One mile of Ocean Front, One Incredible Real Estate Development

Multi-Billion Dollar Agreement Signed With Oman

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Message: Form 10-Q - March 31, 2017

Dear Omagine Shareholders,

 

Omagine, Inc. has today filed with the SEC its quarterly report on Form 10-Q for the period ended March 31, 2017 (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:

https://www.sec.gov/Archives/edgar/data/820600/000121390017005649/f10q0317_omagineinc.htm

Excerpts from the 10-Q Report:

 

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.

 

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. 

 

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.

Regards,

AGORACOM

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