Dear Omagine Shareholders,
Omagine, Inc. has today filed with the SEC its quarterly report on Form 10-Q for the period ended June 30, 2015 (the “10-Q Report”).
Below are certain excerpts from the 10-Q Report. The excerpts do not purport to be or represent the full filing. Please use the following link to view the complete text of the 10-Q Report:
http://www.sec.gov/Archives/edgar/data/820600/000101376215000862/f10q0615_omagineinc.htm
Excerpts from 10-Q Report
Pursuant to the DA, the time periods for the execution by Omagine of certain tasks are measured either from the Execution Date or the Effective Date. On July 2, 2015, the Government confirmed in writing its agreement with LLC that all such time periods are now measured from the UA Date of July 1, 2015.
The five (5) year time period allocated to complete the MBO begins on the UA Date and the term of the DA is for 20 years after the UA Date.
Since the Execution Date, management has initiated a fast-track development strategy and has undertaken many required development activity efforts (See: “The CCC-Oman Contract” and “Financing / Pre-Design Activities / Financing Agreement Date”, below).
The DA also obligates LLC to pay the Government twenty-five (25) Omani Rials (approximately $65) for each square meter of Project Land purchased directly by LLC or sold by LLC to any third party (the “Land Price Payment”). The average valuation for the Usufruct Rights over the Project Land (net of such $65 per square meter Land Price) is seven hundred eighteen million six hundred fourteen thousand dollars ($718,614,000) (See: “The Usufruct Rights”, below).
The Usufruct Rights
The Savills and DTZ final valuation reports were received by LLC in January 2015. The JLL final valuation report was received by LLC on July 7, 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 Usufruct Rights. The Usufruct Rights valuations by the three aforementioned firms are summarized in the table below:
The Accounting Treatment for the Usufruct Rights
Omagine and JOL prepare their financial statements in accordance with accounting principles generally accepted in the United States (“USGAAP”) and the Company’s consolidated financial statements are prepared in accordance with USGAAP. LLC’s financial statements are prepared in accordance with the IFRS.
LLC’s financial statements are audited by Deloitte & Touche (M.E.) & Co. LLC (“Deloitte”).
As previously reported, management’s present interpretation of the applicable IFRS regulations pertaining to the proper method of accounting for “intangible assets” such as the Usufruct Rights Payment-In-Kind is that the issue turns on the question of whether or not consideration was paid for the intangible asset in question. In this regard, it is management’s opinion that Clause 4.1[d][iii] of the Shareholder Agreement (quoted above) resolves the question of consideration. LLC has clearly paid 663,750 shares of its capital stock (the “LLC Shares”) as consideration for the Usufruct Rights. We believe, in any event, that the value of the Usufruct Rights is more readily determinable than the value of the 663,750 LLC Shares. Therefore the value of the Usufruct Rights should, in management’s present opinion, be recorded as capital on LLC’s financial records.
If the consideration consists of a “payment-in-kind” as is the case with Usufruct Rights – then the value of that consideration must be determined in order to properly record the correct number when accounting for the intangible asset in the relevant financial statements. As indicated in the discussion above, LLC and Company management presently believe that the correct number for the value of such consideration is $718,614,000.
LLC management’s present opinion therefore is that LLC should record the $718,614,000 average valuation of its Usufruct Rights as an intangible asset on its balance sheet and as a capital contribution from RCA, but management will not persist in this opinion absent the consent of its independent auditor Deloitte & Touche (M.E.) & Co. LLC. Deloitte will not opine on this matter until after it has reviewed LLC’s theory and determination in the matter. It is LLC’s obligation to first make such determination independent from its auditor, Deloitte. Notwithstanding the foregoing present opinion of management, LLC has consulted with its IFRS accounting consultant, PriceWaterhouseCoopers LLP (“PWC”), before definitively determining the correct method of reflecting the $718,614,000 average value of its Usufruct Rights in its IFRS compliant financial statements.
Since the value determined for the Usufruct Rights is substantial, LLC retained the services of PWC to provide LLC with PWC’s written report regarding the correct IFRS compliant accounting method to be utilized in recording the $718,614,000 average value of its Usufruct Rights on LLC’s financial statements. PWC is not advising on the valuation of the Usufruct Rights (as determined by Savills, DTZ and JLL), but only on the correct accounting methodology to be utilized in recording such valuation on LLC’s financial statements in accordance with IFRS. LLC received PWC’s draft report on August 13, 2015 and expects to receive PWC’s final report within a few days hereof. LLC intends promptly thereafter to consult with its auditor, Deloitte, to finalize the accounting treatment of its Usufruct Rights on LLC’s financial statements.
After the correct IFRS compliant accounting method to be followed by LLC is concluded with Deloitte, the Company will then consult with its U.S. auditors to finalize the correct USGAAP compliant accounting method to be followed by the Company in the preparation of the Company’s consolidated financial statements. We expect to conclude this matter shortly.
The LLC Shareholder Agreement
Pursuant to the provisions of the Shareholder Agreement:
1.The LLC Shareholders acknowledged the significant expenditure of the “Pre-Development Expenses” (as hereinafter defined) by Omagine prior to the date of the Shareholder Agreement (approximately $9 million at such time and in excess of $15 million as of the date hereof), and
2.the LLC Shareholders subscribed for an aggregate of 4,136,250 LLC Shares in consideration for an aggregate cash investment by them of 26,968,125 Omani Rials [$70,117,125] (the “Cash Investment”), and
3.RCA subscribed for an additional 663,750 LLC Shares in consideration for its non-cash Payment-In-Kind investment of the Usufruct Rights.
I.After the October 2, 2014 DA signing date, the LLC Shareholders are obligated to invest 26,838,125 Omani Rials [$69,779,125] (the “Deferred Cash Investments”), as follows:
a)Omagine is obligated to invest an additional 210,000 Omani Rials [$546,000](the “OMAG Deferred Cash Investment”) before the Financing Agreement Date in consideration for the issuance to Omagine of an additional 2,100,000 LLC Shares.
i.Although not yet obligated to do so, Omagine has already invested 180,000 Omani Rials ($468,000) of such OMAG Deferred Cash Investment into LLC as of the date hereof, and
ii.Pursuant to its obligations under the Shareholder Agreement, Omagine intends to invest the final 30,000 Omani Rials ($78,000) of the OMAG Deferred Cash Investment into LLC before the Financing Agreement Date,
b)On or immediately subsequent to the occurrence of the later of (A) the Financing Agreement Date, or (B) the Contract Date (as hereinafter defined):
i.CCC-Panama will invest an additional 12,658,333 Omani Rials [$32,911,666] in consideration for the issuance to CCC-Panama of an additional 350,000 LLC Shares, and
ii.CCC-Oman will invest an additional 6,329,167 Omani Rials [$16,455,835] in consideration for the issuance to CCC-Oman of an additional 175,000 LLC Shares, and
iii.RCA will invest an additional 7,640,625 Omani Rials [$19,865,625] in consideration for the issuance to RCA of an additional 211,250 LLC Shares.
Management presently expects that the Contract Date will occur within the next sixty (60) days (See: “The CCC-Oman Contract”, below) and that the Financing Agreement Date will occur over the next nine months as the master planning process unfolds. After the Contract Date, the single remaining condition precedent necessary to be satisfied for CCC-Panama and CCC-Oman (collectively, “CCC”) and RCA to make their $69,233,125 aggregate Deferred Cash Investments (the “Final Deferred Cash Investment”) is the occurrence of the Financing Agreement Date.
Non-Cash Investment into LLC pursuant to the Shareholder Agreement
Pursuant to Clause 4.1[d][iii] of the Shareholder Agreement, LLC also sold 663,750 LLC Shares to RCA for a purchase price of 276,666,667 Omani Rials ($718,614,000) which is the value of RCA’s non-cash PIK investment of the Usufruct Rights (See: “The Usufruct Rights”, above). The investment into LLC of the Usufruct Rights was perfected on July 2, 2015 when the Usufruct Agreement was officially registered with the Government. As mentioned above (See: “The Accounting Treatment for the Usufruct Rights”), LLC is awaiting the final report from PWC and then the consent of its auditor Deloitte before determining the definitive method of recording the Usufruct Rights as an intangible asset in its financial statements.
Until the Financing Agreement Date occurs, none of the LLC Shareholders (including Omagine, Inc.) are legally obligated to make any further investment into LLC beyond their Initial Cash Investments. In order to advance the development of the Omagine Project prior to the Financing Agreement Date however, and although we are not obligated to do so, from October 2, 2014 through the date hereof Omagine has voluntarily:
(i)paid approximately $1.6 million dollars of LLC’s cash development expenses since the October 2, 2014 Execution Date of the DA (the “Omagine Payments”), and
(ii)advanced over 85% ($468,000) of the OMAG Deferred Cash Investment to LLC, and
(iii)provided a multitude of free-of-charge services to LLC.
As of the date hereof and as contemplated by the Shareholder Agreement, CCC-Panama, CCC-Oman and RCA have not made any cash advance to or further investment into LLC beyond their Initial Cash Investments. Management has conducted presentations with several potential equity investors interested in becoming shareholders of LLC, including sovereign funds, investment funds and high net-worth individuals from various MENA Region countries. These investor discussions are ongoing.
LLC Capital Structure
Management believes that the 26,968,125 Omani Rial ($70,117,125) Cash Investment and the 276,666,667 Omani Rials ($718,614,000) Payment-In-Kind investment of the Usufruct Rights are the most important parts of LLC’s equity capital structure. They were the most difficult to arrange since they are the highest risk portion of such equity capital structure. Both the $70,117,125 Cash Investment and the $718,614,000 PIK investment are memorialized in the Shareholder Agreement (See: Exhibit 10.5).
As of the date hereof, Omagine has also made an earlier than legally required investment of 180,000 Omani Rials ($468,000) of its OMAG Deferred Cash Investment into LLC and RCA has completed the PIK investment (collectively, the “Post-DA Investments”). In consideration for the Post-DA Investments, LLC is obligated to issue an aggregate of 2,463,750 LLC Shares (the “Unissued Post DA Shares”).
As of the date hereof, in order to bring the Omagine Project into existence, Omagine has expended in excess of $15 million of Pre-Development Expenses through the October 2, 2014 DA signing date which are not recorded as capital on LLC’s financial statements (See: Pre-Development Expense Amount”, below).
Assuming (a) the issuance of the Unissued Post DA Shares, and (b) that the value of the Usufruct Rights is recorded as capital on LLC’s balance as management presently expects, then LLC is presently capitalized as follows:
The CCC-Oman Contract:
A draft of the CCC-Oman Contract (“Draft Construction Contract “) has been completed based on the internationally accepted contracting standards promulgated by the International Federation of Consulting Engineers (“FIDIC”) and it contains a set of industry standard performance parameters, incentives and penalties to ensure Omagine LLC’s interests are protected and that value is delivered. The Draft Construction Contract outlines a two part framework agreement specifying that several phases of the required construction work (“Sections”) will occur during:
1.a “Pre-Design Period”, and
2.a “Fixed-Price Period”
and the different contracting methodologies to be followed for the Sections in each such period. LLC plans to maintain direct control of the design of each Section through to completion. CCC-Oman will work closely with LLC and its master planner and architects to ensure that constructability and value engineering are integrated in the final design for each Section.
The Draft Construction Contract was received by LLC in late July 2015 and is now being revised and updated based on LLC’s comments and will then be circulated to CCC-Oman and to LLC’s proposed bankers, insurer, engineering consultant and quantity surveyor (cost consultant) for final comments. The “Final CCC Contract” will be presented to the LLC Shareholders for their consideration and expected approval and, based on present estimates, management expects that the Final CCC Contract will be signed by LLC and CCC-Oman in late September or early October 2015.
The Pre-Design Period is the time period beginning on the July 1, 2015 UA Date and lasting approximately 12 months thereafter during which LLC’s engineers, architects and designers will be undertaking the master-planning, engineering and architectural design work for the Omagine Project (the “Design Work”). During the Pre-Design Period LLC will pay CCC-Oman for its construction activities and services (the “Initial Construction Activities”) based on an agreed bill-of-materials (the “BOM”) included in the Final CCC Contract, which BOM will specify the unit pricing for each of the Initial Construction Activities expected to be performed during the Pre-Design Period.
The Fixed-Price Period is the time period beginning at the conclusion of the Pre-Design Period and lasting until the conclusion of all remaining construction work required on the Omagine Project (the “Remaining Construction Activities”) are completed. The Fixed-Price Period will consist of several Sections and CCC-Oman will only commence construction activities on such Sections after the Design Work for the relevant Section is sufficiently completed such that LLC and CCC-Oman can agree on a fixed lump-sum price for all the construction work required to complete such Section.
The costs and expenses associated with the Design Work and the Initial Construction Activities executed during the Pre-Design Period could vary substantially depending on the scope of such activities determined to be undertaken by LLC during the Initial Design Period – which determination by LLC will be driven primarily by the availability of financing for such Design Work and Initial Construction Activities.
LLC continues to enjoy a good working relationship with CCC-Oman and in this regard, since the UA is now registered with the Government, it is presently planned that CCC-Oman will now begin several of the Initial Construction Activities (surveying, site fencing, leveling, etc.), even before the execution of the Final CCC Contract.
Financing / Pre-Design Activities / Financing Agreement Date:
Project Financing/ Equity Sales/ Debt Facilities
Management continues to meet regularly with a number of banks and financial institutions seeking to act as LLC’s financial adviser (“Financial Adviser”). Our Financial Adviser will arrange the syndication among several banks of the debt financing necessary for the development and construction of the Omagine Project (the “Syndicated Project Financing”). It is presently expected that a definitive agreement between one or more of such potential Financial Advisers will be concluded within the next few months. No assurance however can be given that any such agreement will be signed until it is actually signed by the parties.
Notwithstanding anything contained in this Report regarding possible, proposed or planned:
i.sales of equity by Omagine and/or LLC (“Equity Sales”), or
ii.debt facilities with banks, financial institutions or other persons (including loans from Omagine to LLC) or sale of debt securities by LLC (collectively, “Debt Facilities”), or
iii.Syndicated Project Financing,
no assurance can be given at this time as to whether the Company or LLC will be able to obtain the significant amount of financing necessary to execute the development of the Omagine Project.
Over the past many months, we have conducted, and continue to conduct, numerous meetings:
i.with respect to LLC Equity Sales, with several potential equity investors interested in becoming shareholders of LLC, including sovereign funds, investment funds and high net-worth individuals from several MENA Region countries, and
ii.with respect to Omagine Equity Sales, with investment funds and high net-worth investors in the U.S., Europe and the MENA Region interested in becoming shareholders of Omagine, and
iii.with respect to Syndicated Project Financing, with major local and international banks in Oman and the GCC at which there appears to be a significant amount of banking liquidity. We have witnessed a large appetite at such banks for providing Syndicated Project Financing and Debt Facilities to LLC, and
iv.with respect to Debt Facilities for LLC other than Syndicated Project Financing, with several high-net worth investors and investment funds and other potential investors (including Omagine) in the U.S., Europe and Oman.
Management presently believes it can maintain Omagine’s majority control of LLC via Equity Sales of a further minority percentage of LLC’s equity to non-U.S. investors in the MENA Region for an amount in excess of the average cash investment amount paid by the LLC Shareholders.
LLC and CCC management and financial executives have held numerous meetings and discussions over the past several months with many major local and international banks, the purpose of which, among other things, was to discuss the prospects for such banks providing the Syndicated Project Financing which is expected to be composed primarily of debt financing from banks. This is a crucial matter to address and accomplish in order to make the Omagine Project a reality. Based on present assumptions, we estimate that LLC’s peak Syndicated Project Financing requirements will be approximately $350 to $400 million during the development cycle of the Omagine Project.
The process of obtaining Syndicated Project Financing is not a trivial exercise. It is a time-consuming, complicated, drawn-out and expensive process which, when successful, culminates in an event known as a “Financial Close” – usually several Financial Close events - as projects of the size and scope of the Omagine Project are almost always developed in phases or Sections. The Omagine Project will be developed in Sections.
The process of arriving at a Financial Close involves some or all of the following: A Financial Adviser is appointed by LLC to, among several other things, structure and organize the Syndicated Project Financing among several banks. The Financial Adviser may or may not be a participant in the Syndicated Project Financing so organized. LLC also plans to appoint several other specialized consultants whose efforts are crucial to reaching a Financial Close. These consultants include, but are not limited to, a master planning company, a consulting engineering company, a real estate consultant and a hospitality consultant. Together, these consultants and advisers, along with CCC, all contribute to and inform the final design process for the project.
Exact sizes, shapes and placement of the various project elements (residential, hotels, entertainment, landscape, etc.) are determined and as the master plan evolves and takes shape, the various Sections of development and construction will also naturally evolve. Simultaneously with these processes, the Financial Adviser will be updating the Omagine Project’s financial model to reflect the precise and final constituent project elements along with their projected costs and associated projected revenue streams. Finally, all of the foregoing data and other marketing, sales and strategic planning studies created by or on behalf of LLC are assembled into an “LLC Business Plan”. With the LLC Business Plan in hand and with the LLC Financial Adviser in the lead, LLC and the Financial Adviser and other select consultants set about the business of making final presentations to the various banks, with which we are now and will continue to be in touch, with the objective of achieving a Financial Close and a Financing Agreement Date.
With respect to any proposed Syndicated Project Financing requirements, the question of whether or not LLC’s intangible asset, the Usufruct Rights, can or will be used by the various banks as collateral to support such Syndicated Project Financing is therefore of considerable importance.
The DA (See: Exhibits 10.24 and 10.25) addresses this matter in considerable length and clearly contemplates that LLC - as the registered owner of the Usufruct Rights over the land - will be granting a security interest in its Usufruct Rights to Lenders to the project. The DA further obliges the Government - as the registered owner of the land - to consent to any such grant of a security interest by LLC. (See: Exhibits 10.24 and 10.25, Clause 22 of the DA - Lenders Security Interests). The DA states in relevant part:
“… the Government shall enter into Direct Agreements with Lenders acknowledging their rights by way of Security Interests over certain assets of the Project Company including an assignment to the Lenders of the Development Agreement, the Usufruct Agreement, other related agreements, and the Project Assets …” (See: Exhibits 10.24 and 10.25, Schedule 20 to the DA - Principles of Direct Agreement).
The many major Omani, regional and international banks with which LLC management has met - and with whom we continue to meet and update - have indicated that LLC’s Usufruct Rights will be considered by the banks as collateral to support the Syndicated Project Financing debt facilities for the Omagine Project. Although management presently expects that the value of the Usufruct Rights will be recorded as an asset on LLC’s balance sheet, it is significant to note that these banks have also indicated to us that in considering the above question of collateral, it is irrelevant to them whether or not such value of the Usufruct Rights appears on LLC’s balance sheet or in the notes to its financial statements.
LLC management is therefore presently confident that the 276,666,667 Omani Rials ($718,614,000) value of its Usufruct Rights will be considered by the banks as collateral for the Syndicated Project Financing bank debt for the Omagine Project. Notwithstanding the foregoing statement however, it is not possible at this time to predict with certainty what future events may alter LLC’s present assessment of its ability to use its Usufruct Rights to collateralize the Syndicated Project Financing. The only time this matter can be definitively resolved is at the conclusion of a Financial Close with the relevant syndicate of banks.
Updated Studies
In addition to the valuation studies and reports with respect to the Usufruct Rights (See: “The Usufruct Rights”, above), management also commissioned:
(i)an updated feasibility study of the Omagine Project by an independent third party which is a professional real estate, tourism and marketing consultant, and
(ii)an updated LLC internal financial model for the Omagine Project by unaffiliated third parties who are expert financial, investment banking and real-estate consultants.
Both the updated feasibility study and the financial model have been completed and they will be utilized by LLC to fine tune its development plans, and by LLC’s designated Financial Adviser in arranging the necessary Syndicated Project Financing and other financing for LLC as may be required.
Omagine LLC’s internal financial model is updated, modified and adjusted from time to time in order to capture what management believes are the then present market realities and projected trends. The financial model is organized to show best case, worst case and probable case scenarios. The most recently updated probable case scenario forecasts substantial net positive cash flows for Omagine LLC over the seven year period subsequent to the signing of the DA and a net present value (“NPV”) of the Omagine Project of approximately $1.4 billion dollars. Management believes its financial model assumptions are reasonable but cautions that they may change as new facts and information become available, as the development program and design process unfolds and as market conditions require. It is virtually certain that the various components of the financial model - and therefore the estimates of total cash flow and NPV - will change from time to time in line with market fluctuations and as the project unfolds.
The sale of residential and commercial properties are the main revenue drivers supporting Omagine LLC's internal financial projections. The increase over the last several years in the value of the land constituting the Omagine Site has had a positive effect on projected revenue and on the $718,614,000 valuation of the Usufruct Rights.
Management cautions that investors should not place undue reliance on the aforementioned financial model projections or on estimates by market participants mentioned herein as all such projections, estimates and forecasts are subject to significant uncertainties and contingencies, many of which are beyond the Company's control, and no assurance can be given that the projections will be realized or that the estimates or forecasts will prove to be accurate. Potential investors are cautioned not to place undue reliance on any such forward-looking statement or forecast, which, unless otherwise noted to the contrary, speaks only as of the date hereof.
Off Plan Sales and Land Price Payments
As is present practice in Oman, LLC anticipates that sales contracts with third party purchasers of residential or commercial properties that are purchased “off plan” (i.e. purchased before the construction thereof), will stipulate the payment to LLC by such purchasers of (i) a deposit on signing of such sales contract, and (ii) progress payments during the construction period of the relevant property covered by such sales contract. Since the aggregate of such deposit and progress payments before and during the construction of the relevant property is expected to be approximately 85% of the sales price of the relevant property stipulated in such sales contract, LLC anticipates that (i) the construction costs for properties that are sold “off plan” will be “owner-financed” by the relevant purchaser, and (ii) it will likely be unnecessary therefore for LLC to utilize any or very much Syndicated Project Financing in order to pay for the construction costs of properties which are sold pursuant to “off plan” sales contracts. Management expects that this commonly accepted sales contract and payment process will significantly benefit LLC by reducing its aggregate requirements for Syndicated Project Financing from its banks. The consumer appetite for such “off plan” sales is less today than it was before the 2009/2010 worldwide banking and financial crisis. (See “Market Conditions” below).
Furthermore, Land Price Payments are not due or owing to the Government from LLC until such time as LLC legally transfers the freehold title to such land to such purchasers, which time will coincide with the closing of the sale of such properties. Such closings will only occur after LLC has received final payment from the purchaser of the relevant sales contract amount for such properties. LLC’s financing profile is therefore further enhanced since it is not obligated to make any Land Price Payments to the Government until after it has already received 100% of the contracted sales price amount from the relevant purchaser at the closing when the freehold title to such land and property is transferred to the purchaser.
Pre-Design Activities / The Financing Agreement Date and The Final Deferred Investment
Although the LLC Shareholders will have invested an aggregate of 360,000 Omani Rials in cash ($936,000) prior to the Financing Agreement Date, the Final Deferred Cash Investment of 26,628,125 Omani Rials ($69,233,125) is not expected to be invested by CCC and RCA until the Financing Agreement Date occurs.
It is anticipated that the Omagine Project will be developed in several phases (described as Sections in the CCC-Contract) and therefore several tranches of Syndicated Project Financing will occur and several Financing Agreements will be executed during the course of the project’s development. Each such Financing Agreement will coincide approximately with the beginning of a new Section of the development. As indicated above, the execution date of the first such Financing Agreement is defined in the Shareholder Agreement as the “Financing Agreement Date”. The closing of each tranche of Syndicated Project Financing will be memorialized by a Financing Agreement (each, a “Syndicated Financing Agreement”).
Provided the execution and delivery of a Syndicated Financing Agreement is the first Financing Agreement to be executed and delivered, the date of such execution and delivery will therefore be the Financing Agreement Date (as defined in the Shareholder Agreement) and RCA and CCC will then be obligated pursuant to the Shareholder Agreement to invest the Final Deferred Cash Investment of 26,628,125 Omani Rials ($69,233,125) into LLC.
The Pre-Design Period will consist of several Sections and its scope is presently being determined by LLC. Subject to the level of financing available to LLC, it could include all or some of the initial planning, design, environmental studies and approvals, master planning, surveying, soil engineering and testing, initial site work, additions by LLC of office space, personnel and equipment, and administrative, organizational, marketing and public relations efforts (collectively, the “Pre-Design Activities”). The cost for the Pre-Design Activities will vary substantially (from between $5 million to over $20 million) depending on the scope of such Pre-Design Activities as determined by LLC; which determination will be driven by the availability of financing for such Pre-Design Activities. If alternate financing is not available, LLC will wait until the closing of the Syndicated Project Financing (and the first Financing Agreement Date) to begin many of the aforesaid Pre-Design Activities.
LLC management decided that the optimum development plan for the Omagine Project required the adoption of a “fast-track” strategy to undertake the maximum amount of Pre-Design Activities. This “fast-track” strategy was implemented by LLC beginning on October 3, 2014 and continues to date.
The execution of many initial Pre-Design Activities 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. This early initiative (financed entirely by Omagine, Inc.) has greatly benefited LLC to date in many ways, among which are:
i.the DA has been Ratified by the Government, and
ii.the UA is signed and registered with the Government, and
iii.the UA Date of July 1, 2015 is now the date from which all DA timelines are measured replacing both the Execution Date of October 2, 2014 and the Effective Date of March 11, 2015, and
iv.three separate land valuation studies and reports were commissioned and completed, and
v.the 276,666,667 Omani Rials ($718,614,000) valuation of the Usufruct Rights is now complete, and
vi.finalization of the accounting treatment for the value of the Usufruct Rights is imminent, and
vii.creation by a third party independent accounting & finance expert consultant of the cost accounting budgetary framework to be used during the development, construction and marketing of the Omagine Project, and
viii.conceptualization of the IT framework we intend to implement across LLC and the Company and across the Omagine Project’s “smart city” environment, and
ix.an independent third party update to our feasibility study was commissioned and completed, and
x.an update of LLC’s internal financial model by specialist real-estate investment bankers and advisers was commissioned and completed, and
xi.confirmation from the banks that the value of the Usufruct Rights can be used as collateral to support the Syndicated Project Financing, and
xii.creation of the “Brand Identity” and associated brand pillar components and uniform brand messaging platform we intend to implement for Omagine, LLC and the Omagine Project, and
xiii.LLC’s strategic plan is now complete, and
xiv.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
a.preliminary selections of all such consultants have been made by management, and
xv.candidates for ten senior LLC executive positions have been recruited, interviewed and selected, and
xvi.extensive and multiple presentations and meetings with potential LLC equity investors in six MENA Region countries, Europe, Asia and the U.S. have been conducted and final negotiations are underway with selected strategic investors, and
xvii.extensive and multiple presentations and meetings with local, regional and international banks in Oman, the MENA Region and Europe with respect to the provision of Syndicated Project Financing have occurred and these discussions and negotiations are ongoing, and
xviii.The CCC-Contract is almost completed and is now presently expected to be formally executed and approved by the parties within the next 60 days, and
xix.Five other contracts for 5 of the mission-critical consultants are presently being prepared by our attorneys.
This immediate implementation of this LLC fast-track strategy was only possible however because it was financed entirely by Omagine, Inc. via the Omagine Payments described above. It is not possible to completely execute all the Pre-Design Activities included in this fast-track strategy absent additional financing for the balance of such Pre-Design Activities.
LLC is presently exploring possible Equity Sales and Debt Facilities in order to finance the balance of the Pre-Design Activities in an effort to accomplish the initiation and completion of the maximum amount of Pre-Design Activities. One of such Debt Facilities presently under consideration by management is a secured loan from Omagine to LLC, if and when sufficient funds are available to Omagine to make such loan. This or any other such Debt Facility would be memorialized by a written agreement constituting a Financing Agreement (as defined in the Shareholder Agreement) and the date of the closing of any such Debt Facility, provided it is the first Financing Agreement to be executed, would therefore be the Financing Agreement Date (as defined in the Shareholder Agreement). The occurrence of the Financing Agreement Date will trigger the obligations of RCA and CCC pursuant to the Shareholder Agreement to invest the Final Deferred Cash Investment of 26,628,125 Omani Rials ($69,233,125) into LLC.
The earlier the Financing Agreement occurs, the better for LLC, the Omagine Project, and all concerned; because:
i.it will accelerate the date that RCA and CCC become obligated under the Shareholder Agreement to make their Final Deferred Cash Investment of 26,628,125 Omani Rials ($69,233,125) into LLC, and
ii.it will facilitate the Syndicated Project Financing effort which LLC’s designated financial adviser will be conducting with the bank syndicate because:
a.LLC’s capital will be increased, and
b.the CCC-Oman Contract will likely be in effect with its Fixed Price Period lump sum provisions which will be attractive to banks when considering Syndicated Project Financing for the Omagine Project, and
c.the Omagine Project’s design will be greatly advanced or completed as the Syndicated Project Financing process is underway, and
iii.it advances LLC’s marketing, advertising and sales schedules relevant to the sales releases of its residential and commercial properties, and
iv.it advances LLC’s development and construction schedules with respect to such Pre-Design Activities by nine to twelve months ahead of the schedules that would otherwise be attainable, and
v.many critical non-design activities included in the Pre-Design Activities will be underway or completed as the Syndicated Project Financing process is underway, and
vi.it further solidifies LLC’s relationship with the Government and the MOT as the relevant Government authorities see the development of the Omagine Project being rapidly initiated.
Management presently intends to finance the remaining Pre-Design Activities (budgeted at approximately $20 million) by arranging one or more Equity Sales, or in the alternative, by arranging a Debt Facility which would trigger the Financing Agreement Date and the investment of the Final Deferred Cash Investment.
No assurance however can be given at this time as to whether the Company will be successful in arranging either Equity Sales or Debt Facilities to finance the balance of the Pre-Design Activities necessary to facilitate the continuation of its fast-track development strategy.
Any reference in this report to a term or condition of the Development Agreement, the Usufruct Agreement and/or the Shareholders Agreement does not purport to be complete and is qualified in its entirety by reference to the full texts of such agreements. The full text of the Development Agreement is attached hereto as Exhibits 10.24 and 10.25. The full text of the Usufruct Agreement is attached hereto as Exhibits 10.28 and 10.29. The full text of the Shareholder Agreement is attached hereto as Exhibit 10.5.
Consolidated Results
The financial results of LLC are included in the consolidated financial results of the Company in accordance with accounting principles generally accepted in the United States. If and when the Financing Agreement Date occurs, the Company will experience a substantial increase in capital when 60% (or the then appropriate percentage representing Omagine’s ownership interest in LLC) of the approximately $70 million of cash capital investments into LLC are recorded in the Company’s consolidated financial statements as Omagine’s ownership interest in LLC.
Assuming, as management presently expects, that the Usufruct Rights are recorded as capital on LLC’s balance sheet and consolidated pursuant to USGAAP into the Company’s consolidated balance sheet (See: “The Accounting Treatment for the Usufruct Rights”, above), the Company will experience an additional increase in its capital of approximately $431,168,400 when 60% of the $718,614,000 valuation of the PIK is recorded as capital on the Company’s consolidated financial statements. LLC's ongoing financial results will be included in the consolidated financial statements of the Company as appropriate for as long as Omagine remains a shareholder of LLC.
Pre-Development Expenses / Success Fee
Prior to the DA being signed, Omagine and JOL 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
The Shareholder Agreement (i) estimates that, as of the date of the Shareholder Agreement (April 20, 2011), the Pre-Development Expense Amount was approximately nine (9) million U.S. dollars (and it is significantly higher as of October 2, 2014), and (ii) defines the Success Fee as being equal to ten (10) million dollars.
As provided for in the Shareholder Agreement, Omagine will receive payment in full from LLC of:
(i)
the Pre-Development Expense Amount and,
(ii)
the $10 million Success Fee.
The Shareholder Agreement also defines the date subsequent to the Financing Agreement Date when LLC draws down the first amount of debt financing as the “Draw Date”. The ten (10) million dollar Success Fee will be paid to Omagine in five annual two (2) million dollar installments beginning on or within ten (10) days after the Draw Date.
Fifty percent (50%) of the Pre-Development Expense Amount will be paid to Omagine on or within ten (10) days after the Draw Date and the remaining fifty percent (50%) will be paid to Omagine in five equal annual installments beginning on the first anniversary of the Draw Date.
As of the date hereof, Omagine has and continues to incur costs on behalf of LLC via the Omagine Payments for the Pre-Design Activities undertaken by LLC since October 2, 2014. Up until the October 2, 2014 Execution Date of the DA, Omagine had paid all of the Pre-Development Expenses for LLC. Subsequent to the October 2, 2014 Execution Date of the DA, Omagine has continued to pay for most of LLC’s operating expenses via the Omagine Payments.
The 2011 Shareholder Agreement is, of course, silent with respect to the 2014 and 2015 Omagine Payments. Management expects that the other LLC Shareholders (CCC and RCA) will recognize Omagine’s extraordinary and voluntary assistance to LLC since October 2, 2014 and that Omagine will be reimbursed by LLC for the Omagine Payments as promptly as LLC is able to do so subsequent to its receiving additional financing.
Financial Adviser / Syndicated Project Financing
LLC intends to appoint a Financial Adviser with a reputation for excellence and a strong presence in the MENA Region. There are presently many such reputable financial advisory firms and financial institutions that have indicated their interest in the Omagine Project. Since the Execution Date, management has been meeting with, interviewing and requesting proposals from a number of such highly reputable banks and financial institutions seeking to act as LLC’s Financial Adviser. It is presently expected that a definitive agreement between LLC and one or more such Financial Advisers will be executed in the next few months. No assurance however can be given that any such agreement will be signed until it is actually signed by the parties.
LLC’s Financial Adviser will advise on capital structure and lead the arrangement and placement of the Syndicated Project Financing required to execute the Omagine Project. LLC will then work together with its Financial Advisor to appoint lead arrangers for such Syndicated Project Financing which may include the Financial Advisor itself.
The amount of Syndicated Project Financing owed at any one time by LLC to its Lenders is expected to fluctuate over the development and construction cycle of the Omagine Project and will be greatly influenced by (i) any additional Equity Sales, and (ii) the pace and tempo of LLC’s receipt of proceeds from its planned sales of real-estate to third parties. The capital of LLC, proceeds from Equity Sales, if any, Syndicated Project Financing and the proceeds from sales of its residential and commercial properties, are expected to be utilized by LLC to develop the Omagine Project.
The maximum amount of such Syndicated Project Financing presently expected to be outstanding at any one time during the development and construction cycle of the Omagine Project is presently estimated by management to be between $350 million and $400 million.
Management believes that all the Financial Advisers with whom it has recently met concur that there is currently a high degree of liquidity and a strong appetite among MENA Region banks and financial institutions for lending to, and investing in, sound development projects in the MENA Region. The banks and Financial Advisers with which we have discussed the Omagine Project both before and after the DA was signed have been uniformly impressed with the design vision for the Omagine Project and with the quality of the LLC shareholders.
Notwithstanding the foregoing, no assurance can be given at this time that LLC will be able to obtain any, or a sufficient amount of, the Syndicated Project Financing required to develop, build and complete the Omagine Project. If such a circumstance were to occur, it would have a material adverse effect on our business and operations.
Market Conditions
During 2014, the worldwide market price for crude oil experienced significant declines from over approximately $100 per barrel to approximately $60 a barrel and such prices have not yet recovered as of the date hereof. This has had a negative effect on market sentiment and results in Oman and the GCC. All GCC nations, including Oman, rely on crude oil sales for a majority of their governmental income. Reduced revenue from crude oil sales result in reduced deposits at major banks utilized by the Government, and - although this has not yet been the case in Oman - may result in lower Government employment and infrastructure spending. These conditions, should they occur, could cause a knock-on effect in the real-estate markets resulting in slower or fewer sales and lower selling prices.
The market intelligence garnered by management indicates that local bankers and market participants believe that both transaction volume and pricing in the Omani real estate market are steadily improving. Management believes that LLC is well positioned to benefit from the ongoing and improving market conditions in both the real-estate and project financing sectors (with the caveat that we are presently unsure what the impact on these two sectors will be from the fall in crude oil prices) since, from a timing perspective and subject to the financing for the continuation of our fast-track strategy described above becoming available, LLC plans to now begin the more intense Pre-Design Activities (mostly, design and finance) for the next year or more followed by the launch of residential and commercial sales at the Omagine Project.
In Iraq, Syria, Yemen and Libya, among other countries, daily violent military clashes and terrorism are now commonplace. Other Arab countries in the MENA Region have experienced and are experiencing demonstrations of discontent with the rule of their heads of state and in some cases these demonstrations are being met with violent pushback by some MENA Region governments but this was not and is not the case in politically and economically stable Oman. Notwithstanding the foregoing, Oman did experience several low-intensity demonstrations against government corruption and with respect to job opportunities and wages for Omanis (a very few of which involved violent behavior) and these have been met by His Majesty and the Government with pro-active positive measures and economic and political initiatives (including an aggressive anti-corruption campaign and widely acclaimed elections) to address the expressed concerns of the citizens of Oman. Short term work stoppages and strikes with respect to labor matters accompanied by non-violent demonstrations now occur occasionally in Oman but these events, as well as several newly organized and legally allowed labor unions and the aforementioned anti-corruption campaign, are now regarded as a normal part of the emerging democratic fabric of Omani society. In recent months, anxiety over the health of His Majesty, the much beloved Sultan Qaboos, and what effect, if any, that will have on Oman’s political stability and leadership succession has been widely reported in the media. His Majesty has now returned to Oman from an overseas trip for medical treatment and these fears have now been greatly allayed.
Construction material costs and property selling prices in Oman and the surrounding region remain somewhat volatile and undue reliance on present forecasts should be avoided. Management cautions that future events rarely develop exactly as forecast and the best estimates routinely require adjustment. Management fully expects that its cost estimates for the Omagine Project (and therefore, its financial model) will require adjustment – possibly significant adjustment – as future events unfold. Investors and shareholders are cautioned not to place undue reliance on any such forward-looking statement or forecast, which speaks only as of the date hereof.
Nearby Dubai leads the way for the Gulf tourism market and this is likely to be the case for the foreseeable future, given its existing visitor market (nearly 12 million visitors in 2014), attractions, its impressive future capital development and marketing investment programs, and especially given its recent selection as the host for EXPO 2020 which is expected to attract over 25 million visitors.
Sales and Marketing
LLC plans to undertake several wide ranging and continuous marketing, advertising, branding and public relations campaigns to establish its brand identity in anticipation of its launch of residential and commercial properties for sale and to advertise and promote its forthcoming entertainment, hospitality and retail offerings.
CCC-Oman is presently completing construction of its elegant new multi-story headquarters building in the fashionable Shatti Qurum area of Muscat. LLC will occupy the first floor (ground level floor) of this building as its Muscat executive office and “in-town” sales showroom for the Omagine Project. As we move forward we will also construct and operate an additional sales showroom at the Omagine Site. Both sales office/showrooms will be staffed with experienced real-estate sales personnel and will contain large scale models of the Omagine Project and its various components as well as associated collateral sales and marketing materials.
The anticipated launch date for residential and commercial sales is presently planned for mid-2016. Management expects that the continuing recovery of local real estate markets as well as the Government’s continuing - and uninterrupted - improvements to Oman’s infrastructure (roads, airports, etc.) will contribute positively to LLC’s future sales prospects, albeit the impact of the recent fall in crude oil prices is unknown at this time.
Management expects the Omagine Project to benefit from Dubai’s hosting of EXPO 2020, and similarly from nearby Qatar’s hosting of the World Cup Games in 2022. Both of these events are expected to attract a huge amount of visitors and tourists. The Omagine Project will be conveniently located one hour from Dubai and Qatar by air and is easily accessible by a fine roadway system in both Oman and the U.A.E. A visit to the Omagine Project will be a natural and logical addition to a Dubai or Qatar visit.
Sale prices and rental rates for housing in other integrated tourism projects in the Muscat area of Oman have recovered and are increasingly strengthening. The inventory of unsold housing in the secondary (re-sale) market (both outside of and within ITCs) has diminished due to recent robust, albeit quite price-sensitive, sales activity. New housing inventory, especially smaller apartments designed to hit perceived market price-points, has continued to come onto the local Muscat area market and the market absorption rates (number of market transactions) for such new residential housing is brisk. The DA allows for sales and pre-sales of any of the residential or commercial buildings that will be developed and built on the Omagine Site.
The DA stipulates the obligation of the Government to issue such Licenses and Permits as may be required for the development of the Omagine Project, including but not limited to issuing an Integrated Tourism Complex License (“ITC License”) designating the Omagine Project as an ITC. On June 26, 2014, the Government issued an ITC License to LLC designating the Omagine Project as an ITC.
Non-Omani persons (including expatriates living and working in Oman) are forbidden by Omani law to purchase land, residences or commercial properties in Oman unless such land, residences or commercial properties are located within an ITC. Because it is now licensed as an ITC, the land, residences and commercial properties within the Omagine Project may be sold to any buyer worldwide - including any non-Omani buyer - and the freehold title to such land, residences and commercial properties may be transferred to such buyers. Residences in ITCs are viewed to be highly desirable by purchasers (by both investors and owner-occupiers) and ITC residences therefore enjoy a premium selling price relative to non-ITC residences.
The excellent location of the Omagine Site is recognized by local market participants and the significance of the provision of the Omagine Site via the Usufruct Agreement to LLC is substantial. The increase in the value over the last several years of the land constituting the Omagine Site has had a positive effect on the valuation of the Usufruct Rights and is expected to have a positive effect on LLC’s revenue from the sale of residential and commercial properties. The value of the land constituting the Omagine Site is expected to be a primary driver of future LLC and Company revenue and the benefits accruing to LLC and the Company pursuant to LLC’s Usufruct Rights over the Project Land is expected to be material and significant.
Pursuant to the DA and UA, LLC will pay the Government 25 Omani Rials (approximately $65) per square meter for the Project Land it sells to third party purchasers. The average valuation for the Usufruct Rights over the Project Land (net of such $65 per square meter Land Price) is seven hundred eighteen million six hundred fourteen thousand dollars ($718,614,000) (See: “The Usufruct Rights”, above).
Design, Engineering, Construction, Program Management, Content Development
The Company does not presently own or directly operate any design, engineering, content development or construction companies or facilities. Because of our strategic emphasis on design however, the Company or LLC may contract with or enter into joint ventures with firms providing such design and design supervision services.
With assistance from Omagine via the Omagine Payments and the early investment of 85% of the OMAG Deferred Investment, LLC has since the Execution date undertaken portions of its planned Pre-Design Activities as indicated above, but for LLC to fully accomplish its fast-track development strategy and undertake and finance the balance of such Pre-Design Activities, it will have to close an Equity Sale or Debt Facility transaction (or a combination thereof).
In the absence of closing such Equity Sale or Debt Facility transaction, LLC will be compelled to modify its fast-track development strategy and defer certain important activities until financing for them is available at the Financing Agreement Date when it receives the Final Deferred Cash Investment of 26,628,125 Omani Rials ($69,233,125) from CCC and RCA. (See “Financing / Pre-Design Activities / Financing Agreement Date”, above).
Subject to the approval of its shareholders and to negotiating and agreeing to a contract, LLC presently intends to hire Michael Baker Corporation (“Baker”) as its Program Manager and Project Manager. Baker is in the business of providing program and project management, engineering, design and construction management services to a wide variety of clients including the U.S. Department of Defense and many state governments and commercial clients. Omagine has employed Baker through the feasibility and engineering study phases of the Omagine Project and presently anticipates that, subject to the approval of the LLC shareholders, LLC will execute an agreement with Baker.
Baker is headquartered in Pittsburgh, PA, with offices throughout the U.S. and in Abu Dhabi in the United Arab Emirates and is experienced in all aspects of engineering, program management and construction management for large scale construction and development projects of the magnitude of the Omagine Project. Baker has significant program management and construction management contracts with the United States military worldwide, including in the MENA Region.
The interpre