG issued 161,290 restricted Common shares to the YA Affiliate. (See Note 7).

 

Pursuant to the terms of the 2014 SEDA, OMAG may in its sole discretion, and upon giving written notice to YA (an ”Advance Notice”), periodically sell Common Shares to YA (“Shares”) at a per Share price (“Purchase Price”) equal to 95% of the lowest daily volume weighted average price (the “VWAP”) for a Common Share as quoted by Bloomberg, L.P. during the five (5) consecutive Trading Days (as such term is defined in the 2014 SEDA) immediately subsequent to the date of the relevant Advance Notice (the “Pricing Period”).

 

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OMAG is not obligated to sell any Shares to YA but may, over the term of the 2014 SEDA and in its sole discretion, sell to YA that number of Shares valued at the Purchase Price from time to time in effect that equals up to five million dollars ($5,000,000) in the aggregate. YA is obligated under the 2014 SEDA to purchase such Shares from OMAG subject to certain conditions including (i) OMAG filing a registration statement with the SEC to register the resale by YA of the Shares sold to YA under the 2014 SEDA (“Registration Statement”), (ii) the SEC declaring such Registration Statement effective (the date of such declaration by the SEC being the “Effective Date”), (iii) OMAG certifying to YA at the time of each Advance Notice that OMAG has performed all covenants and agreements to be performed and has complied with all obligations and conditions contained in the 2014 SEDA, (iv) periodic sales of Shares to YA must be separated by a time period of at least five Trading Days, and (v) the dollar value of any individual periodic sale of Shares designated by OMAG in any Advance Notice may not exceed the greater of (a) two hundred thousand dollars ($200,000), or (b) the average of the ”Daily Value Traded” for each of the five (5) Trading Days immediately preceding the date of the relevant Advance Notice, where Daily Value Traded is the product obtained by multiplying the number representing the daily trading volume of Common Shares for such Trading Day by the VWAP for a Common Share on such Trading Day.

 

Omagine Project

 

The Omagine Project is planned to be developed on one million square meters (equal to approximately 245 acres) of beachfront land facing the Gulf of Oman just west of the capital city of Muscat and nearby Muscat International Airport (the “Omagine Site”). LLC has signed a Development Agreement (“DA”) and a Usufruct Agreement (“UA”) for the Omagine Project with the Government of Oman. (See “Development Agreement and Usufruct Agreement” below). The Omagine Project is planned to be an integration of cultural, heritage, entertainment and residential components including a high-culture theme park and associated buildings, shopping and retail establishments, restaurants and approximately 2,100 residences.

 

Development Agreement and Usufruct Agreement

 

OMAG’s 60% owned subsidiary, LLC, signed a DA with the Government of Oman in October 2014 for the development in Oman by LLC of the Omagine Project. The legal effectiveness of the DA was conditional upon its ratification by Oman’s Ministry of Finance, which Ratification occurred in March 2015. On July 1, 2015 (the “Operative Date”), the Government and LLC entered into the UA with respect to the land constituting the Omagine Site.

 

The Land Rights give LLC extensive rights over the land constituting the Omagine Site including the right to sell such land on a freehold basis. On July 2, 2015, the UA was registered by the Government and a Land Rights registration fee of 20,250 Omani Rials ($52,650) was paid by LLC to the Government (and expensed in the consolidated statements of operations for the three months ended September 30, 2015), which registration legally perfected LLC’s ownership of the Land Rights.

 

The five year period commencing on the Operative Date is a rent free period and thereafter LLC will pay annual rent to the Government based on only the built but unsold commercial area of the Omagine Project (approximately 150,000 square meters) or approximately 45,000 Omani Rials ($117,000) per year based on the current annual per square meter fee of 0.300 Omani Rials ($0.78). The term of the DA is 20 years and the term of the UA is 50 years (renewable) commencing from the Operative Date. The UA and the DA provisions relevant to the UA survive the expiration of the term of the DA.

 

The Operative Date of July 1, 2015 is the date from which all time periods for the execution by LLC of various tasks enumerated in the DA are to be measured. The continued legal effectiveness of the DA subsequent to the Operative Date is dependent upon the following milestone dates being achieved (any or all of which may be extended or waived by the Government): (1) LLC’s delivery to the Government within twelve months from the Operative Date of a term sheet with lenders for the financing of the first phase, any other phase or all of the Project, (2) LLC’s submission to the Ministry of Tourism of a social impact assessment within 8 months of the Operative Date and the Government’s approval thereof within 12 months of the Operative Date, (3) the Government’s approval within 12 months of the Operative Date of the development control plan for the Omagine Project, and (4) the transformation of LLC into a joint stock company within 12 months of the Operative Date. Company management has had informal discussions with the concerned government officials and management is confident that given the present economic conditions in the region (of which the Government is keenly aware), the Company will be granted an extension of time on many of such due dates similar to the extension of the Operative Date to July 1. 2015 already previously granted by the Government.

 

Pursuant to the DA, LLC must substantially complete the construction of the seven Pearl buildings and one hotel (the “Minimum Build Obligation” or “MBO”) within 5 years of the Operative Date. Any material breach by LLC of its obligation to perform the MBO would constitute an event of default under the DA. The DA specifies that the principal construction contracts should be executed within one year of the Operative Date. LLC is required to provide written notice to the Government in certain circumstances, such as LLC’s change in an anticipated milestone date that would result in a substantial achievement of work to occur later than 60 days after such milestone date. The DA provides that the Government is required to grant reasonable requests for the extension of the terms of the DA in such circumstances.

 

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The foregoing discussion of the terms of the DA and UA is not meant to be definitive or complete and is qualified in its entirety by reference to the complete texts of the DA and UA as filed by the Company with the SEC.

 

Omagine LLC Shareholder Agreement

 

OMAG and JOL organized LLC in Oman and capitalized it with an initial investment of twenty thousand (20,000) Omani Rials ($52,000). On April 20, 2011, OMAG, JOL and the New Investors entered into a shareholder agreement relating to LLC (the “Shareholder Agreement”).

 

Pursuant to the Shareholder Agreement, OMAG invested an additional 70,000 Omani Rials ($182,000) into LLC and agreed to make a further additional investment into LLC of 210,000 Omani Rials ($546,000) after the execution of the DA (the “OMAG Final Equity Investment”). As of December 31, 2015, OMAG had invested 300,000 Omani Rials ($780,000) into LLC. Pursuant to the Shareholder Agreement, RCA invested the value of the Land Rights as a non-cash “payment-in-kind” capital contribution to LLC on July 2, 2015.

 

Further pursuant to the Shareholder Agreement, the New Investors invested an aggregate of 60,000 Omani Rials ($156,000) into LLC and agreed, subject to certain conditions precedent, to make further additional investments into LLC in the aggregate amount of 26,628,125 Omani Rials ($69,233,125).

 

The CCC Deferred Investment Obligation and the OMAG Options

 

The conditions precedent to CCC and RCA being required to make their agreed $69,233,125 aggregate additional investments (their “Deferred Equity Investments”) into LLC include (1) the execution of a construction contract on or before July 1, 2016 between LLC and CCC-Oman (the “CCC-Contract”) and (2) execution of a legally binding agreement between LLC and a lender pursuant to which such lender agrees to provide Debt Financing for the first phase or any or all phases of the Omagine Project in an amount sufficient to finance the first phase of the Omagine Project’s construction plus the installment payments due to OMAG for its Success Fee and Pre-Development Expense Amount.(the “First Financing Agreement Date”).

 

The First Financing Agreement Date occurred on November 29, 2015 but the CCC-Contract was not executed on or before July 1, 2016 nor will it be executed and RCA and Omagine, Inc. are presently in negotiations with investors which may lead to an “Amended and Restated Shareholder Agreement”.

 

The failure to execute the CCC-Contract by July 1, 2016 does not relieve RCA of its continuing obligation under the Shareholder Agreement (irrespective of such CCC-Contract failure) to make RCA’s approximately $20 million Deferred Investment into LLC; but it may (under certain conditions) relieve CCC of its obligation under the Shareholder Agreement to make its approximately $49 million Deferred Investment into LLC.

 

Additionally pursuant to the Shareholder Agreement, such failure of the CCC-Contract to occur on or before July 1, 2016 automatically and without any further action required by any party, triggered and activated on July 2, 2016 two options in favor of OMAG (the “OMAG Options”) to purchase all LLC Shares presently owned by CCC-Oman and CCC-Panama at any time of OMAG’s choosing prior to July 1, 2017 at a price equal to the aggregate original purchase price of 22,500 Omani Rials ($58,500). Furthermore pursuant to the Shareholder Agreement, neither CCC-Oman nor CCC-Panama is permitted to sell any of such LLC Shares presently owned by them prior to July 2, 2017 to any Person other than OMAG, or to a purchaser designated by OMAG, in a sale made pursuant to the exercise of the OMAG Options. See Note 11 – Subsequent Events.

 

Although the LLC Shareholders are presently negotiating an Amended and Restated Shareholder Agreement, there is no assurance that it will happen. If agreement is not reached by the LLC Shareholders on the matters presently under discussion, or if alternative financing is not obtained, or if alternative shareholder arrangements are not agreed, LLC may not be able to complete the Omagine Project and may not be able to recover the $718,614,000 value of the Land Rights included in the Company’s Consolidated Balance Sheet at March 31, 2017 and December 31, 2016 (See Note 2).

 

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Further pursuant to the Shareholder Agreement, LLC is required to pay OMAG a Success Fee of $10,000,000 in five equal annual installments beginning on or within 10 days after the Draw Date and a Pre-Development Expense Amount to be determined (presently estimated at $17,920,114) payable 50% on or within 10 days after the Draw Date and 50% in five equal annual installments beginning on the first anniversary of the Draw Date. The Draw Date is defined as “the date upon which LLC draws and receives the first amount of Debt Financing pursuant to a Financing Agreement”. It is possible that the payment terms for the Pre-Development Expense Amount and the Success Fee may be modified if and only if the LLC Shareholders agree to an Amended and Restated Shareholder Agreement.

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

At March 31, 2017 and December 31, 2016, respectively, OMAG’s accounts payable included $15,675 and $42,800 due to its officers and directors.

 

For the three months ended March 31, 2017 and 2016, the Company expensed a total of $0 and $84,000, respectively, for consulting fees paid to an entity controlled by the Deputy Managing Director of LLC.

 

In April 2016, the Company paid a $300,000 sponsorship fee to the same such entity controlled by the Deputy Managing Director of Omagine LLC for the Company to serve as the Title Sponsor Partner of the 2016 World Summit on Innovation and Entrepreneurship hosted by the United Nations at UN headquarters in New York City from May 19 to May 23, 2016.

 

NOTE 11 – SUBSEQUENT EVENTS

 

On April 3, 2017, OMAG exercised its OMAG Options to purchase all of the shares of LLC owned by CCC-Oman and CCC-Panama thereby leaving OMAG and RCA as LLC’s two remaining shareholders. After the closing of the option purchase, the registered shareholders at the Ministry of Commerce & Industry in Oman will be amended to reflect the fact that CCC is no longer an LLC shareholder.

 

On April 4, 2017, the Company sold 266,667 restricted Common Shares to an accredited investor for proceeds of $80,000.

 

On April 11, 2017, the Company sold 132,275 Common Shares pursuant to the 2014 SEDA for proceeds of $50,000.

 

On April 13, 2017, the Company issued a non-interest bearing $100,000 convertible promissory note to an accredited investor due October 12, 2017 in exchange for cash of $50,000 and for the cancellation of a $50,000 convertible promissory note due April 13, 2017 and accrued interest (See Note 4). The Conversion Price of the convertible promissory note is $0.40 per share. In connection with the six month Note the Company issued 100,000 Warrants to the accredited investor, each of which is exercisable for the purchase of one restricted Common Share at the greater of (a) $0.50 or (b) eighty percent (80%) of the Market Price on the Trading Day immediately preceding the relevant Exercise Date. The Warrants expire on December 31, 2017.

 

On May 8, 2017, the Company issued a convertible promissory note to an accredited investor for the principal amount of $100,000 with interest at 12% per annum, due February 7, 2018 and convertible into the Company’s Common Stock after 180 days from the Note Issuance Date at a conversion price equal to 60% of the lowest trading price of the Common Stock during the twenty day period prior to the conversion.

 

On May 10, 2017, the Company and St. George Investments LLC executed an amendment to the $185,000 Convertible Promissory Note dated November 14, 2016 extending the May 16, 2017 Maturity Date to July 17, 2017. In consideration of the extension, the Company paid $10,000 to St. George Investments LLC. 

  

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Summary

The development of the Omagine Project has been delayed. Neither we nor RCA expected that a $5 Billion company like CCC would default on their investment obligation – but they did. CCC has now been removed as an LLC shareholder and is being replaced by a new financial investor.

In addition to the written Investment Agreement from the estate of our proposed new local investor mentioned below, we have verbal commitments from two European investment funds and are expecting a letter of intent shortly from one of them which is active as a real-estate investor in the Middle East and in Oman. LLC accelerated its efforts with non-MENA Region investors (who are value-oriented and less indecisive and discount-oriented than local investors) and presently LLC is in final discussions with two European investment funds.

The OMAG Common Stock is, and always has been, a proxy for the performance of LLC and the project delays to date have put downward pressure on the OMAG Common Stock. When any of the three new LLC investment prospects close (which we presently expect will occur in or before July), LLC will begin the masterplanning and development of the Omagine Project. Management presently estimates that the total net positive cash flow from the development of the Omagine Project will be approximately $3 billion and the net present value of that cash flow is approximately $1.55 billion.

The financing and execution framework for real estate development projects are usually quite similar. They generally move from concept design; to feasibility studies; to land acquisition; to masterplanning; to detailed design; to debt financing for construction; to construction; and then finally to revenue generating sales and/or operations.

The financial architecture of real estate projects generally requires that the developer (in our case, LLC) finance and pay for all organizational costs (legal, accounting, administrative, etc.), concept design, land acquisition (i.e. purchasing the land for the project), initial feasibility and market studies, masterplanning, detailed design, financial advisory fees and/or other engineering & development consultancy costs (collectively, the “Soft Costs”). The Soft Costs are all financed from the developer’s (in our case LLC’s) own cash resources provided by its shareholders (in our case OMAG, RCA and CCC). The cost of construction (the “Hard Costs”) are financed via bank loans (“Project Finance”).

Most Soft Costs are not capitalized as assets on the developer’s balance sheet but are written off as operating expenses. Land however (like buildings, machinery or equipment) is a long-lived asset that is capitalized as an asset on the developer’s balance sheet and recorded at the purchase price paid for it by the developer. Like any asset therefore, it becomes a component of the developer’s shareholder equity.

As specifically memorialized by the Shareholder Agreement, LLC did not purchase the land rights with cash – but with shares of LLC stock. Therefore the consideration paid by RCA for the purchase of such shares of LLC stock was the approximately $720 million value of the land given in exchange for such stock. The acquisition of the land rights by LLC in exchange for LLC stock resulted in a $720 million increase in LLC’s shareholder equity with no cash outlay by LLC.

After the Soft Costs have been incurred by the developer, a project’s construction is then generally financed via a combination of bank debt and the developer’s cash (from equity or property sales), Bank debt is typically restricted by the bank assuring itself that there is an acceptable ratio of debt to equity on the developer’s balance sheet (a typical ratio being 70% debt vs 30% equity) and requiring a portion of that equity to be cash equity.

For example using the 70/30 ratio, a developer wishing to construct a $330 million project (or a $330 million phase of a project) would need approximately $100 million of shareholder equity on its balance sheet in order to borrow the full $330 million. Such borrowings may of course be further supported or reduced by the developer utilizing the receipt of deposits, installment payments and final payments from property sales made by the developer during the construction of the project (or phase of the project) or by utilizing a portion of its own cash reserves.

One can readily see therefore the significant borrowing power advantage and financial leverage afforded to LLC by the aforementioned $720 million addition to its shareholder equity. Only after the developer (LLC) completes the land acquisition, the necessary engineering & development consultancy studies and the project masterplanning (all of which are Soft Cost tasks to be paid for by LLC), can LLC approach banks to arrange the debt facilities needed to finance the Hard Costs of construction. In the case of the Omagine Project, management estimates that such Soft Cost expenses will be approximately $25 million USD.

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The 2011 LLC Shareholder Agreement among OMAG, RCA and CCC as well as OMAG’s 2012 Strategic Warrant distribution to its shareholders and other capital raising activities (including the SEDA with YA and other private placement stock sales) foresaw, foreshadowed and accommodated the various future Omagine Project’s development stages. Management had a clear-eyed pre-DA and Post-DA view of its multiple strategic objectives.

OMAG conceptualized the project and executed and financed all Pre-DA efforts including the following strategic objectives (i) signing a Shareholder Agreement that assembled an unassailably credible and financially strong shareholder structure for LLC (RCA and CCC); (ii) arranging a world-class construction contractor with proven capability & financial capacity (CCC); (iii) demonstrating the project’s desirability and viability to the Government (getting the DA signed). Delays in signing the DA were longer than expected but ultimately the foregoing Pre-DA strategic objectives were achieved.

OMAG had financed its support of LLC and the Omagine Project during this Pre-DA time with private placement sales of its Common Stock, the YA SEDA and via a rights offering to its shareholders. Management viewed its Post-DA tasks as more uncomplicated since the financial and operational roadmap had been put in place. The Shareholder Agreement was specifically structured to, among other things: (i) have LLC assume the ongoing financial burdens of carrying out the project in the Post-DA period, (ii) increase LLC’s shareholder equity by $700 million to $1 billion via the land rights thereby greatly supporting LLC’s Project Finance bank loan requirements, (iii) reimburse OMAG for its $18 million of Pre-DA expenses. Moreover, OMAG had put in place the 2012 Strategic Warrant distribution to its shareholders as a back-up capital raising measure on the theory that the OMAG Common Stock would be positively affected by success at LLC.

Per the Shareholder Agreement which was purposefully structured to align the financial needs of the project’s development with the financial resources required to execute it:

1)Pre-DA, OMAG financed the $18 million of pre-development expenses;
2)Pre-DA, the 3 shareholders made initial token investments totaling $390,000. ($234,000 by OMAG; $97,500 by RCA; $58,500 by CCC);
3)Post-DA, OMAG invested an additional $546,000;
4)Post-DA, RCA invested the land valued at $718 million;
5)Post-DA and after the 1st 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 1st 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 1st Financing Agreement Date had occurred on November 29,2015 - and although CCC and LLC had agreed on several iterations of the construction contract, - CCC essentially strung LLC along with multiple promises and agreements to invest and to sign the construction contract – all of which false promises and agreements were ultimately dishonored by CCC.

Fortunately, the Shareholder Agreement also granted OMAG an option to purchase CCC’s 15% ownership of LLC in the event of such a default by CCC. OMAG exercised this option in April 2017 and OMAG now owns 75% of LLC and RCA owns 25% of LLC. The foregoing described default by CCC (whether purposeful or otherwise) had several effects on LLC & OMAG:

1)Valuable time was lost in beginning the project development because the critical Soft Cost tasks of masterplanning and engineering studies could not be undertaken absent funding for the approximately $25 million Soft Cost budget mentioned above;
2)Someone had to continue to finance LLC’s and the Omagine Project’s existence Post-DA until either
a.the CCC matter could be favorably resolved and CCC’s investment received, or
b.until CCC was replaced with an alternate investor.

Only OMAG stepped forward to do this. OMAG has incurred approximately $13 million in such Post -DA expenses to date. OMAG has in fact single-handedly kept LLC and the Omagine Project viable for the past 18 months via its continued financing of LLC’s operations.

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3)The OMAG Common Stock is, and always has been, a proxy for the performance of OMAG’S subsidiary, LLC. The aforementioned delays and financial strains put downward pressure on the OMAG stock thus inhibiting management’s ability to utilize the SEDA or to arrange private placements of its Common Stock without unduly diluting its shareholders.
4)OMAG’s continued financing of LLC’s Post-DA expenses severely strained OMAG’s resources and caused it to incur debt which management of OMAG previously had studiously avoided.

Nevertheless, now that the long drama / spectacle with CCC is over, the only matter preventing forward progress on the Omagine Project is securing an agreement with an investor to replace the CCC investment. That process has been ongoing now for many months, is well advanced, and we presently expect to close a new LLC investment in July 2017 after which the masterplanning and development of the Omagine Project will begin.

LLC has a signed written agreement (an “Investment Agreement”) with one such local investor. This binding Investment Agreement was signed by LLC and the investor in November 2016 and contemplated the funding of the investment in January 2017. Subsequent to entering into this Investment Agreement, the investor unexpectedly passed away. The investor’s heirs have acknowledged the validity of the Investment Agreement and we are awaiting the settlement of the investor’s estate (which we understand to be quite substantial and complicated).

 

LLC has accelerated its efforts with two European investment funds and presently is in final discussions with them.

 

Although often beset by byzantine delays, the present state of affairs with respect to the Omagine Project is quite straightforward. When any of the three new LLC investment prospects (1 local and 2 international) close (which we presently expect will occur in July 2017), LLC will begin the masterplanning and development of the Omagine Project.

 

Notwithstanding the foregoing, shareholders and investors are again cautioned that until an equity investment transaction as generally described above actually closes LLC will not have the funding sufficient to begin design, masterplanning and initial site work on the Omagine Project and no assurance can be given at this time that any such investment transaction will be finally consummated.

Overview

 

Omagine, Inc. (“OMAG” or the “Registrant”) was incorporated in Delaware in October 2004 and is a holding company which conducts substantially all its operations through its majority owned subsidiary Omagine LLC, an Omani limited liability corporation (“LLC”) and its wholly-owned subsidiary Journey of Light, Inc., a New York corporation (“JOL”). The Registrant and JOL are sometimes collectively referred to herein as “OMAG” and the Registrant, JOL and LLC are collectively referred to herein as the “Company”.

 

The Company is focused on entertainment, hospitality and real estate development opportunities in the Middle East and North Africa (the “MENA Region”) and on the design and development of distinctive tourism destinations. The Company presently concentrates the majority of its efforts on the business of LLC and specifically on the Omagine Project. OMAG has 22,042,120 shares of its Common Stock issued and outstanding as of May 9, 2017.

 

In November 2009, OMAG organized LLC as a wholly owned subsidiary under the laws of the Sultanate of Oman (“Oman”) to design, develop, own and operate our initial project – a mixed-use tourism and real estate project named the “Omagine Project” (See “The Omagine Project” below). OMAG initially capitalized LLC at Omani Rials (“OR”) 20,000 [$52,000]. In October 2014, LLC and the Government of Oman (the “Government”) signed an agreement (the “Development Agreement” or “DA”) for the development in Oman by LLC of the Omagine Project (See: Exhibits 10.7 and 99.1 and “The Development Agreement and the Usufruct Agreement”, below). On July 2, 2015, after the Usufruct Agreement (“UA”) was registered by the Government legally perfecting LLC’s ownership of the Land Rights, the Government and LLC agreed that July 1, 2015 (the “Operative Date”) was the date from which time periods for the execution by LLC of certain tasks enumerated in the DA were to be measured.

 

In 2011 OMAG’s 100% ownership of LLC was reduced to 60% pursuant to a shareholders’ agreement (the “Shareholder Agreement”) signed by OMAG, JOL and three new LLC minority investors (See: Exhibit 10.6 and “The Shareholder Agreement” below).

 

As of the date hereof, the shareholders of LLC as registered in Oman at the Ministry of Commerce & Industry (the “Registered Shareholders”) are:

 

i. Omagine, Inc. and
ii. Royal Court Affairs (“RCA”), an organization representing the personal interests of His Majesty Sultan Qaboos bin Said, the ruler of Oman, and
iii. Two subsidiaries of Consolidated Contractors International Company, SAL (“CCIC”) which are:

 

  a. Consolidated Contracting Company S.A. (“CCC-Panama”), a wholly owned subsidiary of CCIC, and
  b. Consolidated Contractors Oman Company LLC (“CCC-Oman”), CCIC’s operating subsidiary in Oman.

 

CCIC is a 65 year old Lebanese multi-national company headquartered in Athens, Greece having worldwide and operating subsidiaries in among other places, every country in the MENA Region. In its fiscal years immediately prior to 2016, CCIC had approximately five (5) billion U.S. dollars in annual revenue and one hundred thirty thousand (130,000) employees but management’s best information at this time is that both CCIC’s revenue and number of employees have since been dramatically reduced as a result of adverse economic conditions in the MENA Region (See: “Market Conditions” below). CCC-Panama and CCC-Oman are sometimes referred to collectively in this report as “CCC”.

 

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As previously disclosed, all our prior efforts to conclude CCC’s required investment under the Shareholder Agreement and the CCC-Contract were unsuccessful. On April 3, 2017 OMAG exercised its option (the “OMAG Options”) to purchase all of the shares of LLC owned by CCC-Oman and CCC-Panama, thereby leaving OMAG and RCA as LLC’s two remaining shareholders. After the closing of the option purchase the registered shareholders at the Ministry of Commerce & Industry in Oman will be amended to reflect the fact that CCC is no longer an LLC shareholder.

 

As previously reported, management has a signed written agreement (an “Investment Agreement”) with one such investor. The Investment Agreement is for an amount in excess of the aggregate investment which was to be made by CCC-Oman and CCC-Panama. This binding Investment Agreement was signed by LLC and the investor in November 2016 and contemplated the funding of the investment in January 2017. Subsequent to entering into this Investment Agreement, the investor unfortunately and unexpectedly passed away.

 

The investor’s heirs have acknowledged the validity of the Investment Agreement and have agreed to fulfil their father’s commitment pursuant to it as soon as his estate (which we understand to be quite substantial and complicated) is settled. LLC management has been dealing with the investor’s heirs since December 2016 and our understanding from them is that their father’s estate will be settled “soon”. We have concluded that we can no longer rely on their assurances of an imminent conclusion as the heirs have frequently indicated to us that the estate settlement was imminent – but delays have continued to date. Management has not abandoned its efforts to close the investment transaction memorialized by the Investment Agreement but we no longer believe it will occur in the time frame we require and no assurance can be given to investors and shareholders that such investment transaction will actually occur until it actually does occur.

 

Since exercising the OMAG Options, we have accelerated our efforts with the two European investment funds with whom we have, as previously disclosed, been holding discussions in parallel. We are no longer relying on the prompt conclusion of the estate settlement mentioned above and we are in final discussions with such two European investment funds. When the estate does settle, we will entertain an investment from the heirs.

LLC will not have the approximately $20 to $25 million of funding sufficient to begin the serious design, masterplanning and initial site activities on the Omagine Project until we close a transaction with a replacement investor for CCC. These Soft Costs are typically paid for by the developer (LLC) out of equity as opposed to the much greater project finance costs which are typically paid for by the developer (LLC) via bank loans arranged by the developer. Management has also been conducting parallel project finance discussions with a bank and we expect a successful conclusion to that discussion to occur soon after we close an equity investment with a new investor.

 

Notwithstanding the foregoing, shareholders and investors are again cautioned that until an equity investment transaction as generally described above actually closes LLC will not have the funding sufficient to begin design, masterplanning and initial site work on the Omagine Project and no assurance can be given at this time that any such investment transaction will be finally consummated.

 

We intend to amend the Shareholder Agreement as necessary to memorialize any such new investment by a new investor when and if it occurs (an “Amended and Restated Shareholder Agreement”). Serious design, masterplanning, development and construction activities on the Omagine Project can begin only after such investment transaction closes.

 

As these matters unfold, management will report all material developments and agreements to its shareholders in a timely manner.

 

Management cautions that future events rarely develop exactly as forecast and the best estimates routinely require adjustment. Investors and shareholders are cautioned not to place undue reliance on any forward-looking statement or forecast, which speaks only as of the date hereof.

 

The Shareholder Agreement

 

Upon organizing Omagine LLC in 2009, OMAG made an initial cash investment into LLC of OR 20,000 [$52,000] in consideration for the issuance to OMAG of 200,000 LLC Shares.

 

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Pursuant to the Shareholder Agreement:

 

i. Before the DA was signed and after the execution of the Shareholder Agreement, the LLC Shareholders purchased an aggregate of 1,300,000 LLC Shares for an aggregate cash investment of OR 130,000 [$338,000], as follows:

 

  a) OMAG purchased an additional 700,000 LLC Shares for OR 70,000 [$182,000] in cash, and
     
  b) RCA purchased 375,000 LLC Shares for OR 37,500 [$97,500] in cash, and
     
  c) CCC-Panama purchased 150,000 LLC Shares for OR 15,000 [$39,000] in cash, and CCC-Oman purchased 75,000 LLC Shares for OR 7,500 [$19,500] in cash (collectively, the “225,000 Initial CCC Shares”).

 

ii. After the DA was signed on October 2, 2014, OMAG purchased an additional 2,100,000 LLC Shares for an additional investment by OMAG of OR 210,000 [$546,000] in cash, and

 

iii. On July 2, 2015, RCA purchased an additional 663,750 LLC Shares in consideration for the non-cash investment by RCA of the Land Rights valued at OR 276,666,667 [$718,614,000].

 

The construction contract with CCC-OMAN was not signed and the investments required pursuant to the Shareholder Agreement from CCC-Oman and CCC-Panama were not received by LLC. Pursuant to the terms and conditions of the Shareholder Agreement, OMAG was granted the OMAG Options to purchase the 225,000 Initial CCC Shares from CCC for 22,500 Omani Rials ($58,500) in the event of a default by CCC. (See: the Shareholder Agreement attached hereto as Exhibit 10.6). On April 3, 2017 OMAG exercised the OMAG Options to purchase all of the shares of LLC owned by CCC.

 

As of March 31, 2017 and the date hereof the LLC shareholders have made cash investments into LLC as indicated in the following Table A:

 

Table A - LLC Shareholders’ Cash Equity Investments into Omagine LLC

 

   Omagine, Inc.   Royal Court Affairs   Consolidated Contractors 
   OR   USD   OR   USD   OR   USD 
                         
Initial cash equity investment at inception  OR20,000   $52,000    0    0    0    0 
                               
Additional cash equity investment at signing of Shareholder Agreement (the “SHA”)  OR70,000   $182,000   OR37,500   $97,500   OR22,500   $58,500 
                               
Additional OMAG Deferred Cash Equity Investment due under the SHA before the first Financing Agreement Date **  OR210,000   $546,000    0    0    0    0 
                               
Total Cash Equity Investments made by each of the LLC Shareholders into LLC as of March 31, 2017 and the date hereof.  OR300,000   $780,000   OR37,500   $97,500   OR22,500   $58,500 

 

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As of March 31, 2017 and the date hereof RCA has made a non-cash payment-in-kind investment into LLC as indicated in the following Table B:

 

Table B - RCA’s Non-Cash Equity Investment into Omagine LLC

 

   Omagine, Inc.   Royal Court Affairs   Consolidated Contractors 
   OR   USD   OR   USD   OR   USD 
                               
Additional non-cash equity investment of Land Rights on registration of the Usufruct Agreement   0    0   OR276,666,667   $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   OR7,640,625   $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   OR18,987,500   $49,367,500 

 

* All conversions of Omani Rials to U.S. Dollars in this Report are calculated at an exchange rate of one (1) Omani Rial being equivalent to $2.60 except for the land valuation which is calculated at an exchange rate of one (1) Omani Rial being equivalent to $2.5974. See: “The Land Rights” and “Critical Accounting Policies”, below.

 

In order to bring the Omagine Project to its present state, OMAG (as of March 31, 2017), has:

 

  (i) invested 300,000 Omani Rials ($780,000) in cash into LLC, and

 

  (ii) expended $17.9 million of Pre-Development Expenses on behalf of the Omagine Project through the October 2, 2014 DA signing date consisting of both cash and non-cash expense items as OMAG had promised to do pursuant to the SHA, and

 

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  (iii) single-handedly kept the Omagine Project and LLC financially afloat after the October 2, 2014 DA signing date by expending an additional $12.2 million (as of March 31, 2017) on behalf of the Omagine Project via cash loans from OMAG to LLC (“Loans”) and the direct payment by OMAG of LLC liabilities and accounts payable consisting of both cash and non-cash items (“Advances”), neither of which Loans nor Advances OMAG had any obligation whatsoever to do pursuant to the SHA.

 

All such Loans and Advances are liabilities of LLC to OMAG and all such Pre-Development Expenses will be liabilities of LLC to OMAG; reimbursable to OMAG in accordance with the terms of the Shareholder Agreement (as may be amended).

 

See: the following Table E, and “Pre-Development Expenses and Loans and Advances to LLC” as of March 31, 2017.

 

Table E - Pre-Development Expenses, Loans and Advances

 

Pre-Development Expenses, Loans and Advances  Cash Items   Non-Cash Items (Depreciation; Amortization; Stock Option Expense)   Total 
Pre-Development Expense Amount (incurred prior to the October 2, 2014 DA signing date)  $13,611,951   $4,308,163   $17,920,114 
                
Loans & Advances as of 3/31/2017 (incurred on or after the October 2, 2014 DA signing date)  $4,884,437   $7,394,404   $12,278,841 
                
Total - (Due to OMAG from LLC)  $18,496,388   $11,702,567   $30,198,955 

 

The foregoing is a summary of some of the terms of the Shareholder Agreement and does not purport to be complete and it is qualified in its entirety by reference to the full text of the SHA. The full text of the SHA is attached hereto as Exhibit 10.6. RCA and OMAG are presently in negotiations with investors which may lead to an Amended and Restated Shareholder Agreement.

 

The Omagine Project

 

The Omagine Project is a mixed-use tourism and residential real estate project. Subject to normal and customary scheduling changes during its development and construction the Omagine Project is expected to take approximately five years from its start date to complete. Due to CCC’s default on its investment obligation pursuant to the Shareholder Agreement, the project’s start date has been significantly delayed and has not yet occurred. The Omagine Project is being developed on one million square meters (equal to 100 hectares or approximately 245 acres) of beachfront land (the “Existing Land”) facing the Gulf of Oman just west of Oman’s capital city of Muscat and approximately six miles from Muscat International Airport. Present development plans envision the creation of approximately a net additional 106,000 square meters of “Reclaimed Land” which together with the Existing Land will comprise approximately 1,106,000 square meters of land (the “Project Land”). The Omagine Project will require substantial Project Finance to complete (See: “The Shareholder Agreement”, above and “Financial Advisor”, below).

 

The Omagine Project is planned to be an elegant integration of cultural, scientific, heritage, entertainment and residential components, including seven pearl shaped (20 meter diameter) buildings (the “Pearls”) located along an open boardwalk with associated entertainment exhibitions; an amphitheater and stage; green landscaped spaces; a canal; an enclosed harbor and marina; boat slips and docking facilities; retail shops; a variety of restaurants, cafes and entertainment venues; a five-star resort hotel; a four-star hotel; and possibly an additional three or four-star hotel; shopping and retail establishments integrated with the hotels; commercial office buildings; and more than two thousand elegant residences to be developed for sale by LLC. The ethos of the project is elegant but relaxed entertainment and the Company expects that the Pearls will become “the Landmark” for the Sultanate of Oman.

 

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Pursuant to Omani Law, non-Omani persons are not permitted to purchase land in Oman unless such land is located within an Integrated Tourism Project (“ITC”) such as the Omagine Project. The Government has designated the Omagine Project as an ITC and has issued a license to LLC (an “ITC License”) thereby permitting the sale by LLC of the freehold title to the Project Land and to properties developed on the Project Land to any person, including any non-Omani person. Since the Omagine Project will contain significant hospitality (hotels), retail, commercial, and entertainment elements, LLC’s business operations are expected over time to encompass real estate development, hospitality, entertainment and property management.

 

The Development Agreement and the Usufruct Agreement

 

OMAG’s 60% owned subsidiary, LLC (75% after the closing of the OMAG Options transaction), signed a Development Agreement (“DA”) with the Government of Oman in October 2014 for the development in Oman by LLC of the Omagine Project. The legal effectiveness of the DA was conditional upon its ratification by Oman’s Ministry of Finance which Ratification occurred in March 2015. On July 1, 2015, the Government and LLC entered into a Usufruct Agreement (“UA”) with respect to the Land Rights over the Existing Land and the DA and UA extend such Land Rights to all of the Project Land.

 

On July 2, 2015, after the UA was registered by the Government legally perfecting LLC’s ownership of the Land Rights, the Ministry of Tourism (“MOT”) of the Government and LLC agreed in writing that July 1, 2015 would be the Operative Date from which time periods for the execution by LLC of certain tasks enumerated in the DA are to be measured. The MOT states in relevant part in writing to LLC that: “We ask you to receive the land and begin procedures for executing the project as per the development agreement entered into with you, keeping in mind that the effective commencement date of the development agreement is 1 July 2015”. (See Exhibits 10.8 and 99.2).

 

The DA and UA are the contracts that govern the design, development, construction, management and ownership of the Omagine Project, the use and sale by LLC of the Project Land, and the Government’s and LLC’s rights and obligations with respect to the Omagine Project. In the event of any conflict between the terms and conditions of the DA and the terms and conditions of the UA, the terms and conditions of the DA control (See Exhibits 10.7, 99.1, 10.8 and 99.2). The term of the DA is 20 years and the term of the UA is 50 years (renewable) commencing from the Operative Date. The UA and those DA provisions relevant to the UA survive the expiration of the term of the DA.

 

The Land Rights owned by LLC give it extensive rights over the Project Land including the right to sell such Project Land on a freehold basis. LLC may use, control, develop, retain, operate and/or sell the approximately 1.1 million square meters of Project Land to itself or to third parties. The DA obligates LLC to pay the Government twenty-five (25) Omani Rials ($65) for each square meter of Project Land purchased directly by LLC or sold by LLC to any third party (the “Land Price”). The average valuation for the Land Rights (net of such Land Price is OR 276,666,667 ($718,614,000) (See: “The Land Rights”, below).

 

The five year period commencing on the Operative Date is a rent free period (the “Rent Free Period”) and thereafter LLC will pay annual rent to the Government (the “Land Rent”) based on only the built but unsold commercial area (excluding the residential area) of the Omagine Project (approximately 150,000 sq. meters) or approximately OR 45,000 ($117,000) per year based on the current annual per square meter fee of OR 0.300 ($0.78). No Land Rent is due or owing during the Rent Free Period and no Land Rent is ever due or owing with respect to plots of Project Land (i) on which there is a residential building, or (ii) on which there is not a substantially completed non-residential building (i.e. Project Land that is open space, roads, non-residential building work-in-progress, etc. are rent-free).

 

The continued legal effectiveness of the DA subsequent to the Operative Date is dependent upon certain milestone dates being achieved (any or all of which may be extended or waived by the Government), including: (1) LLC’s delivery to the Government by June 30, 2016 of a term sheet with lenders for the financing of the first or any other phase of the Project, [this milestone date was achieved by the term sheet and financing agreement which LLC received from the Qatari Bank in November 2015], (2) LLC’s submission to the Ministry of Tourism of a social impact assessment by March 31, 2016 and the Government’s approval thereof by June 30, 2016, (3) the Government’s approval by June 30, 2016 of the development control plan for the Omagine Project, and (4) the transformation of LLC into a joint stock company by June 30, 2016 (these milestone dates 2, 3 and 4 are not yet achieved and are expected to be extended as mentioned above if and when the Operative Date is extended). LLC has suffered many delays as a result of the CCC default and we are presently assured by Government officials that the Operative Date will be extended by MOT provided we are able to close the necessary investment with a replacement investor for CCC. No assurance can be given at this time however that the Operative Date will be so extended.

 

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LLC management and RCA have met with and spoken to the staff at the Ministry of Tourism and with the Minister several times during the period from December 2016 to the date hereof in regard to our efforts to finalize the Amended and Restated Shareholder Agreement with the estate of our proposed new investor as well as in regard to the delays encountered to date by LLC in meeting certain DA milestone dates as measured from the Operative Date. The MOT (and all Government Ministries) are also acutely aware of the unusual fiscal strains imposed on the present banking and economic environments in the region. While no conclusive extension of the Operative Date has yet been made, as noted above we have continued to keep both the Minister and the staff updated and LLC management and RCA presently expect that the Operative Date will be extended once we finalize our ongoing negotiations and agreements with a new investor. No assurance can be given however to what extent, if any, that the Operative Date will in fact be extended by MOT.

 

Pursuant to the DA, LLC must substantially complete the construction of the seven Pearl buildings and one hotel (the “Minimum Build Obligation” or “MBO”) by June 30, 2020 (the “MBO Completion Date”), as such date may be amended or extended per the DA as indicated above. The DA imposes no performance timelines on LLC with respect to completing the development or construction of elements of the Omagine Project other than the MBO but the completion of the MBO will require LLC to obtain the necessary Project Finance to do so. Any material breach by LLC of its obligation to perform the MBO would constitute an event of default under the DA. The DA specifies that the principal construction contract should be executed by June 30, 2016. This (i.e. the CCC Contract) did not happen as indicated above. LLC is required to provide written notice to the Government in certain circumstances, such as LLC’s change in an anticipated milestone date that would result in a substantial achievement of work to occur later than 60 days after such milestone date. Such notice has been communicated both verbally and in writing to the appropriate government officials in recent communications with them.

 

The Company undertook and financed many development activities on behalf of LLC subsequent to the DA signing (the “Initial Activities”) in an effort to fast-track the Omagine Project’s development. The fast-track advantages sought to be gained thereby however have not materialized due to CCC’s default which resulted in LLC’s failure to utilize the $25 million Al-Rayan Loan to finance the Initial Activities and LLC’s ongoing operations in Oman (See: our previous disclosures in prior reports filed with the SEC). The cause of such failure was CCC’s failure to make its Deferred Cash Investment into LLC as required after the November 2015 Financing Agreement Date after initially agreeing to do so and the extended and much drawn out and ultimately futile negotiations with CCC relevant to the CCC-Oman construction contract (to which CCC often initially agreed to various versions and later reneged on their prior agreements).

 

Because of these delays therefore, the more serious and substantial design, masterplanning and construction activities for the Omagine Project did not begin in December 2015 (and have not yet begun) as required for the fast-track development strategy and as management had planned. (See: “Initial Activities” and “Pre-Development Expenses and Loans and Advances to LLC”, below). The design, development and construction of the Omagine Project will still benefit from these Initial Activities having been undertaken but not to the extent envisioned by our planned fast-track development approach.

 

Non-Omani persons (such as expatriates living and working in Oman) are not permitted by Omani law to purchase land or residences in Oman outside of an ITC. The Government’s designation and licensing of the Omagine Project as an ITC therefore permits LLC to sell the freehold title to Project Land and properties which are developed on Project Land to any Omani or non-Omani individual or juristic person worldwide. Properties within an ITC enjoy a premium price relative to properties not in an ITC. Any Project Land or buildings remaining unsold at the expiration of the 50 year Usufruct Term will revert to the Government. LLC does not anticipate that there will be any such unsold properties at the expiration of the 50 year Usufruct Term.

 

The foregoing summary of some of the terms of the DA and of the UA does not purport to be complete and it is qualified in its entirety by reference to the full texts of such agreements. The full text of the Development Agreement is attached hereto as Exhibits 10.7 and 99.1. The full text of the Usufruct Agreement is attached hereto as Exhibits 10.8 and 99.2 and also contained in Schedule 2A of the Development Agreement.

 

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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  OR295,000,000 
C&W  OR385,000,000 
JLL  OR150,000,000 
      
Average  OR276,666,667 

 

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).

 

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Since the 276,666,667 Omani Rial value of the Land Rights is substantial, LLC retained the services of PricewaterhouseCoopers LLP (“PwC”) to provide its written analysis and report to LLC with respect to the correct IFRS accounting method LLC should use to record the 276,666,667 Omani Rial Land Rights value in its IFRS compliant financial statements. PwC did not advise on the valuation of the Land Rights (as determined by Savills, C&W and JLL), but only on the correct accounting LLC should use to record such Land Rights valuation in LLC’s financial statements in accordance with IFRS. PwC’s written report was received by LLC in August 2015. Promptly thereafter, LLC consulted with its independent auditor, Deloitte & Touche (M.E.) & Co. LLC (“Deloitte”) with respect to the matter, and Deloitte’s written technical analysis report (which agreed with PwC’s analysis) was received by LLC in November 2015.

 

The Land Rights over the Project Land are extensive, are closely akin to ownership rights and include the right to sell such land on a freehold basis. The Land Rights are virtually equivalent to ownership rights and like any asset, if its value were to become impaired for any reason (including any contractual reason pursuant to the DA requirements), a reserve for such impairment would need to be established at such time. Although it is not required to do so, in view of the unsettled economic environment in Oman and the greater MENA Region and because of the inordinate delays in resolving the CCC matters and obtaining a replacement investor for CCC, LLC plans to update its land valuation when it has the resources to do so to verify if any material changes in the value of the Project Land may have occurred since the above three valuation reports were completed. Consideration of the foregoing concerns may possibly require the establishment of such a reserve for impairment. Management’s decision as to whether or not to undertake such updated reports and/or whether or not to establish such a reserve will depend to a large extent upon management’s assessment at the time of the likelihood of securing a replacement investor for CCC and the economic conditions in Oman. Both PwC and Deloitte independently concluded that the Land Rights should be recorded as capital and as tangible assets (work-in-process inventory and land) on LLC’s financial statements. With respect to the Company’s consolidated financial statements, the Company’s independent auditor in the U.S. has likewise concurred that pursuant to US GAAP, the Land Rights should be recorded as capital, inventory and land.

 

In determining the proper amounts to be allocated to inventory and to land, LLC calculated the percentage (x) by dividing (y) the area of the land LLC presently plans definitively to sell, by (z) the total area of the Project Land, and then multiplying that percentage (x) by 276,666,667 Omani Rials to get the number (N) for inventory. The amount to be allocated to property was then calculated by subtracting N from 276,666,667 Omani Rials. Using its detailed internal financial model, management calculated (x) to be equal to 68.3%, thereby making the inventory number (N) equal to 188,963,334 Omani Rials ($490,813,363 based on a $2.5974 per 1 Omani Rial exchange rate) and the property number equal to 87,703,333 Omani Rials ($227,800,637 based on a $2.5974 per 1 Omani Rial exchange rate). In its consolidated financial statements therefore, the Company has allocated the value of the Land Rights between (i) land under development which is held for sale (inventory), and (ii) land under development which is held for investment (PP&E). As more precise land use percentages emerge during and after the masterplanning and construction of the Omagine Project, the percentage allocations for the value of the Land Rights may be reclassified to distinguish between the land underlying properties that we will own and operate and those which we will own and lease.

 

Pre-Development Expenses and Loans and Advances to LLC

 

Prior to the DA being signed, OMAG incurred significant costs related to marketing, planning, concept design, re-design, feasibility studies, engineering, financing, promotions, capital raising, travel, legal fees, consulting and professional fees, other general and administrative activities and similar such activities including preparing and making presentations to the Government and to potential investors and all other activities and matters associated with the negotiation and conclusion of the DA with the Government (collectively, the “Pre-Development Expenses”). The Shareholder Agreement defines the “Pre-Development Expense Amount” as the total amount of such Pre-Development Expenses incurred before the DA was signed by the Government and LLC on October 2, 2014.

 

OMAG expended $17,920,114 to pay for 100% of the Pre-Development Expense Amount.

 

Subsequent to the October 2, 2014 DA signing date, OMAG has voluntarily - and without any obligation to do so - single-handedly kept LLC and the Omagine Project financially afloat by expending (as of March 31, 2017) an additional $12,278,841 million on behalf of LLC and the Omagine Project via Loans and Advances from OMAG to LLC.

 

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A summary of the Pre-Development Expense Amount and of the Loans and Advances is detailed in the following table:

 

Pre-Development Expenses, Loans and Advances

 

   Cash
Items
   Non-Cash Items   Total 
Pre-Development Expense Amount (incurred prior to the October 2, 2014 DA signing date)  $13,611,951   $4,308,163   $17,920,114 
                
Loans & Advances (incurred on or after the October 2, 2014 DA signing date)  $4,884,437   $7,394,404   $12,278,841 
                
Total Due to OMAG from LLC  $18,496,388   $11,702,567   $30,198,955 

 

The Loans and Advances are liabilities of LLC to OMAG; reimbursable to OMAG on demand. The Pre-Development Expense Amount will be a liability of LLC to OMAG reimbursable to OMAG in accordance with the terms of the Shareholder Agreement. The terms and conditions of an Amended and Restated Shareholder Agreement may change the presently existing terms and conditions of the existing Shareholder Agreement with respect to the payment of the Pre-Development Expense Amount and/or the Loans and Advances.

 

The Pre-Development Expense Amount

 

Pursuant to the Shareholder Agreement as presently in effect, the date subsequent to the first Financing Agreement Date when LLC draws down the first amount of debt financing is defined as the “Draw Date”.

 

The first Financing Agreement Date occurred on November 29, 2015 when LLC and Masraf Al Rayan signed a Financing Agreement. A Draw Date pursuant to that Financing Agreement never occurred however because CCC (represented by CCIC executive management), after first agreeing in December 2015 to promptly (i) finalize the negotiation of the CCC-Oman construction contract (“CCC-Contract”) which in December 2015 was in an advanced stage of completion, (ii) sign the CCC-Contract, and (iii) invest their Deferred Cash Investments immediately after the CCC-Contract was signed – subsequently – and on several different occasions – defaulted on all of these commitments and on its obligations under the Shareholder Agreement. Consequently, these matters have been the subject matter of numerous and virtually continuous discussions, negotiations and agreed changes (subsequently defaulted on by CCC) since December 2015 through March 2017 with many and varied interim “agreed agreements”, all of which were “agreed” and then later forsaken by CCC. The CCC-Contract negotiations were ultimately abandoned by management (See: “The CCC-Contract”, below) and the OMAG Options was exercised by OMAG in April 2017.

 

Further pursuant to the Shareholder Agreement as presently in effect:

 

  1) the liability for the Pre-Development Expense Amount shall be recorded on LLC’s financial records on the Draw Date and in accordance with the International Financial Reporting Standards (“IFRS”), and

 

  2) fifty percent (50%) of the Pre-Development Expense Amount will be paid to OMAG on or within ten (10) days after the Draw Date, and

 

  3) the remaining fifty percent (50%) of the Pre-Development Expense Amount will be paid to OMAG in five equal annual installments beginning on the first anniversary of the Draw Date.

 

The Loans and Advances to LLC

 

The $12,278,841 of Loans and Advances (as of March 31, 2017) are payable to OMAG by LLC on demand (but as a practical matter, not until LLC has the financial capacity to do so and OMAG has no present intention of demanding immediate payment of the Loans and Advances until LLC has such financial capacity).

 

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The Success Fee

 

The Shareholder Agreement defines the Success Fee as being equal to ten (10) million dollars. Pursuant to the terms of the Shareholder Agreement as presently in effect:

 

  1) the liability for the Success Fee shall be recorded on LLC’s financial records on the Draw Date and in accordance with the IFRS, and

 

  2) the Success Fee will be paid to OMAG in five annual two (2) million dollar installments beginning on or within ten (10) days after the Draw Date.

 

OMAG, may at its sole option, not enforce the aforementioned payment schedules for the Pre-Development Expense Amount and/or the Success Fee as agreed in the Shareholder Agreement and may agree to a different schedule for such payments and OMAG may likewise, at its sole option, refrain from demanding payment of the Loans and Advances until LLC is in a financial position to make such payment.

 

As of the date hereof, OMAG continues to make Loans and Advances to and on behalf of LLC for the activities being undertaken by or on behalf of LLC for the Omagine Project and expects to do so for only a short time further or until the closing of an equity investment into LLC occurs.

 

The Amended and Restated Shareholder Agreement (assuming it is agreed and executed) is expected to, among other things, address, restate and formalize the terms of repayment by LLC to OMAG of the Pre-Development Expense Amount, the Loans and Advances and the Success Fee but the manner, terms and conditions to be agreed relative thereto is uncertain at this time. Management’s primary goal continues to be the launch of serious design and construction activities for the Omagine Project and management does not object to any reasonable resolution of these and other matters preventing that goal from being accomplished. Notwithstanding the foregoing, if and when LLC closes an equity investment as or similar to the equity investment mentioned above and herein with respect to the Investment Agreement or with one or both of the European investment funds (or other investor), it is management’s present intention to demand repayment from LLC to OMAG of all or a large part of the Loans & Advances then due and outstanding.

 

LLC Capital Structure

 

As of the date hereof the Registered Shareholders have made:

 

  (i) cash investments totaling OR 360,000 [$936,000] (of which OR 300,000 [$780,000] was invested by OMAG), and
     
  (ii) a non-cash investment of the Land Rights valued at OR 276,666,667 ($718,614,000), for a total investment to date of OR 277,026,667 ($720,269,334).

 

LLC is presently capitalized as follows:

 

Shareholder  Omani Rials   US Dollars 
OMAG  OR300,000   $780,000 
RCA  OR 276,704,167   $718,711,500 
CCC-Panama  OR15,000   $39,000 
CCC-Oman  OR7,500   $19,500 
Total  OR77,026,667   $719,550,000 

 

As of the date hereof, as a result of (i) OMAG having made its OR 210,000 ($560,000) Deferred Cash Investment into LLC, and (ii) RCA having made its OR 276,666,667 ($718,614,000) non-cash PIK Investment of the Land Rights into LLC, LLC is presently obligated to issue and register a further 2,100,000 LLC Shares to OMAG and a further 663,750 LLC Shares to RCA. As of the date hereof, RCA has not yet made its Deferred Cash Investment into LLC but is expected to do so pursuant to an Amended & Restated Shareholder Agreement and CCC has defaulted on its obligation to make its Deferred Cash Investment into LLC.

 

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As of the date hereof, the ownership percentages of LLC as registered at Oman Ministry of Commerce & Industry are as follows:

 

LLC Shareholder  % Ownership 
OMAG   60%
RCA   25%
CCC-Panama   10%
CCC-Oman   5%
Total:   100%

 

On April 3, 2017 OMAG exercised the OMAG Options to purchase all of the shares of LLC owned by CCC-Oman and CCC-Panama. RCA continues to be obligated to make its further cash investment into LLC in the aggregate amount of OR 7,640,625 [$19,865,625] but the timing and payment of such RCA Deferred Cash Investment may change from that memorialized in the Shareholder Agreement presently in effect to that which may be agreed in an Amended and Restated Shareholder Agreement. CCC has indicated to management that it will default and not make its Deferred Cash Investment into LLC in the aggregate amount of OR 18,987,500 [$ 49,367,500].

 

The Transformation

 

At some time subsequent to the execution of the Amended and Restated Shareholder Agreement, LLC intends to transform its corporate structure from a limited liability company into a joint-stock company (the “Transformation”).

 

The Shareholder Agreement also specifies, among other things, the corporate governance and management policies of LLC and it provides for the LLC shares presently owned by JOL to be transferred to OMAG subsequent to the signing of the DA. We presently expect this share transfer to occur at the time of the Transformation of LLC into a joint stock company or at the time of the execution of the Amended and Restated Shareholder Agreement.

 

The foregoing summary of the terms of the Shareholder Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Shareholder Agreement attached hereto as Exhibit 10.6.

 

Banks, Investors and Contractors

 

The Al Rayan Bank 

 

As previously reported, on November 29, 2015, LLC executed a Murabaha Facility Agreement with Masraf Al Rayan Bank (Qatar) for a $25 million loan (the “Al Rayan Bank Loan”) to finance the first phase of the Omagine Project (the “Al Rayan Loan Agreement”) consisting of design, development and initial construction activities. The loan, which is subject to satisfaction of certain conditions precedent to closing, would bear interest at an annual rate equal to the 12 month LIBOR rate plus 1% and would be payable one year from the closing date. One condition precedent to closing is that the loan be secured by a $25,000,000 cash deposit in an LLC account at Masraf Al Rayan Bank (Qatar). Such security deposit was expected (and agreed by CCC) to be provided by CCC pursuant to the terms pf the Shareholder Agreement but this did not occur and it is presently unlikely that this loan facility will be utilized. The Al Rayan Loan Agreement and the Al Rayan Bank Loan will not be utilized by LLC due to CCC’s default under the Shareholder Agreement and its failure to make its required OR 18,987,500 [$ 49,367,500] Deferred Investment into LLC.

 

Management remains optimistic that its ongoing discussions with an alternative bank can be concluded when and if our new investor to replace CCC becomes an LLC shareholder.

 

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Other Investors and Contractors

 

During 2015, 2016 and to date, management has conducted a multitude of investor presentations across the MENA Region with potential LLC equity investors and high net-worth individuals. Several of these investors expressed interest in becoming shareholders of LLC but in all such cases to date except one, management concluded that the percentage of LLC equity required by such investors was exorbitantly excessive and much too dilutive to the LLC Shareholders (and indirectly dilutive to our OMAG shareholders via OMAG’s ownership of LLC). LLC management is presently focused on the estate of the abovementioned investor with whom it has a written Investment Agreement) and on two European investment funds as investors.

 

Given the present liquidity issues at local banks, the matter of construction debt financing (“Project Finance”) is an issue at the top of all developer’s and contractor’s agendas. As mentioned above, the required Project Finance for the Omagine Project – or any project – is not really needed until after the masterplanning and design phase is complete or near complete.

 

Design, Development & Construction:

 

The design, development and construction of the Omagine Project will be divided into various phases (each, a “Phase”). Since the CCC Contract has not and will not be signed, neither CCC nor any other contractor is presently expected to be the General Contractor for the entire Omagine Project. The various construction Phases are now expected to be put out to bid to various contractors and this competitive bidding process (especially given the present economic environment for contractors in the MENA Region) is expected to garner substantial cost savings for LLC.

 

Initial Activities

 

The Post-DA Period is the time period between the DA signing and the date hereof. The execution of many initial activities during this period by LLC required the parallel launching by LLC management of many diverse efforts and processes on multiple fronts immediately after the DA Execution Date of October 2, 2014 and continuing through the date hereof. This early initiative fast track strategy (financed entirely by OMAG) benefited LLC to date in many ways, among which are:

 

1. the DA was Ratified by the Government;
   
2. the UA was signed and registered with the Government;
   
3. the Operative Date of July 1, 2015 replaced both the Execution Date of October 2, 2014 and the Effective Date of March 11, 2015 referenced in the DA;

 

4. three separate valuation studies and reports were commissioned and the valuation of the Land Rights was completed;
   
5. expert accounting analyses and reports were received from PwC, Deloitte and the Company’s independent auditor regarding LLC’s purchase of the Land Rights and the recording thereof in LLC’s and the Company’s financial statements;
   
6. LLC booked 276,666,667 Omani Rials of new equity which is also reflected in the Company’s consolidated financial statements;
   
7. a cost accounting budgetary framework to be used during the development, construction and marketing of the Omagine Project was created by an independent accounting and finance consultant;
   
8. an expert IT consultant was selected to architect and install the IT framework and solutions we intend to implement across LLC and the Company and across the Omagine Project’s “smart city” environment;
   
9. an independent third party update to our feasibility study was commissioned and completed;
   
10. an update of LLC’s internal financial model by specialist real estate investment bankers and advisers was commissioned and completed;
   
11. confirmation from banks in Oman (but not from banks outside of Oman) that the value of the Land Rights can be used as collateral to support the Syndicated Bank Financing was received;
   
12. the “Brand Identity” and associated brand pillar components and uniform brand messaging platform we intend to implement for OMAG, LLC and the Omagine Project were created;
   
13. LLC’s strategic plan was completed;

 

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14. multiple meetings with, and multiple iterations of proposals and presentations from major mission-critical project consultants (architects, designers, master planners, engineers, program managers, quantity surveyors, real estate advisers, hospitality advisers, hotel management companies, financial advisers and others) have been received, reviewed and analyzed by management and selections of many consultants have been made by management;
   
15. candidates for senior LLC executive positions have been recruited, interviewed and selected;
   
16. extensive and multiple presentations and meetings with potential LLC equity investors in six MENA Region countries, Europe, Asia and the U.S. were conducted and while most offers were declined by LLC, negotiations with several selected strategic investors are still ongoing with a present focus on one such investor;