United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 2004 000-28638
BMB MUNAI, INC.
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization
30-0233726
------------------------------------
(I.R.S. Employer Identification No.)
20A Kazibek Bi Street, Almaty, 480100 Kazakhstan
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(Address of principal executive offices)
+7 (3272) 58-85-17/47
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 [ ]
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: common stock, par value
$0.001; 28,513,766 shares outstanding as of February 3, 2005.
Transitional small business disclosure format (check one) Yes [ ] No [X]
BMB MUNAI, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2004
and March 31, 2004 ............................................. 3
Unaudited Consolidated Statements of Loss for the Three
and Nine Months Ended December 31, 2004, the Three Months
Ended December 31, 2003, the period from inception
(May 6, 2003) to December 31, 2003 and for the period
from inception (May 6, 2003) to December 31, 2004................ 4
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2004 and the period from
inception (May 6, 2003) to December 31, 2003..................... 5
Notes to Unaudited Consolidated Financial Statements............... 6
Item 2. Managements Discussion and Analysis or Plan of Operation...... 13
Item 3. Controls and Procedures....................................... 22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................. 23
Item 4. Submission of Matters to a Vote of Security Holders........... 23
Item 6. Exhibits ..................................................... 24
Signatures............................................................. 25
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, March 31,
2004 2004
(Unaudited)
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 1,063,270 $ 2,126,355
MARKETABLE SECURITIES 776,817 2,879,136
INVENTORIES 3,353,255 183,884
PREPAID AND OTHER ASSETS 4,769,890 522,148
INTEREST RECEIVABLE 17,539 -
LOAN RECEIVABLE 370,987 -
--------------------------------
TOTAL CURRENT ASSETS 10,351,758 5,711,523
--------------------------------
LONG TERM ASSETS
FIXED ASSETS LESS ACCUMULATED DEPRECIATION 987,651 259,653
OIL AND GAS PROPERTIES, FULL COST METHOD, LESS ACCUMULATED DEPRECIATION 42,836,248 12,489,931
INTANGIBLE ASSETS 15,670 5,411
RESTRICTED CASH 60,057 20,000
DEPOSITS 23,672 21,172
--------------------------------
TOTAL LONG TERM ASSETS 43,923,298 12,796,167
--------------------------------
TOTAL ASSETS $ 54,275,056 $ 18,507,690
================================
LIABILITIES
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 1,702,006 $ 332,487
DUE TO RESERVOIR CONSULTANTS 278,000 278,000
ACCRUED LIABILITIES 121,335 56,232
--------------------------------
TOTAL CURRENT LIABILITIES 2,101,341 666,719
--------------------------------
LONG TERM LIABILITIES
DUE TO RESERVOIR CONSULTANTS 222,000 222,000
DUE TO THE GOVERNMENT OF KAZAKHSTAN 5,994,745 5,994,745
LIQUIDATION FUND 60,057 20,000
--------------------------------
TOTAL LONG TERM LIABILITIES 6,276,802 6,236,745
--------------------------------
TOTAL LIABILITIES 8,378,143 6,903,464
MINORITY INTEREST - 82,134
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL
Preferred Stock, $0.001 par value
Authorized - 20,000,000 shares
Issued and outstanding - None - -
Common Stock, $0.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 28,513,762 28,514 20,429
ADDITIONAL PAID IN CAPITAL 48,494,266 12,115,445
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (2,625,867) (613,782)
--------------------------------
TOTAL SHAREHOLDERS' EQUITY 45,896,913 11,522,092
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 54,275,056 $ 18,507,690
================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
BMB MUNAI, INC.
(A Development Stage Entity)
UNAUDITED CONSOLIDATED STATEMENTS OF THE LOSS
Period from Period from
inception inception
Three Months Three Months Nine Months (May 6, 2003) (May 6, 2003)
Ended Ended Ended through through
December 31, December 31, December 31, December 31, December 31,
2004 2003 2004 2003 2004
----------- ----------- ------------ ----------- -----------
REVENUES
OIL SALES $ 55,904 $ - $ 347,891 $ - $ 347,891
-----------------------------------------------------------------------
EXPENSES
OPERATING COSTS
PRODUCTION COSTS (24,370) - (85,619) - (85,619)
GENERAL AND ADMINISTRATIVE (1,298,613) (196,412) (2,716,894) (226,508) (3,498,651)
DEPRECIATION AND AMORTIZATION (21,917) (271) (49,103) (271) (53,861)
-----------------------------------------------------------------------
TOTAL EXPENSES (1,344,900) (196,683) (2,851,616) (226,779) (3,638,131)
-----------------------------------------------------------------------
LOSS FROM OPERATIONS (1,288,996) (196,683) (2,503,725) (226,779) (3,290,240)
-----------------------------------------------------------------------
OTHER INCOME (EXPENSE)
REALIZED GAINS ON MARKETABLE SECURITIES 46 - 58,944 - 78,312
UNREALIZED GAIN (LOSS) ON MARKETABLE
SECURITIES 4,666 197,550 (287,944) 197,550 (39,537)
NET INTEREST INCOME (EXPENSE) 126,331 (29,463) 122,430 (86,702) 38,423
FOREIGN CURRENCY EXCHANGE GAIN 329,339 - 532,025 - 602,974
OTHER INCOME / EXPENSE (NET) (9,049) (25,920) (9,049) (26,967) (9,049)
-----------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) 451,333 142,167 416,406 83,881 671,123
-----------------------------------------------------------------------
NET LOSS BEFORE INCOME TAXES AND MINORITY
INTEREST (837,663) (54,516) (2,087,319) (142,898) (2,619,117)
-----------------------------------------------------------------------
INCOME TAX EXPENSE 6,750 - 6,750 - 6,750
-----------------------------------------------------------------------
NET LOSS BEFORE MINORITY INTEREST (844,413) (54,516) (2,094,069) (142,898) (2,625,867)
MINORITY INTEREST - (50,443) - (51,175) -
-----------------------------------------------------------------------
NET LOSS $ (844,413) $ (104,959) $ (2,094,069) $ (194,073) $(2,625,867)
=======================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 28,513,761 17,190,833 25,128,792 16,049,400 20,848,144
LOSS PER COMMON SHARE BASIC AND DILUTED $ (0.03) $ (0.01) $ (0.08) $ (0.01) $ (0.13)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
BMB MUNAI, INC.
(A Development Stage Entity)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from Period from
inception inception
Nine Months (May 6, 2003) (May 6, 2003)
Ended through through
December 31, December 31, December 31,
2004 2003 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (2,094,069) $ (194,073) $ (2,625,867)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Depreciation and amortization 49,103 271 53,861
Minority interest in operations of subsidiary - 51,175
Changes in operating assets and liabilities
Increase in inventories (3,169,371) (391,452) (3,353,255)
Increase in prepaid and other assets (4,265,281) (70,158) (4,787,429)
Increase in account payable and accrued liabilities 1,434,622 722,841 2,101,341
Restricted cash (40,057) - (60,057)
Deposits (2,500) (21,172) (23,672)
-------------------------------------------------------
Net cash provided by (used in) operating activities (8,087,553) 97,432 (8,695,078)
-------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in short term loan receivable (370,987) - (370,987)
Cash proceeds from sale of marketable securities 2,102,319 - -
Purchase of marketable securities - - (776,817)
Acquisition of fixed assets (775,016) (165,600) (1,039,427)
Acquisition of intangible assets (12,344) - (17,755)
Purchase of oil and gas properties (11,231,410) (5,515,482) (17,484,596)
-------------------------------------------------------
Net cash used in investing activities (10,287,438) (5,681,082) (19,689,582)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 17,311,906 9,936,024 27,247,930
Repayment of short-term financing - (500,000) (500,000)
Procceds from short-term financing - 500,000 500,000
Proceed from issuanse of convertible debt - 2,000,000 2,000,000
Proceeds from execise of common stock options - 200,000 200,000
-------------------------------------------------------
Net cash provided by financing activities 17,311,906 12,136,024 29,447,930
-------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,063,085) 6,552,374 1,063,270
Cash at Beginning of the Period 2,126,355 - -
-------------------------------------------------------
Cash at End of the Period $ 1,063,270 $ 6,552,374 $ 1,063,270
=======================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
NON-CASH TRANSACTIONS
------------
Acquisition of 30% of Emir Oil LLC by issuance 3,500,0000 common stock $ 19,075,000
============
5
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE A -ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company was incorporated in Delaware on February 7, 1994. Prior to November
26, 2003, the Company existed under the name InterUnion Financial Corporation
("InterUnion"). The Company changed domicile from the State of Delaware to the
State of Nevada in December 2004.
On November 26, 2003, InterUnion executed an Agreement and Plan of Merger (the
"Agreement") with BMB Holding, Inc ("BMB"), a private Delaware corporation,
formed for the purpose of acquiring and developing of oil and gas fields in the
Republic of Kazakhstan.
The Company has minimal operations to date and is considered to be in the
development stage. The Company began test production at one well in May 2004 and
at two wells in December 2004.
The financial information included herein is unaudited. However, such
information includes all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods. The results of
operations for the interim period are not necessarily indicative of the results
to be expected for an entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted in this Form
10-QSB Report pursuant to certain rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes included in our March 31, 2004 Form
10-KSB Report.
BASIS OF CONSOLIDATION
The Company's financial statements present the consolidated results of BMB
Munai, Inc., and Emir Oil LLP, its wholly owned subsidiary (hereinafter
collectively referred to as the "Company"). All significant inter-company
account balances and transactions have been eliminated.
Emir Oil has a fiscal year ending December 31, which is different from Company's
fiscal year end. All transactions of Emir Oil from April 1, 2004 through
December 31, 2004 are reflected in the Unaudited Consolidated Financial
Statements and Notes to Consolidated Financial Statements.
CASH EQUIVALENTS
The Company considers all demand deposits and money market accounts purchased
with an original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities consist of short term repurchase agreements for securities
issued by Kazakhstan banks and Kazakhstan financial institutions. The Company
records these marketable securities as trading securities and any change in the
fair market value is recorded in earnings. As of December 31, 2004, the Company
6
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
has marketable securities in amount of $776,817. All marketable securities have
been pledged to collateralize payment to Saipem S.p.A., a European oil drilling
and service company, for drilling services. The marketable securities are
scheduled to be released from the security interest of Saipem S.p.A on February
9, 2005.
PREPAID AND OTHER ASSETS
Prepaid and other assets include a prepayment for tangible drilling materials in
amount of $2,658,799 expected to be received in lots, the last lot to be
received in February 2005.
LOAN RECEIVABLE
Loan receivable consists of a short-term loan to a Kazakhstan financial
institution in the amount of $370,987 under reverse repurchase agreements and
repurchase agreements. Deferred gain on the loan is reflected in current
liabilities in the amount of $1,460.
RESTRICTED CASH
Restricted cash reflected in long-term assets consists of $60,057 deposited in a
Kazakhstan bank and is restricted to meet possible environmental obligations
according to the regulations of Kazakhstan (see Note F).
INVENTORY
Inventory represents tangible drilling materials required for drilling
operations in the amount of $3,200,827 and spare parts, diesel fuel, and various
materials for use in oil field operations. Inventory is valued using the
weighted average method and is recorded at the lower of cost or net realizable
value. Inventory also consists of crude oil of test production in the amount of
$70,668.
LICENSES AND CONTRACTS
Emir Oil is the operator of the Aksaz, Dolinnoe and Emir oil and gas fields in
Western Kazakhstan (ADE Block, ADE Fields). The Government of the Republic of
Kazakhstan (the "Government") initially issued the license to Zhanaozen Repair
and Mechanical Plant on April 30, 1999. On September 23, 2002, the license was
assigned to Emir Oil. On June 9, 2000, the contract for exploration of the
Aksaz, Dolinnoe and Emir oil and gas fields was entered into between the Agency
of the Republic of Kazakhstan on Investments and the Zhanaozen Repair and
Mechanical Plant. On September 23, 2002, the contract was assigned to Emir Oil.
The Company is legally entitled to receive this commercial production contract
and has an exclusive right to negotiate this contract and the Government is
obligated to conduct these negotiations under the Law of Petroleum in
Kazakhstan. If no terms can be negotiated, the Company has a right to produce
and sell oil, including export oil, under the Law of Petroleum for the term of
its existing contract through June 9, 2007.
OIL AND GAS PROPERTIES
The Company recently started test production at the Dolinnoe-1, Aksaz-1 and
Emir-1 wells and has no other present production history, the Company follows
the full cost method of accounting for its costs of acquisition, exploration and
development of oil and gas properties.
7
Under full cost accounting rules, the net capitalized costs of evaluated oil and
gas properties shall not exceed an amount equal to the present value of future
net cash flows from estimated production of proved oil and gas reserves, based
on current economic and operating conditions, including the use of oil and gas
prices as of the end of each quarter.
Given the volatility of oil and gas prices, it is reasonably possible that the
estimate of discounted future net cash flows from proved oil and gas reserves
could change. If oil and gas prices decline, even if only for a short period of
time, it is possible that impairments of oil and gas properties could occur. In
addition, it is reasonably possible that impairments could occur if costs are
incurred in excess of any increases in the cost ceiling, revisions to proved oil
and gas reserves occur, or if properties are sold for proceeds less than the
discounted present value of the related proved oil and gas reserves.
All geological and geophysical studies, with respect to the ADE Block have been
capitalized as part of the oil and gas properties. The Company's oil and gas
properties primarily include the value of the license and other capitalized
costs under this method of accounting.
Costs of acquiring unproved leases shall be evaluated for impairment until such
time as the leases are proved or abandoned. In addition, if the sums of expected
undiscounted cash flows are less than net book value, unamortized costs at the
field level will be reduced to fair value.
Long-term assets include fixed assets. Fixed assets are valued at the historical
cost less accumulated depreciation. Historical cost includes all direct costs
associated with the acquisition of the fixed assets.
Depreciation and amortization of producing properties shall be computed using
the unit-of-production method based on estimated proved recoverable reserves.
Depreciation of other depreciable assets shall be calculated using the straight
line method based upon estimated useful life ranging from two to ten years.
Maintenance and repairs shall be charged to expense as incurred. Renewals and
betterments shall be capitalized.
Amortization of intangible assets with determinable lives shall be calculated
using straight line method upon estimated useful life ranging from three to four
years.
RISKS AND UNCERTAINTIES
The ability of the Company to realize the carrying value of its assets is
dependent on being able to develop, transport and market oil and gas. Currently
exports from the Republic of Kazakhstan are primarily dependent on transport
routes either via rail, barge or pipeline through Russian territory. Domestic
markets in the Republic of Kazakhstan might not permit world market price to be
obtained. However, management believes that over the life of the project,
transportation options will be improved by further increases in the capacity of
the transportation options.
REVENUE RECOGNITION
Revenue from the sale of oil and gas shall be recorded using the accrual method
of accounting.
FOREIGN EXCHANGE TRANSACTIONS
The Company's functional currency is the U.S. dollar, thus the financial
statements of the Company's foreign subsidiary are measured using the U.S.
dollar. Accordingly, transaction gains and losses for foreign subsidiaries shall
be recognized in U.S. dollars in consolidated operations in the year of
occurrence. There are no current regulatory issues in Kazakhstan dealing with
8
currency conversions between the local currency in Kazakhstan and the U.S.
Dollar that are expected to negatively impact the Company's business, however,
the risk of actual currency fluctuations as it relates to the U.S. dollar is
present.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. 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. Under the liability method,
the effect on previously recorded deferred tax assets and liabilities resulting
from a change in tax rates is recognized in earnings in the period in which the
change is enacted.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Accordingly, actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT
In December 2004, the FASB issued a revision of SFAS No. 123 "Share-Based
Payment" (No. 123R). The statement establishes standards for the accounting for
transactions in which an entity exchanges its equity investments for goods and
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. The statement does not change the accounting guidance for
share-based payments with parties other than employees. The statement requires a
public entity to measure the cost of employee service received in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exception). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award
(usually the vesting period). A public entity will initially measure the cost of
employee services received in exchange for an award of a liability instrument
based on its current fair value; the fair value of that award will be remeasured
subsequently at each reporting date through the settlement date. Changes in fair
value during the requisite service period will be recognized as compensation
over that period. The grant-date for fair value of employee share options and
similar instruments will be estimated using option-pricing models adjusted for
the unique characteristics of these instruments. The Company will be required to
comply with this pronouncement for periods beginning after December 15, 2005.
9
NOTE B - GOING CONCERN
The Company's consolidated financial statements have been presented on the basis
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company is in the process of building its oil and gas business,
which is intended to generate revenue to sustain the operations of the Company.
To fully develop the geographical area covered by the oil exploration license
held by Emir, the Company needs substantial additional funding. Concurrently,
prior to commencing oil production, the Company must also obtain a commercial
production contract with the Government of Kazakhstan. The Company is legally
entitled to receive this commercial production contract, has an exclusive right
to negotiate this contract and the Government of Kazakhstan is obligated to
conduct these negotiations under the Law of Petroleum in Kazakhstan. If no terms
can be negotiated, the Company has a right to produce and sell oil, including
export oil, under the Law of Petroleum for the term of its existing contract
through June 9, 2007. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern.
NOTE C - ACQUISITION
On June 7, 2003, BMB acquired a 70% equity interest in Emir Oil for $1,300,000.
On May 24, 2004, the Company agreed to purchase the remaining 30% interest of
its minority interest partner in Emir Oil in exchange for 3,500,000 shares of
restricted Company common stock. On August 6, 2004, the Company issued the
3,500,000 shares to its minority partner in Emir Oil. The aggregate purchase
price was determined to be $19,075,000 using a price of our common shares on
OTCBB on August 6, 2004 of $5.45 per share. The entire purchase price has been
allocated to oil and gas properties in the accompanying consolidated balance
sheet
The results of Emir's operations have been included in the consolidated
financial statements since June 7, 2003. Emir had no operations prior to its
acquisition by BMB. Emir holds an oil and gas exploration license for the ADE
Block. Based on its ownership of Emir Oil, the Company is required to fund the
exploration efforts of Emir Oil. (See Note G.) The Company anticipates
henceforth the cost of exploration to be approximately $60,000,000, which the
Company will seek to fund through additional equity and/or debt financing and
the sale of oil produced during well testing.
NOTE D - FOREIGN ASSETS AND ECONOMIC CONCENTRATION
Marketable securities of $766,817 are held in short term repurchase agreements
for securities issued by Kazakhstan banks and Kazakhstan financial institutions.
Cash and Cash Equivalents include deposits in Kazakhstan banks in the amount
$574,538. Restricted Cash reflected in the long-term assets consists of $60,057
deposited in a Kazakhstan bank and restricted to meet possible environmental
obligations according to the regulations of Kazakhstan. The deposits in the
banks of Kazakhstan and the securities are subject to country risk of the
Republic of Kazakhstan. Furthermore, the primary asset of the Company is Emir
Oil; an entity formed under the laws of the Republic Kazakhstan is also subject
to country risk in the Republic of Kazakhstan.
NOTE E -FIXED ASSETS
Fixed Assets
Summary of the fixed assets net of accumulated depreciation is provided below:
10
Field facilities $ 83,960
Field equipment 506,041
Field vehicles 139,979
Office vehicles 152,203
Office equipment and furniture 157,250
-------------------------------------------------------------
Total 1,039,433
Accumulated Depreciation 51,782
--------------------------------------------------------------
Net $ 987,651
=============
NOTE F - LONG TERM LIABILITIES
Long Term Liabilities include:
1. Amounts due to the Government of Kazakhstan to reimburse the historical
investments by the Government in the properties currently held under the
exploration license and contract by Emir Oil. When Emir Oil obtains a commercial
production license for the oil fields it currently holds exploration license to,
as a condition to receipt of the commercial production license and contract for
hydrocarbons by Emir Oil, Emir Oil will be required to negotiate a repayment
schedule for the debt owed to the Government of the Republic of Kazakhstan.
Should Emir Oil not proceed with acquisition of a production contract and
license for any property that property would revert to the Government in
settlement of Emir Oil's obligations to the Government.
2. The amount of $222,000 due to reservoir consultants represents a part of a
$700,000 contract with PGS Reservoir Consultants payable during 2006. The
Company has paid to PGS $200,000 during 2004 and will pay $278,000 in 2005.
3. Liquidation Fund. Under the laws of the Republic of Kazakhstan, the Company
is obligated to set aside funds for required environmental remediation.
Accordingly, the Company contributed $60,057 to the Liquidation Fund.
NOTE G - COMMITMENTS AND CONTINGENCIES
Under the terms of the five-year exploration contract, Emir Oil is required to
spend a total of $27 million in exploration and development activities on the
ADE Block. To retain its rights under the exploration contract, the Company must
spend a minimum of $9.3 million in 2005 and $6 million in 2006. The failure to
make these minimum capital expenditures could result in the loss of the
exploration contract.
A lawsuit was filed in Florida naming the Company as one of the defendants. The
claim alleges that the Plaintiff should have received compensation and/or a
percentage of stock of the Company as a result of the merger between the Company
and BMB Holding, Inc. The Company is confident that the matter shall be resolved
in the Company's favor. The Company has retained legal counsel to protect its
interests. In the opinion of the Company's management and legal counsel, the
resolution of this lawsuit will not have a material adverse effect on our
financial condition, results of operations or cash flows.
11
NOTE H - CAPITAL STOCK, ADDITIONAL PAID-IN-CAPITAL
Net Loss per Common Share
Basic earnings per share excludes any dilutive effects of option, warrants and
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share are computed similar to basic earnings per
share. However, diluted earnings per share reflects the assumed conversion of
all potentially dilutive securities.
The following table sets forth the computation of basic and diluted loss per
common share:
Period from
inception
Three Months Three Months Nine Months (May 6, 2003)
Ended Ended Ended through
December 31, 2004 December 31, 2003 December 31, 2004 December 31, 2003
----------------- ----------------- ----------------- -----------------
Numerator:
Net loss and numerator for basic and
diluted loss per share $ (844,413) $ (104,959) $(2,094,069) $ (194,073)
Denominator:
Denominator for basic and diluted
loss per share, weighted average
shares 28,513,761 17,190,833 25,128,792 16,049,400
Net Loss per Share, Basic and Diluted $ (0.03) $ (0.01) $ (0.08) $ (0.01)
The effect of the stock warrants and stock options is anti-dilutive.
The Financing
During the quarter ended September 30, 2004, the Company sold an aggregate of
4,584,340 shares of Company common shares at $4.00 per share in a private
placement offering. The Company raised total proceeds of $18,337,360 and net
proceeds (less expenses and brokerage commissions) of $17,311,906. The offering
was made only to accredited investors in the United States under Regulation D
and pursuant to Regulation S to non U.S. Persons.
The private placement commenced in July and concluded in September 2004. The
placement agents engaged to represent the Company in the private placement
offering received commissions equal to 5% of the gross proceeds received and
warrants equal to 10% of the number of shares they sold on behalf of the
Company.
NOTE I - RELATED PARTY TRANSACTIONS
During nine months ended December 31, 2004, the following related party
transactions occurred:
During nine months ended December 31, 2004, the Company retained the services of
TatArka LLC, and Kazmorgeophysica, CJSC. TatArka was paid $393,791 to obtain 3D
seismic data of ADE Block. Kazmorgeophysica was paid $59,875 for rendering other
geophysical research services on ADE Block and $153,846 of advance payment.
TatArka and Kazmorgeophysica are subsidiaries of a company that shared a common
director with our Company.
The Company leases ground fuel tanks and other oil fuel storage facilities and
warehouses from Term Oil, LLC., a Kazakhstan company. The lease payment for the
nine months ended December 31, 2004, totaled to $166,195. Also, during nine
months ended December 31, 2004, Term Oil, LLC was paid $15,381 of lease advance
payment for the period from January 1, 2005 through March 31, 2005. One of our
shareholders is an owner of Term Oil LLC.
12
Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion is intended to assist the reader in
understanding our results of operations and our present financial condition. Our
Consolidated Financial Statements and the accompanying notes included in this
Form 10-QSB contains additional information that should be referred to when
reviewing this material.
Statements in this discussion may be forward-looking. These
forward-looking statements involve risks and uncertainties, including those
discussed below, which could cause actual results to differ from those
expressed. Please read Forward-Looking Information on page 22.
We operate in one segment, oil and natural gas exploration, development
and production.
Overview
Prior to November 26, 2003, the Company existed under the name
InterUnion Financial Corporation ("InterUnion"). The primary business strategy
of InterUnion was to acquire majority interests in financial services
businesses. On November 26, 2003, InterUnion executed an Agreement and Plan of
Merger with BMB Holding, Inc., a private Delaware corporation, formed for the
purpose of acquiring and developing oil and gas fields in the Republic of
Kazakhstan ("ROK"). Pursuant to the Agreement, BMB Holding merged into
InterUnion, with InterUnion being the surviving corporation. For accounting
purposes, the transaction was treated as a reverse merger under accounting
principles generally accepted in the United States, with BMB Holding and its
then 70% owned subsidiary, Emir Oil, treated as the surviving entity. BMB
Holding was incorporated on May 6, 2003. Following the merger, we changed our
name to BMB Munai, Inc.
On May 24, 2004, we agreed to purchase the 30% interest of our minority
partner in Emir Oil. The acquisition was made in exchange for 3,500,000 shares
of our common stock. As a result of the acquisition, Emir Oil became a wholly
owned subsidiary of BMB Munai. The acquisition of the final 30% interest in Emir
Oil was consummated during the quarter.
Since incorporation on May 6, 2003, our primary focus has been the
acquisition, exploration, development, exploitation and production of crude oil
and natural gas in Kazakhstan. With the acquisition of the exploration and
development license and contract of Emir Oil, we are focusing our efforts on the
development of the Aksaz, Dolinnoe and Emir Oil and Gas Fields in Kazakhstan
(the "ADE Block").
13
We anticipate spending between $25 million and $30 million in the
continued exploration and development of the ADE Block in the next twelve
months. In September 2004, we completed a private placement in which we sold
4,584,340 shares of our common stock for $4.00 per share to raise gross proceeds
of $18,337,360. After paying commissions, fees and costs of the offering, we
realized net proceeds of $17,311,906. This money has and will continue to be
used primarily to fund our exploration and development efforts. We also intend
to apply proceeds from the sale of oil we produce during well testing to help
fund our exploration and development activities. We anticipate the need to raise
an additional $40,000,000 to support exploration and development activities
before we expect income from oil production to be sufficient to meet our needs
for operating capital.
Extension of the License Territory
During the quarter, we received written notification from the Ministry
of Energy and Mineral Resources of the ROK that the Ministry had approved and
finalized an amendment to the oil and gas exploration license AI No. 1552 and
Contract No. 482 for Exploration of Hydrocarbons in Aksaz-Dolinnoe-Emir oil
fields held by Emir extending the ADE Block licensed territory by an additional
64,247 acres, (approximately 260 square kilometers.) Reinterpretation of 2D
seismic data from the Soviet Union era performed by PGS-GIS, of Almaty,
Kazakhstan, showed four oil and gas bearing structures of deeper Triassic
formations that have geologic composition similar to the ADE block where
discovered.
The amendment grants us the exclusive right to explore the additional
territory during the remaining term of the license, which expires in July 2007.
Pursuant to the terms of the amendment, we are required to spend a minimum of
$5,500,000 exploring and/or developing the extended territory, with a minimum of
$3,000,000 in exploration and/or development in 2006 and $2,500,000 in 2007.
These commitments are in addition to our commitments under the original license.
New Wells
During the next twelve months we intend to spend at least $20 million
to drill new exploratory wells. Initially we will focus our drilling efforts in
the Dolinnoe and Askaz oil fields, where we hope to drill at least one new
exploratory well, Dolinnoe-3, and drill-in two wells, Aksaz-3 and Aksaz-4.
Construction of the Dolinnoe-2 well was completed on January 4, 2005.
Preliminary tests indicated the presence of four oil bearing zones. Inside the
producing intervals core sampling, geophysical research and formation testing
were completed and oil and gas flow was discovered. Preparatory works for more
extensive testing are currently under way. It is anticipated that the Dolinnoe-2
well could go into test production in March 2005. Subsequent to quarter end, a
drilling rig has been moved to the drilling site of the Dolinnoe-3 well. On
January 26, 2005, we commenced drilling of the Dolinnoe-3 well. Presently, the
well has been drilled to 1,194 meters.
In January 2004, dismantling of the drilling rig at the Aksaz-3 well,
which was abandoned during the Soviet Union period, was completed. This rig
14
hindered further drilling works at this well site. At the present time similar
dismantling works are under way on the Aksaz-4 well. The Aksaz-3 and Aksaz-4
wells were previously incompletely drilled and spudded during the Soviet Union
period to determine the commercial viability of additional drilling at these
sites. During the 1990s, each of these wells was cased to approximately 3,400
meters. The Company expects the cost to drill these wells the remaining distance
to the pay zones will be relatively inexpensive.
Workover of Existing Wells
In the next twelve months we will continue workover of wells existing
since the Soviet Union period in the ADE Block. The Dolinnoe-1 well continues
steady production of approximately 165 barrels per day. The output of this well
is only from the top 7 meters of the pay zone due to equipment that was
abandoned in the well. Removal of this geophysical equipment is planned to occur
during 2005, which should increase production at the well. In December
subsurface workover of the Emir-1 well included the lowering of a deep
sucker-rod pump into the well. We are currently carrying out crude oil and gas
test production at this well site. Finally, during the quarter, we completed
development works at the Aksaz-1 well. As a result, gas and gas condensate flow
was discovered at the Aksaz-1 well.
Infrastructure Improvements
We plan to continue improving existing infrastructure in the ADE Block.
During the quarter we completed construction of 8.6 km pipeline connecting the
Dolinnoe and Aksaz fields. We have also completed construction of a gas
collection and pre-sale processing facility in the Aksaz field for natural gas
produced at ADE Block, including a well head heater, heat exchanger, oil and gas
separator, two pumping units and a 1,260 barrel oil products tank. We also began
developing plans to construct a 16 kilometer natural gas pipeline connecting the
Aksaz processing facility to an existing gas pipeline that ties into the Aktau
gas grid. This will allow us to sell natural gas to customers in Aktau. During
the quarter we also completed installation of a rocker machine on the Emir-1
well and laid 300 meters of power line to supply electricity for the rocker
machine. In the next twelve months we plan to continue to improve power supply
to the ADE Block through the construction of additional 6 kilowatt power lines
running through the ADE Block. We will also continue expanding the road network
within the ADE Block.
Oil Production and Sale
We have been engaged in test production and selling of crude oil since
May, 2004. Due to a lack of oil storage capacity at the storage facility we
lease, all of our crude oil sales have been to the Kazakhstan domestic market.
The average price per barrel of crude oil in the Kazakhstan domestic market
during that time has been approximately $14 per barrel. During the quarter,
however, capacity at the storage facility was increased from 945 barrels to
20,000 barrels as the result of reconstruction of two ground fuel tanks. With
this increase in oil storage capacity, we are now able to collect sufficient
volumes of oil for export and sale to the international market.
15
Our revenue, profitability and future growth rate will depend
substantially on factors beyond our control, such as economic, political and
regulatory developments and competition from other sources of energy. Oil and
natural gas prices historically have been volatile and may fluctuate widely in
the future. Sustained periods of low prices for oil or natural gas, or failure
to gain access to markets outside of the ROK, either through governmental
requirement or because of a lack of infrastructure to provide such access could
materially and adversely affect our financial position, our results of
operations, the quantities of oil and natural gas reserves that we can
economically produce and our access to capital.
Results of Operations
Three months ended December 31, 2004, compared to the three months
ended December 31, 2003
Revenues. During the three months ended December 31, 2004, we realized
revenues of $55,904, compared to $0 during the three months ended December 31,
2003. All revenues were from the sell of oil produced in test production. This
increase in revenues in the current year is primarily the result of the fact
that in the prior year we were just beginning operations and seeking to acquire
rights to oil and gas properties. We anticipate revenues will continue to
increase in the upcoming fiscal quarters. At the present time, however, it is
unclear the rate at which our revenues may increase.
Expenses. During the three months ended December 31, 2004, we incurred
total expenses of $1,344,900 compared to expenses of $196,683 during the three
months ended December 31, 2003. Again, the increase is primarily the result of
the growth of our operations during the past twelve months. For instance, during
the three month period ended December 31, 2003, we incurred general and
administrative expenses of $196,412, compared to $1,298,613 in the quarter ended
December 31, 2004. This increase is largely the result of hiring personnel to
operate our business, as well as travel and professional expenses including
accounting and legal fees. Also during the quarter ended December 31, 2004, we
incurred production costs of $24,370 and amortization and depreciation expenses
of $21,917. By comparison, we incurred no production costs and depreciation and
amortization costs of $271 in the quarter ended December 31, 2003. We expect
that as we execute our planned business activities over the next twelve months
our expenses will continue to increase at the same or greater rates.
Loss from Operations. During the three months ended December 31, 2004,
we incurred losses from operations totaling $1,288,996 compared to operating
losses of $196,683 for the three months ended December 31, 2003. These losses,
at least in part, are the result of us incurring significant expenses in
connection with the development of our oil fields before we can produce any
significant quantities of oil or gas. If we are unable to develop our oil and
gas fields to a level where oil and gas production and sales offset the costs of
exploration, development and production, we will continue to generate operating
losses until such time as we can no longer continue operations. At this time, it
is unclear when we will generate sufficient revenue from oil and gas production
to offset expenses, if at all.
16
Other Income. During the three months ended December 31, 2004, we
realized other income totaling $451,333 compared to other expenses of $142,167
for the three months ended December 31, 2003. The current year other income
included realized gains and unrealized gains on marketable securities of $4,712,
net interest of $126,331 and foreign currency exchange gain of $329,339,
partially offset by other net expense of $9,049. During the quarter ended
December 31, 2003, we realized no gain or loss on marketable securities and had
unrealized gain on marketable securities of $197,550, which was partially offset
by net interest expense of $29,463 and other net expense of $25,920. During the
current fiscal year we have raised approximately $17 million through the sale of
our securities in private placement transactions. Therefore, during the fiscal
quarter ended December 31, 2004, we had funds that were not being used in
operations that we invested in marketable securities. We expect to use all of
the funds we have raised to fund our operations. Until such time as they are
needed, however, such funds may be used to purchase marketable securities. We
anticipate that as funds are used in operations over the next twelve months,
gains and losses from marketable securities, both realized and unrealized, will
continue to decrease.
Net Loss. During the three months ended December 31, 2004, we realized
a net loss of $844,413 compared to a net loss of $104,959 for the three months
ended December 31, 2003. As discussed above this net loss is largely the result
of the increased size or our operations at December 31, 2004, compared to
December 31, 2003. We anticipate that we will continue to realize net losses
from operations until such time as revenues generated from oil and gas
production and sales and other income offset our expenses. At this time, it is
unclear when, or if, that may occur.
Nine months ended December 31, 2004, compared to the period from
inception (May 6, 2003) to December 31, 2003.
As discussed above, we incorporated on May 6, 2003, therefore, we do
not have a comparable prior period. Rather all comparisons to the period ended
December 31, 2003, will be for the period from May 6, 2003 through December 31,
2003.
Revenues. During the nine months ended December 31, 2004, we realized
revenues of $347,891, compared to $0 for the period from May 6, 2003, to
December 31, 2003. All revenues were from the sell of oil produced in test
production. This increase in revenues in the current year is primarily the
result of the fact that in the prior year we were just beginning operations and
seeking to acquire rights to oil and gas properties. We anticipate revenues will
continue to increase in the upcoming fiscal quarters. At the present time,
however, it is unclear the rate at which our revenues may increase.
Expenses. During the nine months ended December 31, 2004, we incurred
total expenses of $2,851,616 compared to expenses of $226,779 during the period
from May 6, 2003, to December 31, 2003. Again, the increase is primarily the
result of the growth of our operations during the past twelve months. For
instance, during the period from May 6, 2003 to December 31, 2003, we incurred
17
general and administrative expenses of $226,508, compared to $2,716,894 during
the nine months ended December 31, 2004. This increase is largely the result of
hiring personnel to operate our business, as well as travel and professional
expenses including accounting and legal fees. Also during the quarter ended
December 31, 2004, we incurred production costs of $85,619 and amortization and
depreciation expenses of $49,103 by comparison, we incurred no production costs
and $271 in depreciation and amortization during the period from May 6, 2003
through December 31, 2003. We expect that as we continue to execute our planned
business activities over the next twelve months our expenses will continue to
increase at the same or greater rates.
Loss from Operations. During the nine months ended December 31, 2004,
we incurred losses from operations totaling $2,503,725 compared to operating
losses of $226,779 for the period from May 6, 2003, through December 31, 2003.
These losses were largely the result of incurring expenses in connection with
the development of our oil fields before they produce any oil or gas. If we are
unable to develop our oil and gas fields to a level where oil and gas production
and sales offset the costs of exploration, development and production, we will
continue to generate operating losses until such time as we can no longer
continue operations. At this time, it is unclear when we will generate
sufficient revenue from oil and gas production to offset expenses, if at all.
Other Expense. During the nine month period ended December 31 2004, we
realized total other income of $416,406, compared to $83,881 for the period from
May 6, 2003, to December 31, 2003. The current period other expenses included a
realized gain on marketable securities of $58,944, net interest income of
$122,430 and foreign currency exchange gain of $532,025, offset in part by
unrealized loss on marketable securities of $287,944. By comparison, during the
period from May 6, 2003, to December 31, 2003, we realized no gains on
marketable securities and had unrealized gain on marketable securities of
$197,550, which was partially offset by net interest expense of $86,702 and
other net expense of $26,967.
Net Loss. During the nine months ended December 31, 2004, we realized a
net loss of $2,094,069 compared to a net loss of $194,073 for the period from
May 6, 2003 through December 31, 2003. As discussed above this net loss is
largely the result of the increased size or our operations at December 31, 2004,
compared to December 30, 2003. We anticipate that we will continue to realize
net losses from operations until such time as revenues generated from oil and
gas production and sales and other income offset our expenses. At this time, it
is unclear when, or if, that may occur
Liquidity and Capital Resources
Since inception on May 6, 2003, our capital resources have primarily
consisted of funds raised through the sale of our common stock and debt
convertible to our common stock. We anticipate our capital resources in the
upcoming twelve months will likewise consist largely of funds raised in
financing activities completed during the quarter ended September 30, 2004,
additional debt and/or equity financing which the Company will seek, and to some
level, revenues from oil sales.
18
Note B of the Notes to the Financial Statements discloses several
factors that raise substantial doubt about our ability to continue as a going
concern. Among those noted is the fact that we will need significant additional
funding to develop the geographical area covered by our exploration and
development license. As discussed herein, we have completed the private
placement of 4,584,340 shares of our common stock raising net proceeds of
$17,311,906. Most of these funds have now been used. We anticipate the need to
raise an additional $25,000,000 to $30,000,000 to meet our exploration,
development, production and operational needs for the next twelve months.
Another factor that raises concern about our ability to continue as a
going concern is the requirement that we must obtain a commercial production
contract from the ROK prior to commencing commercial oil production. While we
are legally entitled to receive this commercial production contract and have the
exclusive right to negotiate such with the ROK, and the ROK is required to
conduct the negotiations under the Law of Petroleum in Kazakhstan, there is no
guarantee that we will be awarded a production contract. If we cannot obtain a
production contract, we will only be able to produce and sell oil under the Law
of Petroleum for the term of the existing contract, which expires June 9, 2007.
Cash Flows
During the nine months ended December 31, 2004, cash was primarily used
to fund exploration and development related activities. We had a net decrease in
cash and cash equivalents of $1,063,085 during the nine months ended December
31, 2004, compared to a net increase of cash and cash equivalents of $6,552,374
in the period from May 6, 2003 to December 31, 2003. See below for additional
discussion and analysis of cash flow.
Nine months ended Period from inception (May 6, 2003)
December 31, 2004 through December 31, 2003
-------------------------- -------------------------------------
Net cash provided (used) in operating activities $ (8,087,553) $ 97,432
Net cash used in investing activities $(10,287,438) $(5,681,082)
Net cash provided by financing activities $ 17,311,906 $12,136,024
-------------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 1,063,085 $ 6,552,374
==================== =================
During the nine months ended December 31, 2004, net cash used in
operations was $8,087,553, compared to net cash provided from operations of
$97,432 during the period from May 6, 2003 to December 31, 2003. This
significant increase in net cash used in operation was the result of our
aggressive exploration and development strategy, as net loss, increase in
inventories, increase in prepaid and other assets, restricted cash and deposits
was only partially offset by increases in accounts payable and accrued
liabilities. Net cash used in investing activities was $10,287,438, compared to
$5,681,082 for the period from inception to December 31, 2003. The increase in
19
net cash used in investing activities included investment in a short term loan
receivable, acquisitions of fixed and intangible assets, as well as acquisition
of additional oil and gas properties, partially offset by cash proceeds from the
sale of marketable securities. During the nine months ended December 31, 2004,
$17,311,906 was provided from the private placement of our common stock. At
December 31, 2004, we had cash on hand of $1,063,270, compared to cash on hand
at December 31, 2003, of $6,552,374, again this decrease in cash on hand is the
result of our aggressive efforts to explore and develop the ADE Block. As a
result we have incurred significant costs and expenses, which have not been
offset by significant revenues.
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the upcoming twelve
months are $20 million to $25 million for exploration, development, production
and acquisitions. As discussed above, we have already spent most of the funds
raised in the private placement we completed during the quarter ended September
30, 2004. Therefore, we will need to seek additional funds either in the equity
or debt markets to fund the remainder of our budgeted capital expenditures and
to continue our operations. If we are unsuccessful in obtaining significant
additional capital, we may be forced to significantly curtail our exploration
and development activities or even to terminate operations until such time as
appropriate funds can be raised.
Contractual Obligations and Contingencies
The following table lists our significant commitments at December 31,
2004, excluding current liabilities as listed on our consolidated balance sheet:
Payments Due By Period
------------------------------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- -----------------------------------------------------------------------------------------------------------------
Capital Expenditure Commitment(1) $27,000,000 $9,300,000 $8,500,000 $ -- $ --
Due to the Government of Kazakhstan(2) 5,994,745 -- -- 5,994,745 --
Due to Reservoir Consultants 500,000 278,000 222,000 -- --
Liquidation Fund 20,000 -- 20,000 -- --
- -----------------------------------------------------------------------------------------------------------------
Total $33,514,745 $9,578,000 $8,742,000 $5,994,745 $ --
- -----------------------------------------------------------------------------------------------------------------
(1) Under the terms of our Contract with the ROK, we are required to
spend a total of at least $27 million dollars in exploration, development and
improvements within the ADE Block, as extended during the term of the license,
including $9.3 million in the 2005 calendar year, $6 million in the 2006
calendar year and $2.5 million in the 2007 calendar year. If we fail to do so,
we may be subject to the loss of our Contract.
(2) In connection with our acquisition of the License and Contract, we
will be required to repay the ROK for exploration and development expenditures
incurred by it prior to the time we acquired the License and Contract. The
repayment terms of this obligation will not be determined until such time as we
are granted a commercial production contract. Prior to commencing commercial oil
production, we must obtain a commercial production contract from the ROK. While
we are legally entitled to receive this commercial production contract and have
20
the exclusive right to negotiate such with the ROK, and the ROK is required to
conduct the negotiations under the Law of Petroleum in Kazakhstan, there is no
guarantee that we will be awarded a production contract. Moreover, at this time
it is unclear when might apply for a production contract or when it might be
issued, if at all. Therefore, we have made our best estimate as to when we
anticipate becoming subject to this repayment obligation.
Off-Balance Sheet Financing Arrangements
As of December 31, 2004, we had no off-balance sheet financing
arrangements.
Recently Issued Accounting Pronouncement
In December 2004, the FASB issued a revision of SFAS No. 123
"Share-Based Payment" (No. 123R). The statement establishes standards for the
accounting for transactions in which an entity exchanges its equity investments
for goods and services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. The statement does not change the accounting guidance
for share-based payments with parties other than employees. The statement
requires a public entity to measure the cost of employee service received in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exception). That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award (usually the vesting period). A public entity will initially measure
the cost of employee services received in exchange for an award of a liability
instrument based on its current fair value; the fair value of that award will be
remeasured subsequently at each reporting date through the settlement date.
Changes in fair value during the requisite service period will be recognized as
compensation over that period. The grant-date for fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of these instruments. The Company will
be required to comply with this pronouncement for periods beginning after
December 15, 2005.
Effects of Inflation and Pricing
The oil and natural gas industry is very cyclical and the demand for
goods and services of oil field companies, suppliers and others associated with
the industry puts extreme pressure on the economic stability and pricing
structure within the industry. Typically, as prices for oil and natural gas
increase, so do all associated costs. Material changes in prices impact the
current revenue stream, estimates of future reserves, borrowing base
calculations of bank loans and value of properties in purchase and sale
transactions. Material changes in prices can impact the value of oil and natural
gas companies and their ability to raise capital, borrow money and retain
personnel. While we do not currently expect business costs to materially
increase, continued high prices for oil and natural gas could result in
increases in the cost of material, services and personnel.
21
Forward Looking Information and Cautionary Statement
The statements regarding future financial and operating performance and
results, market prices, future hedging activities, and other statements that are
not historical facts contained in this report are forward-looking statements.
The words "expect," "project," "estimate," "believe," "anticipate," "intend,"
"budget," "plan," "forecast," "predict," "may," "should," "could," "will" and
similar expressions are also intended to identify forward-looking statements.
Such statements involve risks and uncertainties, including, but not limited to,
market factors, market prices (including regional basis differentials) of
natural gas and oil, results for future drilling and marketing activity, future
production and costs and other factors detailed herein and in our other
Securities and Exchange Commission filings. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officers and Chief Financial Officer have conducted an
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13A-15(e) under the Securities Exchange Act of 1934 ("Exchange Act") as of
the end of the period covered by this quarterly report (the "Evaluation Date").
Based on their evaluation, the Company's Chief Executive Officers and Chief
Financial Officer have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in its Exchange Act reports is recorded,
processed, summarized and reported within the applicable periods specified by
the SEC's rules and forms.
(b) Changes in Internal Controls and Procedures. During the period
covered by this quarterly report, there were no changes in the Company's
internal control over financial reporting (as defined in Rule 13a-15) or 15d-15
under the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial reporting.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In December 2003, a complaint was filed in the 15th Judicial Court in
and for Palm Beach County, Florida, naming, among others, BMB Munai, Inc.,
Alexandre Agaian and Georges Benarroch, Company directors, as defendants. The
plaintiffs, Brian Savage, Thomas Sinclair and Sokol Holdings, Inc., allege
claims of breach of contract, unjust enrichment, breach of fiduciary duty,
conversion and violation of a Florida trade secret statute in connection with a
business plan for the development Aksaz, Dolinnoe and Emir oil and gas fields
owned by Emir Oil, LLC. The plaintiffs seek unspecified compensatory and
exemplary damages.
We will vigorously defend ourselves in this action and strongly
questions the merit of all claims alleged by plaintiffs. During the quarter, we
retained the law firm of Gunster, Yoakley & Stewart, P.A., located in Fort
Lauderdale, Florida to represent us in connection with certain motions we filed
with the court to dismiss the complaint of plaintiffs, Brian Savage, Thomas
Sinclair and Sokol Holdings, Inc., on jurisdictional grounds. The motion was
scheduled for hearing in late August 2004, however, that hearing has been stayed
to allow the parties to conduct jurisdictional discovery. The hearing has not
yet been rescheduled. There were no other significant changes in this matter
during the quarter.
In the opinion of management, the resolution of this lawsuit will not
have a material adverse effect on our financial condition, results of operations
or cash flows.
Other than the foregoing, to the knowledge of management, there is no
other material litigation or governmental agency proceeding pending or
threatened against the Company or our management.
Item 4. Submission of Matters to a Vote of Security Holders
On October 8, 2004, the Company held its annual meeting of
stockholders. The total number of shares entitled to be voted at the meeting was
28,263,766. At the meeting the shareholders were asked to vote on the following
matters:
1) To amend the Certificate of Incorporation of the Company to accomplish
several purposes. First, to increase the authorized common stock of the
Company from 50,000,000 shares to 100,000,000 shares. Second to
eliminate the currently authorized 1,500,000 shares of Series A
preferred stock, 1,000 shares of Series B preferred stock and 1,000
shares of Series C preferred stock of the Company and replace it with
20,000,000 shares of preferred stock, the rights preferences and
privileges of which will be designated by the Board of Directors prior
to issuance of such shares. Third to update the Company's Certificate
of Incorporation to be more consistent with and take greater advantage
of the General Corporation Law of the State of Delaware and the
Company's Bylaws. 20,462,040 shares voted in favor of this proposal, no
shares voted against or abstained from voting on this proposal.
2) To elect six individuals to the board of directors of the Company on
staggered terms, with certain directors being elected for one year
(Class I Directors), two year (Class II Directors), and three year
(Class III Directors) terms and to retain a seventh directorship vacant
until such time as an individual who is both independent and may
qualify as a "financial expert" to serve on the Company's audit
committee can be appointed by the Board of Directors. This seventh
directorship to be classified as a Class I Director. Each of the
individuals nominated and elected as a director at the meeting was a
director of the Company prior to the meeting. The following individual
were elected to the Board of Directors of the Company:
23
For Abstain
--- -------
Class I Directors:
Georges Benarroch 20,462,040 -0-
Valery Tolkachev 20,462,040 -0-
Class II Directors:
Alexandre Agaian 20,462,040 -0-
Mirgali Kunayev 20,462,040 -0-
Class III Directors:
Bakhytbek Baiseitov 20,462,040 -0-
Boris Cherdabayev 20,462,040 -0-
3) To approve the BMB Munai, Inc., 2004 Stock Incentive Plan. 20,462,040
shares voted in favor of this proposal, no shares voted against or
abstained from voting on this proposal.
4) To ratify the actions of our directors for the last fiscal year, and
for the period from the fiscal year end through the date of the special
shareholder meeting. 20,462,040 shares voted in favor of this proposal,
no shares voted against or abstained from voting on this proposal.
Following the vote on these matters, the annual meeting was adjourned
until October 11, 2004. The meeting was reconvened on October 11, 2004, to
discuss and vote upon the proposal to change the domicile of the Company from
the State of Delaware to the State of Nevada for the purpose of decreasing our
franchise tax obligations. 20,462,040 shares voted in favor of this proposal, no
shares voted against or abstained from voting on this proposal.
Item 6. Exhibits
(A) Exhibits. The following exhibits are included as part of this report:
Exhibit 3.1(1) Articles of Incorporation of BMB Munai, Inc.
(a Nevada corporation)
Exhibit 3.2(1) By-Laws of BMB Munai, Inc. (as amended
through January 13, 2005)
Exhibit 10.1(2) Extension of Emir Oil License
Exhibit 31.1(2) Certification of Principal Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2(2) Certification of Principal Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.3(2) Certification of Principal Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1(2) Certification of Principal Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2(2) Certification of Principal Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.3(2) Certification of Principal Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Previously filed as an exhibit to the Current Report of Form 8-K
filed by the Company on January 18, 2005, and incorporated herein
by this reference.
(2) Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned
thereunto duly authorized.
BMB MUNAI, INC.
February 11, 2005 /s/ Alexandre Agaian
---------------------------
Alexandre Agaian,
Co-Chief Executive Officer
February 11, 2005 /s/ Boris Cherdabayev
---------------------------
Boris Cherdabayev,
Co-Chief Executive Officer
February 11, 2005 /s/ Anuar Kulmagambetov
---------------------------
Anuar Kulmagambetov,
Chief Financial Officer
25