OCTAGON 88 RESOURCES, INC. - FORM 10-Q - November 19, 2014

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EX-32.1 - CERTIFICATION - OCTAGON 88 RESOURCES, INC.ex321.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
 
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2014
   
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to ______________

000-53560
(Commission File Number)
   
OCTAGON 88 RESOURCES, INC.
(Exact name of registrant as specified in its charter)
   
Nevada
26-2793743
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
Hochwachtstrasse 4, Steinhausen, CH
6312
(Address of principal executive offices)
(Zip Code)
   
 (41) 79 237-6218
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 
Yes [X]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 
Yes [  ]  No [ X ]

 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[  ]
Accelerated filer
[  ]
       
Non-accelerated filer
[  ]
Smaller reporting company
[X]
(Do not check if a smaller reporting company)
      

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 
Yes [ ]  No [ X]
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 
Yes [  ]  No [  ]

APPLICABLE ONLY TO CORPORATE ISSUERS

26,932,342 shares of common stock outstanding as of November 14, 2014
(Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.)
 
 
2
 
OCTAGON 88 RESOURCES, INC.
TABLE OF CONTENTS

   
Page
 
PART I – FINANCIAL INFORMATION
  
     
Financial Statements
  5
     
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 6
     
Quantitative and Qualitative Disclosures About Market Risk
  9
     
Controls and Procedures
  9
     
 
PART II – OTHER INFORMATION
  
     
Legal Proceedings
  11
     
Risk Factors
  11
     
Unregistered Sales of Equity Securities and Use of Proceeds
  11

Defaults Upon Senior Securities
  11
     
Mine Safety Disclosures
  11
     
Other Information
  11
     
Exhibits
  12
     
 
  13
 
 
3
 
PART I

ITEM 1.  FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 210 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal recurring nature.  Operating results for the three month period ended September 30, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2015. For further information refer to the audited financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014 as filed with the Securities and Exchange Commission on October 14, 2014.

 
 
4
 
OCTAGON 88 RESOURCES, INC.

CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the three month periods ended September 30, 2014 and September 30, 2013

 (Stated in US Dollars)
 
F-1
 
OCTAGON 88 RESOURCES, INC.
 Consolidated Balance Sheets

   
September 30,
    
June 30,
  
   
2014
(Unaudited)
    
2014
(Audited)
  
ASSETS
            
  Current assets:
            
    Cash
  
$
67,308
    
$
250,360
  
    Prepaid expenses
    
3,222
      
-
  
      Total current assets
    
70,530
      
250,360
  
                 
Long-term investments accounted for under the equity method (Note 3)
    
60,267,634
      
60,676,134
  
      Total assets
  
$
60,338,164
    
$
60,926,494
  
                 
LIABILITIES
                
  Current liabilities:
                
    Accounts payable and accrued liabilities
  
$
92,300
    
$
64,550
  
    Advances from shareholders
    
19,167
      
19,167
  
      Total current liabilities
    
111,467
      
83,717
  
                 
STOCKHOLDERS' DEFICIT
                
  Common stock, $0.0001 par value, 400,000,000 authorized,
                
     26,932,342 shares issued and outstanding as at September 30, 2014 and June 30, 2014
    
2,693
      
2,693
  
  Capital in excess of par value
    
70,190,700
      
69,623,212
  
  Accumulated deficit
    
(9,966,696
)
    
(8,783,128
)
      Total stockholders' deficit
    
60,226,697
      
60,842,777
)
      Total liabilities and stockholders' deficit
  
$
60,338,164
    
$
60,926,494
  

The accompanying notes are an integral part of these financial statements
 
F-2
 

OCTAGON 88 RESOURCES, INC.
Consolidated Statements of Operations
(Unaudited)
       
   
Three Months Ended
  
   
September 30,
  
   
2014
    
2013
  
             
Revenues
  
$
-
    
$
-
  
                 
General and administrative expenses:
                
Exploration expenses
    
-
      
29,066
  
Professional fees
    
111,113
      
18,795
  
Investor relations fees
    
47,272
      
51,455
  
Stock-based compensation
    
567,488
      
-
  
Other general and administrative expenses
    
49,195
      
7,036
  
Losses (gain) equity investments, net
    
408,500
      
94,833
  
Total operating expenses
    
1,183,568
      
201,185
  
    (Loss) from operations
    
(1,183,568
)
    
(201,185
)
                 
 (Loss) before taxes
    
(1,183,568
)
    
(201,185
)
                 
Provision (credit) for taxes on income:
    
-
      
-
  
    Net (loss)
  
$
(1,183,568
)
  
$
(201,185
)
                 
Basic and diluted earnings (loss) per common share
  
$
(0.04
)
  
$
(0.01
)
                 
Weighted average number of shares outstanding
    
26,932,342
      
26,545,473
  
 
The accompanying notes are an integral part of these financial statements
 
F-3
 
OCTAGON 88 RESOURCES, INC.
Consolidated Statements of Cash Flow
(Unaudited)

   
Three Months Ended
September 30,
  
   
2014
    
2013
  
             
Cash flows from operating activities:
            
Net (loss)
  
$
(1,183,568
)
  
$
(201,185
)
Adjustments to reconcile net (loss) to cash provided (used) operating activities:
                
 Stock-based compensation
    
567,488
      
-
  
 Share of (loss) of equity accounted investees
    
408,500
      
94,833
  
Changes in current assets and liabilities:
                
Accounts payable, trade
    
27,750
      
12,597
  
Prepared expenses
    
(3,222
)
        
Net cash used in operating activities
    
(183,052
)
    
(93,755
)
                 
Cash flows from investing activities:
                
Net cash flows from investing activities
    
-
      
-
  
                 
Cash flows from financing activities:
                
Investor deposit
    
-
      
44,898
  
Net cash flows from financing activities
    
-
      
44,898
  
                 
Net cash flows
    
(183,052
)
    
(48,857)
  
Cash and cash equivalents, beginning of period
    
250,360
      
108,597
  
Cash and cash equivalents, end of period
  
$
67,308
    
$
59,736
  
                 
Supplemental cash flow disclosures:
                
Cash paid for interest
  
$
-
    
$
-
  
Cash paid for income taxes
  
$
-
    
$
-
  
                 
 
The accompanying notes are an integral part of these financial statements
 
F-4
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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 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. (North Star), a company with oil and gas operations. North Star, Zentrum Energie Trust AG (“Zentrum”), who is our controlling stockholder, and our Company have a common director, Mr. Hilekes.  The CEO of North Star is an advisor to Zentrum, who is also the financing partner for both North Star 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 continuing operations and we are assisting in sourcing funding for the oil and gas company in which we hold an interest.  At our current stage of operations, 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:
 
F-5
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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.
 
F-6
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

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 three months ended September 30, 2014 and 2013.

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

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 September 30, 2014 and June 30, 2014:

Warrants
576,818
Stock options
1,500,000

Since the Company reported a net loss at September 30, 2014 and June 30, 2014, 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.

Recent Accounting Pronouncements – On June 10, 2014, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, consolidation, which removes all incremental financial reporting requirements from GAAP for development stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification. For the first annual period beginning after December 15, 2014, the presentation and disclosure requirements in Topic 915 will no longer be required for the public business entities. The revised consolidation standards are effective one year later, in annual periods beginning after December 15, 2015. Early adoption is permitted. The Company has adopted the amendment.
 
F-7
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 1 – Organization and summary of significant accounting policies: (continued)

Recent Accounting Pronouncements (continued)

There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. As of September 30, 2014, none of these pronouncements is expected to have a material effect on the financial position, results of operations or cash flows of the Company

Note 2 – Going concern:

As at September 30, 2014, 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 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 with limited 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). During the fiscal year ended June 30, 2014 the Company entered into further securities purchase agreements to raise a total $750,000. There can be no assurance that funds will be available from the credit facility if and when needed.

From inception through September 30, 2014, we have incurred operating losses of approximately $9,966,696, of which approximately $851,795 represents actual cash losses. At September 30, 2014, our cash on hand was $67,308.

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 who joined our Board of Directors on January 29, 2013, following the consummation of the transactions discussed below, is also President and a member of the Board of Directors of North Star and the sole officer, director and controlling shareholder of Zentrum 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 North Star.  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.
 
F-8
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 3 – Investment in CEC North Star Energy Ltd.: (continued)

Further, to close the transaction, the Company was required to negotiate terms with its then 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.  Kenmore agreed to return the 31,942,000 shares which, prior to the acquisition of the ownership interest in North Star, had nominal value, in order to facilitate the consummation of the Company’s acquisition of a significant interest in North Star and create value in the 100,000 shares of the Company it retained.  Kenmore was also a minority shareholder of North Star at the time of the transaction.  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.   There is no relationship between Zentrum, our current controlling shareholder, and Kenmore, the Company’s former controlling shareholder, other than the fact they were both shareholders of North Star and the Company.

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.   

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.  The Company anticipates that as North Star continues to finance its planned operations by way of equity offerings, considers further incentivizing its management team by the grant of additional stock options, or pursues the acquisition of additional resource based interests by way of equity based consideration the Company may experience dilution to our current investment interest of 31.4%.  While we plan to consider further equity investments in North Star as they progress their operating plan and equity investment opportunities become available, there is no guarantee we will be able to main our current equity ownership percentage.

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 $38CDN, and one two year warrant to acquire a common share of North Star at an exercise price of: (i) $58CDN per common share of North Star if exercised prior to September 30, 2014; or (ii) $76CDN per common share of North Star if exercised any time on or between September 30, 2014 and the expiry date.

On June 4, 2014, North Star closed a private placement and issued additional common stock to investors.  As of June 30, 2014, the Company currently holds 30.56% of the shares of North Star which is down from 31.4% as of June 30, 2013 due to dilution following the June 4th North Star private placement. We account for this investment applying the Equity Method (APB No. 18).
 
F-9
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 3 – Investment in CEC North Star Energy Ltd.: (continued)

The changes in the fair value of these investments were as follows:

Balance as of June 30, 2012
      
Contributions
      
Issue 14,000,000 restricted shares of the Company at market value
  
$
44,100,000
  
Issue 5,310,000 restricted shares of the Company at market value
    
17,523,000
  
Total
    
61,623,000
  
Equity (loss) income on long-term investment in North Star accounted for under the equity method
    
(468,869
)
Balance as of June 30, 2013
  
$
61,154,131
  
         
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
    
(961,636
)
Balance as of June 30, 2014
  
$
60,676,134
  
         
Equity (loss) income on long-term investment in North Star accounted for under the equity method
    
(408,500
)
Balance as of September 30, 2014
  
$
60,267,634
  

The underlying equity in the net assets of North Star as to the Company’s 30.50% as at September 30, 2014 totals $41,881,979 (June 30, 2014 30.56%, $43,586,107).

Summarized financial information with respect to North Star accounted for using the equity method as of and for the three months period ended September 30, 2014, as of and for the fiscal year ended June 30, 2014 and as of the acquisition dates were as follows:
 
     
At September 30,
2014
      
At June 30,
2014
      
At January 24,
2013
      
At December 21,
2012
  
Current assets
  
$
1,371,555
    
$
2,385,492
    
$
39,117
    
$
110,884
  
Property, and other assets, net
    
136,825,675
      
140,576,497
      
145,357,735
      
144,911,963
  
Total assets
  
$
138,197,230
    
$
143,361,989
    
$
145,396,852
    
$
145,022,847
  
                                 
Current liabilities
  
$
863,056
    
$
738,330
    
$
246,398
    
$
209,719
  
Long-term debt and other liabilities
    
-
      
-
      
2,515,750
      
2,508,250
  
Equity
    
137,334,174
      
142,623,659
      
142,634,704
      
142,304,878
  
Total liabilities and equity
  
$
138,197,230
    
$
143,361,989
    
$
145,396,852
    
$
145,022,847
  
 
     
Three Months ended
September 30,
  
     
2014 
      
2013
  
Net Revenues
  
$
-
    
$
-
  
Operating expenses
    
1,339,268
      
 300,973
  
Operating loss
    
(1,339,268
)
    
(300,973
)
Interest expenses
    
(235
)
    
(562
)
Net loss
  
$
(1,339,503
)
  
$
(301,535
)
 
 
F-10
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 3 – Investment in CEC North Star Energy Ltd.: (continued)

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.  Results of the Company’s assessment indicated that at the year ended June 30, 2013 there was no impairment to the carrying value of its investment in North Star.  In 2014, the Company engaged a third party valuation firm (the “Valuator”) in order to independently evaluate its equity interest in North Star for indication of impairment as at the fiscal year ended June 30, 2013.  The scope of the Valuator’s analysis included, but was not limited to, the following: (i) discussions with Management of North Star regarding the North Star’s history, organizational structure, products and services, markets, historical financial results, funding history, capitalization, competitive position, economic and industry outlook, and prospects for the future; (ii) examination of available documentation relating to North Star, its assets, operations, and financial results; (iii) independent research concerning North Star, its financial and operating history, the nature of its products, its competitive position, and the industry in which it operates; (iv) a directed search and examination of comparable public companies and transactions involving public and private comparable companies; and (v) an analysis of all of the aforementioned information.  The results of the Valuator’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.  The Company further undertook a review of the carrying value of its investment in North Star in order to test for impairment at the year ended June 30, 2014.  There have been no factors present during the fiscal year ended June 30, 2014, or as at September 30, 2014,  to indicate that the carrying value of our investment may have experienced a decline in value.

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 P&NG Development Lease No. 7408100382
Expiry: July, 2015

On February 13, 2014, Company and Zentrum entered into a further letter agreement amending and restating the terms of the original Mineral Rights Agreement of January 22, 2013, so that the following terms and conditions were adopted:

· Octagon and Zentrum will enter into a formal Farm-out and Operating Agreement;
 
· Octagon will have the right to earn a fifty percent (50%) working interest in the Trout Properties;
 
· A 3% Royalty of Gross Monthly Production to be paid to Zentrum;
 
· Octagon 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");
 
· Within six months of the successful completion and production of the Well, Octagon will pay to Zentrum a cash payment in the amount of$1,250,000;
 
 
F-11
 

OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
 
Note 4 – Mineral rights agreement (continued)

In May 2014 the Company received the first draft of the Farm-out and Operating Agreements together with a cash call for its 50% share of the drilling costs for the first well to be drilled at 7-9-89-3 W5M in the total amount of CAD$998,647 (USD $935,869).  Concurrent with [the delivery of?] the draft Farm-out and Operating Agreements, Zentrum advised the Company of its agreement to Farm-out 42.5% of its remaining 50% working interest.  Assuming all parties are successful in earning their respective working interests, Zentrum will maintain a 7.5% working interest, other partners have acquired a 22.5% working interest and North Star has farmed in to earn a 20% working interest.

As at June 30, 2014 joint venture partners including Zentrum and North Star, have completed certain geological and geophysical work to identify the bottom hole target and have conducted extensive field work to locate an appropriate surface location with reasonable access for a directional drilling rig.  Further, the joint venture partners have obtained an environmental assessment for the drilling application and obtained project approval for the drilling from the Peerless/Trout First Nations Band.  The site has also been made ready for drilling and has been secured with gates on access roads as required.  The drilling license will remain in place for a year, expiring April 2015, by which time the well must be drilled and completed.   Mineral rights on this lease targeted for drilling expire in July 2015 and any work will need to be reclaimed if the project does not proceed.

The Company has not yet returned the signed Farm-out and Operating Agreement, nor has the cash call been funded as at the date of this filing.  The joint venture partners have advised the Company they will not spud the well until such documents and required funding have been provided.  It is anticipated management will complete its review of the pending agreements  prior to December 31, 2014.

During the most recently completed three months ended September 30, 2014, the Company expended nil (June 30, 2014 - $30,706) on the Trout property.

Note 5 – Advances:

As of September 30, 2014 total advances from shareholders of the Company were $19,167 (June 30, 2014 - $19,167). The advances are on demand and bear no interest.

Note 6 – Issuance of shares:

As of September 30, 2014 and June 30, 2014, there were a total of 26,932,342 shares issued and outstanding.

Note 7 – Stock options and Stock awards:

(1)  
Stock Option

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.
 
F-12
 

OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 7 – Stock option and Stock award: (continued)

(1)  
Stock Option (continued)

The following tables summarize information concerning stock options outstanding as of June 30, 2014:

 
September 30, 2014
June 30, 2014
   
Shares
  
Weighted Average Exercise Price
$
  
Shares
  
Weighted Average Exercise Price
$
Outstanding at beginning of the year
    
1,500,000
  
6
    
-
  
-
   Granted
    
-
  
-
    
1,500,000
  
6
   Exercised
    
-
  
-
    
-
  
-
   Expired or cancelled
    
-
  
-
    
-
  
-
Outstanding at the period
    
1,500,000
  
6
    
1,500,000
  
6

   
Stock Options
    
Weighted Average
Grant Date
Fair Value
  
             
Unvested, at June 30, 2014
    
1,000,000
      
6
  
Granted
    
-
    
$
-
  
Vested
    
-
      
-
  
Forfeited
    
-
      
- 
  
Unvested, end of September 30, 2014
    
1,000,000
    
$ 
6
  

Exercise Price
    
Number Outstanding
    
Weighted Average Remaining Contractual Life
    
Number Subject to Exercise
  
$
6
      
1,500,000
      
5.15
      
1,500,000
  

The Company recognized stock-based compensation expense of $567,488 during the three month period ended September 30, 2014 (September 30, 2013 - $Nil)
.
Unrecognized compensation expense related to outstanding stock options as of September 30, 2014 was $1,226,955 and is expected to be recognized in future periods.

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.
SAC 442565458v2
 
 
F-13
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 7 – Stock option and Stock award: (continued)

(1)  
Stock Option (continued)

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 fiscal year ended June 30, 2014:

   
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.
 
(2)  
Stock Purchase Warrants

On April 28, 2014 the Company granted 70,000 share purchase warrants exercisable into 70,000 shares of common stock at $5.50 per share for a period of 5 years from the date of issue to a consultant to the Company.

On April 28, 2014 the Company granted 250,000 share purchase warrants exercisable into 250,000 shares of common stock at $5.50 per share for a period of 5 years from the date of issue to a consultant to the Company.

On April 28, 2014 the Company granted 50,000 share purchase warrants exercisable into 50,000 shares of common stock at $5.50 per share for a period of 5 years from the date of issue to a Mr. Richard Ebner, a member of the Company’s Board of Directors.

The Company recorded stock compensation expense as a result of the issued stock purchase warrants of $196,100 during the fiscal year ended June 30, 2014.
 
 
F-14
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 8 – Warrants:

On October 3, 2013, Zentrum completed a subscription agreement through the Zentrum AG financing agreement. 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.

On January 31, 2014, the Company closed a financing with one subscriber and shall pay to DVB 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.

During the fiscal year ended June 30, 2014, the Company issued a total of 370,000 warrants to a director and consultants.  The warrants are exercisable into 370,000 shares of our common stock at an exercise price of $5.50 per share.  The warrants expire on April 28, 2019.  

As at September 30, 2014, the Company had the following warrants outstanding:

Exercise Price
  
Expiry Date
  
Weighted Average Remaining Contractual Life (Years)
    
Outstanding at
June 30, 2014
    
Issued
    
Exercised
    
Expired
    
 
Outstanding at
September 30, 2014
  
$
3
  
October 3, 2016
    
2.26
      
200,000
      
-
      
-
      
-
      
200,000
  
$
6.50
  
February 8, 2016
    
1.61
      
6,818
      
-
      
-
      
-
      
6,818
  
 $
5.50
  
April 28, 2019
    
4.83
      
370,000
      
-
      
-
      
-
      
370,000
  
                   
576,818
      
-
      
-
      
-
      
576,818
  

Note 9 – Related party transactions:

On January 29, 2013, the Board appointed Mr. Guido Hilekes as a Director and President of the Company.  Concurrently, Mr. Feliciano Tighe tendered his resignation as President of the Company.  Mr. Tighe remains Corporate Secretary and a director of the Company, and also provides consulting services to North Star.   Mr. Guido Hilekes, our current President and a Director is also a member of the Board of Directors and the President of North Star, as well as the sole officer, director and controlling shareholder of Zentrum.

Zentrum has provided a line of credit to the Company and has also provided financing to North Star by way of a $1,500,000 (CDN) convertible debenture which debenture was converted to equity ownership in North Star during the fiscal year ended June 30, 2014 so that Zentrum is now a 11.86% shareholder of North Star and is also the controlling shareholder of our Company.  The CEO of North Star is also an advisor to Zentrum. The mineral rights agreement for our oil and gas asset was entered into between the Company and Zentrum.

During the three month period ended September 30, 2014 the Company paid a total of $16,650 to Mr. Richard Ebner, a member of our Board of Directors for corporate administrative fees and director’s fees.  
 
 
F-15
 
OCTAGON 88 RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014

Note 9 – Related party transactions (continued):

During the three month period ended September 30, 2014, Mr. Guido Hilekes, a member of our Board of Directors, invoiced the Company $4,593 in administrative fees and director’s fees. The Company paid a total of $4,692, leaving $1,472 owing to Mr. Hilekes as at September 30, 2014 included on the Company’s balance sheets in accounts payable (June 30, 2014 - $1,571).

During the three month period ended September 30, 2014, Mr. Feliciano Tighe, a member of our Board of Directors, invoiced the Company $15,745 in administrative fees and director’s fees. The Company paid a total of $16,083, leaving $4,993 owing to Mr. Tighe as at September 30, 2014 included on the Company’s balance sheets in accounts payable (June 30, 2014 - $5,331).

During the three month period ended September 30, 2014, Mr. Peter Beck, a member of our Board of Directors invoiced the Company $3,947 in administrative fees and director’s fees. The Company paid a total of $3,573, leaving $1,114 owing to Mr. Beck as at September 30, 2014 included on the Company’s balance sheets in accounts payable (June 30, 2014 - $740).

Note 10 – 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 September 31, 2014, of approximately $2,824,178, will begin to expire in 2028. Accordingly, deferred tax assets total approximately $960,220 related to the net operating loss carry-forward. For the three month periods ended September 30, 2014 and 2013, the allowance increased by approximately $209,467 and $68,403, respectively.

The Company has no tax positions at September 30, 2014, or June 30, 2014, 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, 2014 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.

The tax returns for the years from fiscal 2009 to fiscal year ended June 30, 2014 are subject to examination by the Internal Revenue Service.

Note 11 – Subsequent events:

On October 29, 2014 the Company accepted a private placement subscription from one accredited investor for total proceeds of $100,000.80 to purchase 29,412 Units at $3.40 per Unit, each Unit consisting of one share and one share purchase warrant entitling the holder to acquire an additional share of common stock at $4.50 per share,  for a period of two years from the acceptance date. The Company will pay an agent’s fee of $5,000 and issue 1,471 warrants exercisable for a period of two years at $4.50 per share to Mr. David Bisang in respect of the aforementioned placement.
 
 
F-16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Forward Looking Statements

This current report contains forward-looking statements relating to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "intends", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these statements, which speak only as of the date that they were made. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results, later events or circumstances or to reflect the occurrence of unanticipated events.

In this report unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares of our capital stock.

The management’s discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements for the fiscal year ended June 30, 2014, as filed with the Securities and Exchange Commission on October 14, 2014, along with the accompanying notes.  As used in this quarterly report, the terms "we", "us", "our", and the "Company" means Octagon 88 Resources, Inc.

Plan of Operation and Capital Requirements

Our overall plan is to undertake exploration and exploitation activities on our projects which are determined to be the most expedient route to generate cash flow.  Our initial plan is, through North Star, to drill and develop the Elkton Erosional Edge project.  The overall Elkton schedule envisages first oil sales beginning in early 2015 with initial plans for 5 horizontal production wells.  While we may provide funds to North Star by way of loans or equity investment from time to time, we have no requirement to fund the operations of North Star.  We hope to generate revenues through North Star with their planned operations, however there is no obligation for North Star to provide us with any revenues derived from operations.  We have an immediate capital requirement of approximately $1,000,000 to be funded for the drilling of the first well on the Trout Lake property.  Thereafter we will be required within six months from the successful completion of the well to pay Zentrum $1,250,000 in order to earn our 50% working interest.  With the Zentrum credit facility in place we believe that we will have sufficient working capital to fund our ongoing administrative operations for the next twelve months.  We expect we will be required to raise at least an additional $2,000,000 in the near term in order to meet all anticipated operational costs.

Results of Operations

Three Month Period Ended September 30, 2014 Compared to Three Month Period Ended September 30, 2013

We generated no revenue for the three month periods ended September 30, 2014 and September 30, 2013, respectively.
 
5
 
For the three month periods ended September 30, 2014 and 2013, we incurred a net loss from operations of $1,183,568 and $201,185, respectively.  Due to increased operations we experienced an increase to stock based compensation from $nil for the three months ended September 30, 2013 to $567,488 for the three months ended September 30, 2014, professional fees increased from $18,795 for the three months ended September 30, 2013 to $111,113 from the three months ended September 30, 2014; other general and administrative expenses increased to $49,195 for the three months ended September 30, 2014 from $7,036 for the three months ended September 30, 2013, and we incurred exploration expenses in the amount of $29,066 as of September 30, 2013 with no comparable expense for the period ended September 30, 2014.

During the three months ended September 30, 2014, we incurred losses from equity investments of $408,500 compared to loss from equity investments of $94,833 in the same period ended September 30, 2013 as a result of the investments in CEC North Star Energy Ltd.

Liquidity

As of the three months ended September 30, 2014, our cash balance was $67,308 and our liabilities totaled $111,467 as compared to cash of $250,360 and liabilities of $83,717 as at June 30, 2014.  Our ability to meet our financial liabilities and commitments is primarily dependent upon the continued issuance of equity to new stockholders, the ability to borrow funds, and our ability to achieve and maintain profitable operations.  Initially, we will not have any cash flow from operating activities.  We previously entered into a financing agreement with Zentrum Energie Trust AG to raise up to $2,507,800 (CDN$2,500,000) by way of equity or debt, with the first draw down of CDN$500,000 being an equity draw down.   

On October 3, 2013, pursuant to the financing agreement, Zentrum completed a subscription agreement whereby they finalized the initial $500,000 equity draw down and they sent a warrant notice of exercise for $151,515 which was the remaining portion of the funds reflected on our balance sheet as investor deposits at the notice date. To complete the equity draw down, at our request, Zentrum provided funds of $483,639 (CDN$500,000) directly to CEC North Star Energy Ltd. (“North Star”) for drilling operations.  The amount provided to North Star on our behalf was applied to 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 CDN$38, and one two year warrant to acquire a common share of North Star at an exercise price of: (i) CDN$58 per common share of North Star if exercised prior to September 30, 2014; or (ii) CDN$76 per common share of North Star if exercised any time on or between September 30, 2014 and the expiration date.

In respect of the completed equity draw down from Zentrum of $500,000 we issued a total of 200,000 shares and a further 50,505 shares pursuant to the warrant exercise for a total of 250,505 common shares on January 31, 2014.  The remaining 149,495 warrants under the initial share purchase warrant expired at the close of business on October 3, 2013 and have been cancelled.  Zentrum 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 fully exercised.   Further, under the terms of the financing agreement, the Company is required to pay fees of 8% on funds received on an equity draw down, and in that regard, $40,000 was paid out during the nine month period ended March 31, 2014 in respect of the $500,000 received from Zentrum.  
 
We have approximately $1,747,550 (CDN$1,950,000) in funding remaining available under the credit facility.  We have a requirement to expend approximately $678,236 (CDN$750,000) on our Trout Lake property to earn our 50% working interest once we enter into a formal Farm-out Agreement and Operating Agreement with Zentrum.

On January 31, 2014, we entered into a securities purchase agreement (the “SPA”) to raise a total $750,000 with one accredited investor introduced by David Bisang to the Company.  Under the terms of the SPA, the investor subscribed for a total of 136,364 shares of our common stock 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 were issued on February 11, 2014.
 
 
6
 
Subsequent to our quarter ended September 30, 2014, on October 29, 2014, we entered into a private placement subscription agreement with one accredited investor for total proceeds of $100,000.80 to purchase a total of 29,412 units at $3.40 per unit, with each unit consisting of one share and one share purchase warrant entitling the holder to acquire an additional share of common stock at $4.50 per share, for a period of two years from the acceptance date.

There are no assurances funds will be available when needed.   We do not have a requirement to provide funding to North Star so all remaining funds under the equity line should be sufficient for operations of the Company over the next twelve months.    There can be no assurance that additional financing under the credit line will be available to us when needed or whether other funding will be available, and , if available, that it can be obtained on commercially reasonable terms.  If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our obligations as they become due and we will be forced to scale down or perhaps even cease the operation of our business.

Capital Resources

As of September 30, 2014, we had total assets of $60,338,164, comprised of cash on hand of $67,308, prepaid expenses of $3,222 and the value of our investment in a private oil and gas exploration company, CEC North Star Energy Ltd., valued at $60,267,634, as compared to total assets of $60,926,494, comprised of cash on hand of $250,360 and the value of our investment in a private oil and gas exploration company, in the amount of $60,676,134, on June 30, 2014.  As of September 30, 2014, our total liabilities increased to $111,467 from $83,717 as of June 30, 2014 as we increased operations.   While we have substantially increased our net assets with the recent acquisition of shares in a private oil and gas company, we are not able presently to monetize these assets.  We have not generated revenue since the date of Inception (June 9, 2008).

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements that will have a current or future effect on our financial condition and changes in financial condition.
 
Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. Our significant accounting policies are more fully discussed in the Notes to our Financial Statements.

Recent Accounting Pronouncements

On June 10, 2014, The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, consolidation, which removes all incremental financial reporting requirements from GAAP for development stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification. For the first annual period beginning after December 15, 2014, the presentation and disclosure requirements in Topic 915 will no longer be required for the public business entities. The revised consolidation standards are effective one year later, in annual periods beginning after December 15, 2015. Early adoption is permitted. The Company adopted the amendment in the fiscal year ending June 30, 2014.
 
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The Company has reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company and are not required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of September 30, 2014. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2014 in ensuring that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  This conclusion is based on findings that constituted material weaknesses.  A material weakness is a deficiency or combination of control deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.  
 
In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of September 30, 2014:

1)  
Lack of an audit committee.  We do not have an audit committee.  These factors may be counter to corporate governance practices as defined by the various stock exchanges and may lead to less supervision over management;
 
    2)  
Inadequate staffing and supervision within our bookkeeping operations.  We have consultant relatively small number of people involved in bookkeeping functions and part of our work is provided by an outside booking firm who has only two staff members.  The relatively small number of people who are responsible for bookkeeping functions prevents us from segregating duties within our internal control system.  The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. This may result in a failure to detect errors in spreadsheets, calculations or assumptions used to compile the financial statements and related disclosures as filed with the SEC;
 
 
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3)  
Outsourcing of the majority of our accounting operations.  We have outsourced the majority of our accounting functions to an independent firm.  The employees of this firm are managed by supervisors within the firm and are not answerable to the Company’s management.  This is a material weakness because it could result in a disjunction between the accounting policies adopted by our Board of Directors and the accounting practices applied by the independent firm;
 
4)  
Insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and
 
5)  
Ineffective controls over period end financial disclosure and reporting processes.

Our management feels the weaknesses identified above have not had any material effect on our financial results. However, we have taken steps to mitigate this risk by expanding the financial supervision, record keeping and reporting duties undertaken by certain members of our management team and board of directors to ensure more effective coordination and communication with third party consultants that presently perform the majority of our accounting functions.  Additionally, we are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the near term when funding is available, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources to potentially mitigate these material weaknesses. Our management team will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Changes in Internal Control over Financial Reporting

During the period covered by this report, there were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.
 
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PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings and is not aware of any pending legal proceedings as of the date of this Form 10-Q.

ITEM 1A. RISK FACTORS

The Company is a smaller reporting company and is not required to provide this information.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On October 29, 2014, the Company completed an equity private placement for 29,412 units of common stock at $3.40 per unit, with each unit consisting of one share and one share purchase warrant exercisable at $4.50 per share.    The Company will issue 1,471 warrants exercisable for a period of two years at $4.50 per share to Mr. David Bisang in respect of the aforementioned placement.

These securities were issued in reliance upon Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) to persons who are "accredited investors" as such term is defined in Rule 501(a) under the Securities Act, or in offshore transactions (as defined in Rule 902 under Regulation S of the Securities Act), based upon representations made by the recipients.

Other than as disclosed herein, there were no unregistered securities to report which were sold or issued by the Company without the registration of these securities under the Securities Act of 1933 in reliance on exemptions from such registration requirements, within the period covered by this report, which have not been previously included in an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Company does not have any senior securities as of the date of this Form 10-Q.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

Effective November 18, 2014, we amended the Common Stock Purchase Warrant, dated April 28, 2014, issued to certain warrant holders (the “Warrant”), to allow for cashless exercise of such Warrant.  No consideration was provided in exchange for this amendment to the Warrant.
 
 
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ITEM 6. EXHIBITS

The following exhibits are filed as part of this Quarterly Report:

Number
Description
  
3.1
Articles of Incorporation
Incorporated by reference to the Exhibits filed with the Form S-1 filed with the SEC on September 18, 2008
3.2
Bylaws
Incorporated by reference to the Exhibits filed with the Form S-1 filed with the SEC on September 18, 2008
4
Form of Warrant
Incorporated by reference to the Exhibits filed with the Current Report on Form 8-K filed with the SEC on February 7, 2014
10
Form of Securities Purchase Agreement/Subscription Agreement
Incorporated by reference to the Exhibits attached to the Company’s Form 8-K filed with the SEC on February 7, 2014
31.1
Section 302 Certification - Principal Executive Officer
Filed herewith
31.2
Section 302 Certification - Principal Financial Officer
Filed herewith
32
Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer and Principal Financial Officer
Filed herewith
101
Interactive Data Files
To be filed by amendment
 
 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
OCTAGON 88 RESOURCES, INC.
       
Date:
 November 19, 2014
By:
/s/ Guido Hilekes
   
Name:
Guido Hilekes
   
Title:
Chief Executive Officer (Principal Executive Officer), President and Director
       
Date:
 November 19, 2014
By:
/s/ Richard Ebner
   
Name:
Richard Ebner
   
Title:
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Director

 
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OCTAGON 88 RESOURCES, INC. Reports