United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB/A-1
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 2004 000-28638
BMB MUNAI, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization
87-0520294
------------------------------------
(I.R.S. Employer Identification No.)
20A Kazibek Bi Street, Almaty, 480100Kazakhstan
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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; 27,863,762 shares outstanding as of August 11, 2004.
Transitional small business disclosure format (check one) Yes [ ] No [X]
BMB MUNAI, INC.
FORM 10-QSB/A-1
TABLE OF CONTENTS
PART I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004
and March 31, 2004 ............................................. 4
Unaudited Consolidated Statements of Loss Three Months
Ended June 30, 2004, and the period from inception
(May 6, 2003) to June 30, 2004.................................. 5
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2004 and the period from
inception (May 6, 2003) to June 30, 2004........................ 6
Notes to Unaudited Consolidated Financial Statements.............. 7
Item 2. Managements Discussion and Analysis or Plan of Operation..... 16
Item 3. Controls and Procedures...................................... 25
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings............................................ 26
Item 2. Changes in Securities........................................ 26
Item 6. Exhibits and Reports on Form 8-K............................. 28
Signatures............................................................ 29
2
Explanatory Note
In response to certain comments raised by the staff of the Securities
and Exchange Commission, BMB Munai, Inc., is filing this Amendment No. 1 on Form
10-QSB/A-1 (this "Amendment") to its Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2004 originally filed with the Securities and Exchange
Commission on August 13, 2004 (the "Original Form 10-QSB"). Revisions have been
made to the Consolidated Balance Sheets to reduce "Oil and Gas Properties, Full
Cost Method, Less Accumulated Depreciation" by $5,994,745 and to eliminate the
same amount from "Due to the Government of Kazakhstan." Because we are not
required to repay this obligation until such time as we are granted production
rights this asset and liability have been removed from the Consolidated Balance
Sheets. As a result of this change to the financial statements, Note J has been
added to and revisions have been made to Notes F & G of the "Notes to the
Consolidated Financial Statements," and Item 2, "Management's Discussion and
Analysis of Results of Operations" of the Original Form 10-QSB.
We have revised Note A of the "Notes to the Consolidated Financial
Statements" to clarify that the corporation was originally incorporated in Utah
and to provide additional details about our accounting for inventory and share
based compensation.
The language of Item 3, "Controls and Procedures" of the Original Form
10-QSB has been revised in connection with the restatement and to make reference
to the definition of such controls and procedures as set forth in Rules
13a-15(d) and 15d-15(e).
For the convenience of the reader, this Amendment forth the text of the
Original Form 10-QSB in its entirety. As a result of this Amendment, the
certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act
of 2002, filed as exhibits to our 10-QSB have been revised, re-executed and
re-filed as of the date of this Form 10-QSB/A-1 and Item 6 hereof has been
accordingly amended. We have not updated other information contained in the
Original Form 10-QSB in this Amendment. Therefore, you should read this
Amendment together with other reports and documents which update and supersede
some of the information contained in this Amendment.
3
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 2004 March 31, 2004
(Unaudited) (Audited)
------------- --------------
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 304,777 $ 2,126,355
MARKETABLE SECURITIES 766,473 2,879,136
INVENTORIES 592,671 183,884
PREPAID AND OTHER ASSETS 2,836,275 522,148
---------------------------------
TOTAL CURRENT ASSETS 4,500,196 5,711,523
---------------------------------
LONG TERM ASSETS
FIXED ASSETS LESS ACCUMULATED DEPRECIATION 315,572 259,653
OIL AND GAS PROPERTIES, FULL COST METHOD, LESS ACCUMULATED DEPRECIATION 7,412,629 6,495,186
INTANGIBLE ASSETS 5,012 5,411
RESTRICTED CASH 20,000 20,000
DEPOSITS 21,172 21,172
---------------------------------
TOTAL LONG TERM ASSETS 7,774,385 6,801,422
---------------------------------
TOTAL ASSETS $ 12,274,581 $ 12,512,945
=================================
LIABILITIES
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 715,796 $ 332,487
DUE TO RESERVOIR CONSULTANTS 278,000 278,000
OTHER CURRENT LIABILITIES 76,687 56,232
---------------------------------
TOTAL CURRENT LIABILITIES 1,070,483 666,719
---------------------------------
LONG-TERM LIABILITIES
DUE TO RESERVOIR CONSULTANTS 222,000 222,000
LIQUIDATION FUND 20,000 20,000
---------------------------------
TOTAL LONG TERM LIABILITIES 242,000 242,000
---------------------------------
TOTAL LIABILITIES 1,312,483 908,719
MINORITY INTEREST 42,212 82,134
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL
Class A Preferred Stock, $0.10 par value
Authorized - 1,500,000 shares
Issued and outstanding - None - -
Class B Preferred Stock, $0.10 par value
Authorized - 1,000 shares
Issued and outstanding - None - -
Class C Preferred Stock, $0.10 par value
Authorized - 1,000 shares
Issued and outstanding - None - -
Common Stock, $0.001 par value
Authorized - 50,000,000 shares
Issued and outstanding - 20429422 20,429 20,429
ADDITIONAL PAID IN CAPITAL 12,115,445 12,115,445
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (1,215,988) (613,782)
---------------------------------
TOTAL SHAREHOLDER'S EQUITY 10,919,886 11,522,092
---------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 12,274,581 $ 12,512,945
=================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
4
BMB MUNAI, INC.
(A Development Stage Entity)
UNAUDITED CONSOLIDATED STATEMENTS OF LOSS
Period from inception
Three month ended (May 6, 2003) through
June 30, 2004 June 30, 2004
-------------------------------------------
REVENUES
OIL SALES $ 118,949 $ 118,949
-------------------------------------------
-
EXPENSES -
OPERATING COSTS -
PRODUCTION COSTS (24,322) (24,322)
GENERAL AND ADMINISTRATIVE (559,386) (1,341,143)
AMORTIZATION AND DEPRECIATION (9,125) (13,883)
-------------------------------------------
TOTAL EXPENSES (592,833) (1,379,348)
-------------------------------------------
LOSS FROM OPERATIONS (473,884) (1,260,399)
-------------------------------------------
-
OTHER INCOME (EXPENSE) -
REALIZED GAIN ON MARKETABLE SECURITIES 54,915 74,283
UNREALIZED LOSS ON MARKETABLE SECURITIES (303,697) (55,290)
INTEREST INCOME (EXPENSE) NET 2,884 (81,123)
FOREIGN CURRENCY EXCHANGE GAIN 77,654 148,603
-------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (168,244) 86,473
-------------------------------------------
NET LOSS BEFORE MINORITY INTEREST (642,128) (1,173,926)
-------------------------------------------
MINORITY INTEREST 39,922 (42,062)
-------------------------------------------
NET LOSS $ (602,206) $ (1,215,988)
===========================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,429,422 16,571,429
LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.03) $ (0.07)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
5
BMB MUNAI, INC.
(A Development Stage Entity)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from inception
Three month ended (May 6, 2003) through
June 30, 2004 June 30, 2004
------------------ -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (602,206) $ (1,215,988)
Adjustment to reconcile net loss to net cash used
in operating activities
Non cash operating expenses (income)
Depreciation expenses 9,124 13,882
Minority Interest in Operations of Subsidiary (39,922) 42,062
Change in operating assets and liabilities
Increase in Marketable Securities 2,112,663 (766,473)
Increase in Inventories (408,787) (592,671)
Increase in Prepaid and Other Assets (2,314,127) (2,836,275)
Increase in Account Payable and accrued liabilities 403,764 1,070,483
Restructed cash - (20,000)
Rent deposits - (21,172)
-------------------------------------------
Net cash used in operating activities (839,491) (4,326,152)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (64,414) (328,825)
Acquisition of intangible assets (230) (5,641)
Purchase of Oil and Gas Properties (917,443) (7,170,629)
-------------------------------------------
Net cash used in investing activities (982,087) (7,505,095)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Sale of Common Stock - 9,936,024
Proceeds from Short-term Financing - 500,000
Repayment of Short-term financing - (500,000)
Proceeds from Issuance of Convertible Debt - 2,000,000
Proceeds from Execise of Common Stock Options - 200,000
-------------------------------------------
Net cash provided by financing activities - 12,136,024
-------------------------------------------
-
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,821,578) 304,777
Cash and Cash Equivalents at Beginning of the Period 2,126,355 -
-------------------------------------------
Cash and Cash Equivalents at End of the Period $ 304,777 $ 304,777
===========================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
6
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 originally incorporated in Utah in July 1981. The Company
changed domicile to Delaware in February 1994. Prior to November 26, 2003, the
Company existed under the name Inter Union Financial Corporation ("InterUnion").
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. On May 2004, the company began test production at one well.
The Company recorded revenue in the amount of $118,949.
The financial information included herein, except the balance sheet as of March
31, 2004, 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 generally accepted accounting principles
have been condensed or omitted in this Form 10-Q 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-K Report
BASIS OF CONSOLIDATION
The Company's financial statements present the consolidated results of BMB
Munai, Inc., and Emir Oil LLP, its 70% 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 the April 1, 2004 through
June 30, 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.
7
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.
RESTRICTED CASH
Restricted Cash reflected in the long-term assets consists of $20,000 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 equipment for development activities, tangible drilling
materials required for drilling operations, spare parts, diesel fuel, and
various materials to be used in oil field operations. Under the full cost method
inventory is transferred to oil and gas properties when used in exploration,
drilling and development operations in oilfields. 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 amount of $
7,082.
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 in a process of obtaining a commercial production contract with
the Government of Kazakhstan. The Company is legally entitled to receive this
commercial production contract and 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.
OIL AND GAS PROPERTIES
While the Company has just recently started the test production at the
Dolinnoe-1 well and has no other present production history, in the future it
plans to follow the full cost method of accounting for its costs of acquisition,
exploration and development of oil and gas properties.
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.
8
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 a 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 expenses as incurred. Renewals and
betterments shall be capitalized.
Amortization of intangible assets shall be calculated using straight line method
upon estimated useful life ranging from 3 to 4 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
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.
SHARE BASED COMPENSATION
The Company accounts for options granted to non-employees at their fair value in
accordance with FAS 123, Accounting for Stock-Based Compensation. Under FAS No.
123, stock-based compensation is determined as the fair value of the equity
instruments issued. The measurement date for these issuances is the earlier of
9
the date at which a commitment for performance by the recipient to earn the
equity instruments is reached or the date at which the recipient's performance
is complete. Stock options were granted to the "selling agents" in the private
equity placement transactions and have been offset to the proceeds as a cost of
capital.
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 March 2004, the FASB issued an exposure draft entitled "Shared-Based Payment,
an Amendment of FASB Statement No. 123 and 95." This proposed statement
addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. The proposed statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value-based method. As
proposed, this statement would be effective for the Company on January 1, 2005.
The Company is currently unable to determine what effect this statement will
have on the Company's financial position or results of operations.
NOTE B - GOING CONCERN
The Company's consolidated financial statements have been presented on the basis
that the Company continues 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 the 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 and 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.
10
NOTE C - ACQUISITION
On June 7, 2003, BMB acquired a 70% equity interest in Emir Oil. The results of
Emir's operations have been included in the consolidated financial statements
since that date. Emir had no operations prior to its acquisition by BMB. Emir
holds oil and gas exploration license for ADE Block. The aggregate purchase
price was $1,300,000. The entire purchase price has been allocated to oil and
gas properties in the accompanying consolidated balance sheet. BMB is in the
process of obtaining third party valuations of the oil and gas licenses; thus,
the allocation of the purchase price is subject to refinement. The Company,
based on its holding of Emir Oil, is required to fund the exploration efforts of
Emir Oil. (See Note G.) The Company anticipates henceforth the cost of
exploration to be approximately $30,000,000, which the Company will seek to fund
through additional equity financing and the sale of oil produced during well
testing.
NOTE D - FOREIGN ASSETS AND ECONOMIC CONCENTRATION
Marketable securities of $766,473 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
$169,682. Restricted Cash reflected in the long-term assets consists of $20,000
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:
Field facilities $ 76,898
Field equipment 118,302
Field vehicles 58,783
Office equipment and furniture 74,842
--------
Total 328,825
Accumulated Depreciation 13,253
--------
Net $315,572
========
NOTE F - LONG TERM LIABILITIES
Long Term Liabilities include:
1. 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.
2. 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 $20,000 to the Liquidation Fund.
11
NOTE G - COMMITMENTS AND CONTINGENCIES
The Government of the Republic of Kazakhstan made historical investments in the
ADE Block in total amount of $5,994,200. When the Company applies for and is
granted commercial production rights license for the ADE Block, the Company will
be required to begin repaying these historical investments to the Government of
the Republic of Kazakhstan. The terms of repayment will be negotiated at the
time the Company applies for commercial production rights.
Under the terms of the five-year exploration contract, Emir Oil is required to
spend a total of $21.5 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 $7 million in 2004 and $9.3 million in 2005. 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
NOTE H - CAPITAL STOCK, ADDITIONAL PAID-IN-CAPITAL
Net Loss per Common Share
Basic earnings per share exclude 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 ended (May 6, 2003)
June 30, through
2004 June 30, 2003
------------------- -------------
Numerator:
Net loss and numerator for basic and diluted loss per share $ 602,206 $ 25,922
------------ -------------
Denominator:
Denominator for basic and diluted loss per share, weighted
average shares 20,429,422 1,000
Net Loss per Share, Basic and Diluted $ 0.03 $ 25.92
The effect of the stock warrants and stock options is anti-dilutive.
During the year ended March 31, 2004, the Company completed a reverse merger
with BMB Holding, Inc. Additionally the Company:
12
a. Completed a private placement for the total amount of $11,113,562
(less expenses and brokerage commissions of $1,177,688).
b. Converted a $2 million debt to the shareholders of BMB Holding, Inc.
into equity.
c. Issued 200,000 shares of stock upon exercise of stock option worth
$200,000.
d. Completed a 10 for 1 reverse stock split.
Options exercised
On December 15, 2003 the Agent exercised its first option for 200,000 shares at
the exercise price of $1.00. No other options were exercised in reported
periods.
BMB Munai, Inc. Capital Structure on June 30, 2004.
The resulting capital structure of the Company after the reverse merger, its
financing activities and a 10 for 1 share consolidation as of the end of the
reporting period is shown in the following table:
Number Interest
of shares (fully diluted) Share price Amount raised
--------- --------------- ----------- -------------
BMB Shareholders 14,857,143 70.62%
IUFC Shareholders 541,785 2.58%
Private Placement Investors 2,750,494 13.07% $2.15 $5,913,562.10 1st tranche
Private Placement Investors 1,680,000 7.99% $2.50 $4,200,000.00 2nd tranche
Private Placement Investors 400,000 1.90% $2.50 $1,000,000.00 3rd tranche
Total Amount Raised $11,113,562.10
------------------- --------------
Options exercised 200,000 0.95% $1.00 $200,000.00 Credifinance
Outstanding shares 20,429,422
Warrants and Options 607,977 2.89%
Fully Diluted 21,037,399 100.00%
NOTE I - SUBSEQUENT EVENT
During July 2004, the Company completed a private placement for the total amount
of $14,875,382 (less expenses and brokerage commissions of $861,978).
NOTE J - RESTATEMENT OF FINANCIAL STATEMENTS
In response to comments raised by the staff of the Securities and Exchange
Commission, the Company commenced a review of the accounting related to an
amount due to the Government of the Republic of Kazakhstan for historical costs
incurred by the Government in the exploration and development of the Company's
ADE block oil field. Based on the Company's internal review, and after
consultation with the Audit Committee of the Company's Board of Directors and
independent registered public accounting firm, on July 12, 2005, the Company
determined it was necessary to restate its Consolidated Balance Sheets as of
June 30, 2004 to correct its accounting for oil and gas properties and a
liability due to the Government of the Republic of Kazakhstan.
13
The primary effect of the correction discussed above resulted in the Company
reducing the long-term asset "Oil and Gas Properties, Full Cost Method, Less
Accumulated Depreciation" and the long-term liability "Due to the Government of
Kazakhstan" by $5,994,745 on its Consolidated Balance Sheet.
Following is a summary of the effects of these adjustments on the Company's
Consolidated Balance Sheets as of June 30, 2004 and March 31, 2004:
CONSOLIDATED BALANCE SHEETS
AS PREVIOUSLY REPORTED ADJUSTMENTS AS RESTATED
- ----------------------------------------------------------------------------------------------------------------
JUNE 30, 2004:
- ----------------------------------------------------------------------------------------------------------------
Oil and Gas Properties, Full Cost
Method, Less Accumulated
Depreciation $13,407,374 $5,994,745 $7,412,629
- ----------------------------------------------------------------------------------------------------------------
Total Long Term Assets $13,769,130 $5,994,745 $7,774,385
- ----------------------------------------------------------------------------------------------------------------
Total Assets $18,269,326 $5,994,745 $12,274,581
- -------------------------------------------------------------------- -------------------------------------------
Due to the Government of
Kazakhstan $5,994,745 $5,994,745 $ -
- ----------------------------------------------------------------------------------------------------------------
Total Long Term Liabilities $6,236,745 $5,994,745 $ 242,000
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities $7,307,228 $5,994,745 $1,312,483
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities & Shareholders'
Equity $18,269,326 $5,994,745 $12,274,581
- ----------------------------------------------------------------------------------------------------------------
MARCH 31, 2004:
Oil and Gas Properties, Full Cost
Method, Less Accumulated
Depreciation $12,489,931 $5,994,745 $6,495,186
Total Long Term Assets $12,796,167 $5,994,745 $6,801,422
Total Assets $18,507,690 $5,994,745 $12,512,945
Due to the Government of
Kazakhstan $5,994,745 $5,994,745 $ -
Total Long Term Liabilities $6,236,745 $5,994,745 $ 242,000
Total Liabilities $6,903,464 $5,994,745 $ 908,719
Total Liabilities & Shareholders'
Equity $18,507,690 $5,994,745 $12,512,945
This restatement has no effect on net loss or net loss per common share.
Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion is intended to assist you 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/A-1
contain 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 21.
We operate in one segment, oil and natural gas exploration, development
and production.
14
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. 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. We are currently completing the necessary
paperwork with the government of the Republic of Kazakhstan ("ROK") to register
the acquisition.
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").
We anticipate spending between $10 million and $20 million in the
continued exploration and development of the ADE Block in the next twelve
months. We recently completed a private placement in which we sold 3,934,340
shares of our common stock for $4.00 per share to raise gross proceeds of
$15,737,360. After paying commissions, fees and costs of the offering, we
realized net proceeds of $14,875,382. This money will be primarily used to fund
our exploration and development efforts. We also intend to apply proceeds made
from the sale of oil we produce during well testing to help fund our exploration
and development activities.
New Wells
Based on the funds raised in the offering, during the next twelve
months we intend to spend at least $12 million to drill new exploratory wells.
Initially we will focus our drilling efforts in the Dolinnoe Oil Field, where we
hope to drill at least two new exploratory wells. We have begun drilling the
Dolinnoe-2 well under our exploration license. The anticipated depth of a new
well is approximately 4,000 meters. The drilling site is in the Dolinnoe oil and
gas field. We selected the well site based on the results of a 3D seismic study
prepared by PGS-GIS Data Processing. The site preparation and drilling rig
placement were completed in July, 2004. We have contracted with a Saipem S.p.A.,
a European oil drilling and service company, to drill and complete the well.
15
Acquisition of Additional Reserves
Depending on available funds, during the next twelve months, we also
expect to spend up to five million dollars toward increasing our oil and gas
reserves through the identification, investigation and acquisition of additional
oil and gas concessions in Kazakhstan.
Work Over of Existing Wells
In the next twelve months we will continue work over on existing wells
in the ADE Block. The research works on Emir-1 well have begun. We will commence
work over of the Aksaz-1 well shortly. We also intend to investigate other wells
in the ADE Block that were previously spudded to determine the commercial
viability of additional drilling at these sites.
Infrastructure Improvements
We plan to continue improving existing infrastructure in the ADE Block.
During the quarter, we completed construction of a 10 kilometer long high
voltage power line to the Emir field and a one kilometer long high voltage power
line to the Dolinnoe field. We also completed construction of 11 kilometers of
gravel roads in the Emir and Dolinnoe fields. In August 2004, we plan to begin
construction of a pipeline from the Aksaz-1 well to the temporary collection and
processing facility at the Emir-1 well. We have begun reconstruction to increase
the storage capacity of the ground fuel tanks at the oil and fuel storage
facility we are currently using. This should allow us to collect volumes
sufficient for exporting. Under the proposed terms of our lease, the cost of
reconstruction will be used to offset our lease payments. We plan to acquire a
railroad spur located near the Aksaz Field territory, with plans to build a
storage facility and pouring station at the terminal to allow for oil
transportation via railroad. This should help us create our own transportation
route for export and domestic oil sales. We expect to finalize acquisition of
the railroad spur early in 2005. Additionally, in the next twelve months we plan
to improve power supply to the ADE Block through the construction of additional
kilometers of 6 Kilowatt power line running through the ADE Block. We will also
continue expanding the road network within the ADE Block.
Oil Production and Sale
During the quarter all crude oil sales from test production at the
Dolinnoe-1 well were to the Kazakhstan domestic market. Since May 12, 2004, a
steady flow rate from 200 up to 500 barrels of crude oil per day has been
produced from the Dolinoe-1 well. The price we receive for oil sales in the
domestic market is controlled by the ROK. Subsequently, the price of oil in the
Kazakhstan domestic market is currently artificially lower than the going market
rate. The average price per barrel of oil we have received for crude oil sold in
the Kazakhstan domestic market is approximately $14 per barrel.
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
16
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
As discussed above, we incorporated on May 6, 2003, therefore, we do
not have a full prior year fiscal quarter against which to compare. Rather all
comparisons to our fiscal quarter ended June 30, 2003, will be for the period
from May 6, 2003 through June 30, 2003.
Revenues. During the quarter ended June 30, 2004, we realized revenues
of $118,949, compared to $0 in the period from May 6, 2003, to June 30, 2003.
All revenues were from oil sales. 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.
Expenses. During the three months ended June 30, 2004, we incurred
expenses of $592,833 compared to expenses of $25,928 during the period from May
6, 2003, to June 30, 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 June 30, 2003, we incurred general and administrative
expenses of $25,928, compared to $592,833 in the quarter ended June 30, 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 June 30, 2004, we incurred production costs of
$24,322 and amortization and depreciation expenses of $9,125, neither of which
were incurred in the prior year period. 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 June 30, 2004, we
had incurred losses from operations totaling $473,884 compared to operating
losses of $25,928 for the period from May 6, 2003, through June 30, 2003. These
losses are largely the result of incurring numerous general and administrative
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. 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 period from April 1, 2004 to June 30, 2004,
we realized other expenses totaling $168,244, compared to $3 for the period from
May 6, 2003, to June 30, 2003. The current year other expenses included
unrealized loss on marketable securities of $303,697, offset by realized gain on
marketable securities of $54,915, interest income of $2,884 and foreign currency
exchange gain of $77,654. During the prior fiscal year, we raised approximately
$12 million through the sale of our securities in private placement
transactions. Therefore, during the fiscal quarter ended June 30, 2004, we had
funds that were not being used in operations that we invested in marketable
securities. Subsequent to the quarter end, we raised an additional $14.8 million
through the sale of our securities in a private placement. We expect to use all
17
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.
Therefore, initially we anticipate that gains and losses from marketable
securities, both realized and unrealized, may increase. As funds are used in
operations, and over the next twelve months, we expect that gains and losses
from marketable securities, both realized and unrealized, will decrease.
Net Loss. During the three months ended June 30, 2004, we realized a
net loss of $602,206 compared to a net loss of $25,922 for the period from May
6, 2003 through June 30, 2003. As discussed above this net loss is largely the
result of the increased size or our operations at June 30, 2004, compared to
June 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
5sales 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 subsequent to the quarter ended June 30, 2004,
and to some level, revenues from oil sales.
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, subsequent to June 30, 2004, we
completed a private placement of 3,934,340 shares of our common stock for net
proceeds of $14,875,382. We anticipate these funds, along with those we
previously raised, should be sufficient 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 quarter ended June 30, 2004, cash was primarily used to fund
exploration and development expenditures. We had a net decrease in cash and cash
18
equivalents of approximately $1.8 million during the quarter ended June 30, 2004
compared to a net increase of cash and cash equivalents of $670,500 in the
period ended June 30, 2003. See below for additional discussion and analysis of
cash flow.
Three months ended Period from May 6, 2003
June 30, 2004 through June 30, 2003
-------------------- ----------------------------
Net cash used in operating activities $ (839,491) $ (29,500)
Net cash used in investing activities $ (982,087) $(1,300,000)
Net cash provided by financing activities $ (-0-) $ 2,000,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,821,578) $ 670,500
During the quarter ended June 30, 2004, net cash used in operations was
$839,491, as net loss, minority interest in operations of our subsidiary,
increase in inventories and increase in prepaid and other assets was only
partially offset by depreciation expenses, increases in marketable securities
and increases in accounts payable and accrued liabilities. Net cash used in
investing activities was $982,087, which included acquisitions of fixed and
intangible assets as well as additional oil and gas properties. During the
quarter, no cash was provided from financing activities. At June 30, 2004, we
had cash on hand of $304,777.
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the upcoming 12 months
are $10 million to $20 million for exploration, development, production and
acquisitions. We expect to fund these expenditures primarily from capital raised
in the private placement completed subsequent to June 30, 2004.
Contractual Obligations and Contingencies
The following table lists our significant commitments at June 30, 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 Commitment1 $21,300,000 $7,000,000 $14,300,000 $ -- $ --
Due to the Government of Kazakhstan2 5,994,200 -- -- 5,994,200 --
Due to Reservoir Consultants 500,000 278,000 222,000 -- --
Liquidation Fund 20,000 -- 20,000 -- --
- - ---------------------------------------------------------------------------------------------------------------------
Total $27,814,200 $7,278,000 $14,542,000 $ 5,994,200 $ --
=====================================================================================================================
1 Under the terms of our Contract with the ROK, we are required to
spend a total of at least $21.5 million dollars in exploration, development and
improvements within the ADE Block during the term of the license, including $7
19
million during the 2004 calendar year and $9.3 million in the 2005 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. 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. Although we
can apply for a commercial production contract at any time, we enjoy certain
benefits during exploration and development that currently make it more
advantageous for us to continue to exploration and development activities at
this time. We anticipate we will apply for a commercial production contract
sometime during the first half of the 2007 calendar year. Should we decide not
to pursue a commercial production contract, we can relinquish the ADE Block to
the ROK in satisfaction of this obligation
Off-Balance Sheet Financing Arrangements
As of June 30, 2004, we had no off-balance sheet financing
arrangements.
Recently Issued Accounting Pronouncements
Accounting Pronouncements - In March 2004, the FASB issued an exposure
draft entitled "Shared-Based Payment, an Amendment of FASB Statement No. 123 and
95." This proposed statement addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. The proposed statement would eliminate
the ability to account for share-based compensation transactions using APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and generally would
require instead that such transactions be accounted for using a fair-value-based
method. As proposed, this statement would be effective for the Company on
January 1, 2005. The Company is currently unable to determine what effect this
statement will have on the Company's financial position or results of
operations.
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
20
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.
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
Our chief executive officer and our chief financial officer (the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15 and
Rule 15d-15(e)). Such officers have concluded (based upon their evaluations of
these controls and procedures, as more fully discussed in the following
paragraphs, as of the end of the period covered by this amended report) that our
disclosure controls and procedures are now effective to ensure that information
required to be disclosed by us in this report is accumulated and communicated to
management, including the Certifying Officers as appropriate, to allow timely
decisions regarding required disclosure.
We are restating our consolidated balance sheets as of June 30, 2004 to
correct an error in our accounting for a liability we will be required to repay
to the Government of the Republic of Kazakhstan in the event we are granted
commercial production rights. Previously, we treated this obligation as a
long-term liability. As a result of a normal periodic review of our financial
statements by the staff of the Securities and Exchange Commission, management
determined on July 12, 2005 that the amount due to the Government was not a
liability of the Company and should be removed from our consolidated balance
sheets. The primary effect of this restatement resulted in the Company reducing
its long-term asset "Oil and Gas Properties" by $5,994,745 and removing the
long-term liability "Due to the Government of Kazakhstan" of $5,994,745 from its
consolidated balance sheet. This restatement does not have any impact on net
loss or net loss per common share. Please refer to Note J of the accompanying
consolidated financial statements for additional information.
In light of our decision to restate our financial statements we carried
out an evaluation in accordance with Exchange Act Rules 13a-15 and 15d-15 and
under the supervision and with the participation of management, including our
Certifying Officers, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
21
evaluation, our Certifying Officers concluded that, due to the restatement
discussed above, our disclosure controls and procedures were not effective as of
June 30, 2004. Following the discovery of this error in July 2005, we have
implemented new policies requiring our internal accounting staff to receive
ongoing training on accounting for oil and gas properties in accordance with
generally accepted accounting principles in the United States to prevent
recurrence of future errors of this nature and to strengthen our internal
control process.
There have been no other changes in our internal controls over
financial reporting that occurred during the three month period ended June 30,
2004 that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
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. We have retained the
Florida law firm of Shutts & Bowen LLP, to defend it in this matter. We have
filed a motion to dismiss the complaint of plaintiffs, Brian Savage, Thomas
Sinclair and Sokol Holdings, Inc., on several grounds. The motion is scheduled
for hearing in late August 2004. 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 2. Changes in Securities
During the quarter ended June 30, 2004, and subsequent thereto, the
following equity securities, which were not registered under the Securities Act
of 1933, were issued.
During the month of July 2004, we issued 3,934,340 restricted common
shares to ten investors for $4.00 per share, raising gross proceeds of
$15,373,360 in a private placement. The shares were issued without registration
22
under the Securities Act of 1933 in reliance upon exemptions from registration
pursuant to Rule 506 of Regulation D and Regulations S of the rules and
regulations promulgated by the Securities and Exchange Commission under the
Securities Act of 1933.
In connection with the private placement, at the Closing of the private
placement on July 31, 2004, we granted placement agent warrants to Aton
Securities, Inc., and Credifinance Securities, Ltd., a related company through a
common director, in the amounts of 309,454 and 83,890 respectively, to purchase
shares of our common stock at $4.00 per share. These warrants are immediately
exercisable and expire on January 31, 2006. The warrants were issued without
registration under the Securities Act of 1933 in reliance upon an exemption from
registration pursuant Section 4(2) of the Securities and Exchange Commission
under the Securities Act of 1933.
In August 2004, we issued 3,500,000 shares of restricted common stock
to acquire the 30% interest in Emir Oil, LLP from our minority partner. The
shares were issued without registration under the Securities Act of 1933 in
reliance upon an exemption from registration pursuant to Regulations S of the
rules and regulations promulgated by the Securities and Exchange Commission
under the Securities Act of 1933.
Item 5. Other Information
As discussed above, 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 will become a wholly owned subsidiary of BMB Munai. We are
currently completing the necessary paperwork with the government of the Republic
of Kazakhstan ("ROK") to finalize the acquisition.
Item 6. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
On May 25, 2004, we filed a Current Report on Form 8-K disclosing that
we had entered into a Share Purchase and Sale Agreement to acquire the remaining
30% interest in Emir Oil, LLP from Tolmakov Toleush Kalmukanovitch.
(B) Exhibits. The following exhibits are included as part of this
report:
Exhibit 31.1 Certification of Principal Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Principal Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Principal Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Principal Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
23
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.
October 4, 2005 /s/ Boris Cherdabayev
---------------------------------------------
Boris Cherdabayev, Chief Executive Officer
October 4, 2005 /s/ Anuar Kulmagambetov
---------------------------------------------
Anuar Kulmagambetov, Chief Financial Officer
24