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, 2005 000-28638
BMB MUNAI, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
30-0233726
-----------------------------------
(I.R.S. Employer Identification No.)
20A Kazibek Bi Street, Almaty, 050010, Kazakhstan
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(Address of principal executive offices)
+7 (3272) 58-85-17
---------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to section 12(g) of the Exchange Act: Common,
$0.001 par value
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; 32,458,584 shares outstanding as of November 4, 2005.
Transitional small business disclosure format (check one) Yes [ ] No [X]
BMB MUNAI, INC.
FORM 10-QSB/A-1
TABLE OF CONTENTS
EXPLANATORY NOTE
PART I -- FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2005 and
March 31, 2005 ....................................................4
Consolidated Statements of Loss for the Three and Six Months
Ended September 30, 2005, the Three and Six Months Ended
September 30, 2004, and the period from inception
(May 6, 2003) to September 30, 2005................................5
Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 2005, the Six Months Ended September 30, 2004,
and the period from inception (May 6, 2003) to
September 30, 2005.................................................6
Notes to Consolidated Financial Statements...........................7
Item 2. Managements' Discussion and Analysis of Financial Condition
and Results of Operations....................................21
Item 3. Controls and Procedures........................................34
PART II -- OTHER INFORMATION
Item 6. Exhibits.......................................................35
Signatures..............................................................36
2
Explantory Note to Amendment No. 1 to Form 10-QSB
This Form 10-QSB/A-1 is being filed to correct errors in the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements and Management's Discussion and Analysis resulting from a downward
revision of the Company's proved oil and gas reserves as of March 31, 2005. In
response to comments raised by the staff of the Securities and Exchange
Commission, the Company's independent petroleum engineering firm re-evaluated
its estimate of the Company's proved reserves at March 31, 2005. The
re-evaluation resulted in a reduction of the Company's proved reserves from
approximately 41 million barrels of oil equivalent to 13 million barrels of oil
equivalent. This downward revision of proved reserves requires the Company to
restate its Consolidated Balance Sheets as of September 30, 2005 to correct its
accounting for oil and gas properties and Consolidated Statements of Loss for
three and six months ended September 30, 2005 and for the period from inception
(May 6, 2003) to September 30, 2005 to correct its accounting for depletion
expense.
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" by $497,287 on its Consolidated Balance Sheet and
additional accrual of depletion expense by $175,484 on its Consolidated
Statement of Loss for three months ended September 30, 2005 and by $497,287 on
its Consolidated Statements of Loss for six months ended September 30, 2005 and
for the period from inception (May 6, 2003) to September 30, 2005.
The Consolidated Financial Statements and the entire text of Part I,
Item 2. Management's Discussion and Analysis and Part I, Item 3, Controls and
Procedures have been included in this Form 10-QSB/A-1 and reflect the revisions
discussed above. Otherwise, this Amendment No. 1 does not modify or update
disclosures presented in the original Form 10-QSB. This Amendment No. 1 speaks
to the original filing date of the Form 10-QSB on November 21, 2005, and does
not modify or update disclosures contained therein, including the nature and
character of such disclosures, to reflect events occurring, or items discovered,
after the original filing date of the Form 10-QSB.
3
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Consolidated Financial Statements
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 2005
Notes (Restated) March 31, 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,764,783 $ 9,989,632
Marketable securities 617,497 788,921
Trade accounts receivable 806,612 132,400
Inventories 3 4,016,174 3,227,411
Prepaid expenses and other assets, net 4 4,068,325 4,172,291
----------------------- -----------------------
Total current assets 11,273,391 18,310,655
----------------------- -----------------------
LONG TERM ASSETS
Oil and gas properties, full cost method, net 6 51,625,809 42,802,405
Other fixed assets, net 664,314 683,459
Intangible assets, net 60,407 14,435
Restricted cash 60,973 60,973
----------------------- -----------------------
Total long term assets 52,411,503 43,561,272
----------------------- -----------------------
TOTAL ASSETS $ 63,684,894 $ 61,871,927
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,641,723 $ 5,844,639
Due to reservoir consultants 278,000 278,000
Taxes payable 370,876 333,063
Due to Astana Fund 5 - 250,000
Accrued liabilities and other payables 29,688 291,969
----------------------- -----------------------
Total current liabilities 3,320,287 6,997,671
----------------------- -----------------------
LONG TERM LIABILITIES
Due to reservoir consultants 222,000 222,000
Liquidation fund 60,973 60,973
Deferred income tax liabilities 343 343
----------------------- -----------------------
Total long term liabilities 283,316 283,316
----------------------- -----------------------
COMMITMENTS AND CONTINGENCIES 9 - -
SHAREHOLDERS' EQUITY
Share capital 7 32,459 30,514
Additional paid in capital 7 68,532,034 58,460,520
Deficit accumulated during the development stage (8,483,202) (3,900,094)
----------------------- -----------------------
Total shareholders' equity 60,081,291 54,590,940
----------------------- -----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 63,684,894 $ 61,871,927
======================= =======================
See notes to the consolidated financial statements.
4
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED STATEMENTS OF LOSS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
inception
(May 6, 2003)
Three months ended Three months ended Six months ended Six months ended through
September 30, 2005 September 30, 2004 September 30, 2005 September 30, 2004 September 30, 2005
(Restated) (Restated) (Restated)
REVENUES $ 1,385,336 $ 173,038 $ 2,047,973 $ 291,987 $ 3,021,619
EXPENSES
Production 52,070 36,927 89,881 61,249 287,578
Selling 134,364 14,563 176,826 22,999 383,755
General and administrative 4,880,514 844,332 5,881,752 1,395,282 10,724,471
Depletion 313,912 - 665,644 - 733,096
Amortization and
depreciation 34,368 18,060 64,806 27,186 136,015
----------------- ------------------ ------------------- ------------------- ---------------------
Total expenses 5,415,228 913,882 6,878,909 1,506,716 12,264,915
----------------- ------------------ ------------------- ------------------- ---------------------
LOSS FROM OPERATIONS (4,029,892) (740,844) (4,830,936) (1,214,729) (9,243,296)
OTHER INCOME (EXPENSE)
Realized gain on marketable
securities 118,909 3,983 181,688 58,898 386,123
Unrealized gain (loss) on
marketable securities - 11,087 (7,539) (292,610) (11,899)
Foreign exchange gain
(loss), net 8,279 125,032 (124,136) 202,686 446,334
Interest income /
(expense), net - (6,785) 12,022 (3,901) (54,186)
Other income, net 17,247 - 23,839 - 76,049
----------------- ------------------ ------------------- ------------------- ---------------------
Total other income 144,435 133,317 85,874 (34,927) 842,421
----------------- ------------------ ------------------- ------------------- ---------------------
LOSS BEFORE INCOME TAXES (3,885,457) (607,527) (4,745,062) (1,249,656) (8,400,875)
INCOME TAX EXPENSE - - - - (343)
----------------- ------------------ ------------------- ------------------- ---------------------
LOSS BEFORE MINORITY INTEREST (3,885,457) (607,527) (4,745,062) (1,249,656) (8,401,218)
----------------- ------------------ ------------------- ------------------- ---------------------
MINORITY INTEREST - - - - (81,984)
----------------- ------------------ ------------------- ------------------- ---------------------
NET LOSS $ (3,885,457) $ (607,527) $ (4,745,062) $ (1,249,656) $ (8,483,202)
================= ================== =================== =================== =====================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 32,376,574 26,392,115 32,187,708 23,427,059 29,568,073
LOSS PER COMMON SHARE
(BASIC AND DILUTED) $ (0.12) $ (0.02) $ (0.15) $ (0.05) $ (0.29)
See notes to the consolidated financial statements.
5
BMB MUNAI, INC.
(A Development Stage Entity)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Period from
Six months Six months ended inception
ended September 30, (May 6, 2003)
Notes September 30, 2004 through
2005 September 30, 2005
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,745,062) $ (1,249,656) $ (8,483,202)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation, depletion and amortization 730,450 27,186 869,111
Provision for doubtful accounts - - 129,051
Deferred income tax expense - - 343
Stock based compensation expense 7 3,815,158 - 3,815,158
Stock issued for services 7 172,682 - 172,682
Unrealized loss on marketable securities 118,909 - 123,269
Changes in operating assets and liabilities
Decrease / (increase) in marketable securities 52,515 2,102,800 (740,766)
Increase in trade accounts receivable (674,212) - (806,612)
Increase in inventories (788,763) (1,780,079) (4,016,174)
Decrease / (increase) in prepaid expenses and other assets 103,966 (5,136,252) (4,176,204)
(Decrease) / increase in current liabilities (3,677,384) 1,444,436 3,361,260
Restricted cash - - (60,973)
Rent deposit - - (21,172)
---------------- ----------------- ---------------------
Net cash used in operating activities (4,891,741) (4,591,565) (9,834,229)
---------------- ----------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in short term loan receivable - (5,667,220) -
Acquisition of oil and gas properties 6 (9,294,889) (5,379,966) (32,959,936)
Acquisition of other fixed assets (67,093) (609,777) (868,204)
Acquisition of intangible assets (56,745) (1,541) (74,501)
---------------- ----------------- ---------------------
Net cash used in investing activities (9,418,727) (11,658,504) (33,902,641)
---------------- ----------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 5,221,685 17,311,906 42,437,719
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 exercise of common stock options 863,934 - 1,063,934
---------------- ----------------- ---------------------
Net cash provided by financing activities 6,085,619 17,311,906 45,501,653
---------------- ----------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,224,849) 1,061,837 1,764,783
CASH AND CASH EQUIVALENTS at beginning of period 9,989,632 2,126,355 -
---------------- ----------------- ---------------------
CASH AND CASH EQUIVALENTS at end of period 1,764,783 $ 3,188,192 1,764,783
================ ================= =====================
Significant non cash transactions:
Conversion of debt into common stock - - $ 2,000,000
Accrual of liabilities to Astana Fund - - $ 250,000
Acquisition of 30% of Emir Oil LLP by issuance of
3,500,000 shares of common stock - $ 19,075,000 $ 19,075,000
Stock options and grants issued for services 7 $ 172,682 - $ 172,682
Stock options and grants issued to employees 7 $ 3,815,158 - $ 3,815,158
See notes to the consolidated financial statements.
6
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
BMB Munai, Inc. was incorporated in Utah in July 1981. BMB Munai, Inc.
later changed its domicile to Delaware on February 7, 1994. Prior to
November 26, 2003, BMB Munai, Inc.existed under the name InterUnion
Financial Corporation ("InterUnion"). BMB Munai, Inc. changed its domicile
from Delaware to Nevada in December 2004.
On November 26, 2003, InterUnion executed an Agreement and Plan of Merger
(the "Agreement") with BMB Holding, Inc ("BMB"), a private Delaware
corporation, formed for the purpose of acquiring and developing oil and
gas fields in the Republic of Kazakhstan. As a result of the merger, the
shareholders of BMB have obtained control of BMB Munai, Inc. BMB was
treated as the acquiror for accounting purposes. A new board of directors
was elected that was comprised primarily of the former directors of BMB
Holding, Inc.
BMB Munai, Inc.'s consolidated financial statements presented are a
continuation of BMB, and not those of InterUnion Financial Corporation,
and the capital structure of BMB Munai, Inc. is now different from that
appearing in the historical financial statements of InterUnion Financial
Corporation due to the effects of the recapitalization.
BMB Munai, Inc. has a representative office in Almaty, the Republic of
Kazakhstan.
BMB Munai, Inc. has minimal operations to date and is considered to be in
the development stage.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information included herein is unaudited,
except for the balance sheet as of March 31, 2005, which is derived from
the Company's audited consolidated financial statements for the year ended
March 31, 2005. 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 consolidated results of operations
for the interim period are not necessarily indicative of the consolidated
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 consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
included in our March 31, 2005 Form 10-KSB Report.
The accounting principles applied are consistent with those as set out in
the Company's annual Consolidated Financial Statements for the year ended
March 31, 2005.
7
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Basis of consolidation
The Company's consolidated financial statements present the consolidated
results of BMB Munai, Inc., and its wholly owned subsidiary, Emir Oil LLP
(hereinafter collectively referred to as the "Company"). All significant
inter-company balances and transactions have been eliminated from the
Consolidated Financial Statements.
All transactions of Emir Oil LLP from the date of its purchase by BMB
(June 7, 2003) through September 30, 2005 are reflected in the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements.
Use of estimates
The preparation of consolidated 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 Consolidated
Financial Statements and revenues and expenses during the reporting
period. Accordingly, actual results could differ from those estimates and
affect the results reported in these Consolidated Financial Statements.
Foreign currency translation
Transactions denominated in foreign currencies are reported at the rates
of exchange prevailing at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated to U.S.
dollars at the rates of exchange prevailing at the balance sheet dates.
Any gains or losses arising from a change in exchange rates subsequent to
the date of the transaction are included as an exchange gain or loss in
the Consolidated Statements of Loss.
Share-based compensation
The Company accounts for options granted to non-employees at their fair
value in accordance with FAS No. 123, Accounting for Stock-Based
Compensation. Under FAS No. 123, share-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
granted to the "selling agents" in the private equity placement
transactions and have been offset to the proceeds as a cost of capital.
Stock options and stocks granted to other non-employees are recognized in
the Consolidated Statements of Loss.
8
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has a stock option plan as described in Note 7. Compensation
expense for options and stocks granted to employees is determined based on
their fair values at the time of grant, the cost of which is recognized in
the Consolidated Statements of Loss over the vesting periods of the
respective options.
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 historically and
currently do 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.
Recognition of revenue and cost
Revenue and associated costs from the sale of oil are charged to the
period when goods were shipped or when ownership title transferred.
Produced but unsold products are recorded as inventory until sold. As of
September 30, 2005 the production unit of the Company - Emir Oil LLP had
test production sales at Kazakhstan domestic market price, which is
considerably lower than world market prices.
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.
Cash and 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 and
cash equivalents. The fair value of cash and cash equivalents approximates
their carrying amounts due to their short-term maturity.
As of September 30, 2005 the Company pledged cash in the amount of
$363,358 to collateralize payment to an oil drilling and service company
for drilling services.
9
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Trade accounts receivable and prepaid expenses
Accounts receivable and prepaid expenses are stated at their net
realizable values after deducting provisions for uncollectable amounts.
Such provisions reflect either specific cases or estimates based on
evidence of collectability. The fair value of accounts receivable and
prepaid expense accounts approximates their carrying amounts due to their
short-term maturity.
Inventories
Inventories of equipment for development activities, tangible drilling
materials required for drilling operations, spare parts, diesel fuel, and
various materials for use in oil field operations are recorded at the
lower of cost and net realizable value. Under the full cost method,
inventory is transferred to oil and gas properties when used in
exploration, drilling and development operations in oilfields.
Inventories of crude oil are recorded at the lower of cost and net
realizable value. Cost comprises direct materials and, where applicable,
direct labour costs and overhead, which has been incurred in bringing the
inventories to their present location and condition. Cost is calculated
using the weighted average method. Net realizable value represents the
estimated selling price less all estimated costs to completion and costs
to be incurred in marketing, selling and distribution.
Oil and gas properties
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 the period.
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
10
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
Costs of acquiring unproved leases shall be evaluated for impairment until
such time as the leases are proved or abandoned. In addition, if the sums
of expected undiscounted cash flows are less than net book value,
unamortized costs at the field level will be reduced to fair value.
Depletion of producing properties is computed using the unit-of-production
method based on estimated proved recoverable reserves.
Other fixed assets
Other fixed assets are valued at the historical cost adjusted for
impairment loss less accumulated depreciation. Historical cost includes
all direct costs associated with the acquisition of the fixed assets.
Depreciation of other fixed assets is calculated using the straight-line
method based upon the following estimated useful lives:
Buildings and improvements 7-10 years
Machinery and equipment 6-10 years
Vehicles 3-5 years
Office equipment 3-5 years
Other 2-7 years
Maintenance and repairs are charged to expenses as incurred. Renewals and
betterments are capitalized.
Other fixed assets of the Company are evaluated for impairment. If the
sums of expected undiscounted cash flows are less than net book value,
unamortized costs of other fixed assets will be reduced to a fair value.
In accordance with SFAS No. 19, "Financial Accounting and Reporting by Oil
and Gas Producing Companies", depreciation related to support equipment
and facilities used in exploration and development activities in the
amount of $104,287 was capitalized to oil and gas properties.
11
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Intangible assets
Intangible assets include accounting and other software. Amortization of
intangible assets is calculated using straight-line method upon estimated
useful life ranging from 3 to 4 years.
Restricted cash
Restricted cash includes funds deposited in a Kazakhstan bank and is
restricted to meet possible environmental obligations according to the
regulations of the Republic of Kazakhstan.
Comparative figures
The presentation of certain amounts for the previous periods has been
reclassified to conform to the presentation adopted for the current
quarter.
Recent accounting pronouncements
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion 20, "Accounting Changes"
and FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements." This Statement changes the requirements for the
accounting for and reporting of a change in accounting principle. APB
Opinion 20 previously required that most voluntary changes in accounting
principles be recognized by including in net income of the period of the
change the cumulative effect of changing to the new accounting principle.
FASB Statement No. 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period specific effects or the
cumulative effect of the change. This statement is effective for
accounting changes and corrections of errors made in fiscal periods that
begin after December 15, 2005. Management does not anticipate this
statement will impact the Company's consolidated financial position or
consolidated results of operations and cash flows.
3. INVENTORIES
Inventories as of September 30, 2005 and March 31, 2005 were as follows:
September 30, 2005 March 31, 2005
Construction material $ 3,844,558 $ 3,103,555
Spare parts 112,568 59,706
Crude oil produced 9,126 7,735
Other 49,922 56,415
----------------- --------------
$ 4,016,174 $ 3,227,411
================= ===============
12
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. PREPAID EXPENSES AND OTHER ASSETS, NET
Prepaid expenses and other assets, net, as of September 30, 2005 and March
31, 2005 were as follows:
September 30, 2005 March 31, 2005
Advances for services $ 1,975,365 $ 589,944
VAT recoverable 1,354,005 1,217,751
Advances for material 618,084 2,301,074
Other 249,922 192,573
Reserves against uncollectible advances and prepayments (129,051) (129,051)
----------------- --------------
$ 4,068,325 $ 4,172,291
================= ===============
5. DUE TO ASTANA FUND
In 2004 the Government of the Republic of Kazakhstan imposed a liability
in the amount of $250,000 to make cash contributions to the Astana Fund.
The Astana Fund is a government fund used by the Government of the
Republic of Kazakhstan to accumulate cash for construction and development
of Astana, the new capitol of the Republic of Kazakhstan. On May 27, 2005
the Company made a cash contribution of $250,000 to Astana Fund.
6. OIL AND GAS PROPERTIES, FULL COST METHOD, NET
Oil and gas properties, full cost method, net, as of September 30, 2005
and March 31, 2005 were as follows:
September 30, 2005 March 31, 2005
Subsoil use right $ 20,788,119 $ 20,788,119
Cost of drilling wells 12,977,179 9,334,021
Material and fuel used in exploration and development activities 7,633,137 2,891,765
Professional services received in exploration and development
activities 4,529,910 4,798,314
Infrastructure development costs 1,330,640 1,231,391
Geological and geophysical 989,187 653,571
Other capitalized costs 4,110,733 3,334,630
Accumulated depletion (733,096) (229,406)
----------------- --------------
$ 51,625,809 $ 42,802,405
================= ==============
13
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. SHARE AND ADDITIONAL PAID IN CAPITAL
Common and preferred stock as of September 30, 2005 and March 31, 2005 are
as follows:
September 30, 2005 March 31, 2005
Preferred stock, $0.001 par value
Authorized 20,000,000 20,000,000
Issued and outstanding - -
Common stock, $0.001 par value
Authorized 100,000,000 100,000,000
Issued and outstanding 32,458,584 30,513,761
Reverse merger
During the period ended March 31, 2004, the Company completed a reverse
merger with BMB Holding, Inc. Additionally the Company:
a) Completed a private placement for the total amount of $11,113,562.
b) Converted a $2,000,000 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.
Acquisition
On May 24, 2004, the Company agreed to purchase the remaining 30% interest
of its minority interest partner in Emir Oil LLP 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 LLP. The
aggregate purchase price was determined to be $19,075,000 using a price of
the Company's 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 Sheets.
Private placements
On July 2, 2004, the Company sold an aggregate of 4,584,340 common shares
of the Company at $4.00 per share in a private placement offering. The
Company received $17,311,906 net of the agent fees and out of pocket
expenses.
On March 9, 2005, the Company sold an aggregate of 2,000,000 common shares
of the Company at $5.00 per share in a private placement offering. The
Company received $9,968,254 net of the agent fees and out of pocket
expenses.
On March 31, 2005, the Company sold an aggregate of 1,101,000 common
shares of the Company at $5.00 per share in a private placement offering.
On April 12, 2005 the Company received $5,221,685 net of the agent fees
and out of pocket expenses.
14
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Common stock sold in private placements as of September 30, 2005 is as
follows:
Number of Share price Gross amount Net amount
shares sold raised received
First private placement 4,830,494 $ 2.15-$ 2.50 $ 11,113,562 $ 9,935,874
Second private placement 4,584,340 $ 4.00 18,337,360 17,311,906
Third private placement 3,101,000 $ 5.00 15,505,000 15,189,939
----------------- ----------------- ------------------
12,515,834 $ 44,955,922 $ 42,437,719
================= ================= ==================
The offerings were made only to accredited investors in the United States
of America under Regulation D and pursuant to Regulation S to non U.S.
Persons.
Share-Based Compensation
On April 12, 2005, the Company granted warrants to placement agents in
connection with funds raised on the Company's behalf. These warrants grant
the placement agents the right to purchase up to 110,100 shares of the
Company's common stock at an exercise price of $5.00 per share. Subsequent
to quarter end, in October 2005, warrants to purchase 60,000 shares were
exercised. Outstanding warrants expire on April 11, 2006.
On July 18, 2005, the Company granted options to legal counsel, for the
legal services rendered. These options grant the legal counsel the right
to purchase up to 41,053 shares of the Company's common stock at an
exercise price of $4.75 per share. The options expire five years from the
date of grant. Granted options vest immediately. Expense for options
granted is determined based on fair value of stocks at the time of grant,
the cost of which in the amount of $82,684 is recognized in the
Consolidated Statements of Loss. On July 18, 2005, the Company also
granted common shares to legal counsel, for the legal services rendered.
The number of such stock grants has been set at 18,947 shares at the price
of $4.75 per share. Stock grants vest immediately. Expense in the amount
of $89,998 is recognized in the Consolidated Statements of Loss and
Consolidated Balance Sheet.
During the fiscal year ended March 31, 2005 the shareholders of the
Company approved an incentive stock option plan (the "Plan") under which
directors, officers and key personnel may be granted options to purchase
common shares of the Company, as well as other stock based awards.
5,000,000 common shares were reserved for issuance under the Plan. The
Board determines the terms of options and other awards made under the
Plan. Under the terms of the Plan, no incentive stock options shall be
granted with an exercise price at a discount to the market.
On July 18, 2005, the Company granted stock options to Company's directors
and officers for the past services rendered. These options grant the
directors and officers the right to purchase up to 779,730 shares of the
Company's common stock at an exercise price of $4.75 per share. The
options expire five years from the date of grant. Granted options vest
immediately. Compensation expense for options granted is determined based
on their fair value at the time of grant, the cost of which in the amount
of $1,569,223 is recognized in the Consolidated Statements of Loss.
15
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stock options and warrants outstanding and exercisable as of September 30,
2005 are:
Number of Shares Weighted Average
Exercise
Price
----------------- ------------------------
As of March 31, 2005 1,144,341 $ 3.22
Granted 930,883 4.78
Exercised (384,080) 2.25
Expired (98,970) 2.50
----------------- ------------------------
As of September 30, 2005 1,592,174 $ 4.41
================= ========================
Stock options and warrants as of September 30, 2005 are:
Options and Warrants Outstanding Options and Warrants Exercisable
----------------------------------------------------------------------- -----------------------------------
Range of Options and Weighted Weighted Options and Weighted Average
Exercise Price Warrants Average Average Warrants Exercise Price
Exercise Price Contractual
Life (years)
------------------ ----------------- --------------- ---------------------------------- ------------------
$ 3.50 - $ 5.00 1,592,174 4.41 3.75 1,592,174 4.41
The estimated fair value of the stock options and warrants issued were
determined using Black-Scholes option pricing model with the following
assumptions:
September, 2005 March 31, 2005
Risk-free interest rate 4.01% 3.20%
Expected option life 2 years 1 year
Expected volatility in the price of the Company's common 74% 76%
shares
Expected dividends 0% 0%
Weighted average fair value of options and warrants granted
during the year $ 2.01 $ 2.22
Under the Plan the directors, officers and key personnel may be granted
common shares of the Company. The Board determines the directors, officers
and key personnel which shall be granted common shares of the Company. The
vesting conditions are also being determined by the Board.
16
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During the quarter ended September 30, 2005 the Company granted restricted
common shares to Company's former co-chief executive officer and president
for services rendered. He was granted 70,526 shares. The shares were
valued at $5.02 per share. The stock grants vested immediately.
Compensation expense in the amount of $354,041 is recognized in the
Consolidated Statements of Loss and Consolidated Balance Sheet.
On July 18, 2005, the Company granted common shares to Company's directors
and officers for past services rendered. The number of shares granted was
360,270. The shares were valued at $4.75 per share. This stock grant
vested immediately. Compensation expense in the amount of $1,711,283 is
recognized in the Consolidated Statements of Loss and Consolidated Balance
Sheet.
On July 18, 2005, the Company granted 90,000 restricted common shares to
three Company employees. Each employee's stock grants vest in three equal
tranches of 10,000 shares on the first, second and third anniversaries of
their employment with the Company. The stock grants were valued at $4.75
per share. The first 10,000 shares vested during the three months ended
September 30, 2005. Accordingly, compensation expense for those shares in
the amount of $47,500 has been recognized in the Consolidated Statements
of Loss and Consolidated Balance Sheet.
8. RELATED PARTY TRANSACTIONS
The Company leases ground fuel tanks and other oil fuel storage facilities
and warehouses from Term Oil LLC. The lease expenses for the three months
ended September 30, 2005, totaled to $54,478. One of our shareholders is
an owner of Term Oil LLC.
During the three months ended September 30, 2005, the Company also
retained the services of several companies. Expenses for those services
rendered during the three months ended September 30, 2005, totaled to
$33,120. The suppliers which rendered services are affiliated with
shareholders of the Company.
During the three months ended September 30, 2005 the Company also provided
an interest-free loan in the amount of $15,000 to one of the employees of
the Company.
9. COMMITMENTS AND CONTINGENCIES
Historical investments by the Government of the Republic of Kazakhstan
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 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.
17
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Capital Commitments
Under the terms of its subsurface exploration contract, Emir Oil LLP is
required to spend a total of $32 million in exploration and development
activities on the ADE Block. To retain its rights under the contract, the
Company must spend a minimum of $9.3 million in 2005, $6 million in 2006
and $4.5 million in 2007. The failure to make these minimum capital
expenditures could result in the loss of the subsurface exploration
contract.
Litigation
In December 2003, a lawsuit was filed in Florida naming the Company as one
of the defendants. The claim 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 LLP. The
plaintiffs seek unspecified compensatory and exemplary damages. The
parties have mutually agreed to dismiss this lawsuit without prejudice.
In April 2005, Sokol Holdings, Inc., filed a complaint in United States
District Court, Southern District of New York alleging that the Company
wrongfully induced Mr. Tolmakov, Director of Emir Oil, to breach a
contract under which Mr. Tolmakov had agreed to sell to Sokol 70% of his
90% interest in Emir Oil LLP. Sokol Holdings, Inc. seeks damages in an
unspecified amount exceeding $75,000 to be determined at trial, punitive
damages, specific performance in the form of an order compelling BMB to
relinquish its interest in Emir and the underlying interest in the ADE
fields to Sokol Holdings, Inc. and such other relief as the court finds
just and reasonable.
In October 2005, Sokol Holdings amended its complaint in New York to add
Brian Savage and Thomas Sinclair as plaintiffs and adding Credifinance
Capital, Inc., and Credifinance Securities, Ltd., (collectively
"Credifinance") as defendants in the matter. The amended complaint alleges
tortious interference with contract, specific performance, breach of
contract, unjust enrichment, breach of fiduciary duty, conversion,
misappropriation of trade secrets, tortuous interference with fiduciary
duty and aiding and abetting breach of fiduciary duty in connection with a
business plan for the development of the Aksaz, Dolinnoe and Emir oil and
gas fields owned by Emir Oil, LLP. The plaintiffs seek damages in an
amount to be determined at trial, punitive damages, specific performance
and such other relief as the Court finds just and reasonable.
The Company is confident that the matters shall be resolved in the
Company's favor. The Company has retained legal counsels to protect its
interests. In the opinion of the Company's management and legal counsels,
the resolution of those lawsuits will not have a material adverse effect
on Company's financial condition, results of operations or cash flows.
18
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS
As of September 30, 2005 and March 31, 2005 marketable securities of
$551,300 and $788,921, respectively, are held in short term repurchase
agreements for securities issued by Kazakhstan banks and Kazakhstan
financial institutions. As of September 30, 2005 and March 31, 2005 cash
and cash equivalents include deposits in Kazakhstan banks in the amount
$1,365,958 and $9,090,276, respectively. As of September 30, 2005 and
March 31, 2005 the Company made advance payments to Kazakhstan companies
and government bodies in the amount $4,197,376 and $4,301,342,
respectively. As of September 30, 2005 and March 31, 2005 trade accounts
receivable of $806,612 and $132,400, respectively, are with the Kazakhstan
companies. Restricted cash reflected in the long-term assets consists of
$60,973 deposited in a Kazakhstan bank and restricted to meet possible
environmental obligations according to the regulations of Kazakhstan.
Furthermore, the primary asset of the Company is Emir Oil LLP; an entity
formed under the laws of the Republic Kazakhstan.
11. SUBSEQUENT EVENTS
Subsequent to the quarter ended September 30, 2005, a party exercised
stock warrants for 309,454 shares at the exercise price of $4 and stock
warrants for 60,000 shares at the exercise price of $5.
12. RESTATEMENT OF FINANCIAL STATEMENTS
In response to comments raised by the staff of the Securities and Exchange
Commission, the Company commenced a re-evaluation of its proved reserves.
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 March 22, 2006, the Company
determined it was necessary to restate its Consolidated Balance Sheet as
of September 30, 2005 to correct its accounting for oil and gas properties
and Consolidated Statements of Loss for three months ended September 30,
2005, six months ended September 30, 2005 and for the period from
inception (May 6, 2003) to September 30, 2005 to correct its accounting
for depletion expense.
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" by $497,287 on its Consolidated
Balance Sheet and additional accrual of depletion expense by $175,484 on
its Consolidated Statement of Loss for three months ended September 30,
2005 and by $497,287 on its Consolidated Statements of Loss for six months
ended September 30, 2005 and for the period from inception (May 6, 2003)
to September 30, 2005.
Following is a summary of the effects of these adjustments on the
Company's Consolidated Balance Sheet as of September 30, 2005 and
Consolidated Statements of Loss for three months ended September 30, 2005,
six month ended September 30, 2005 and the period from inception (May 6,
2003) to September 30, 2005:
19
BMB MUNAI, INC.
(A Development Stage Entity)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Balance sheet/Statement of loss items As restated As previously reported
September 30, 2005:
Oil and Gas Properties, Full Cost Method,
Less Accumulated Depreciation $ 51,625,809 $ 52,123,096
Total long term assets 52,411,503 52,908,790
Total assets 63,684,894 64,182,181
Deficit accumulated during the development
stage (8,483,202) (7,985,915)
Total shareholders' equity 60,081,291 60,578,578
Total liabilities and shareholders' equity 63,684,894 64,182,181
For the three months ended September 30, 2005:
Depletion $ (313,912) $ (138,428)
Total expenses (5,415,228) (5,239,744)
Loss from operations (4,029,892) (3,854,408)
Loss before income taxes (3,885,457) (3,709,973)
Loss before minority interest (3,885,457) (3,709,973)
Net loss (3,885,457) (3,709,973)
Loss per common share (basic and diluted) (0.12) (0.11)
For the six months ended September 30, 2005:
Depletion $ (665,644) $ (168,357)
Total expenses (6,878,909) (6,381,622)
Loss from operations (4,830,936) (4,333,649)
Loss before income taxes (4,745,062) (4,247,775)
Loss before minority interest (4,745,062) (4,247,775)
Net loss (4,745,062) (4,247,775)
Loss per common share (basic and diluted) (0.15) (0.13)
For the period from inception (May 6, 2003)
to September 30, 2005:
Depletion $ (733,096) $ (235,809)
Total expenses (12,264,915) (11,767,628)
Loss from operations (9,243,296) (8,746,009)
Loss before income taxes (8,400,875) (7,903,588)
Loss before minority interest (8,401,218) (7,903,931)
Net loss (8,483,202) (7,985,915)
Loss per common share (basic and diluted) (0.29) (0.27)
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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
contain additional information that should be referred to when reviewing this
material and this document should be read in conjunction with the Form 10-KSB of
the Company for the year ended March 31, 2005.
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.
Forward Looking Statements
Certain of the statements contained in all parts of this document
including, but not limited to, those relating to our drilling plans, future
expenses, changes in wells operated and reserves, future growth and expansion,
future exploration, future seismic data, expansion of operations, our ability to
generate new prospects, our ability to obtain a production license, review of
outside generated prospects and acquisitions, additional reserves and reserve
increases, managing our asset base, expansion and improvement of capabilities,
integration of new technology into operations, credit facilities, new prospects
and drilling locations, future capital expenditures and working capital,
sufficiency of future working capital, borrowings and capital resources and
liquidity, projected cash flows from operations, future commodity price
environment, expectations of timing, the outcome of legal proceedings,
satisfaction of contingencies, the impact of any change in accounting policies
on our consolidated financial statements, the number, timing or results of any
wells, the plans for timing, interpretation and results of new or existing
seismic surveys or seismic data, future production or reserves, future
acquisitions of leases, lease options or other land rights, management's
assessment of internal control over financial reporting, financial results,
opportunities, growth, business plans and strategy and other statements that are
not historical facts contained in this report are forward-looking statements.
When used in this document, words like "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. These forward-looking statements speak only as
of their dates and should not be unduly relied upon. We undertake no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
21
Overview
BMB Munai, Inc., is an independent oil and natural gas company engaged
in the exploration, development, acquisition and production of crude oil and
natural gas properties in the Republic of Kazakhstan (sometimes also referred to
herein as the "ROK" or "Kazakhstan"). We hold a contract that allows us to
explore and develop approximately 460 square kilometers in western Kazakhstan.
Our contract grants us the right to explore and develop the Aksaz, Dolinnoe and
Emir oil and gas fields, referred to herein as "the ADE Block" as well as an
area adjacent to the ADE Block referred to herein as "the Extended Territory."
The ADE Block and Extended Territory are collectively referred to herein as "our
properties."
We are currently in the development stage. We generate revenue, income
and cash flow by producing and marketing oil and natural gas from our oil and
natural gas properties. We make significant capital expenditures in our
exploration and development activities that we anticipate will allow us to
increase and improve our ability to generate revenue. Our drilling strategy is
focused toward enhancing cash flows and increasing proved developed reserves by
drilling developmental wells within a proximity of existing wells, which we
believe decreases our likelihood of drilling a dry hole, while at the same time
increasing our current production and cash flow. As our cash flow and proved
developed reserves grow, we will begin drilling exploratory wells to find new
reservoirs or extend known reservoirs. We believe this strategy will result in
growth of proved developed reserves, production and financial strength.
Industry and Economic Factors
We are a development stage company and have not yet generated
significant production or revenues from the development of our properties. While
we have raised capital to fund acquisitions and operations to date, we believe
we still lack sufficient capital to complete exploration and development of our
properties. We are currently using more cash in operations than we generate. We
anticipate the need for additional funding before our revenue from oil and
natural gas production will be sufficient to meet our operating needs.
In managing our business, we must deal with many factors inherent in
our industry. First and foremost is the fluctuation of oil and gas prices.
Historically, oil and gas markets have been cyclical and volatile, with future
price movements, which are difficult to predict. While our revenues are a
function of both production and prices, wide swings in commodity prices will
likely have the greatest impact on our results of operations. We have no way to
predict those prices or to control them without losing some advantage of the
upside potential. The oil and gas industry has continued to experience high
commodity prices in 2005, which has positively impacted the entire industry as
well as our Company.
22
Our operations entail significant complexities. Advanced technologies
requiring highly trained personnel are utilized in both exploration and
development. Even when the technology is properly used, we may still not know
conclusively if hydrocarbons will be present or the rate at which they may be
produced. Despite our best efforts to limit risk, exploration is a high-risk
activity, often times resulting in no commercially productive reserves being
discovered. Moreover, costs associated with operating within our industry are
substantial.
Our business, as with other extractive industries, is a depleting one
in which each oil and gas equivalent produced must be replaced or our business,
and a critical source of future liquidity, will shrink.
The oil and gas industry is highly competitive. Competition in
Kazakhstan and Central Asia includes other junior hydrocarbons exploration
companies, mid-size producers and major exploration and production companies.
Many of our competitors have greater financial resources and larger technical
staff than we have.
We are subject to various levels of government regulation and control,
both in Kazakhstan and the United States of America. In particular, our
activities are subject to stringent operational and environmental regulations.
These regulations affect our costs of planning, designing, drilling, installing
and operating oil and gas wells and related facilities. These regulations may
become more demanding in the future.
Recent Developments
During the second quarter 2005 we continued testing and development
works on Dolinnoe-3 well. We penetrated two bearing zones in Dolinnoe-3 well,
perforated and tested the other productive zones. After that we performed works
in isolation of two previously explored productive zones and opened a pay
section of the fourth productive zone. During the works related to the
perforation of a productive stratum, which has a capacity of 17.6 meters, we
experienced significant flow of oil and gas from the fourth productive zone. We
also completed a hydrodynamic study of the third productive horizon and took
samples of formation fluids. In the course of continued testing and development
works on the Dolinnoe-3 well we are continuing to undertake a complex of
geophysical studies aimed at identifying additional productive intervals.
During the second quarter 2005 we undertook operations to reenter the
Aksaz-4 well that was abandoned during the Soviet Union period due to lack of
financing. We drilled the well from its pre-existing depth of 4,080 meters to a
depth of 4,907 meters. While drilling, we performed geophysical, geological and
technical studies in an open hole and core sampling of Triassic formations. On
August 12, 2005 drilling works on Aksaz-4 well were completed. In September we
started development and testing works at the well, including perforation works
in the productive horizons. Testing and development works in Aksaz-4 well are in
process.
23
During the second quarter 2005 we continued workover of the Aksaz-1
well to eliminate annular flow and isolate a previously penetrated watered
formation by means of a packer installation. After completion of the isolation
works we made attempts to stimulate inflow in the well. Operations revealed that
the barite, which dropped out from the drilling mud, was blocking the packer in
the annular space of the well. When we removed the pumping and compression
tubing, several pipes were deformed as a result of pressure differentials in the
tubing and annular space. We therefore undertook fishing operations to extract
the deformed and broken tubing in the well. At the moment workover operations on
the well have been suspended due to the unavailability of a serviceable hoisting
unit. We expect fishing operations will resume in the late November or early
December of 2005.
As a result of workover operations performed on Emir-1 well during the
second quarter, the first production object was added to previously perforated
production horizons. We cleaned the well of the propane originating from the
formation, performed acid treatment of the bottom-hole zone of the well and
lowered a deep well pump into the well. We also intend to optimize the
performance of the well through increased stroke length and pumping speed.
In October 2005 we started preparation for underground workover of the
Dolinnoe-2 well to acid wash the formation. In the Dolinnoe-2 well we also
performed geophysical, geological and technical studies to determine the nature
of the productive horizons.
Outlook
During the remainder of the fiscal year, we will continue work over and
research operations on the existing six wells in the ADE Block.
We invested approximately $3 million in exploration and development of
our properties during the three months ended September 30, 2005. We expect to
invest an additional $2 million to $3 million in exploration and development
during the remainder of the current fiscal year. We anticipate the need to raise
an additional $40,000,000 to support exploration and development activities
before we expect income from oil production to be sufficient to meet our needs
for operating capital. We expect to fund these expenditures primarily from
additional capital we will seek to raise through equity and/or debt financing.
We currently have no commitments from any party to provide us funding and there
is no assurance that such funding will become available to us on acceptable
terms, or at all. If we are not successful in obtaining funding, we anticipate
that we will instead seek to develop existing wells and infrastructure in hopes
of generating sufficient revenue to finance our operations. This development
would be funded by cash and cash equivalents, the sale of marketable securities
and revenue from operations. If the funding is limited to these sources, our
anticipated development activities would be significantly more limited than
anticipated under our present business plan.
24
Our outlook as described above is subject to change based upon factors
that include, but are not limited to, drilling results, commodity prices, access
to capital and other factors referred to in "Forward Looking Statements."
We have and will continue to seek to increase our proven reserves
through continued exploration of our properties, as well as the acquisition of
other properties with exploration and production potential.
For us to operate profitability and grow in the future we need to
obtain additional capital either through additional fund raising or through
significantly increased production. Our revenue, profitability and future growth
depend substantially on factors beyond our control, such as economic, political
and potential regulatory 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 could
materially and adversely affect our financial position, results of operations,
the quantities of oil and natural gas reserves that we can economically produce,
the markets into which we can sell our oil and our access to additional capital.
In a worst case scenario, future drilling operations could be largely
unsuccessful, oil and gas prices could sharply decline, we could fail to gain
access to the world oil markets and/or other factors beyond our control could
cause us to modify or substantially curtail our exploration and development
plans, which could negatively impact our earnings, cash flow and most likely the
trading price of our securities.
Results of Operations
Three months ended September 30, 2005, compared to the three months
ended September 30, 2004
Revenue and Production
The following table summarizes production volumes, average sales prices
and operating revenue for our oil and natural gas operations for the three
months ended September 30, 2005 and the three months ended September 30, 2004.
Three months ended
September 30, 2005
to the three months ended
September 30, 2004
For the three For the three -------------------------------
Months ended months ended $ %
September 30, September 30, Increase Increase
2005 2004 (Decrease) (Decrease)
------------------ ------------------ -------------- -------------
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 70,365 15,952 54,413 341%
Barrels of Oil equivalent (BOE) - - - -
25
Average Sales Price
Natural gas ($ per Mcf) - - - -
Natural gas liquids ($ per Bbl) - - - -
Oil and condensate ($ per Bbl) $ 21.68 $ 13.30 $ 8.38 63%
Barrels of Oil equivalent
($ per BOE) - - - -
Operating Revenue:
Natural gas - - - -
Natural gas liquids - - - -
Oil and condensate $ 1,385,336 $ 173,038 $ 1,212,298 701%
Gain on hedging and derivatives(1) - - - -
------------------ ------------------ -------------- -------------
- -------------------
(1) We did not engage in hedging transactions, including derivatives during the
three months ended September 30, 2005, or the three months ended September
30, 2004.
Revenues. We generate revenue under our contract from the sale of oil
and natural gas recovered during test production. During the three months ended
September 30, 2005 and 2004, 100% of our revenue was generated from the sale of
crude oil. During the three months ended September 30, 2005 we realized revenue
from oil and gas sales of $1,385,336 compared to $173,038 during the three
months ended September 30, 2004. This increase in revenues is primarily the
result of two facts. First, we performed works related to the perforation of a
productive stratum with a capacity of 17.6 meters which led to a significant
flow of oil and gas at the Dolinnoe-3 well. As a result in September 2005,
monthly oil production rate at the Dolinnoe-3 well increased by about 680%
comparing to average production rate of prior periods. Second, oil prices in the
domestic market increased 63% in the three months ended September 30, 2005
compared to three months ended September 30, 2004. We anticipate production will
continue to increase in the upcoming fiscal quarters. If production increases
and oil prices remain constant or continue to increase, we expect revenue will
continue to increase in the upcoming quarters. At the present time, however, it
is unclear the rate at which our production and corresponding revenues may
increase.
Our revenue is sensitive to changes in prices received for our
products. Our production is sold at the prevailing market price in Kazakhstan,
which fluctuates in response to many factors that are outside our control.
Imbalances in the supply and demand for oil can have a dramatic effect on the
prices we receive for our production. Political instability, the economy,
weather and other factors outside our control could impact supply and demand.
26
Costs and Operating Expenses
The following table presents details of our expenses for the three
months ended September 30, 2005 and 2004:
For the three months ended For the three months ended
September 30, 2005 September 30, 2004
------------------------------- ------------------------------
Expenses:
Production $ 52,070 $ 36,927
Selling 134,364 14,563
Depletion 313,912 -
Depreciation and amortization 34,368 18,060
General and administrative 4,880,514 844,332
Total $ 5,415,228 $ 913,882
=============================== ==============================
Expenses ($ per BOE):
Oil and gas operating(1) 0.83 2.84
Depletion (2) 5.56 1.39
- -----------------
(1) Includes production costs and ad valorem taxes.
(2) Represents depletion of oil and gas properties only.
Production Expenses. During the three months ended September 30, 2005,
we incurred $52,070 in production expenses compared to $36,927 during the three
months ended September 30, 2004. Production expenses increased as a result of
hiring more production and maintenance personnel and repair overhead due to
increase of production. We expect production expenses to continue to increase in
the upcoming fiscal quarters. At the present time, however, it is unclear the
rate at which our production expenses may increase in upcoming fiscal quarters.
Selling Expenses. We incurred selling expenses of $134,364 during the
three months ended September 30, 2005 compared to $14,563 during the three
months ended September 30, 2004. The increase in selling expenses is nearly
proportional to the increase in revenue. Selling expenses during the three
months ended September 30, 2005 increased by 823% and revenue increased by 701%
compared to the three months ended September 30, 2004. We transported oil to
railway terminals and accordingly we used more gasoline and incurred more
expenses. We expect selling expenses to continue to increase in the upcoming
fiscal quarters as revenue continues to increase. At the present time, however,
it is unclear the rate at which our production expenses may increase in the
upcoming fiscal year.
General and Administrative Expenses. General and administrative
expenses during the three months ended September 30, 2005 were $4,880,514
compared to $844,332 during the three months ended September 30, 2004. This
represents a 478% increase in general and administrative expenses. This
significant increase is attributable to a 924% increase in payroll and other
compensation to employees. During the three months ended September 30, 2005 we
granted restricted stock and stock options to directors, officers and key
employees of the Company. Fair value of stock and stock options was recognized
in our consolidated financial statements as compensation expense. The total
27
amount of compensation expense recognized as a result of the stock and option
grants is $3,734,159. Additionally during the three months ended September 30,
2005 we hired more field and administrative personnel and incurred legal
expenses. We do not expect general and administrative expenses to increase at
such a significant rate in the upcoming quarters. We anticipate increases in
revenue, operating expenses and selling expenses will outpace the increase in
general and administrative expenses in upcoming quarters.
Loss from Operations. During the three months ended September 30, 2005
we realized a loss from operations of $4,029,892 compared to a loss from
operations of $740,844 during the three months ended September 30, 2004. We
realized a 701% increase in revenue during the three months ended September 30,
2005 compared to the comparable period 2004. This increase was offset by a 41%
increase in production expenses and a 478% increase in general and
administrative expenses, which resulted in a 444% increase in loss from
operations during the quarter ended September 30, 2005 compared to the quarter
ended September 30, 2004. Until such time as revenue from oil and gas sales
exceeds expenses we will continue to generate operating losses. At this time, it
is unclear when we will generate sufficient oil and gas to offset our expenses.
Other Income. During the three months ended September 30, 2005 we
realized total other income of $144,435 compared to total other income of
$133,317 for the three months ended September 30, 2004. This decrease in other
income is largely attributable to a decrease in foreign exchange gain in the
amount of $116,753 resulting from fluctuations in foreign currency rates against
the U.S dollars. This decrease was partially offset by an increase in realized
and unrealized gain on marketable securities of $103,839 and our realizing
interest income of $6,785.
Net Loss. During the three months ended September 30, 2005 we realized
a net loss of $3,885,457 compared to a net loss of $607,527 for the three months
ended September 30, 2004. Notwithstanding the significant increase in revenue
resulting from increased oil and gas production during the quarter ended
September 30, 2005 net loss increased significantly. This significant increase
in net loss is largely attributable to 478% increase in general and
administrative expenses. During the three months ended September 30, 2005 our
general and administrative expenses increased by $4,036,182 compared to the
three months ended September 30, 2004. While our production and revenues are
increasing, 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, 2005, compared to the six months ended
September 30, 2004
Revenue and Production
The following table summarizes production volumes, average sales prices
and operating revenue for our oil and natural gas operations for the six months
ended September 30, 2005 and the six months ended September 30, 2004.
28
Six months ended
September 30, 2005
to the six months ended
For the six For the six September 30, 2004
Months ended months ended -------------------------------
September 30, September 30, $ %
2005 2004 Increase Increase
------------------ ------------------ -------------- -------------
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 111,821 27,357 84,464 309%
Barrels of Oil equivalent (BOE) - - - -
Average Sales Price
Natural gas ($ per Mcf) - - - -
Natural gas liquids ($ per Bbl) - - - -
Oil and condensate ($ per Bbl) $ 20.58 $ 13.27 $ 7.31 55%
Barrels of Oil equivalent
($ per BOE) - - - -
Operating Revenue:
Natural gas - - - -
Natural gas liquids - - - -
Oil and condensate $ 2,047,973 $ 291,987 $ 1,755,986 601%
Gain on hedging and derivatives(1) - - - -
------------------ ------------------ -------------- -------------
- -----------------
(1) We did not engage in hedging transactions, including derivatives during the
six months ended September 30, 2005, or the six months ended September 30,
2004.
Revenues. During the six months ended September 30, 2005 we realized
revenue from oil and gas sales of $2,047,973 compared to $291,987 during the six
months ended September 30, 2004. Our revenue for the six months ended September
30, 2005 increased by 601% compared to the revenue for the six months ended
September 30, 2004. We performed workover of re-entered wells and drilled three
additional wells, both of which led to increased production volume in the fiscal
year. Additionally, oil prices in the domestic market increased 55% in the six
months ended September 30, 2005 compared to six months ended September 30, 2004.
We anticipate production will continue to increase in the upcoming periods. If
production increases and oil prices remain constant or continue to increase, we
expect revenue will continue to increase in the upcoming quarters. At the
present time, however, it is unclear the rate at which our production and
corresponding revenues may increase.
Our revenue is sensitive to changes in prices received for our
products. Our production is sold at the prevailing market price in Kazakhstan,
which fluctuates in response to many factors that are outside our control.
Imbalances in the supply and demand for oil can have a dramatic effect on the
prices we receive for our production. Political instability, the economy,
weather and other factors outside our control could impact supply and demand.
29
Costs and Operating Expenses
The following table presents details of our expenses for the six months
ended September 30, 2005 and 2004:
For the six months ended For the six months ended
September 30, 2005 September 30, 2004
------------------------------- ------------------------------
Expenses:
Production $ 89,881 $ 61,249
Selling 176,826 22,999
Depletion 665,644 -
Depreciation and amortization 64,806 27,186
General and administrative 5,881,752 1,395,282
Total $ 6,878,909 $ 1,506,716
=============================== ==============================
Expenses ($ per BOE):
Oil and gas operating(1) 0.90 2.78
Depletion (2) 7.34 1.24
- -------------------
(1) Includes production costs and ad valorem taxes.
(2) Represents depletion of oil and gas properties only.
Production Expenses. During the six months ended September 30, 2005, we
incurred $89,881 in production expenses compared to $61,249 during the six
months ended September 30, 2004. Production expenses increased as a result of
hiring more production and maintenance personnel and repair overhead due to
increase of production. We expect production expenses to continue to increase in
the upcoming periods. At the present time, however, it is unclear the rate at
which our production expenses may increase in upcoming periods.
Selling Expenses. We incurred selling expenses of $176,826 during the
six months ended September 30, 2005 compared to $22,999 during the six months
ended September 30, 2004. The increase in selling expenses is proportional to
the increase in revenue. Selling expenses during the six months ended September
30, 2005 increased by 669% and revenue increased by 601% compared to the six
months ended September 30, 2004. We transported oil to railway terminals and
accordingly we used more gasoline and incurred more expenses. We expect selling
expenses to continue to increase in the upcoming periods as revenue continues to
increase. At the present time, however, it is unclear the rate at which our
production expenses may increase in the upcoming fiscal year.
General and Administrative Expenses. General and administrative
expenses during the six months ended September 30, 2005 were $5,881,752 compared
to $1,395,282 during the six months ended September 30, 2004. This represents a
322% increase in general and administrative expenses. This significant increase
is attributable to a 674% increase in payroll and other compensation and a 144%
increase in professional services fees. The significant increase in general and
30
administrative expenses is largely the result of hiring more personnel to
operate our business, using services of technicians, engineers, accountants and
lawyers, as well as incurring other general corporate expenses. We do not expect
general and administrative expenses to increase at such a significant rate in
the upcoming periods. We anticipate increases in revenue, operating expenses and
selling expenses will outpace the increase in general and administrative
expenses in upcoming quarters.
Loss from Operations. During the six months ended September 30, 2005 we
realized a loss from operations of $4,830,936 compared to a loss from operations
of $1,214,729 during the six months ended September 30, 2004. We realized a 601%
increase in revenue during the six months ended September 30, 2005 compared to
the comparable period 2004. This increase was offset by a 47% increase in
production expenses and a 322% increase in general and administrative expenses,
which resulted in a 298% increase in loss from operations during the period
ended September 30, 2005 compared to the period ended September 30, 2004. Until
such time as revenue from oil and gas sales exceeds expenses we will continue to
generate operating losses. At this time, it is unclear when we will generate
sufficient oil and gas to offset our expenses.
Other Income. During the six months ended September 30, 2005 we
realized total other income of $85,874 compared to total other loss of $34,927
for the six months ended September 30, 2004. This increase in other income is
largely attributable to increase in realized and unrealized gain on marketable
securities of $407,861 and our realizing interest income of $15,923. This
decrease was partially offset by the decrease in foreign exchange gain in the
amount of $326,822 resulting from fluctuations in foreign currency rates against
the U.S. dollars.
Net Loss. During the six months ended September 30, 2005 we realized a
net loss of $4,745,062 compared to a net loss of $1,249,656 for the six months
ended September 30, 2004. Notwithstanding the significant increase in revenue
resulting from increased oil and gas production during the period ended
September 30, 2005 net loss increased significantly. This significant increase
in net loss is largely attributable to 322% increase in general and
administrative expenses. During the six months ended September 30, 2005 our
general and administrative expenses increased by $4,486,470 compared to the six
months ended September 30, 2004. While our production and revenues are
increasing, 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
Funding for our activities has historically been provided by funds
raised through the sale of our common stock. From inception on May 6, 2003
through September 30, 2005, we have raised $46,955,922 ($44,437,719 net) through
the sale of our common stock and proceeds from the issuance of convertible debt.
As of September 30, 2005, we had cash and cash equivalents of $1,764,783. We
anticipate our capital resources in the upcoming quarters will likewise consist
31
primarily of funds raised in financing activities and revenue from the sale of
oil and gas recovered during test production.
Our need for capital, in addition to funding our ongoing operations, is
primarily related to the exploration and development of our properties as
required under our contract, and the potential acquisition of additional oil and
gas properties. For the period from inception on May 6, 2003 through September
30, 2005, we have incurred capital expenditures of $52,123,096 for exploration,
development and acquisition activities including $19,075,000 non-cash
transaction for acquisition of the remaining 30% interest of its minority
interest partner in Emir Oil LLC in exchange for 3,500,000 shares of restricted
Company common stock.
Cash Flows
During the six months ended September 30, 2005 cash was primarily used
to fund exploration and development expenditures. We had a net decrease in cash
and cash equivalents of $8,224,849 during the six months ended September 30,
2005. See below for additional discussion and analysis of cash flow.
Six months ended Six months ended
September 30, 2005 September 30, 2004
---------------------- ---------------------
Net cash used in operating activities $ (4,891,741) $ (4,591,565)
Net cash used in investing activities $ (9,418,727) $ (11,658,504)
Net cash provided by financing activities $ 6,085,619 $ 17,311,906
---------------------- ---------------------
NET (DECREASE) / INCREASE IN CASH AND CASH
EQUIVALENTS $ (8,224,849) $ 1,061,837
====================== =====================
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the 2006 fiscal year
are $10 million to $14 million for exploration, development, production and
acquisitions. Through the six months ended September 30, 2005, we have spent $9
million in exploration, development and production. We have funded these
expenditures primarily from cash on hand. In the event we are not successful in
raising additional funds, we nevertheless believe we can fund the remaining $3
to $4 planned budgeted capital expenditures for the current fiscal year through
cash on hand, the sale of marketable securities and revenues from anticipated
oil production. We anticipate significant increase of our revenue during the
next periods considering the fact that just our September 2005 revenue
constituted about 42% of total revenue for the six months ended September 30,
2005. The minimum level of capital expenditures on our properties is dictated by
the contract. The amount of funds we devote to any particular activity in excess
of the minimum required capital expenditures may increase or decrease
significantly depending on available opportunities, cash flows and development
results, among others.
32
If we are not successful in obtaining funding, we anticipate that we
will instead seek to develop existing wells and infrastructure in hopes of
generating sufficient revenue to finance our operations. This development would
be funded by cash and cash equivalents and the sale of marketable securities we
currently hold. If the funding is limited to these sources, our anticipated
development activities would be significantly more limited than anticipated
under our present business plan.
We hold marketable securities consisting of short-term repurchase
agreements for securities issued by Kazakhstan banks and Kazakhstan financial
institutions. Additionally, certain operating cash flows are denominated in
local currency and are translated into U.S. dollars at the exchange rate in
effect at the time of the transaction. Because of the potential for civil
unrest, war and asset expropriation, some or all of these matters, which impact
operating cash flow, may affect our ability to meet our short-term cash needs.
Contractual Obligations and Contingencies
The following table lists our significant commitments at September 30,
2005:
Payments Due By Period
---------------------------------------------------------------------------
Contractual obligations Total Less than 1 1-3 years 4-5 years After 5
year years
--------------- --------------- --------------- -------------- ------------
Capital Expenditure $27,350,000 $16,850,000 $10,500,000 - -
Commitment(1)
Due to the Government of
the Republic of Kazakhstan(2)(3) $ 5,994,200 - $ 5,994,200 - -
Due to Reservoir Consultants $ 500,000 $ 278,000 $ 222,000 - -
Liquidation Fund $ 124,000 - - - $124,000
Office Lease $ 165,010 $ 82,505 $ 82,505 - -
----------- ----------- ----------- ---------- --------
Total $34,133,210 $17,210,505 $16,798,705 - $124,000
=========== =========== =========== ========== ========
(1) Under the terms of our contract with the ROK, we are required to spend
a total of at least $27.4 million dollars in exploration, development and
improvements within the ADE Block, as extended during the term of the license,
including $16.8 million in the 2005 calendar year, $6 million in the 2006
calendar year and $4.5 million in the 2007 calendar year. If we fail to do so,
we may be subject to the loss of our exploration license.
(2) In connection with our acquisition of the oil and gas contract covering
the ADE Block, we are required to repay the ROK for historical costs incurred by
it in undertaking geological and geophysical studies and infrastructure
improvements. The repayment terms of this obligation will not be determined
until such time as we apply for and are granted commercial production rights by
the ROK. Under our contract, if we wish to commence commercial production, we
must apply for such right prior to the expiration of our exploration and
development rights in June 2007. We are legally entitled to receive commercial
production rights 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 commercial production rights at any
time, we enjoy certain benefits under our contract that currently make it more
economically advantageous for us to continue exploration and development
activities at this time. We anticipate that we will apply for commercial
production rights 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.
(3) As with the ADE Block, we will also be required to repay the ROK its
historical costs for access to and use of geological and geophysical data
33
gathered and infrastructure improvement previously made by the ROK within the
Extended Territory. We are presently negotiating the amount and terms of this
obligation with the ROK. This approximately $6 million obligation represents
only our repayment obligation with respect to the ADE Block, and not the
extended territory.
Off-Balance Sheet Financing Arrangements
As of September 30, 2005, we had no off-balance sheet financing
arrangements.
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion 20, "Accounting Changes" and
FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements." This Statement changes the requirements for the accounting for and
reporting of a change in accounting principle. APB Opinion 20 previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. This statement requires retrospective
application to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the period specific
effects or the cumulative effect of the change. This statement is effective for
accounting changes and corrections of errors made in fiscal periods that begin
after December 15, 2005. Management does not anticipate this statement will
impact the Company's consolidated financial position or consolidated results of
operations and cash flows.
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 of the end of the period covered by this
report) that our disclosure controls and procedures are 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.
In response to comments raised by the staff of the Securities and
Exchange Commission ("SEC") in connection with its review of the SB-2
registration statement filed by us in October 2005, the SEC petroleum
engineering staff conducted a review of our estimates of proved reserves, which
were the proved reserves we provided in our Form 10-KSB annual report for 2005.
Our statement of estimated proved reserves was based upon an evaluation
conducted by Chapman Petroleum Engineering, Ltd., an independent third-party
petroleum engineering firm in Calgary, Canada ("Chapman Petroleum"). Based on
the staff's comments, the Company and Chapman Petroleum commenced a review of
the estimated proved reserves evaluation contained in the Reserve and Economic
Evaluation prepared by Chapman Petroleum as of April 1, 2005 (the "Chapman
34
Report.") In our Form 10-KSB annual report, we disclosed estimated proved
reserves of oil and natural gas totaling 40,914 MBbls BOE. Following the review
of the Chapman Petroleum report by us and Chapman, it was determined that the
estimated proved reserves of oil and natural gas as of March 31, 2005, will be
revised to 13,160 MBbls BOE under the SEC reporting standards. Based on this
review and after consultation with the Audit Committee of our Board of Directors
and our independent registered public accounting firm, on March 22, 2006, we
concluded that our audited consolidated financial statements for the year ended
March 31, 2005, and the unaudited consolidated financial statements for the
quarterly periods ended June 30, 2005, September 30, 2005 and December 31, 2005
required restatement in those periods relating to our calculation of depletion.
The change in estimated proved reserves directly effects the calculation of
depletion.
In light of our determination that the restatement of our proved
reserves as contained in the Chapman Report resulted in the need to restate the
financial statements contained in our annual report for the year ended March 31,
2005 and the quarterly reports for the quarters ended June 30, 2005, September
30, 2005 and December 31, 2005, 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. We have evaluated the accounting procedures and
controls in place and determined that the accounting for depletion was properly
carried out based on the proved reserves figures contained in the original
Chapman Report. We have evaluated the process by which management selected
Chapman Petroleum to perform the independent evaluation of our reserves and
determined that management performed proper and adequate due diligence to
investigate and assess the qualifications, expertise and ability of Chapman
Petroleum to perform the independent evaluation of our petroleum reserves to the
applicable SEC reporting standards. We have evaluated our communications with
Chapman Petroleum and determined that the scope and purpose for which Chapman
Petroleum was retained to evaluate our reserves was clearly and appropriately
communicated to Chapman Petroleum. We have undertaken an investigation to
confirm that information provided by us to Chapman Petroleum was correct. We
have also investigated to determine whether we have certain policies in place,
such as performance based compensation tied to reserve balances, which could
have resulted in undue pressure to inflate proved reserves and determined that
we had and have no such policies in place. Based on this evaluation, our
Certifying Officers have concluded that the restatement of our financial
statements resulting from the restatement of our proved reserves contained in
the Chapman Report was not the result of ineffective disclosure controls and
procedures.
There have been no changes in our internal controls over financial
reporting that occurred during the year ended September 30, 2005.
PART II - OTHER INFORMATION
Item 6. Exhibits
Exhibits. The following exhibits are included as part of this report:
35
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
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf,
thereunto duly authorized.
BMB MUNAI, INC.
Date: April 12, 2006 By: /s/ Boris Cherdabayev
---------------------------
Boris Cherdabayev,
Chief Executive Officer,
President and Director
Date: April 12, 2006 By: /s/ Sanat Kasymov
---------------------------
Sanat Kasymov,
Chief Financial Officer
36