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
September 30, 2004 000-28638
BMB MUNAI, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization
87-0520294
(I.R.S. Employer Identification No.)
20A Kazibek Bi Street, Almaty, 480100 Kazakhstan
(Address of principal executive offices)
+7 (3272) 58-85-17/47
(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 November 6, 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 September 30, 2004
and March 31, 2004 ............................................... 4
Unaudited Consolidated Statements of Loss for the Three
and Six Months Ended September 30, 2004, the Three Months
Ended September 30, 2003 and the period from inception
(May 6, 2003) to September 30, 2003............................... 5
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended September 30, 2004 and the period from
inception (May 6, 2003) to September 30, 2003..................... 6
Notes to Unaudited Consolidated Financial Statements................ 7
Item 2. Managements Discussion and Analysis or Plan of Operation.......17
Item 3. Controls and Procedures........................................25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings..............................................26
Item 2. Changes in Securities..........................................26
Item 4. Submission of Matters to a Vote of Security Holders............27
Item 5. Other Information..............................................28
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 September 30, 2004 originally filed with the Securities and
Exchange Commission on November 15, 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 K 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 September 30, 2004 March 31, 2004
(Unaudited)
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 3,188,192 $ 2,126,355
MARKETABLE SECURITIES 776,336 2,879,136
INVENTORIES 1,963,963 183,884
PREPAID AND OTHER ASSETS 5,658,400 522,148
LOAN RECEIVABLE 5,667,220 -
------------------------------------
TOTAL CURRENT ASSETS 17,254,111 5,711,523
------------------------------------
LONG TERM ASSETS
FIXED ASSETS LESS ACCUMULATED DEPRECIATION 843,617 259,653
OIL AND GAS PROPERTIES, FULL COST METHOD, LESS ACCUMULATED DEPRECIATION 30,950,002 6,495,186
INTANGIBLE ASSETS 5,579 5,411
RESTRICTED CASH 20,000 20,000
DEPOSITS 21,172 21,172
------------------------------------
TOTAL LONG TERM ASSETS 31,840,370 6,801,422
------------------------------------
TOTAL ASSETS $ 49,094,481 $ 12,512,945
====================================
LIABILITIES
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 1,651,159 $ 332,487
DUE TO RESERVOIR CONSULTANTS 278,000 278,000
OTHER CURRENT LIABILITIES 181,996 56,232
------------------------------------
TOTAL CURRENT LIABILITIES 2,111,155 666,719
------------------------------------
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 2,353,155 908,719
MINORITY INTEREST - 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 -28,513,762 28,514 20,429
ADDITIONAL PAID IN CAPITAL 48,494,267 12,115,445
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE (1,781,455) (613,782)
------------------------------------
SHAREHOLDERS' EQUITY 46,741,326 11,522,092
------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 49,094,481 $ 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 Period from inception
Three Months Ended Three Months Ended Six Months Ended (May 6, 2003) through (May 6, 2003) through
September 30, 2004 September 30, 2003 eptember 30, 2004 September 30, 2003 September 30, 2004
REVENUES
OIL SALES $ 173,038 $ - $ 291,987 $ - $ 291,987
----------------------------------- -------------------------------------------------------------
EXPENSES
OPERATING COSTS
PRODUCTION COSTS (36,927) - (61,249) - (61,249)
GENERAL AND
ADMINISTRATIVE (858,895) (40,247) (1,418,281) (66,175) (2,200,038)
DEPRECIATION AND
AMORTIZATION (18,060) - (27,186) - (31,944)
----------------------------------- -------------------------------------------------------------
TOTAL EXPENSES (913,883) (40,247) (1,506,716) (66,175) (2,293,231)
----------------------------------- -------------------------------------------------------------
LOSS FROM OPERATIONS (740,845) (40,247) (1,214,729) (66,175) (2,001,244)
----------------------------------- -------------------------------------------------------------
OTHER INCOME (EXPENSE)
REALIZED GAINS ON
MARKETABLE SECURITIES 3,983 - 58,898 - 78,266
UNREALIZED GAIN (LOSS)
ON MARKETABLE
SECURITIES 11,087 - (292,610) - (44,203)
INTEREST INCOME/EXPENSE
(NET) (6,785) (38,422) (3,901) (57,239) (87,909)
FOREIGN CURRENCY
EXCHANGE GAIN 125,032 93 202,686 90 273,635
----------------------------------- -------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) 133,317 (38,329) (34,927) (57,149) 219,789
----------------------------------- -------------------------------------------------------------
NET LOSS BEFORE MINORITY
INTEREST (607,528) (78,576) (1,249,656) (123,324) (1,781,455)
----------------------------------- -------------------------------------------------------------
MINORITY INTEREST - 305 - 314 -
NET LOSS $ (607,528) $ (78,271) $(1,249,656) $ (123,010) (1,781,455)
=================================== =============================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 26,392,115 1,000 23,427,059 1,000
LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.02) $ 78.27 $ (0.05) $ (123.01)
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 Period from inception
Six Months Ended (May 6, 2003) through (May 6, 2003) through
September 30, 2004 September 30, 2003 September 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,249,656) $ (123,010) $ (1,781,455)
--------------------------------------------------------------------
Adjustment to reconcile net loss to net cash used
in operating activities
Depreciation and Amortization expense 27,186 - 31,944
Minority Interest in Operations of Subsidiary - (314) -
Changes in operating assets and liabilities
Increase in Inventories (1,780,079) (1,817) (1,963,963)
Increase in Prepaid and other Assets (5,136,252) (568,101) (5,658,400)
Increase in Account Payable and accrued liabilities 1,444,436 61,920 2,111,155
Restricted Cash - - (20,000)
Rent Deposit - - (21,172)
--------------------------------------------------------------------
Net cash used in operating activities (6,694,365) (631,322) (7,301,891)
--------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in short term loan receivable (5,667,220) - (5,667,220)
Cash proceeds from sale of marketable securities 2,102,800 - (776,336)
Acquisition of fixed assets (609,777) (250) (874,188)
Acquisition of intangible assets (1,541) - (6,952)
Purchase of Oil and Gas Properties (5,379,966) (1,340,732) (11,633,151)
--------------------------------------------------------------------
Net cash used in investing activities (9,555,704) (1,340,982) (18,957,847)
--------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Sale of Common Stock 17,311,906 - 27,247,930
Repayment of Short-term Financing (500,000)
Proceeds from Short-term Financing - 500,000 500,000
Proceeds from Issuance of Convertible Debt - 2,000,000 2,000,000
Proceeds from Execise of Common Stock Options 200,000
--------------------------------------------------------------------
Net cash provided by financing activities 17,311,906 2,500,000 29,447,930
--------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,061,837 527,696 3,188,192
Cash at Beginning of the Period 2,126,355 - -
--------------------------------------------------------------------
Cash at End of the Period $ 3,188,192 $ 527,696 $ 3,188,192
====================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT
NON CASH TRANSACIONS
Acquisition of 30% of Emir Oil LLC for issuanse 3,500,0000
common stock $ 19,075,000
===============
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 InterUnion 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. In May 2004, the Company began test production at one well.
The Company recorded revenue in the amount of $291,987 up to September 30, 2004
inclusively.
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
presentation of financial position and results of operations for the interim
periods. The results of operations for the interim periods 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-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
September 30, 2004 are reflected in the Unaudited Consolidated Financial
Statements and Notes to Consolidated Financial Statements.
7
BMB MUNAI, INC.
(A Development Stage Entity)
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 September 30, 2004, the Company
has marketable securities in amount of $776,336. 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 November
15, 2004.
PREPAID AND OTHER ASSETS
Prepaid and other assets include a prepayment for tangible drilling materials in
amount of $3,303,627 expected to be received in lots, a last lot to be received
in February 2005.
LOAN RECEIVABLE
Loan receivable consists of a short-term loan to a Kazakhstan financial
institution in amount of $5,667,220 under reverse repurchase agreements and
repurchase agreements. Deferred gain on the loan is reflected in current
liabilities in amount of $107,580 (see Note I). According to the FASB
Interpretation No. 41 an amount of $2,482,616 recognized as payable under the
repurchase agreements was offset against amounts recognized as receivables under
reverse repurchase agreements and reported as net amount $745 in the statement
of Balance Sheet (see Note I).
RESTRICTED CASH
Restricted cash reflected in long-term assets consists of $20,000 deposited in a
Kazakhstan bank and is restricted to meet environmental obligations according to
the regulations of Kazakhstan (see Note F).
INVENTORY
Inventory represents tangible drilling materials required for drilling
operations in amount of $1,899,825 and 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
$20,336.
8
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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
While the Company recently started test production at the Dolinnoe-1 well 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.
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 is 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.
9
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Depletion and amortization of producing properties is computed using the
unit-of-production method based on estimated proved recoverable reserves.
Depreciation of other depreciable assets is calculated using the straight line
method based upon estimated useful life ranging from two to ten years.
Maintenance and repairs are charged to expenses as incurred. Renewals and
betterments are capitalized.
Amortization of intangible assets is 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 is 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 remeasured using the U.S.
dollar. Accordingly, transaction gains and losses for foreign subsidiaries are
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
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.
10
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 "Share-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 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 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.
11
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 $30,000,000 which the
Company will seek to fund through additional equity financing, debt financing
and sale of oil produced during well testing.
NOTE D - FOREIGN ASSETS AND ECONOMIC CONCENTRATION
Marketable securities of $766,336 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
$2,007,274. 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 are the oil and gas properties of 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 394,548
Field vehicles 139,979
Office vehicles 146,721
Office equipment and furniture 116,048
------------
Total 874,194
Accumulated Depreciation 30,577
------------
Net $ 843,617
============
12
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE F - LONG TERM LIABILITIES
Long Term Liabilities include:
1. The amount of $222,000 due to reservoir consultants which represents 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.
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 will 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 reflect the assumed conversion of all
dilutive securities.
13
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table sets forth the computation of basic and diluted loss per
common share:
Period from
inception
(May 6, 2003)
Three Months Ended Three Months Ended Six Months Ended through
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Numerator:
Net loss and numerator for basic and
diluted loss per share $(607,528) $(78,271) $(1,249,656) $(123,010)
Denominator:
Denominator for basic and diluted
loss per share, weighted average
shares 26,261,681 1,000 23,427,059 1,000
Net Loss per Share, Basic and Diluted $(0.02) $(78.27) $(0.05) $(123.01)
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- SUBSEQUENT EVENTS
As of September 30, 2004, the Company had a short term loan receivable balance
with a Kazakhstan financial institution in the amount of $5,667,220. During
October 2004, the Kazakhstan financial institution repaid the Company
$3,853,364. Deferred gain reflected in current liabilities on loans repaid
during October, 2004 were fully realized in October, 2004. According to the FASB
Interpretation No. 41 an amount of $2,482,616 recognized as payable under
repurchase agreements was offset against amounts recognized as receivables under
reverse repurchase agreements and reported as a net amount of $745 in the
Consolidated Balance Sheets. During October, 2004, the $2,482,616 was repaid by
the Company.
14
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE J - RELATED PARTY TRANSACTIONS
During six months ended September 30, 2004, the following related party
transactions occurred:
During the six months ended September 30, 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 $30,087 for
rendering other geophysical research services on ADE Block. TatArka and
Kazmorgeophysica are subsidiaries of a company that shares 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
six months ended September 30, 2004, totaled to $123,155. One of our
shareholders is an owner of Term Oil LLC.
NOTE K - 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
September 30, 2004 to correct its accounting for oil and gas properties and a
liability due to the Government of the Republic of Kazakhstan.
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 September 30, 2004 and March 31, 2004:
15
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------
AS PREVIOUSLY REPORTED ADJUSTMENTS AS RESTATED
- ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2004:
Oil and Gas Properties, Full Cost
Method, Less Accumulated
Depreciation $36,944,747 $5,994,745 $30,950,002
Total Long Term Assets $37,835,115 $5,994,745 $31,840,370
Total Assets $55,089,226 $5,994,745 $49,094,481
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 $8,347,900 $5,994,745 $2,353,155
Total Liabilities & Shareholders'
Equity $55,089,226 $5,994,745 $49,094,481
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.
16
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/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 24.
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. 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").
We anticipate spending between $15 million and $21 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.
17
New Wells
During the next twelve months we intend to spend at least $10 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 began drilling the Dolinnoe-2 well under our exploration license on
July 27, 2004, and have presently drilled to a depth of 3,380 meters. The
anticipated depth of this well is 4,000 meters. Site preparation and drilling
rig placement were completed in July 2004. During the quarter, we started and
completed site preparation for the Dolinnoe-3 well. We also completed
construction of a 1.5 kilometer gravel road to provide access to the Dolinnoe-3
well site and purchased drilling materials for drilling of this well. We
selected the well site based on the results of a 3D seismic study prepared by
PGS-GIS Data Processing. We have contracted with a Saipem S.p.A., a well known
European oil drilling and service company, to drill and complete the Dolinnoe-2
and Dolinnoe-3 wells.
Workover of Existing Wells
In the next twelve months we will continue workover on wells existing
since the Soviet Union period in the ADE Block. In July, 2004, we completed
underground well repair to remove foreign objects from the well bore of the
Emir-1 well. We performed a hydraulic explosion in the Emir-1 well in October
2004, to restore oil inflow at that site. We are presently engaged in cleaning
the well of the remnants left from the hydraulic explosion works and preparation
for test production. During quarter we started and completed a workover of
Aksaz-1 well resulting in gas flow with associated condensate. For safety
purposes we have decided to leave this well shut-in until a gas collection and
pre-sale processing facility is installed in the Aksaz field. We intend to
investigate the Aksaz-3 and Aksaz-4 wells in the Aksaz field that were
previously incompletely drilled and spudded during the Soviet Union period 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 started construction of 8.6 km pipeline connecting the
Dolinnoe and Aksaz fields. Construction of the pipeline will be completed soon.
In October, 2004, we began preparations for the construction of a gas collection
and pre-sale processing facility in the Aksaz field for gas produced at ADE
Block. In October, 2004 we also completed reconstruction of two ground fuel
tanks at the oil and fuel storage facility we are currently using in order to
increase storage capacity. With completion of these tanks, the storage capacity
has been increased from 945 barrels to 20,000 barrels. This allows us to collect
volumes sufficient for exporting. Under the proposed terms of our lease of the
oil and fuel storage facility, the cost of reconstruction will be used to offset
our lease payments. During the quarter we installed a registration subsystem at
the oil collection and pre-sale processing facility in the Dolinnoe field. The
registration subsystem allows more accurate accounting for oil produced from
each wells in the Dolinnoe field. Additionally, in the next twelve months we
plan 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.
18
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 our storage facility 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. With the completion of the reconstruction
of two ground fuel tanks at our storage facility, we now have sufficient storage
capacity to collect oil for exporting and have begun to collect oil for export
and sale to the international market.
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 September 30, 2004, compared to the three months
ended September 30, 2003
Revenues. During the three months ended September 30, 2004, we realized
revenues of $173,038, compared to $0 during the three months ended September 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.
At the present time, however, it is unclear the rate at which our revenues may
increase.
Expenses. During the three months ended September 30, 2004, we incurred
total expenses of $913,883 compared to expenses of $40,247 during the three
months ended September 30, 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 September 30, 2003, we incurred general and
administrative expenses of $40,247, compared to $858,895 in the quarter ended
September 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 September 30, 2004, we
incurred production costs of $36,927 and amortization and depreciation expenses
of $18,060, 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 September 30, 2004,
we incurred losses from operations totaling $740,845 compared to operating
19
losses of $40,247 for the three months ended September 30, 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 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 Income. During the three months ended September 30, 2004, we
realized other income totaling $133,317, compared to other expenses of $38,329
for the three months ended September 30, 2003. The current year other income
included realized gain on marketable securities of $3,983, unrealized gains on
marketable securities of $11,087 and foreign currency exchange gain of $125,032,
partially offset by interest expense of $6,785. During the prior fiscal year, we
realized no income or expense from realized and unrealized gains or losses on
marketable securities, but we did realize interest expense of $38,422, partially
offset by foreign currency exchange gain of $93. 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
September 30, 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 decrease.
Net Loss. During the three months ended September 30, 2004, we realized
a net loss of $607,528 compared to a net loss of $78,576 for the three months
ended September 30, 2003. As discussed above this net loss is largely the result
of the increased size or our operations at September 30, 2004, compared to
September 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.
Six months ended September 30, 2004, compared to the period from
inception (May 6, 2003) to September 30, 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
September 30, 2003, will be for the period from May 6, 2003 through September
30, 2003.
Revenues. During the six months ended September 30, 2004, we realized
revenues of $291,987, compared to $0 for the period from May 6, 2003, to
September 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. At the present time, however, it is unclear the rate at which
our revenues may increase.
20
Expenses. During the six months ended September 30, 2004, we incurred
total expenses of $1,506,716 compared to expenses of $66,175 during the period
from May 6, 2003, to September 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 September 30, 2003, we incurred
general and administrative expenses of $66,175, compared to $1,418,281 during
the six months ended September 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 expenses of $61,249 and amortization and
depreciation expenses of $27,186, 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 six months ended September 30, 2004,
we incurred losses from operations totaling $1,214,729 compared to operating
losses of $66,175 for the period from May 6, 2003, through September 30, 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. 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 six month period ended September 30, 2004, we
realized net other expenses of $34,927, compared to $57,149 for the period from
May 6, 2003, to September 30, 2003. The current period other expenses included
unrealized loss on marketable securities of $292,610 and interest expense of
$3,901, offset by realized gain on marketable securities of $58,898 and foreign
currency exchange gain of $202,686. During the period from May 6, 2003, to
September 30, 2003, we had no realized or unrealized gain or loss on marketable
securities. We incurred interest expense totaling $57,239, which was partially
offset by foreign currency exchange gain of $90.
Net Loss. During the six months ended June 30, 2004, we realized a net
loss of $1,249,656 compared to a net loss of $123,010 for the period from May 6,
2003 through September 30, 2003. As discussed above this net loss is largely the
result of the increased size or our operations at September 30, 2004, compared
to September 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, and
to some level, revenues from oil sales.
21
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. 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 six 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 Republic of Kazakhstan 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 Republic of
Kazakhstan, and the Republic of Kazakhstan 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 six months ended September 30, 2004, cash was primarily used
to fund exploration and development related operations. We had a net increase in
cash and cash equivalents of $1,061,837 during the quarter ended September 30,
2004 compared to a net increase of cash and cash equivalents of $527,696 in the
period from May 6, 2003 to September 30, 2003. See below for additional
discussion and analysis of cash flow.
Six months ended Period from inception (May 6, 2003)
September 30, 2004 through September 30, 2003
-------------------------- -------------------------------------
Net cash used in operating activities $(6,694,365) $(631,222)
Net cash used in investing activities $(9,555,704) $(1,340,982)
Net cash provided by financing activities $17,311,906 $2,500,000
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $1,061,837 $527,696
-------------------------- -------------------------------------
During the six months ended September 30, 2004, net cash used in
operations was $6,694,365, as net loss, increase in inventories and increase in
prepaid and other assets was only partially offset by depreciation expenses and
increases in accounts payable and accrued liabilities. Net cash used in
investing activities was $9,555,704, which included acquisitions of fixed and
intangible assets as well as additional oil and gas properties. During the
quarter, $17,311,906 was provided from the private placement of our common
stock. At September 30, 2004, we had cash on hand of $3,188,192.
22
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the upcoming twelve
months are $10 million to $20 million for exploration, development, production
and acquisitions. We expect to fund much of this expense with capital raised in
the private placement completed during the quarter ended September 30, 2004. We
will likely have to seek additional funds either in the equity or debt markets
to fund the remainder of our budgeted capital expenditures.
Contractual Obligations and Contingencies
The following table lists our significant commitments at September 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 Commitment(1) $21,500,000 $7,000,000 $14,300,000 $ -- $ --
Due to the Government of Kazakhstan(2) 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
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
23
Off-Balance Sheet Financing Arrangements
As of September 30, 2004, we had no off-balance sheet financing
arrangements.
Recently Issued Accounting Pronouncement
In March 2004, the FASB issued an exposure draft entitled "Share-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
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.
24
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 September 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 sheets. This restatement does not have any impact on net
loss or net loss per common share. Please refer to Note K 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 evaluation, our Certifying Officers concluded that, due to
restatement discussed above, our disclosure controls and procedures were not
effective as of September 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 September
30, 2004 that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
25
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 retained the Florida
law firm of Shutts & Bowen LLP, to defend us 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 was scheduled for hearing
in late August 2004, however, that hearing has been stayed to allow the parties
to conduct jurisdictional discovery. Due to concerns about a potential conflict
of interest, Shutts & Bowen LLP, filed a motion to withdraw as our counsel in
this matter. The matter has been heard by the court and the parties are awaiting
the order of the court granting the motion to withdraw. We are currently
searching for new counsel to represent us in this matter. 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 September 30, 2004, and subsequent thereto,
the following equity securities, which were not registered under the Securities
Act of 1933, were issued.
During the quarter we issued 4,584,340 restricted common shares to
investors for $4.00 per share, raising gross proceeds of $18,337,360 in a
private placement. The shares were issued without registration 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.
26
In connection with the private placement, at the Closing of the private
placement 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 148,980 respectively, to purchase shares of our
common stock at $4.00 per share. These warrants are immediately exercisable and
expire at various times with the earliest warrants expiring on January 31, 2006
and the latest warrants expiring on March 19, 2006. The warrants were issued
without registration under the Securities Act of 1933 in reliance upon an
exemption from registration pursuant to Section 4(2) of 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 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:
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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 Baiseitove 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 5. Other Information
As discussed above, on May 24, 2004, we agreed to purchase the 30%
interest of our minority partner in Emir Oil. During the quarter, the necessary
paperwork required by the Republic of Kazakhstan was completed and the
acquisition was finalized. As a result of the acquisition, Emir Oil became a
wholly owned subsidiary of BMB Munai.
Item 6. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
On September 3, 2004, we filed a Current Report on Form 8-K disclosing
the adoption of new Company Bylaws by the board of directors with the primary
purpose of updating the Company's Bylaws to more closely follow the General
Corporation Law of the State of Delaware.
Subsequent to the quarter end on October 4, 2004, we filed a Current
Report on Form 8-K, in conformity with Regulation FD disclosing the issuance of
a press release announcing the results of a reserve evaluation on the Aksaz,
Dolinnoe and Emir oil and gas fields.
28
(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.
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
29