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 December 31, 2005 000-28638 BMB MUNAI, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) NEVADA ------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 30-0233726 ----------------------------------- (I.R.S. Employer Identification No.) 202 Dostyk Ave, 4th Floor, Almaty, 050051, Kazakhstan ----------------------------------------------------- (Address of principal executive offices) +7 (3272) 375-125 --------------------------------------------------- (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; 42,004,705 shares outstanding as of January 27, 2006. 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 December 31, 2005 and March 31, 2005 ....................................................4 Consolidated Statements of Loss for the Three Months Ended December 31, 2005 and 2004, for the Nine Months Ended December 31, 2005 and 2004, and the period from inception (May 6, 2003) to December 31, 2005.................................5 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2005, the Nine Months Ended December 31, 2004, and the period from inception (May 6, 2003) to December 31, 2005.......6 Notes to Consolidated Financial Statements...........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................23 Item 3. Controls and Procedures........................................36 PART II -- OTHER INFORMATION Item 6. Exhibits.......................................................37 Signatures..............................................................38 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 December 31, 2005 to correct its accounting for oil and gas properties and Consolidated Statements of Loss for three and nine months ended December 31, 2005 and for the period from inception (May 6, 2003) to December 31, 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 $803,238 on its Consolidated Balance Sheet and additional accrual of depletion expense by $305,951 on its Consolidated Statement of Loss for three months ended December 31, 2005 and by $803,238 on its Consolidated Statements of Loss for nine months ended December 31, 2005 and for the period from inception (May 6, 2003) to December 31, 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 February 13, 2006, 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 - ----------------------------------------------------------------------------------------------------------------------------- Notes December 31, 2005 March 31, 2005 (Restated) ASSETS CURRENT ASSETS Cash and cash equivalents $ 54,293,874 $ 9,989,632 Marketable securities 670,905 788,921 Trade accounts receivable 800,584 132,400 Inventories 3 3,321,055 3,227,411 Prepaid expenses and other assets, net 4 3,922,709 4,172,291 ----------------------- ----------------------- Total current assets 63,009,127 18,310,655 ----------------------- ----------------------- LONG TERM ASSETS Oil and gas properties, full cost method, net 6 54,773,982 42,802,405 Other fixed assets, net 7 994,013 683,459 Intangible assets, net 56,102 14,435 Restricted cash 155,973 60,973 ----------------------- ----------------------- Total long term assets 55,980,070 43,561,272 ----------------------- ----------------------- TOTAL ASSETS $ 118,989,197 $ 61,871,927 ======================= ======================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,038,460 $ 5,844,639 Due to reservoir consultants 278,000 278,000 Taxes payable 401,926 333,063 Due to Astana Fund 5 - 250,000 Accrued liabilities and other payables 313,092 291,969 ----------------------- ----------------------- Total current liabilities 4,031,478 6,997,671 ----------------------- ----------------------- LONG TERM LIABILITIES Due to reservoir consultants 222,000 222,000 Liquidation fund 918,504 60,973 Deferred income tax liabilities 343 343 ----------------------- ----------------------- Total long term liabilities 1,140,847 283,316 ----------------------- ----------------------- COMMITMENTS AND CONTINGENCIES 10 - - SHAREHOLDERS' EQUITY Share capital 8 42,005 30,514 Additional paid in capital 8 122,311,011 58,460,520 Deficit accumulated during the development stage (8,536,144) (3,900,094) ----------------------- ----------------------- Total shareholders' equity 113,816,872 54,590,940 ----------------------- ----------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 118,989,197 $ 61,871,927 ======================= ======================= See notes to the consolidated financial statements. 4
BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) CONSOLIDATED STATEMENTS OF LOSS - ------------------------------------------------------------------------------------------------------------------------------------ Period from inception (May 6, 2003) Three months ended Three months ended Nine months ended Nine months ended through December 31, 2005 December 31, 2004 December 31, 2005 December 31, 2004 December 31, 2005 (Restated) (Restated) (Restated) REVENUES $ 2,058,792 $ 55,904 $ 4,106,765 $ 347,891 $ 5,080,411 EXPENSES Oil and gas operating 242,582 83,933 509,289 168,181 913,915 General and administrative 1,497,515 1,239,050 7,379,267 2,634,332 12,221,986 Depletion 451,029 - 1,116,673 - 1,184,125 Amortization and depreciation 35,316 21,917 100,122 49,103 171,331 ------------------ ----------------- ------------------- ------------------ -------------------- Total expenses 2,226,442 1,344,900 9,105,351 2,851,616 14,491,357 ------------------ ----------------- ------------------- ------------------ -------------------- LOSS FROM OPERATIONS (167,650) (1,288,996) (4,998,586) (2,503,725) (9,410,946) OTHER INCOME (EXPENSE) Realized gain on marketable securities - 46 181,688 58,944 386,123 Unrealized gain / (loss) on marketable securities 62,729 4,666 55,190 (287,944) 50,830 Foreign exchange gain / (loss), net 58,450 329,339 (65,686) 532,025 504,784 Interest income / (expense), net 36,348 126,331 48,370 122,430 (17,838) Other income / (expense), net (42,819) (9,049) (18,980) (9,049) 33,230 ------------------ ----------------- ------------------- ------------------ -------------------- Total other income 114,708 451,333 200,582 416,406 957,129 ------------------ ----------------- ------------------- ------------------ -------------------- LOSS BEFORE INCOME TAXES (52,942) (837,663) (4,798,004) (2,087,319) (8,453,817) INCOME TAX EXPENSE - (6,750) - (6,750) (343) ------------------ ----------------- ------------------- ------------------ -------------------- LOSS BEFORE MINORITY INTEREST (52,942) (844,413) (4,798,004) (2,094,069) (8,454,160) ------------------ ----------------- ------------------- ------------------ -------------------- MINORITY INTEREST - - - - (81,984) ------------------ ----------------- ------------------- ------------------ -------------------- NET LOSS $ (52,942) $ (844,413) $(4,798,004) $(2,094,069) $(8,536,144) ================== ================= =================== ================== ==================== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 33,426,080 28,513,761 32,676,428 25,128,792 LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.0016) $ (0.0030) $ (0.1468) $ (0.0833) See notes to the consolidated financial statements. 5
BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------------------------------------------------------- Period from Nine months Nine months inception Notes ended ended (May 6, 2003) December 31, December 31, through 2005 2004 December 31, 2005 (Restated) (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,798,004) $ (2,094,069) $ (8,536,144) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, depletion and amortization 1,216,795 49,103 1,355,456 Provision for doubtful accounts - - 129,051 Deferred income tax expense - - 343 Stock based compensation expense 8 3,876,658 - 3,876,658 Stock issued for services 8 172,682 - 172,682 Unrealized gain / (loss) on marketable securities 55,190 (287,944) 50,830 Changes in operating assets and liabilities Decrease / (increase) in marketable securities 62,826 2,390,263 (721,735) Increase in trade accounts receivable (668,184) - (800,584) Increase in inventories (93,644) (3,169,371) (3,321,055) Decrease / (increase) in prepaid expenses and other assets 249,582 (4,265,281) (4,030,588) (Decrease) / increase in liabilities (2,966,193) 1,495,595 4,242,485 Restricted cash (95,000) (40,057) (155,973) Rent deposit - (2,500) (21,172) ---------------- ----------------- --------------------- Net cash used in operating activities (2,987,292) (5,924,261) (7,759,746) ---------------- ----------------- --------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in short term loan receivable - (370,987) - Acquisition of oil and gas properties 6 (12,016,813) (11,292,383) (35,851,990) Acquisition of other fixed assets 7 (445,607) (775,016) (1,246,622) Acquisition of intangible assets (58,688) (12,344) (76,444) ---------------- ----------------- --------------------- Net cash used in investing activities (12,521,108) (12,450,730) (37,175,056) ---------------- ----------------- --------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 57,410,892 17,311,906 94,626,926 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 and warrants 2,401,750 - 2,601,750 ---------------- ----------------- --------------------- Net cash provided by financing activities 59,812,642 17,311,906 99,228,676 ---------------- ----------------- --------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 44,304,242 (1,063,085) 54,293,874 CASH AND CASH EQUIVALENTS at beginning of period 9,989,632 2,126,355 - ---------------- ----------------- --------------------- CASH AND CASH EQUIVALENTS at end of period $ 54,293,874 $ 1,063,270 $ 54,293,874 ================ ================= ===================== Significant non cash transactions: Oil and gas properties liquidation fund $ 857,531 $ 60,973 $ 918,504 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 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. (the "Company") was incorporated in Utah in July 1981. The Company later changed its domicile to Delaware on February 7, 1994. Prior to November 26, 2003, the Company existed under the name InterUnion Financial Corporation ("InterUnion"). The Company 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 obtained control of the Company. 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. The Company's consolidated financial statements presented are a continuation of BMB, and not those of InterUnion Financial Corporation, and the capital structure of the Company is now different from that appearing in the historical financial statements of InterUnion Financial Corporation due to the effects of the recapitalization. The Company has a representative office in Almaty, the Republic of Kazakhstan. The Company 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 from the date of its purchase by BMB (June 7, 2003) through December 31, 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 Operations. 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 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 Operations. The Company has a stock option plan as described in Note 8. 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 Operations over the vesting periods of the respective options. 8 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 December 31, 2005 the production unit of the Company - Emir Oil 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. 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. 9 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 or net realizable value. Cost comprises direct materials and, where applicable, direct labor 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 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. 10 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 expense 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 $112,613 was capitalized to oil and gas properties. 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. 11 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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 December 31, 2005 and March 31, 2005 were as follows:
December 31, 2005 March 31, 2005 Construction material $ 3,150,024 $ 3,103,555 Spare parts 98,515 59,706 Crude oil produced 5,543 7,735 Other 66,973 56,415 --------------- ------------------ $ 3,321,055 $ 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 December 31, 2005 and March 31, 2005 were as follows:
December 31, 2005 March 31, 2005 Advances for services $ 2,048,436 $ 589,944 VAT recoverable 1,145,306 1,217,751 Advances for material 575,671 2,301,074 Other 282,347 192,573 Reserves against uncollectible advances and prepayments (129,051) (129,051) --------------- ------------------ $ 3,922,709 $ 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 capital 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 December 31, 2005 and March 31, 2005 were as follows: December 31, 2005 March 31, 2005 Subsoil use rights $ 20,788,119 $ 20,788,119 Cost of drilling wells 13,735,673 9,334,021 Professional services received in exploration and development activities 8,285,364 4,798,314 Material and fuel used in exploration and development activities 5,750,773 2,891,765 Infrastructure development costs 1,404,817 1,231,391 Geological and geophysical 1,026,140 653,571 Other capitalized costs 4,967,221 3,334,630 Accumulated depletion (1,184,125) (229,406) ---------------------------------------------- $ 54,773,982 $ 42,802,405 ==============================================
13
BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7. OTHER FIXED ASSETS, NET Constructions Machinery Vehicles Office Other Total and equipment equipment --------------- -------------- ------------ --------------- ------------ ------------- Cost at April 1, 2005 $ 86,205 $ 234,200 $ 313,207 $ 128,983 $ 38,421 $ 801,016 Additions 63,067 279,413 7,858 42,488 53,899 446,725 Disposals - - - (349) (769) (1,118) --------------- -------------- ------------ --------------- ------------ ------------- at December 31, 2005 149,272 513,613 321,065 171,122 91,551 1,246,623 --------------- -------------- ------------ --------------- ------------ ------------- Accumulated depreciation at April 1, 2005 10,789 18,286 58,866 23,834 5,782 117,557 Charge for the period 9,124 20,971 68,154 15,243 22,105 135,597 Disposals - - - (349) (195) (544) --------------- -------------- ------------ --------------- ------------ ------------- at December 31, 2005 19,913 39,257 127,020 38,728 27,692 252,610 --------------- -------------- ------------ --------------- ------------ ------------- Net book value at March 31, 2005 75,416 215,914 254,341 105,149 32,639 683,459 =============== ============== ============ =============== ============ ============= Net book value at December 31, 2005 $ 129,359 $ 474,356 $ 194,045 $ 132,394 $ 63,859 $ 994,013 =============== ============== ============ =============== ============ ============= In accordance with FAS 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 amount of $ 112,613 was capitalized to oil and gas properties. 8. SHARE AND ADDITIONAL PAID IN CAPITAL Common and preferred stock as of December 31, 2005 and March 31, 2005 are as follows: December 31, 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 42,004,705 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. 14 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. On December 23, 2005, the Company sold an aggregate of 9,166,667 common shares of the Company at $6.00 per share in a private placement offering. On December 29, 2005 the Company received $52,189,207 net of the agent fees and out of pocket expenses. Common stock sold in private placements as of December 31, 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 Fourth private placement 9,166,667 $ 6.00 55,000,002 52,189,207 ----------------- ----------------- ------------------ 21,682,501 $ 99,955,924 $ 94,626,926 ================= ================= ==================
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 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 15 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. Common Stock 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 was recognized in the Consolidated Statements of Operations 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 first 10,000 shares of stock grants were valued at $4.75 per share. The second 10,000 shares vested during the three months ended December 31, 2005 and were valued at $6.15 per share. We record the fluctuations in the fair value of certain unvested stock grants as a deferred compensation asset (reported as a reduction of shareholders' equity on the balance sheet). This asset is amortized upon vesting of related stock grants as non-cash compensation expense. Compensation expense for vested stock grants in the amount of $109,000 has been recognized in the Consolidated Statements of Operations and Consolidated Balance Sheet. 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 was recognized in the Consolidated Statements of Operations and Consolidated Balance Sheet. During the quarter ended September 30, 2005 the Company granted restricted common shares to the 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 was recognized in the Consolidated Statements of Operations and Consolidated Balance Sheet. Stock Options 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 was recognized in the Consolidated Statements of Operations. 16 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- On July 18, 2005, the Company granted options to legal counsel, for the legal services rendered. These options grant 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, $82,684, is recognized in the Consolidated Statements of Operations. Stock options outstanding and exercisable as of December 31, 2005 are as follows:
Weighted Average Number of Shares Exercise Price ----------------- ------------------------ As of March 31, 2005 60,000 $ 4.00 Granted 820,783 4.75 Exercised - - Expired - - ----------------- ------------------------ As of December 31, 2005 880,783 $ 4.70 ================= ======================== Additional information regarding outstanding options as of December 31, 2005 is as follows: Options Outstanding Options Exercisable ---------------------------------------------------------------------- ------------------------------------ Weighted Weighted Average Weighted Average Range of Average Contractual Exercise Price Exercise Price Options Exercise Price Life (years) Options ------------------ ----------------- --------------- ---------------------------------- ------------------ $ 4.00 - $ 4.75 880,783 $4.70 5.00 880,783 $4.70
Warrants 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. In October 2005, warrants to purchase 60,000 shares were exercised. These warrants have been offset to the proceeds as a cost of capital. These warrants expire on April 11, 2006. On December 31, 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 916,667 shares of the Company's common stock at an exercise price of $6.00 per share. These warrants have been offset to the proceeds as a cost of capital. These warrants expire on June 30, 2007. 17 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Warrants outstanding and exercisable as of December 31, 2005 are as follows:
Weighted Average Number of Shares Exercise Price ----------------- ------------------------ As of March 31, 2005 1,084,341 $ 3.18 Granted 1,026,767 5.89 Exercised (753,534) 3.19 Expired (98,970) 2.50 ----------------- ------------------------ As of December 31, 2005 1,258,604 $ 5.44 ================= ======================== Additional information regarding warrants outstanding as of December 31, 2005 is as follows: Warrants Outstanding Warrants Exercisable ------------------------------------------------------------------------ ------------------------------------ Weighted Weighted Average Weighted Average Exercise Price Range of Average Contractual Exercise Price Warrants Exercise Price Life (years) Warrants ------------------ ----------------- --------------- ---------------------------------- ------------------ $ 3.50 - $ 6.00 1,258,604 $5.44 1.89 1,258,604 $5.44
9. 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 December 31, 2005, totaled to $109,913. 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 December 31, 2005, totaled to $24,015. The suppliers which rendered services are affiliated with shareholders of the Company. 10. 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. 18 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 $6 million in 2006 and $4.5 million in 2007. We must also comply with the terms of the work program associated with the contract, which includes the drilling of at least six additional new wells by July 9, 2007. The failure to make these minimum capital expenditures or to comply with the terms of the work program 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. 19 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In November 2005, we learned that the Company has been added as a defendant in a lawsuit filed by Bank CenterCredit against Optima Systems, LLP, KazOvoshProm Company, LLP and Intexi LLP and a number of other parties. The lawsuit was filed in the Special Interregional Economic Court of Almaty, Kazakhstan. Under Kazakh law, it is illegal for a party to purchase stock of a bank with borrowed funds. The lawsuit alleges that Optima Systems, KazOvoshProm Company and Intexi illegally purchased shares of Bank CenterCredit in open market transactions in the Kazakhstan Stock Market from a number of parties, including BMB Munai, with borrowed funds. Bank CenterCredit has delivered a letter to the Company confirming that its has been joined in this matter to comply with the procedural requirements of Kazakh law. In the letter, the Bank acknowledges that the Company acted as a party to the transaction as a good faith seller of shares of the Bank. The Bank further acknowledges that the case has no property or material nature as it relates to BMB Munai. The Bank also guarantees to reimburse the Company for any expenses it may incur in connection with the litigation. In the opinion of management and the Company's counsel in Kazakhstan, the resolution of this lawsuit will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. 11. FINANCIAL INSTRUMENTS As of December 31, 2005 and March 31, 2005 marketable securities of $670,905 and $788,921, respectively, are held in short term repurchase agreements for securities issued by Kazakhstan banks and Kazakhstan financial institutions. As of December 31, 2005 and March 31, 2005 cash and cash equivalents include deposits in Kazakhstan banks in the amount $1,268,381 and $9,090,276, respectively. As of December 31, 2005 and March 31, 2005 the Company made advance payments to Kazakhstan companies and government bodies in the amount $3,793,658 and $4,301,342, respectively. As of December 31, 2005 and March 31, 2005 trade accounts receivable of $800,584 and $132,400, respectively, are with the Kazakhstan companies. Restricted cash reflected in the long-term assets consists of $155,973 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. 12. SUBSEQUENT EVENTS Subsequent to the quarter ended December 31, 2005, the Company entered into a separation agreement with an employee of the Company where the Company agreed, among other conditions, to issue to the employee 50,000 restricted common shares of the Company; and grant to the employee an option to purchase up to 100,000 shares of the Company's restricted common stock at $7.40 per share expiring five years from the date of grant. Subsequent to the quarter ended December 31, 2005, a placement agent exercised stock warrants for 83,980 shares at the exercise price of $4. 20 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 13. 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 estimated 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 December 31, 2005 to correct its accounting for oil and gas properties and Consolidated Statements of Loss for three months ended December 31, 2005, nine months ended December 31, 2005 and for the period from inception (May 6, 2003) to December 31, 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 $803,238 on its Consolidated Balance Sheet and additional accrual of depletion expense by $305,951 on its Consolidated Statement of Loss for three months ended December 31, 2005 and by $803,238 on its Consolidated Statements of Loss for nine months ended December 31, 2005 and for the period from inception (May 6, 2003) to December 31, 2005. Following is a summary of the effects of these adjustments on the Company's Consolidated Balance Sheet as of December 31, 2005 and Consolidated Statements of Loss for three months ended December 31, 2005, nine months ended December 31, 2005 and the period from inception (May 6, 2003) to December 31, 2005:
Balance sheet/Statement of loss items As restated As previously reported December 31, 2005: Oil and Gas Properties, Full Cost Method, Less Accumulated Depreciation $ 54,773,982 $ 55,577,220 Total long term assets 55,980,070 56,783,308 Total assets 118,989,197 119,792,435 Deficit accumulated during the development stage (8,536,144) (7,732,906) Total shareholders' equity 113,816,872 114,620,110 Total liabilities and shareholders' equity 118,989,197 119,792,435 For the three months ended December 31, 2005: Depletion $ (451,029) $ (145,078) Total expenses (2,226,442) (1,920,491) (Loss)/income from operations (167,650) 138,301 (Loss)/income before income taxes (52,942) 253,009 (Loss)/income before minority interest (52,942) 253,009 Net (loss)/income (52,942) 253,009 (Loss)/income per common share (basic) (0.0016) 0.0076 (Loss)/income per common share (diluted) (0.0016) 0.0073
21 BMB MUNAI, INC. (A DEVELOPMENT STAGE ENTITY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
For the nine months ended December 31, 2005: Depletion $ (1,116,673) $ (313,435) Total expenses (9,105,351) (8,302,113) Loss from operations (4,998,586) (4,195,348) Loss before income taxes (4,798,004) (3,994,766) Loss before minority interest (4,798,004) (3,994,766) Net loss (4,798,004) (3,994,766) Loss per common share (basic and diluted) (0.1468) (0.1223) For the period from inception (May 6, 2003) to December 31, 2005: Depletion $ (1,184,125) $ (380,887) Total expenses (14,491,357) (13,688,119) Loss from operations (9,410,946) (8,607,708) Loss before income taxes (8,453,817) (7,650,579) Loss before minority interest (8,454,160) (7,650,922) Net loss (8,536,144) (7,732,906)
22 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. 23 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 marketing crude oil from our oil and natural gas properties produced during test production. 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. To date, we have relied primarily on funds raised through the sell of our equity securities to fund operations. We currently use more cash in operations than we generate. We believe, however, that we have now raised sufficient capital to fund exploration and development of our properties to a point where the revenue derived from our properties will be sufficient to meet our future 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 that 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 and 2006, which has positively impacted the entire industry as well as our Company. 24 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 our third fiscal quarter 2006 we continued testing and development works on Dolinnoe-1, Dolinnoe- 2, Dolinnoe- 3, Emir -1, Aksaz -1 and Aksaz -4 wells. We performed mini formation fracturing by hydrochloric acid at the Dolinnoe-2 well during the quarter. In January 2006 we undertook perforating works to join certain oil bearing horizons within the well. While testing various intervals of the Dolinnoe-3 well, we determined that the current interval from which solid production rates occurred is 24 meters , but only 17 meters were perforated. After perforation of the 17meters a blowout occurred and we could not run in hole with the pipe. As a result we killed the well by squeezing mud into the formation to avoid an open flush. While cleaning out the bottomhole zone, barite and carbomix contained in the drilling mud had settled at the hole bottom due to high formation temperature. This sediment caused the oil well tubing to become stuck. Mud cuttings samples indicated that carbomix accounted for approximately 30% of the mud cuttings. We conducted acid treatment for dissolution of the settlements. Subsequent walking up and down operations were successful and we have been successful at cleaning out the bottomhole zone. After perforation we will lower tubing and start testing again in order to determine the proper rate. In the course of continued testing and development works on the Dolinnoe-3 well we will also continue to undertake a complex of geophysical studies aimed at identifying additional productive intervals. 25 During our third fiscal quarter, we also continued testing and development operations at the Emir -1 well. Based on logging, four prospective objects were identified and perforated and all 4 objects were tested. This well is awaiting a service rig to perform workover. During our third fiscal quarter we performed well logging in the Aksaz-4 well to determine the source of annular water flow. Based on geophysical data there was water inflow from the 4,313 to 4,315 intervals through perforation due to poor cement bonding. As we did not expect water formation in these intervals, we are currently analyzing the water formation, including the isolation of the water-bearing horizon, installation of a cement plug, performing services on determination of bottom hole and undertaking perforation works. During our third fiscal quarter we completed construction of drilling sites and approach roads to the Kariman - 1 and Dolinnoe - 6 wells. During the period we also paved 800 meters of delivery line to the Aksaz group unit. In December 2005 the Government assigned our Company an export quota as a result of our previous application. We intend to continue to apply for export quotas in the future. The export quota we were granted allows us to export up to 29,200 barrels of oil during January 2006, to the world markets and to realize world market prices on those barrels of oil. As the world market price is currently considerably higher than the domestic market price, we anticipate this will result in us realizing greater revenue per barrel of oil for these barrels of oil as compared to the oil we sell in the Kazakhstan domestic market. Outlook During the third fiscal quarter of 2006 we raised an additional $52,189,207 through a private placement of our common stock to qualified institutional buyers in the United States and to non-U.S. persons. These funds will be used to continue our exploration and development activities. During the 2006 calendar year, we plan to drill a total of four exploratory and developmental wells in the Extended Territory. We are also planning to drill an additional four developmental wells in the Dolinnoe oilfield of the ADE Block. Development activities under our present business plan also include re-processing and reinterpretation of seismic data and development of the oilfield by constructing additional electric lines and oil collection units, test and research operations at the Extended Territory. Additionally during the 2006 calendar year we plan to conduct horizontal and directional drilling at two of our existing wells to increase rate of production and revenue. During the next calendar year, we also will continue workover and research operations on the existing six wells in the ADE Block. 26 Our outlook as described above is subject to change based upon factors that include, but are not limited to, drilling results, availability of drilling rigs, 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 and development 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 significantly increase 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 December 31, 2005, compared to the three months ended December 31, 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 December 31, 2005 and the three months ended December 31, 2004.
Three months ended December 31, 2005 to the three months ended December 31, 2004 ------------------------------- For the three For the three $ % months ended months ended Increase Increase December 31, 2005 December 31, 2004 (Decrease) (Decrease) ------------------ ------------------ -------------- ------------- Production volumes: Natural gas (Mcf) - - - - Natural gas liquids (Bbls) - - - - Oil and condensate (Bbls) 92,342 14,426 77,916 540% Barrels of Oil equivalent (BOE) - - - - 27 Average Sales Price Natural gas ($ per Mcf) - - - - Natural gas liquids ($ per Bbl) - - - - Oil and condensate ($ per Bbl) $ 22.08 $ 13.67 $ 8.41 62% Barrels of Oil equivalent ($ per BOE) - - - - Operating Revenue: Natural gas - - - - Natural gas liquids - - - - Oil and condensate $ 2,058,792 $ 55,904 $ 2,002,888 3,583% Gain on hedging and derivatives(1) - - - - ------------------ ------------------ -------------- -------------
- -------------------- (1) We did not engage in hedging transactions, including derivatives during the three months ended December 31, 2005, or the three months ended December 31, 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 December 31, 2005 and 2004, 100% of our revenue was generated from the sale of crude oil. During the three months ended December 31, 2005 we realized revenue from oil sales of $2,058,792 compared to $55,904 during the three months ended December 31, 2004. This increase in revenues is primarily the result of several factors. During the three months ended December 31, 2005, the number of producing wells had doubled from three to six compared to the three months ended December 31, 2004. Moreover, one of the new wells, Dolinnoe-3, constituted about 76% of total production during the three months ended December 31, 2005, which resulted in an average monthly production rate increase of 274% compared to the average monthly production rate of wells during the three months ended December 31, 2004. Additionally oil sale prices were approximately 62% higher during the three months ended December 31, 2005 compared to three months ended December 31, 2004. We anticipate production will continue to increase in the upcoming fiscal quarters as a result of the drilling of new wells. Also, during the third quarter 2005 we were granted an export quota to export and sell up to 29,200 barrels of oil. We anticipate this will lead to an increase in revenue from oil sales in January 2006 because the price per barrel of oil in the world markets is higher than the price per barrel of oil in domestic market in Kazakhstan, where we have been selling our oil. Costs and Operating Expenses The following table presents details of our expenses for the three months ended December 31, 2005 and 2004:
For the three months ended For the three months ended December 31, 2005 December 31, 2004 ------------------------------- ------------------------------ Expenses: Oil and gas operating(1) $ 242,582 $ 83,933 General and administrative 1,497,515 1,239,050 Depletion 451,029 - Amortization and depreciation 35,316 21,917 ------------------------------- ------------------------------ Total $ 2,226,442 $ 1,344,900 =============================== ============================== Expenses ($ per BOE): Oil and gas operating(1) 2.60 20.52 Depletion (2) 5.22 5.36
28 - ------------- (1) Includes transportation cost, production cost and ad valorem taxes. (2) Represents depletion of oil and gas properties only. Oil and Gas Operating Expenses. During the three months ended December 31, 2005 we incurred $242,582 in oil and gas operating expenses compared to $83,933 during the three months ended December 31, 2004. Oil and gas operating expenses increased due to increased production. During the third fiscal quarter 2006 production volume increased by 77,916 barrels or 540% compared to the three months ended December 31, 2004. Such increase led to hiring more production and maintenance personnel which resulted in payroll increases of 238% during the third quarter 2006 compared to the third quarter 2005. We also incurred transportation expenses of $155,966 during the three months ended December 31, 2005 compared to $59,563 during the three months ended December 31, 2004. Transportation expenses during the three months ended December 31, 2005 increased by 162% as a direct result of significant increase in production during the three months ended December 31, 2005 compared to the three months ended December 31, 2004. We transport oil from our fields to the storage facility we use. As a result of the increased production, we rented more oil tank trucks, used more gasoline, enlarged the tank field and incurred more overhead expenses. We expect oil and gas operating expense continue to increase in the upcoming fiscal quarter as revenue continues to increase. General and Administrative Expenses. General and administrative expenses during the three months ended December 31, 2005 were $1,497,515 compared to $1,239,050 during the three months ended December 31, 2004. This represents a 21% increase in general and administrative expenses. This increase is attributable to a 92% increase in payroll and other compensation to employees. This increase is largely the result of hiring personnel to operate our business, as well as travel expenses. While we anticipate general and administrative expenses will continue to increase, we expect increases in revenue to outpace increases in general and administrative expenses in upcoming quarters. Loss from Operations. During the three months ended December 31, 2005 we realized loss from operations of $167,650 compared to a loss from operations of $1,288,996 during the three months ended December 31, 2004. As described above, this change is directly attributable to the 3,583% increase in revenue we realized during the three months ended December 31, 2005 compared to the comparable period 2004. Other Income. During the three months ended December 31, 2005 we realized total other income of $114,708 compared to total other income of $451,333 for the three months ended December 31, 2004. This decrease in other income is largely attributable to a decrease in foreign exchange gain in the amount of $270,889 resulting from fluctuations in foreign currency rates against the U.S dollars and decrease in our interest income in the amount of $89,983. This decrease was partially offset by an increase in unrealized gain on marketable securities of $58,063. 29 Net Loss. During the three months ended December 31, 2005 we realized a net loss of $52,942 compared to a net loss of $844,413 for the three months ended December 31, 2004. As stated above, this change is the direct result of a 3,583% increase in revenue. Nine months ended December 31, 2005, compared to the nine months ended December 31, 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 nine months ended December 31, 2005 and the nine months ended December 31, 2004.
Nine months ended December 31, 2005 to the nine months ended December 31, 2004 For the nine For the nine ------------------------------- Months ended months ended $ % December 31, 2005 December 31, 2004 Increase Increase ------------------ ------------------ -------------- ------------- Production volumes: Natural gas (Mcf) - - - - Natural gas liquids (Bbls) - - - - Oil and condensate (Bbls) 204,163 41,783 162,380 389% Barrels of Oil equivalent (BOE) - - - - Average Sales Price Natural gas ($ per Mcf) - - - - Natural gas liquids ($ per Bbl) - - - - Oil and condensate ($ per Bbl) $ 21.31 $ 13.33 $ 7.98 60% Barrels of Oil equivalent ($ per BOE) - - - - Operating Revenue: Natural gas - - - - Natural gas liquids - - - - Oil and condensate $ 4,106,765 $ 347,891 $ 3,758,874 1,080% Gain on hedging and derivatives(1) - - - -
- ------------------ (1) We did not engage in hedging transactions, including derivatives during the nine months ended December 31, 2005, or the nine months ended December 31, 2004. Revenues. During the nine months ended December 31, 2005 we realized revenue from oil and gas sales of $4,106,765 compared to $347,891 during the nine months ended December 31, 2004. Our revenue for the nine months ended December 31, 2005 increased by 1,080% compared to the revenue for the nine months ended December 31, 2004. This increase in revenues is primarily the result of two factors. First, we performed works related to the perforation of a 30 productive stratum which led to a significant flow of oil and gas at Dolinnoe-3 well. As a result during the nine months ended December 31, 2005 oil production increased by about 389% comparing to total production during the nine months ended December 31, 2004. Second, oil prices in the domestic market in Kazakhstan increased 60% during the nine months ended December 31, 2005 compared to nine months ended December 31, 2004. We anticipate production will continue to increase in upcoming quarters. Also, during the third fiscal quarter 2005 we were granted an export quota from the Government that allows us to export up to 29,200 barrels of oil during January 2006. We anticipate this will lead to an revenue from oil sales during our fourth fiscal quarter of 2006 because the world market price of oil is considerably higher than the domestic market price in Kazakhstan. Costs and Operating Expenses The following table presents details of our expenses for the nine months ended December 31, 2005 and 2004:
For the nine months ended For the nine months ended December 31, 2005 December 31, 2004 ------------------------------- ------------------------------ Expenses: Oil and gas operating(1) $ 509,289 $ 168,181 General and administrative 7,379,267 2,634,332 Depletion 1,116,673 - Amortization and depreciation 100,122 49,103 ------------------------------- ------------------------------ Total $ 9,105,351 $ 2,851,616 =============================== ============================== Expenses ($ per BOE): Oil and gas operating(1) 2.64 6.45 Depletion (2) 6.31 1.88
- ---------------- (1) Includes transportation cost, production cost and ad valorem taxes. (2) Represents depletion of oil and gas properties only. Oil and Gas Operating Expenses. During the nine months ended December 31, 2005, we incurred $509,289 in oil and gas operating expenses compared to $168,181 during the nine months ended December 31, 2004. Oil and gas operating expenses increased due to increased production. During the nine months ended December 31, 2005 production volume increased by 162,380 barrels or 389% compared to the nine months ended December 31, 2004. Such increase led to hiring more production and maintenance personnel and a corresponding payroll increase during the nine months ended December 31, 2005 of 250% compared to the nine months ended December 31, 2004. Increased production also led to an increase in the royalty paid to the Government of 216% during the nine months ended December 31, 2005 compared to nine months ended December 31, 2004. As discussed above, another result of increased production was a $250,231 or 303% increase in transportation expenses during the nine months ended December 31, 2005 compared to the nine months ended December 31, 2004. We expect oil and gas operating expense continue to increase in the upcoming fiscal quarter as revenue continues to increase. 31 General and Administrative Expenses. General and administrative expenses during the nine months ended December 31, 2005 were $7,379,267 compared to $2,634,332 during the nine months ended December 31, 2004. This represents a 180% increase in general and administrative expenses. This significant increase is attributable to a 481% increase in payroll and other compensation and a 46% increase in professional services fees. During our second fiscal quarter 2006 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 amount of compensation expense recognized as a result of the stock and option grants was $4,049,340. Additionally during the nine months ended December 31, 2005 we hired more administrative 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 will outpace the increase in general and administrative expenses in upcoming quarters. Loss from Operations. During the nine months ended December 31, 2005 we realized a loss from operations of $4,998,586 compared to a loss from operations of $2,503,725 during the nine months ended December 31, 2004. We realized a 1,080% increase in revenue during the nine months ended December 31, 2005 compared to the comparable period 2004. This increase was offset by a 106% increase in oil and gas operating expenses and a 180% increase in general and administrative expenses, which resulted in a 68% increase in loss from operations during the period ended December 31, 2005 compared to the period ended December 31, 2004. Until such time as expenses exceed revenue from oil and gas sales we will continue to generate operating losses. At this time, we believe current production rates and current oil prices are such that we are now able to generate sufficient revenue from oil sales to offset our expenses. If, however, current production levels or oil prices were to decrease, we may be unable to offset all of our operating expenses with revenue from production and could experience additional losses from operations. Other Income. During the nine months ended December 31, 2005 we realized total other income of $200,582 compared to total other income of $416,406 for the nine months ended December 31, 2004. This decrease in other income is largely attributable to decrease in foreign exchange gain in the amount of $597,711 resulting from fluctuations in foreign currency rates against the U.S. dollar and a decrease in interest income of $74,060 that was partially offset by the net increase in realized and unrealized gains and losses on marketable securities of $465,878. Net Loss. During the nine months ended December 31, 2005 we realized a net loss of $4,798,004 compared to a net loss of $2,094,069 for the nine months ended December 31, 2004. Notwithstanding the significant increase in revenue resulting from increased oil and gas production during the period ended December 31, 2005 net loss increased significantly. This significant increase in net loss is largely attributable to 180% increase in general and administrative expenses. 32 During the nine months ended December 31, 2005 our general and administrative expenses increased by $4,744,935 compared to the nine months ended December 31, 2004. While expenses have risen significantly in past quarters, we do not expect such significant expense increases in upcoming quarters. We also anticipate that we will continue to realize significant increases in revenue as our production levels continue to increase. Based on these expectations, we anticipate that we will begin to realize net income in upcoming fiscal quarters. 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 December 31, 2005, we have raised $99,955,924 ($96,626,926 net) through the sale of our common stock and proceeds from the issuance of convertible debt. As of December 31, 2005, we had cash and cash equivalents of $54,293,874. We anticipate our capital resources in the upcoming quarters will consist primarily of revenue from the sale of oil and gas recovered during the 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 December 31, 2005, we have incurred capital expenditures of $55,577,220 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 LLP in exchange for 3,500,000 shares of restricted Company common stock, $112,613 for capitalized depreciation related to support equipment and facilities used in exploration and development activities and $918,504 non-cash transactions for accrual of asset retirement obligation. Cash Flows During the nine months ended December 31, 2005 cash was primarily used to fund exploration and development expenditures. During the nine months ended December 31, 2005 we had a net increase in cash and cash equivalents of $44,304,242 as a result of the last private placement in December 2005 where we raised $52,189,207 ,net of offering expenses, through the sale of our common stock. See below for additional discussion and analysis of cash flow. 33
Nine months ended Nine months ended December 31, 2005 December 31, 2004 ----------------------------- ------------------------------ Net cash used in operating activities $ (2,987,292) $ (5,924,261) Net cash used in investing activities $ (12,521,108) $ (12,450,730) Net cash provided by financing activities $ 59,812,642 $ 17,311,906 ----------------------------- ------------------------------ NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS $ 44,304,242 $ (1,063,085) ============================= ==============================
We continually evaluate our capital needs and compare them to our capital resources. Our budgeted capital expenditures for the upcoming fiscal year are about $60 million to $70 million for exploration, development, production and acquisitions. We believe our export quota and favorable world market prices will let allow to generate sufficient oil and gas revenues to finance the gap of $10 million to $20 million required for our planned exploration, development, production and acquisitions. Through the nine months ended December 31, 2005, we have spent $12 million in exploration, development and production. We have funded these expenditures primarily from cash on hand and oil sales revenue. We anticipate significant increase of our revenue during the upcoming quarter. As discussed herein, in December 2005 we were granted an export quota which would allow us to sell up to 29,200 barrels of crude oil during January 2006 in the world markets and will allow us to realize world market price which is considerable higher than the domestic market price in Kazakhstan. The minimum level of capital expenditures on our properties is dictated by the contract and the work program set forth in 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. We were successful in obtaining additional funding and we plan to develop existing wells and infrastructure, construct new wells and increase our oil reserves which will let us generate more revenue to finance our further operations. 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. 34 Contractual Obligations and Contingencies The following table lists our significant commitments at December 31, 2005:
Payments Due By Period -------------------------------------------------------------------------- Contractual obligations Total Less than 1 1-3 years 4-5 years After 5 year years --------------- -------------- --------------- -------------- ------------ Capital Expenditure Commitment(1) $10,500,000 $6,000,000 $ 4,500,000 - - 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 $ 918,504 - $ 918,504 - - Office Lease $ 89,380 $ 82,505 $ 6,875 - - --------- --------- -------- ------------- --------- Total $18,002,084 $6,360,505 $11,641,579 - - =========== ========== =========== ============= =========
(1) Under the terms of our contract with the ROK, we are required to spend a total of at least $10.5 million dollars in exploration, development and improvements within the ADE Block, as extended during the term of the license, including $6 million in the 2006 calendar year and $4.5 million in the 2007 calendar year. Under the terms of the work program associated with the contract, we are required to drill a total of six additional new wells by July 9, 2007. If we fail to comply with the terms of the contract or the work program, 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 July 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 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 December 31, 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 35 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 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 36 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 December 31, 2005. PART II - OTHER INFORMATION Item 6. Exhibits Exhibits. The following exhibits are included as part of this report: Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 37 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 /s/ Boris Cherdabayev ------------------------ Boris Cherdabayev, Chief Executive Officer Date: April 12, 2006 /s/ Sanat Kasymov ------------------------ Sanat Kasymov, Chief Financial Officer 38