NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 1 - Organization and summary of significant accounting policies:
Following is a summary of our organization and significant accounting policies:
Organization and nature of business –
Octagon 88 Resources, Inc. (identified in these footnotes as “we” or the Company) is a Nevada corporation incorporated on June 9, 2008. We are currently based in Switzerland. We intend to operate oil and gas assets in the U.S. and Canada. We use June 30 as a fiscal year for financial reporting purposes.
The Company incorporated Octagon 88 Resources (Schweiz) AG on May 8, 2013, in the country of Switzerland as a wholly-owned subsidiary.
We are a natural resource exploration stage company in the business of acquiring, exploring, and developing natural resource assets. We have a mineral rights agreement over certain oil and gas leases whereby we have the right to earn an interest by undertaking exploration on the leases. We also hold, by way of share ownership, an interest in CEC North Star Energy Ltd.(NorthStar), a private company with oil and gas operations. NorthStar, Zentrum Energie Trust AG (“Zentrum”), who is our controlling stockholder, and our Company have a common director, Mr. Hilekes. The CEO of NorthStar is an advisor to Zentrum, who is also the financing partner for both NorthStar and our Company. Our Secretary and a member of our board of directors is also an advisor to Zentrum.
We are currently negotiating funding for operations and we are assisting in sourcing funding for NorthStar. In the current exploration stage, we anticipate incurring operating losses as we implement our business plan.
Basis of presentation -
These consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The consolidated financial statements of the Company include the Company and its wholly-owned subsidiary,
Octagon 88 Resources (Schweiz) AG
. All material intercompany balances and transactions have been eliminated in consolidation.
Use of estimates -
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents -
For purposes of the statement of cash flows, we consider all cash in banks, money market funds, and certificates of deposit with a maturity of less than three months to be cash equivalents.
Fair value of financial instruments and derivative financial instruments
- The carrying amounts of cash and current liabilities approximate fair value because of the short maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. We do not hold or issue financial instruments for trading purposes, nor do we utilize derivative instruments in the management of our foreign exchange, commodity price or interest rate market risks.
The FASB Codification clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 1 - Organization and summary of significant accounting policies: (continued)
Fair value of financial instruments and derivative financial instruments (continued)
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities.
|
|
Level 2:
|
Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement
Oil and gas properties
– We use the successful efforts method of accounting for oil and gas properties. Under that method:
|
a.
|
Geological and geophysical costs and the costs of carrying and retaining undeveloped properties are charged to expense when incurred since they do not result in the acquisition of assets.
|
|
b.
|
Costs incurred to drill exploratory wells and exploratory-type stratigraphic test wells that do not find proved reserves are charged to expense when it is determined that the wells have not found proved reserves.
|
|
c.
|
Costs incurred to acquire properties and drill development-type stratigraphic test wells, successful exploratory wells, and successful exploratory-type stratigraphic wells are capitalized.
|
|
d.
|
Capitalized costs of wells and related equipment are amortized, depleted, or depreciated using the unit-of-production method.
|
|
e.
|
Costs of unproved properties are assessed periodically to determine if an impairment loss should be recognized.
|
Investments in unconsolidated affiliates
-
The Company has an investment in an unconsolidated affiliate which is accounted for under the equity method with applicable financial reporting guidance provided in section 3430. Under the equity method, carrying value is adjusted for the Company's share of the investees' earnings and losses, as well as capital contributions to, and distributions from, the Company. Distributions in excess of equity method earnings are recognized as a return on investment and recorded as investing cash inflows in the accompanying consolidated statements of cash flows. The Company classifies operating income and losses as well as gains and impairments related to its investments in the unconsolidated affiliate as a component of operating income or loss, as the Company's investment in such unconsolidated affiliates are an extension of the Company's core business operations.
The Company evaluates its investments in the unconsolidated affiliate for impairment whenever events or changes in circumstances indicate that the carrying value of its investment may have experienced an "other-than-temporary" decline in value. Evidence of impairment may include such factors as a significant change in the market, economic or legal environment of the investee, changes in demand for goods or services sold by the investee resulting in adverse marketing conditions, changes in the investee’s financial condition or structural changes in the industry in which the investee operates. If such conditions exist, the Company compares the estimated fair value of the investment to its carrying value to determine if impairment is indicated and determines whether the impairment is "other-than-temporary" based on its assessment of all relevant factors, including consideration of the Company's intent and ability to retain its investment. If the recoverable value, less costs to sell, is lower that the carrying value, the Company will recognize a loss for the difference.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 1 - Organization and summary of significant accounting policies: (continued)
Other long-lived assets –
Property and equipment are stated at cost less accumulated depreciation computed principally using accelerated methods over the estimated useful lives of the assets. Repairs are charged to expense as incurred. Impairment of long-lived assets is recognized when the fair value of a long-lived asset is less than its carrying value. No impairments of long-lived assets occurred during the six month periods ended December 31, 2013 and 2012.
Stock-based Compensation –
Stock-based compensation is accounted for using a fair value based approach under the Topic of FASB ASC 718 which requires the fair value of stocks to be measured based on market price, if available, or be estimated using an option pricing model such as Black-Scholes. The Company uses the graded-vesting attribution approach for the awards with graded vesting.
Warrants
- Proceeds received on the issuance of units, consisting of common shares and warrants, are allocated first to common shares based on the market trading price of the common shares, and any excess is allocated to warrants.
Federal income taxes -
Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes in accordance with applicable FASB Codification regarding Accounting for Income Taxes, which require the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides deferred taxes for the estimated future tax effects attributable to temporary differences and carryforwards when realization is more likely than not.
We have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. We are not currently under examination by the Internal Revenue Service or any other jurisdiction. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material adverse effect on our financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.
Net income per share of common stock
– Basic loss per share includes no dilution and is computed by dividing loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
The Company had the following potential common stock equivalents at December 31, 2013:
Warrants
|
200,000
|
Stock options
|
1,500,000
|
Since the Company reported a net loss in the six month periods ended December 31, 2013 and 2012, respectively, the effect of considering any common stock equivalents, if outstanding, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 2 – Going concern:
As at December 31, 2013, we hold a Mineral Rights Agreement (see note 4) which gives us the rights to certain oil and gas exploration leases and we are an active investor in an operating oil and gas company by virtue of our shared board member and management team. . We continue to seek other oil and gas acquisitions that we can operate. While we have acquired an interest in certain mineral properties (Note 4) we expect to incur exploration stage operating losses until revenue generating operations commence, and for a period of time thereafter. We rely on our officers and directors to perform essential functions without compensation until we have raised sufficient funding for operations. We have entered into an agreement for funding of up to $2,500,000 (CDN) by way of an equity placement and a credit facility. We have drawn the first tranche of $500,000 and issued equity for the funds drawn. The lender has funded an additional $151,515 by the exercise of warrants under the equity placement (Note 5). We have not as yet drawn any funds under the credit facility. There can be no assurance that additional funds will be available from the credit facility if and when needed.
From inception through December 31, 2013, we have incurred operating losses of approximately $6,069,361, of which approximately $317,689 represents actual cash losses. At December 31, 2013, our cash on hand was $1,413.
These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 3 – Investment in CEC North Star Energy Ltd.:
On October 15, 2012, we entered into a share purchase agreement with Zentrum Energie Trust AG (“Zentrum”) (the “Share Purchase Agreement”), which closed on December 24, 2012 whereby we acquired a total of 3,100,000 common shares in the capital stock of CEC North Star Energy Ltd. (“North Star”) from Zentrum, representing approximately 22% of the issued and outstanding shares of North Star. Our President and Director, Mr. Guido Hilekes is also a member of the Board of Directors of both North Star and our controlling stockholder, Zentrum, and Feliciano Tighe, our Secretary and a member of our Board of Directors is an administrative consultant to North Star. The CEO of North Star is an advisor to Zentrum, and Zentrum provides financing for both our Company and NorthStar.
Pursuant to the requirements for closing, on December 21, 2012, the Company issued a total of 14,000,000 restricted shares of the Company to Zentrum based on the market price of our stock on the date of issue at $3.15 per share, for a total investment cost of $44,100,000. As at the date of the transaction the Company determined the market value of the Company’s common stock to be the most reliable measurement as to the fair value of the investment, and in accordance with ASC 323-10 recorded $30,764,329 relative to the purchase price assigned to the Company’s acquired share of the underlying net assets and liabilities of North Star as to the Company’s 22% interest, and a further amount of $13,335,671 as equity method goodwill, on the Company’s balance sheet.
Further, to close the transaction, the Company was required to negotiate terms with its controlling shareholder, Kenmore International S.A. (“Kenmore”) for the return to treasury of no less than 31,942,000 shares of the common stock of the Company controlled by Kenmore. On December 21, 2012, the Company returned to the transfer agent for cancellation effective December 24, 2012, a total of 31,942,000 shares of the Company, at par value, issued in the name of 888333333 Holdings Ltd., a company of which Kenmore was the sole shareholder. Kenmore retained a total of 100,000 shares of the Company after the transaction.
On January 24, 2013, the Company entered into a further share purchase agreement with three independent shareholders of North Star whereby the Company acquired 1,410,000 common shares in the capital stock of North Star (the “Share Purchase Agreement”). Under the terms of the Share Purchase Agreement, the Company issued a total of 5,310,000 shares of the Company’s common stock at a deemed price of $3.30 per share, which was the lowest bid price of the Company’s stock on the date of issuance, for a total investment cost of $17,523,000 in exchange for the 1,410,000 common shares of North Star. As at the date of the transaction the Company determined the market value of the Company’s common stock to be the most reliable measurement as to the fair value of the investment, and in accordance with ASC 323-10 recorded
$14,283,314 relative to the purchase price assigned to the Company’s acquired share of the underlying net assets and liabilities of North Star as to the Company’s additional 10% interest, and a further amount of $3,239,686 as equity method goodwill, on the Company’s balance sheet.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 3 – Investment in CEC North Star Energy Ltd.: (continued)
On October 3,2013, the Company funded $483,639 (CAD$500,000) cash consideration to North Star by way of a private placement subscription for a total of 13,158 units of North Star, each unit consisting of one common share of North Star at the price of $38, and one two year warrant to acquire a common share of North Star at an exercise price of: (i) $58 per common share of North Star if exercised prior to September 30, 2014; or (ii) $76 per common share of North Star if exercised any time on or between September 30, 2014 and the expiry date.
The Company has recorded its initial investments in North Star at cost based on the market value of the Company’s shares which were issued to acquire its equity interests for a total of $61,623,000. As detailed above, the cumulative excess value of $16,575,357 over the net asset value of the Company’s ownership interest in North Star totaling $45,047,643 as at the dates of acquisition of the Company’s initial equity interests was attributed at the respective acquisition dates to equity method goodwill. Thereafter, the Company has used the actual cash value paid for additional North Star shares acquired as its cost base for further interests acquired. North Star is a private company with no quoted market price for its shares. The Company has no obligation to provide financial support to North Star.
As of December 31, 2013, the Company holds 31% of the shares of North Star. We account for this investment applying the
Equity Method (APB No. 18)
.
The changes in the fair value of these investments were as follows:
Balance as of June 30, 2012
|
|
$
|
-
|
|
|
Contributions:
|
|
|
|
|
|
Issue 14,000,000 restricted shares of the Company at market value on December 24, 2012
|
|
|
44,100,000
|
|
|
Issue 5,310,000 restricted shares of the Company at market value on January 24, 2013
|
|
|
17,523,000
|
|
|
Total
|
|
|
61,623,000
|
|
|
Equity (loss) income on long-term investment in North Star accounted for under the equity method
|
|
|
(533,358
|
)
|
|
Balance as of June 30, 2013
|
|
|
61,089,642
|
|
|
Cash payment to acquire 13,158 Units
|
|
|
483,639
|
|
|
Equity (loss) income on long-term investment in North Star accounted for under the equity method
|
|
|
(163,553
|
)
|
|
Balance as of December 31, 2013
|
|
$
|
61,409,728
|
|
|
The underlying equity in the net assets of North Star as to the Company’s 31% ownership as at December 31, 2013 totals $42,182,739. Summarized financial information with respect to North Star accounted for using the equity method as of and for the six month period ended December 31, 2013 and for the fiscal year ended June 30, 2013 were as follows:
|
|
At December 31,
2013
|
|
|
At June 30,
2013
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
783,315
|
|
|
$
|
158,823
|
|
Property, and other assets, net
|
|
|
137,995,803
|
|
|
|
137,704,045
|
|
Total assets
|
|
$
|
138,779,118
|
|
|
$
|
137,862,868
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,705,765
|
|
|
$
|
1,794,136
|
|
Long-term debt and other liabilities
|
|
|
-
|
|
|
|
2,376,250
|
|
Equity
|
|
|
136,073,353
|
|
|
|
133,692,482
|
|
Total liabilities and equity
|
|
$
|
138,779,118
|
|
|
$
|
137,862,868
|
|
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 3 – Investment in CEC North Star Energy Ltd.: (continued)
|
|
3 Months Ended
December 31,
2013
|
|
|
6 Months ended December 31,
2013
|
|
Net Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating expenses
|
|
|
257,765
|
|
|
|
594,875
|
|
Operating loss
|
|
|
(257,765
|
)
|
|
|
(594,875
|
)
|
Interest expenses
|
|
|
(1,095
|
)
|
|
|
(1,284
|
)
|
Net loss
|
|
$
|
(258,860
|
)
|
|
$
|
(596,159
|
)
|
As at the fiscal year ended June 30, 2013 the Company undertook a review of the carrying value of its investment in North Star in order to test for impairment considering the guidance in ASC 820 and ASC 323 and as part of this review the Company assessed various components of its investment. In accordance with ASC 350-20-35-39, equity method goodwill is not amortized and is not tested for impairment. Instead, equity method investments are reviewed for impairment, and a loss in value of an equity method investment that is other-than-temporary should be recognized, if and when a permanent loss in value is indicated. In evaluating its equity interest in North Star for indication of impairment, the Company considered its ownership interest in the present value of the estimated future cash flows expected to be generated by North Star as detailed both in third party valuation reports and reserve report valuations prepared in house by North Star management using inputs derived from industry third party published economic data. In addition the Company conducted its own estimates expected North Star future cash flows applying the recommended valuation methodologies employed by industry investment professionals under published valuation manifestos in conjunction with third party reserve report valuations provided by North Star. The Company further considered North Star’s financial condition, North Star management’s ability to execute its development plans in order to monetize its existing assets, as well as current industry conditions, including applicable commodity pricing, in completing its review. The results of the Company’s assessment indicated that there was no impairment required to the carrying value of its investment in North Star as at the year ended June 30, 2013.
At December 31, 2013, there were no factors present evidencing a change in circumstances to indicate that the carrying value of the Company’s investment in North Star may have declined.
Note 4 – Mineral rights agreement
On January 22, 2013, the Company entered into an acquisition of mineral rights agreement with Zentrum (the “Mineral Rights Agreement”). Under the terms of the Mineral Rights Agreement the Company has the right to acquire the Mineral Rights known as the Trout Properties. The Trout Properties are comprised of certain oil and gas leases as detailed below:
Section 9 -89 R3W5
|
Alberta Crown P&NG
Expiry: August, 2016
|
|
|
Sections 3,4,5 89R3W5
|
Alberta Crown Oil Sands Development Lease No. 7408100382
Expiry: July, 2017
|
The Mineral Rights Agreement contained the following terms, amongst others:
·
|
An 8% Royalty of Gross Monthly Production to be paid to Zentrum;
|
·
|
On or before December 31, 2013, the Company shall have drilled a minimum of one (1) Exploration Well to Contract Depth at locations to be provided by Zentrum and agreed to by the Company on Section 9 89 R3W5 of the Trout Property;
|
·
|
On or before June 30, 2014, unless otherwise mutually agreed to, the Company shall perform a 3D seismic program on Sections 4, 5, 6 89 R3W5 of the Trout Property. A copy and rights to the seismic data shall be provided to the Vendor within 60 days of the completion of the project;
|
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 4 – Mineral rights agreement (continued)
|
·
|
On or before December 31, 2014, unless otherwise mutually agreed to, the Company shall have drilled a minimum of one (1) Exploration Well at a location to be mutually determined based on the 3D seismic above;
|
|
·
|
Any default in the terms above will terminate the Mineral Rights Agreement and the Company shall return the Trout Property to Zentrum.
|
The Company has received a preliminary budget for the drilling of the initial exploration well on the Trout property with costs estimated to be $1,500,000 Canadian dollars (USD $1,504,920), plus or minus 20 percent for seasonal adjustments including weather, rig and crew availability. We anticipate making a drawdown of funds under the financing agreement as more particularly described in Note 5 below in order to finance costs associated with this initial well.
During the six month period ended December 31, 2013, the Company expended $29,066 on the Trout property.
Note 5 – Financing agreement:
On October 3, 2012, the Company entered in to a letter agreement for a Financing Commitment and Credit Facility (the “Financing Agreement”) for the Company with Zentrum, whereby Zentrum will provide both debt and equity funds of up to CAD$2,500,000 (USD$2,337,130) to the Company for investments in assets owned by private operating oil companies.
Under the terms of the Financing Agreement, the first draw is to be an equity placement into the Company by Zentrum of US$500,000 by way of the issuance of 200,000 units, each unit consisting of one share of common stock at US$2.50 per share, a one year warrant to purchase an additional 200,000 shares of common stock at an exercise price of US$3.00 per share on or before October 3, 2013 and a three year warrant to purchase 200,000 shares of common stock at an exercise price of US$3.00 per share. The second warrant will have an expiry date of 3 years after closing of the first draw under this agreement.
Further funds may be by way of debt or equity. Any funds drawn down as debt under the credit facility will have a first security charge on the investments acquired with such funds.
Fees of 8% for equity placements and 3% for debt placements will be deducted on funding. For any debt converted to equity, a further fee of 5% will be paid by the Company at conversion.
Zentrum has agreed that the Company may allocate up to 10% of the funds from debt or equity for general and administrative costs and due diligence costs and any other costs they may approve from time to time.
Zentrum shall further have a first right of refusal on all financings for a period of two years from the execution of the formal agreement. The final agreement shall provide for registration rights. The formal agreements in regard to the initial letter agreement were to be prepared for execution, however as of December 31, 2013 they have not be prepared therefor the Company will rely on the terms of the letter agreement until such time as a formal agreement is finalized.
As of December 31, 2013, Zentrum has funded a total of US$701,515 to the Company (June 30, 2013 - $122,978), As of December 31, 2013, the Company has provided through the Zentrum AG financing agreement (ref Note 5), an amount totaling $483,639 ($500,000CDN) from proceeds received to NorthStar. During the period, Zentrum AG completed a subscription agreement whereby they finalized the initial US$500,000 equity draw down and concurrently delivered notice of warrant exercise for a total of $151,515, which represented additional proceeds funded up to the warrant exercise expiry date of October 3, 2013. The Company is required to issue a total of 200,000 shares as a result of the equity draw down and a total of 50,505 shares pursuant to the warrant exercise, which shares remain payable as of December 31, 2013.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 5 – Financing agreement (continued):
The remaining 149,495 warrants under the first warrant attached to the financing agreement expired at the close of business on October 3, 2013, and therefore they are forfeited. Zentrum AG continues to hold a total of 200,000 warrants exercisable at $3.00 per share for a period of three years from October 3, 2013, expiring on October 3, 2016, if not prior exercised.
Further, under the terms of the financing agreement, the Company is required to pay fees of 8% or $40,000 related to funds received on the equity draw down which has been recorded as accounts payable on the balance sheet of the Company and will be paid out as further financing is provided.
A total of $50,000 reflected on the Company’s balance sheets as investor deposits in relation to additional funds advanced to the Company during the period ended December 31, 2013.
Note 6 – Related party transactions:
Mr. Guido Hilekes, our President and a Director, is also a member of the board of directors of both NorthStar and Zentrum, our controlling shareholder. Zentrum has provided a line of credit to the Company (Note 5) and has also provided financing to CEC North Star Energy Ltd. by way of a $1,500,000 (CAD) convertible debenture. Zentrum is also a significant shareholder of CEC North Star Energy Ltd. and the controlling shareholder of our Company. The CEO of NorthStar is also an advisor to Zentrum. The mineral rights agreement for our oil and gas asset was entered into between the Company and Zentrum.
Note 7 – Advances:
As of December 31, 2013 and June 30, 2013, total advances from shareholders of the Company were $19,167. The advances are on demand and bear no interest.
Note 8 – Issuance of shares:
On August 27, 2012, the Company negotiated debt settlements whereby they agreed to settle debt in the amount of $35,473 with Kenmore International S.A. at a price of $1.00 per share for a total share issuance of 35,473 shares of common stock. These shares were issued on September 24, 2012.
On December 21, 2012, the Company returned to the transfer agent for cancellation effective December 24, 2012, a total of 31,942,000 shares of the Company issued in the name of 888333333 Holdings Ltd., a company of which Kenmore was the sole shareholder. On December 21, 2012, the Company issued a total of 14,000,000 restricted shares of the Company to Zentrum valued at $3.15 per share, which was the market value of the shares on the date of the transaction, for a total acquisition cost of $44,100,000.
On January 24, 2013, the Company issued a total of 5,310,000 restricted shares of the Company to three independent shareholders of North Star valued at $3.30 per share, which was the market value of the shares based on the bid price of the shares on the date of the transaction, for a total acquisition cost of $17,523,000.
On October 3, 2013, Zentrum completed a subscription agreement through the Zentrum AG financing agreement (ref Note 5). Zentrum had funded a total of US$500,000 to the Company requiring the issuance of 200,000 Units, each Unit consisting of one share of common stock at US$2.50 per share, a one year warrant to purchase an additional 200,000 shares of common stock at an exercise price of US$3.00 per share on or before October 3, 2013 and a three year warrant to purchase 200,000 shares of common stock at an exercise price of US$3.00 per share. The second warrant has an expiry date of 3 years after closing of the first draw under this agreement. Concurrently, Zentrum delivered notice of exercise of warrant under the first warrant for a total of 50,505 shares of common stock for total proceeds of $151,515.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 8 – Issuance of shares (continued):
As of December 31, 2013, 250,505 shares in respect of the aforementioned Unit and warrant exercise remained unissued and are recorded as stock payable on the balance sheets.
As of December 31, 2013, there were a total of 26,545,473 shares issued and outstanding.
Note 9 – Stock option and Stock award:
On November 11, 2013, the Company
granted non-qualified stock options for an aggregate of 1,500,000 shares of the Company's common stock under the Company's 2013 Stock Option and Stock Award Plan (the "2013 Plan") to various officers, directors and consultants of the Company. Each option was granted for a six year term with an exercise price of $6.00 per share vesting equally over a period of three years and expiring six years after the grant date. Of the 1,500,000 stock options granted, 950,000 were issued to the Company's directors and executive officers, 250,000 were issued to executive officers and directors of the Company’s wholly owned subsidiary and the remaining 300,000 were issued to various consultants of the Company.
The following tables summarize information concerning stock options outstanding as of December 31, 2013:
|
December 31, 2013
|
June 30, 2013
|
|
|
Shares
|
|
Weighted Average Exercise Price
$
|
|
Shares
|
|
Weighted Average Exercise Price
$
|
Outstanding at beginning of the year
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
Granted
|
|
|
1,500,000
|
|
6
|
|
|
-
|
|
-
|
Exercised
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
Expired or cancelled
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
Outstanding at the period
|
|
|
1,500,000
|
|
6
|
|
|
-
|
|
-
|
|
|
Stock Options
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Unvested, at June 30, 2013
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,500,000
|
|
|
$
|
6
|
|
Vested
|
|
|
(500,000)
|
|
|
|
6
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
Unvested, end of December 31, 2013
|
|
|
1,000,000
|
|
|
$
|
6
|
|
Exercise Price
|
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Number Subject to Exercise
|
|
$
|
6
|
|
|
|
1,500,000
|
|
|
|
5.89
|
|
|
|
1,500,000
|
|
The Company recognized stock-based compensation expense of $4,986,667 during the six month period ended December 31, 2013.
Unrecognized compensation expense related to outstanding stock options as of December 31, 2013 was $2,493,333 and is expected to be recognized in future periods.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 9 – Stock option and Stock award (continued):
Valuation Assumptions
The Company accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company records compensation expense for share-based awards based upon an assessment of the grant date fair value for stock options using the Black-Scholes option pricing model. The fair value of stock options under the Black-Scholes model requires management to make assumptions regarding projected employee stock option exercise behaviors, risk-free interest rates, volatility of the Company’s stock price and expected dividends.
Stock compensation expense for stock options is recognized over the vesting period of the award.
The following table presents the range of the weighted average fair value of options granted and the related assumptions used in the Black-Scholes model for stock option grants made during the three month period ended December 31, 2013:
|
|
Options Granted
|
|
|
November 11, 2013
|
Fair value of options granted
|
|
$
|
5.44
|
|
Assumptions used:
|
|
|
|
|
Expected life (years) (a)
|
|
|
6
|
|
Risk free interest rate (b)
|
|
|
2.12
|
%
|
Volatility (c)
|
|
|
462
|
%
|
Dividend yield (d)
|
|
|
0.00
|
%
|
|
a)
|
Expected life
: The expected term of options granted is determined using the “shortcut” method allowed by SAB No.107. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term.
|
|
|
|
|
b)
|
Risk-free interest rate
: The rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the options.
|
|
|
|
|
c)
|
Volatility:
The expected volatility of the Company’s common stock is calculated by using the historical daily volatility of the Company’s stock price calculated over a period of time representative of the expected life of the options.
|
|
|
|
|
d)
|
Dividend yield
: The dividend yield rate is not considered in the model, as the Company has not established a dividend policy for the stock.
|
Note 10 – Warrants:
On October 3, 2013, Zentrum completed a subscription agreement through the Zentrum AG financing agreement (ref Note 5). Zentrum had funded a total of US$500,000 to the Company requiring the issuance of 200,000 Units, each Unit consisting of one share of common stock at US$2.50 per share, a one year warrant to purchase an additional 200,000 shares of common stock at an exercise price of US$3.00 per share on or before October 3, 2013 and a three year warrant to purchase 200,000 shares of common stock at an exercise price of US$3.00 per share. The second warrant has an expiry date of 3 years after closing of the first draw under this agreement. Concurrently, Zentrum delivered notice of exercise of warrant under the first warrant for a total of 50,505 shares of common stock for total proceeds of $151,515.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 10 – Warrants: (continued)
As at December 31, 2013, the Company had the following warrants outstanding:
Exercise
Price
|
|
Expiry
Date
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Outstanding
at
June 30,
2013
|
|
|
Issued
|
|
|
Exercised
|
|
|
Expired
|
|
|
Outstanding
at
December 31,
2013
|
|
$
|
3
|
|
October 3, 2013
|
|
|
0
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
50,505
|
|
|
|
149,495
|
|
|
|
0
|
|
$
|
3
|
|
October 3, 2016
|
|
|
2.76
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
Note 11 – Income taxes:
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
Operating loss carry-forwards generated during the period of June 9, 2008 (date of inception), through December 31, 2013, of approximately $1,069,320, will begin to expire in 2028. Accordingly, deferred tax assets total approximately $363,500 related to the net operating loss carry-forward. For the six month periods ended December 31, 2013 and 2012, the allowance increased by approximately $125,148 and $6,600, respectively.
The Company has no tax positions at December 31, 2013, or June 30, 2013, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accruals for interest and penalties since inception.
Tax returns have been submitted for the period from inception to the period ended June 30, 2009. The tax returns for the period thereafter to the fiscal year ended June 30, 2013 are subject to examination by the Internal Revenue Service, however, any tax returns submitted will reflect a year over year loss from operations and therefore management does not expect any tax liabilities exist.
Note 12 - New accounting pronouncements:
The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that there are no new accounting standards are applicable to the Company.
Note 13 – Subsequent events:
On January 14, 2014 the Company issued 250,505 shares to Zentrum in respect of the exercise of certain units disclosed above (ref Note 5).
On January 15, 2014, the Company and Zentrum reached an agreement to extend the December 31, 2013 drilling commitment to June 30, 2014 on the Trout Lake properties.
OCTAGON 88 RESOURCES, INC.
(An Exploration Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
Note 13 – Subsequent events (continued):
On January 30, 2014, the Company entered into a Placement Agent Agreement with David Bisang (“DVB”) (the “PA”) whereby DVB agreed to act as the Company’s non-exclusive agent in a private placement or similar unregistered transaction of equity or equity-linked securities of the Company. The PA is for a period of twelve months from the date of execution. The Company shall pay to DVB upon the closing of each transaction with investors, (i) eight percent (8%) of the aggregate consideration raised in each closing in cash and warrants to purchase five (5%) of the Company’s common stock at each closing, identical to any warrants issued to investors. The foregoing fees are payable for any sale of securities during the twelve month term or within twenty-four months thereafter with respect to investors identified by DVB. The Company is further required to pay expenses incurred by DVB including the fees and expenses of its legal counsel and any advisor retained by Palladium. Fees and expenses in excess of $1,000 require prior written authorization from the Company.
On January 31, 2014, the Company closed a financing with one subscriber as described below and shall pay to DVB cash consideration of $60,000 and issue a total of 6,818 stock purchase warrants, each warrant exercisable at $6.50 per share for a period of two years from the date of issuance. The warrants were issued on February 8, 2014.
On January 31, 2014, the Company entered into securities purchase agreements (the “SPA”) to raise a total $750,000 with one accredited investor introduced by DVB to the Company. Under the terms of the SPA, the purchasers subscribed for a total of 136,364 shares of the common stock of the Company at $5.50 per share and an equal number of warrants exercisable at $6.50 per share for a period of two years. The shares and warrants were issued on February 8, 2014.
On February 13, 2014,the Company and Zentrum Energie AG executed a letter agreement whereby they agreed to amend the terms of their initial Mineral Rights Acquisition Agreement entered into on January 22, 2013 (the "Original Agreement") by the termination of the Original Agreement on the Trout Lake Properties and the entry into a Farm In Agreement whereby the Company will have the right to earn a fifty percent (50%) working interest in the Trout Properties as defined in the Original Agreement.
The letter agreement calls for the parties to enter into a formal Farm-in and Operating Agreement on or before February 28, 2014, with the following defined terms which the parties have agreed to:
(i) the Company will pay fifty percent (50%) of the drilling and completion costs of the first production well to be drilled on the Trout Properties at such location as may be agreed between the parties (the “Well”);
(ii) Within six months of the successful completion and production of the Well, the Company will pay to Zentrum a cash payment in the amount of $1,250,000;
(iii) The Gross Overiding Royalty Rights (“GORR”) to Zentrum shall be three percent (3%);
(iv) The Company and Zentrum and any other working interest owners
which Zentrum may identify will enter into a Joint Venture Operating Agreement as a condition of the amended terms.