Document/Exhibit Description Pages Size
1: 10QSB 10-Qsb Ended June 30, 2005 32 149K
2: EX-31.1 CEO Certification Required Under Section 302 2± 10K
3: EX-31.2 CFO Certification Required Under Section 302 2± 10K
4: EX-32.1 CEO Certification Required Under Section 906 1 6K
5: EX-32.2 CFO Certification Required Under Section 906 1 6K
United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 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.)
20A Kazibek Bi Street, Almaty, 480100Kazakhstan
-----------------------------------------------
(Address of principal executive offices)
+7 (3272) 58-85-17/47
---------------------------------------------------
(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; 31,998,846 shares outstanding as of August 1, 2005.
Transitional small business disclosure format (check one) Yes [ ] No [X]
BMB MUNAI, INC.
FORM 10-QSB
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 and March 31, 2005 .... 3
Unaudited Consolidated Statements of Loss for the Three Months Ended
June 30, 2005 and June 30, 2004, and the period from inception
(May 6, 2003) to June 30, 2005......................................... 4
Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2005 and June 30, 2004 and the period from
inception (May 6, 2003) to June 30, 2005............................... 5
Notes to Unaudited Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation........ 19
Item 3. Controls and Procedures.......................................... 29
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................ 30
Item 2. Changes in Securities............................................ 31
Item 5. Other Information................................................ 31
Item 6. Exhibits and Reports on Form 8-K................................. 31
Signatures................................................................ 32
2
PART I - FINANCIAL INFORMATION
Item 1- Financial Statements
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BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------
Notes June 30, 2005 March 31, 2005
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,885,926 $ 9,989,632
Marketable securities 492,539 788,921
Trade accounts receivable 1,178 132,400
Inventories 3 3,876,489 3,227,411
Prepaid expenses and other assets, net 4 4,447,465 4,172,291
-------------- --------------
Total current assets 16,703,597 18,310,655
-------------- --------------
NON-CURRENT ASSETS
Oil and gas properties, full cost method, net 6 48,955,938 42,964,359
Other fixed assets, net 681,811 683,459
Intangible assets, net 66,581 14,435
Restricted cash 60,973 60,973
-------------- --------------
Total non-current assets 49,765,303 43,723,226
-------------- --------------
TOTAL ASSETS $ 66,468,900 $ 62,033,881
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,085,154 $ 5,844,639
Due to reservoir consultants 278,000 278,000
Taxes payable 325,126 333,063
Due to Astana Fund 5 - 250,000
Accrued liabilities and other payables 196,594 291,969
-------------- --------------
Total current liabilities 5,884,874 6,997,671
-------------- --------------
LONG TERM LIABILITIES
Due to reservoir consultants 222,000 222,000
Liquidation fund 60,973 60,973
Deferred income tax liabilities 343 343
-------------- --------------
Total long term liabilities 283,316 283,316
-------------- --------------
COMMITMENTS AND CONTINGENCIES 9 - -
SHAREHOLDERS' EQUITY
Share capital 7 31,999 30,514
Additional paid-in capital 7 64,544,653 58,460,520
Deficit accumulated during the development stage (4,275,942) (3,738,140)
-------------- --------------
Total shareholders' equity 60,300,710 54,752,894
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,468,900 $ 62,033,881
============== ==============
See notes to the consolidated financial statements. 3
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BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------
Period from
inception
Three months Three months (May 6, 2003)
ended ended through
June 30, 2005 June 30, 2004 June 30, 2005
-------------- -------------- --------------
REVENUES $ 662,637 $ 118,949 $ 1,636,283
EXPENSES
Production 67,740 24,322 332,889
Selling 42,462 8,436 249,391
General and administrative 1,001,238 550,950 5,843,957
Amortization and depreciation 30,438 9,125 101,647
-------------- -------------- --------------
Total expenses 1,141,878 592,833 6,527,884
-------------- -------------- --------------
LOSS FROM OPERATIONS (479,241) (473,884) (4,891,601)
OTHER INCOME (EXPENSE)
Realized gain on marketable securities 62,779 54,915 267,214
Unrealized (loss) gain on marketable securities (7,539) (303,697) (11,899)
Foreign exchange gain (loss), net (132,415) 77,654 438,055
Interest income, net 12,022 2,884 (54,186)
Other income, net 6,592 - 58,802
-------------- -------------- --------------
Total other income (expense) (58,561) (168,244) 697,986
-------------- -------------- --------------
LOSS BEFORE INCOME TAXES (537,802) (642,128) (4,193,615)
INCOME TAX EXPENSE - - (343)
-------------- -------------- --------------
LOSS BEFORE MINORITY INTEREST (537,802) (642,128) (4,193,958)
MINORITY INTEREST - 39,922 (81,984)
-------------- -------------- --------------
NET LOSS $ (537,802) $ (602,206) $ (4,275,942)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 31,750,558 20,429,422 29,349,498
-------------- -------------- --------------
LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.02) $ (0.03) $ (0.15)
============== ============== ==============
See notes to the consolidated financial statements. 4
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BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------------
Period from
inception
Three months Three months (May 6, 2003)
ended ended through
Notes June 30, 2005 June 30, 2004 June 30, 2005
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (537,802) $ (602,206) $ (4,275,942)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation, depletion and amortization 60,367 9,124 199,028
Provision for doubtful accounts - - 129,051
Minority interest in operation of subsidiary - (39,922) -
Deferred income tax expense - - 343
Unrealized loss on marketable securities 7,539 303,697 11,899
Changes in operating assets and liabilities
Decrease / (increase) in marketable securities 288,843 1,808,966 (504,438)
Decrease/ (increase) in accounts receivable 131,222 - (1,178)
Increase in inventories (649,078) (408,787) (3,876,489)
Increase in prepaid expenses (275,174) (2,314,127) (4,555,344)
(Decrease) / Increase in accounts payable and other accruals (1,112,797) 403,764 6,009,854
------------- ------------- -------------
Net cash used in operations (2,086,880) (839,491) (6,863,216)
Interest paid - - (84,007)
------------- ------------- -------------
Net cash used in operating activities (2,086,880) (839,491) (6,947,223)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties (6,004,418) (917,443) (29,669,465)
Acquisition of other fixed assets (41,281) (64,414) (842,392)
Acquisition of intangible assets (56,745) (230) (74,501)
Restricted cash - - (60,973)
Deposits - - (21,172)
------------- ------------- -------------
Net cash used in investing activities (6,102,444) (982,087) (30,668,503)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 7 5,221,685 - 42,437,719
Proceeds from short-term financing - - 500,000
Repayment of short-term financing - - (500,000)
Proceeds from issuance of convertible debt - - 2,000,000
Proceeds from exercise of common stock options 863,933 - 1,063,933
------------- ------------- -------------
Net cash provided by financing activities 6,085,618 - 45,501,652
------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,103,706) (1,821,578) 7,885,926
CASH AND CASH EQUIVALENTS
at beginning of period 9,989,632 2,126,355 -
------------- ------------- -------------
CASH AND CASH EQUIVALENTS
at end of period $ 7,885,926 $ 304,777 $ 7,885,926
============= ============= =============
Non cash transactions:
Conversion of debt into common stock $ - $ - $ 2,000,000
Accrual of liabilities to Astana Fund 5 $ - $ - $ 250,000
Acquisition of 30% of Emir Oil LLP by issuance of
3,500,000 shares of common stock 7 $ - $ - $ 19,075,000
See notes to the consolidated financial statements. 5
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 have 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 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 financial information included herein, (except the balance sheet as of
March 31, 2005, which has been derived from our Annual Report on Form 10
KSB for the year ended March 31, 2005), is unaudited. However, such
information includes all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary
for a fair statement of the results of operations for the interim periods.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for an entire year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-QSB
Report pursuant to certain rules and regulations of the Securities and
Exchange Commission. These 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.
6
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Basis of consolidation
----------------------
The Company's 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 June 30, 2005 are reflected in the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements.
Emir Oil maintains its accounting records in Kazakhstan Tenge and prepares
separate statutory financial statements in accordance with accounting
legislation in the Republic of Kazakhstan. Statutory accounting principles
and procedures in Kazakhstan differ from accounting principles generally
accepted in the United States of America. Accordingly, the accompanying
Unaudited Consolidated Financial Statements, which include Emir Oil's
statutory accounting records, reflect adjustments necessary for such
financial statements to be presented in accordance with accounting
principles generally accepted in the United States of America.
Use of estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts of assets and liabilities and the disclosures of contingent assets
and liabilities at the date of the Consolidated Financial Statements and
revenues and expenses during the reporting period. Accordingly, actual
results could differ from those estimates and affect the results reported
in these Consolidated Financial Statements.
Foreign currency translation
----------------------------
Transactions denominated in foreign currencies are reported at the rates
of exchange prevailing at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated to U.S.
dollars at the rates of exchange prevailing at the balance sheet dates.
Any gains or losses arising from a change in exchange rates subsequent to
the date of the transaction are included as an exchange gain or loss in
the Consolidated Statements of Loss.
Share-Based Compensation
------------------------
The Company accounts for options granted to non-employees at their fair
value in accordance with FAS 123, Accounting for Stock-Based Compensation.
Under FAS No. 123, stock-based compensation is determined as the fair
value of the equity instruments issued. The measurement date for these
7
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
issuances is the earlier of the date at which a commitment for performance
by the recipient to earn the equity instruments is reached or the date at
which the recipient's performance is complete. Stock options granted to
the "selling agents" in the private equity placement transactions and have
been offset to the proceeds as a cost of capital.
The Company has a stock option plan as described in Note 7. Compensation
expense for options granted to employees is determined based on their fair
values at the time of grant, the cost of which is recognized in the
Consolidated Statement of Loss over the vesting periods of the respective
options.
Risks and uncertainties
-----------------------
The ability of the Company to realize the carrying value of its assets is
dependent on being able to develop, transport and market oil and gas.
Currently exports from the Republic of Kazakhstan are primarily dependent
on transport routes either via rail, barge or pipeline, through Russian
territory. Domestic markets in the Republic of Kazakhstan might not permit
world market price to be obtained. However, management believes that over
the life of the project, transportation options will be improved by
further increases in the capacity of the transportation options.
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
June 30, 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.
8
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
As of June 30, 2005 the Company pledged cash in amount of $360,045 to
collateralize payment to an oil drilling and service company for drilling
services.
Marketable securities
---------------------
Marketable securities consist of short-term repurchase agreements for
securities issued by Kazakhstan banks and Kazakhstan financial
institutions. The Company records these marketable securities as trading
securities and any change in the fair market value is recorded in
earnings.
As of June 30, 2005 the Company pledged all marketable securities to
collateralize payment to an oil drilling and service company for drilling
services.
Trade accounts receivable and prepaid expenses
----------------------------------------------
Accounts receivable and prepaid expenses are stated at their net
realizable values after deducting provisions for uncollectable amounts.
Such provisions reflect either specific cases or estimates based on
evidence of collectability. The fair value of accounts receivable and
prepaid expense accounts approximates their carrying amounts due to their
short-term maturity.
Inventories
-----------
Inventories of equipment for development activities, tangible drilling
materials required for drilling operations, spare parts, diesel fuel, and
various materials for use in oil field operations are recorded at the
lower of cost and net realizable value. Under the full cost method,
inventory is transferred to oil and gas properties when used in
exploration, drilling and development operations in oilfields.
Inventories of crude oil are recorded at the lower of cost and net
realizable value. Cost comprises direct materials and, where applicable,
direct labour costs and overhead, which has been incurred in bringing the
inventories to their present location and condition. Cost is calculated
using the weighted average method. Net realizable value represents the
estimated selling price less all estimated costs to completion and costs
to be incurred in marketing, selling and distribution.
Oil and gas properties
----------------------
The Company follows the full cost method of accounting for its costs of
acquisition, exploration and development of oil and gas properties.
Under full cost accounting rules, the net capitalized costs of evaluated
oil and gas properties shall not exceed an amount equal to the present
value of future net cash flows from estimated production of proved oil and
gas reserves, based on current economic and operating conditions,
including the use of oil and gas prices as of the end of the period.
9
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
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.
Depreciation, depletion and amortization of producing properties is
computed using the unit-of-production method based on estimated proved
recoverable reserves.
Other fixed assets
------------------
Other fixed assets are valued at the historical cost adjusted for
impairment loss less accumulated depreciation. Historical cost includes
all direct costs associated with the acquisition of the fixed assets.
Depreciation of other fixed assets is calculated using the straight-line
method based upon the following estimated useful lives:
Buildings and improvements 7-10 years
Machinery and equipment 6-10 years
Vehicles 3-5 years
Office equipment 3-5 years
Other 2-7 years
Maintenance and repairs are charged to expenses as incurred. Renewals and
betterments are capitalized.
10
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 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 the
amount of $17,090 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.
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. The fair value of these funds
approximates their carrying amounts as amount and conditions of deposited
funds governed by the Government 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 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion 20, "Accounting Changes" and
FASB Statement 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. 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. Statement
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 and will not impact the Company's financial position or results of
operations and cash flows.
11
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. INVENTORIES
Inventories as of June 30, 2005 and March 31, 2005 were as follows:
[Enlarge/Download Table]
June 30, 2005 March 31, 2005
(unaudited)
Construction material $ 3,719,351 $ 3,103,555
Spare parts 75,543 59,706
Crude oil produced 5,084 7,735
Other 76,511 56,415
------------- -------------
$ 3,876,489 $ 3,227,411
============= =============
4. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses as of June 30, 2005 and March 31, 2005 were as follows:
June 30, 2005 March 31, 2005
(unaudited)
Advances for services $ 1,860,448 $ 589,944
Advances for material 1,276,428 2,301,074
VAT recoverable 1,310,189 1,217,751
Other 129,451 192,573
Reserves against uncollectible advances and prepayments (129,051) (129,051)
------------- -------------
$ 4,447,465 $ 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, Kazakhstan, the new capital of the Republic of Kazakhstan. On
May 27, 2005 the Company made a cash contribution of $250,000 to Astana
Fund.
12
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. OIL AND GAS PROPERTIES
Oil and gas properties as of June 30, 2005 and March 31, 2005 were as
follows:
[Enlarge/Download Table]
June 30, 2005 March 31, 2005
(unaudited)
Subsoil use right $ 20,788,119 $ 20,788,119
Cost of drilling wells 12,004,832 9,334,021
Professional services received in exploration and development activities 5,780,567 4,798,314
Material and fuel used in exploration and development activities 3,588,076 2,891,765
Infrastructure development costs 1,415,791 1,231,391
Geological and geophysical 859,790 653,571
Other capitalized costs 4,616,144 3,334,630
Accumulated depreciation, depletion and amortization (97,381) (67,452)
------------ ------------
$ 48,955,938 $ 42,964,359
============ ============
7. SHARE AND ADDITIONAL PAID IN CAPITALS
Common and preferred stock as of June 30, 2005 and March 31, 2005 are as
following:
June 30, March 31,
2005 2005
(unaudited)
Preferred stock, $0.001 par value
Authorised 20,000,000 20,000,000
Issued and outstanding - -
Common stock, $0.001 par value
Authorised 100,000,000 100,000,000
Issued and outstanding 31,998,841 30,513,761
Reverse merger
--------------
During the year ended March 31, 2004, the Company completed a reverse
merger with BMB Holding, Inc. Additionally the Company:
a) Completed a private placement for the total amount of $11,113,562.
b) Converted a $2,000,000 debt to the shareholders of BMB Holding, Inc.
into equity.
c) Issued 200,000 shares of stock upon exercise of stock option worth
$200,000.
d) Completed a 10 for 1 reverse stock split.
Acquisition
-----------
On May 24, 2004, the Company agreed to purchase the remaining 30% interest
of its minority interest partner in Emir Oil in exchange for 3,500,000
shares of restricted Company common stock. On August 6, 2004, the Company
13
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
issued the 3,500,000 shares to its minority partner in Emir Oil. The
aggregate purchase price was determined to be $19,075,000 using a price of
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 Sheet.
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.
Common stock sold in private placements as of June 31, 2005 are as
following:
[Enlarge/Download Table]
Number of Gross amount Net amount
shares sold Share price raised received
----------- ----------- ------------ ----------
First private placement 4,830,494 $ 2.15-$ 2.50 $11,113,562 $ 9,935,874
Second private placement 4,584,340 $ 4.00 18,337,360 17,311,906
Third private placement 3,101,000 $ 5.00 15,505,000 15,189,939
------------- ----------------- ------------------
12,515,834 $44,955,922 $42,437,719
============= ================= ==================
The offerings were made only to accredited investors in the United States
under Regulation D and pursuant to Regulation S to non U.S. Persons.
Share-Based Compensation
------------------------
On November 19, 2003, the Company granted options to the placement agent
for services rendered in connection with a private placement of the
Company's common stock in November 2003. The first option granted the
placement agent the right to purchase up to 200,000 common shares of the
Company at an exercise price of $1.00 per share. The placement agent
exercised this option and purchased 200,000 shares for $200,000 on
December 15, 2003. The second option grants the placement agent the right
to purchase up to 142,857 common shares of the Company at an exercise
price of $3.50 per share. This option expires on November 26, 2008.
In December 2003, the Company granted warrants to a placement agent in
connection with funds raised on the Company's behalf. These warrants grant
the placement agent the right to purchase up to 275,050 shares of the
Company's common stock at an exercise price of $2.15 and 208,000 shares of
14
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
the Company's common stock at an exercise price of $2.50 per share. In May
and June 2005 a placement agent exercised stock warrants for 275,050
shares at the exercise price of $2.15 and stock warrants for 109,030
shares at the exercise price of $2.50. The remaining warrants for 98,970
shares at the exercise price of $2.50 expired at the end of June 2005.
During July 2004, the Company granted warrants to a placement agent in
connection with funds raised on the Company's behalf. These warrants grant
the placement agents the right to purchase up to 458,434 shares of the
Company's common stock at an exercise price of $4.00 per share. The
warrants expire at the first quarter of 2006 calendar year.
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. The
warrants expire on April 11, 2006.
During the year ended March 31, 2005 the Board of Directors (the "Board")
of the Company approved an incentive stock option plan (the "plan") under
which directors, officers and key personnel may be granted options to
purchase common shares of the Company. The Company has reserved 5,000,000
common shares for issuance upon the exercise of options granted under the
terms of the plan. The Board determines the exercise price of each option,
provided that no option shall be granted with an exercise price at a
discount to market. The vesting periods established under the plan and the
term of the options are set by the Board. During the third quarter of the
year ended March 31, 2005 the Company granted stock options to its
corporate secretary for the past services rendered. These options grant
the employee the right to purchase up to 60,000 shares of the Company's
common stock at an exercise price of $4.00 per share. The options expire
in five years from the date of grant. Granted options vest immediately.
Compensation expense for options granted to a corporate secretary is
determined based on their fair values at the time of grant, the cost of
which in the amount of $81,000 is recognized in the Consolidated Statement
of Income and Consolidated Balance Sheet.
Stock options and warrants outstanding and exercisable as of June 30, 2005
are:
Weighted
Number of Average Exercise
shares price
------------ ----------------
As of March 31, 2005 1,144,341 $ 3.22
Granted 110,100 5.00
Exercised (384,080) 2.25
Expired (98,970) 2.50
------------ -----------
As of June 30, 2005 771,391 $ 4.05
============ ===========
15
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Stock options and warrants as of June 30, 2005 are:
[Enlarge/Download Table]
Options and Warrants outstanding Options and Warrants exercisable
-----------------------------------------------------------------------------------------------------------
Range of Options and Weighted Weighted Options and Weighted Average
exercise price Warrants Average Average Warrants Exercise Price
Exercise Price Contractual
Life (years)
------------------ ----------------- --------------- ---------------- ----------------- ----------------
$ 2.15 - $ 5.00 771,391 4.05 2.41 771,391 4.05
The estimated fair value of the stock options and warrants issued were
determined using Black-Scholes option pricing model with the following
assumptions:
June 30, 2005 March 31, 2005
(unaudited)
Risk-free interest rate 3.63% 3.20%
Expected option life 1 year 1 year
Expected volatility in the price of the Company's common shares 74% 76%
Expected dividends 0% 0%
Weighted average fair value of options and warrants granted
during the year $ 1.74 $ 2.22
8. RELATED PARTY TRANSACTIONS
During the three months ended June 30, 2005, the Company retained the
services of TatArka LLC. TatArka LLC was paid $2,150,562 advance payment
to obtain 3D seismic data of extended territory. TatArka LLC is a
subsidiary of a company that shares a common director with our Company.
The Company leases ground fuel tanks and other oil fuel storage facilities
and warehouses from Term Oil LLC. The lease expenses for the three months
ended June 30, 2005, totaled to $55,240. One of our shareholders is an
owner of Term Oil LLC.
During the three months ended June 30, 2005, the Company also retained the
services of several companies. Expenses for those services rendered during
the three months ended June 30, 2005, totaled to $35,769. The suppliers
which rendered services are affiliated with directors of the Company.
During the three months ended June 30, 2005, Zhanaozen Repair and
Mechanical Plant Ltd was paid $22,399 advance payment for inventory
supply. Zhanaozen Repair and Mechanical Plant Ltd is an affiliated party
with one of the shareholders of the Company.
16
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
Historical investments by the Government of the Republic of Kazakhstan
The Government of the Republic of Kazakhstan made historical investments
in the ADE Block in total amount of $ 5,994,200. When the Company applies
for and is granted commercial production rights for the ADE Block, the
Company will be required to begin repaying these historical investments to
the Government of the Republic of Kazakhstan. The terms of repayment will
be negotiated at the time the Company applies for commercial production
rights.
Capital Commitments
-------------------
Under the terms of its oil and gas contract, Emir Oil is required to spend
a total of $32 million in exploration and development activities on the
ADE Block. To retain its rights under the contract, the Company must spend
a minimum of $9.3 million in 2005, $6 million in 2006 and $4.5 million in
2007. The failure to make these minimum capital expenditures could result
in the loss of the 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. The
plaintiffs seek unspecified compensatory and exemplary damages.
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.
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.
17
BMB MUNAI, INC
(A DEVELOPMENT STAGE ENTITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS
The nature of the Company's operations exposes the Company to fluctuations
in commodity prices, foreign currency exchange rates, credit risk and
country risk. The Company recognizes these risks and manages operations in
a manner such that exposure to these risks is minimized to the extent
practical.
As of June 30, 2005 and March 31, 2005 marketable securities of $492,539
and $788,921, respectively, are held in short term repurchase agreements
for securities issued by Kazakhstan banks and Kazakhstan financial
institutions. As of June 30, 2005 and March 31, 2005 cash and cash
equivalents include deposits in Kazakhstan banks in the amount $4,156,607
and $9,090,276, respectively. As of June 30, 2005 and March 31, 2005 the
Company made advance payments to Kazakhstan companies and government
bodies in the amount $4,576,516 and $4,301,342, respectively. As of June
30, 2005 and March 31, 2005 trade accounts receivable of $1,178 and
$132,400, respectively, are with the Kazakhstan oil processing plant.
Restricted cash reflected in the long-term assets consists of $60,973
deposited in a Kazakhstan bank and restricted to meet possible
environmental obligations according to the regulations of Kazakhstan.
Furthermore, the primary asset of the Company is Emir Oil; an entity
formed under the laws of the Republic Kazakhstan.
11. SUBSEQUENT EVENTS
Subsequent to the quarter ended June 30, 2005 the Company granted 70,526
common stocks to its former Chief Executive Officer and President for the
past services rendered.
18
Item 2. Management's Discussion and Analysis or Plan of Operations
The following discussion is intended to assist you in understanding our
results of operations and our present financial condition. Our Consolidated
Financial Statements and the accompanying notes included in this Form 10-QSB
contains 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 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.
19
Overview
--------
BMB Munai, Inc., is an independent oil and natural gas company engaged
in the exploration, development, acquisition and production of crude oil and
natural gas properties in the Republic of Kazakhstan (sometimes also referred to
herein as the "ROK" or "Kazakhstan"). We hold a contract that allows us to
explore and develop approximately 460 square kilometers in western Kazakhstan.
Our contract grants us the right to explore and develop the Aksaz, Dolinnoe and
Emir oil and gas fields, referred to herein as "the ADE Block" as well as an
area adjacent to the ADE Block referred to herein as "the Extended Territory."
The ADE Block and Extended Territory are collectively referred to herein as "our
properties."
We are currently in the development stage. We generate revenue, income
and cash flow by producing and marketing oil and natural gas from our oil and
natural gas properties. We make significant capital expenditures in our
exploration and development activities that we anticipate will allow us to
increase and improve our ability to generate revenue. Our drilling strategy is
focused toward enhancing cash flows and increasing proved developed reserves by
drilling developmental wells within a proximity of existing wells, which we
believe decreases our likelihood of drilling a dry hole, while at the same time
increasing our current production and cash flow. As our cash flow and proved
developed reserves grow, we will begin drilling exploratory wells to find new
reservoirs or extend known reservoirs. We believe this strategy will result in
growth of proved developed reserves, production and financial strength.
Industry and Economic Factors
-----------------------------
We are a development stage company and have not yet generated
significant production or revenues from the development of our properties. While
we have raised capital to fund acquisitions and operations to date, we believe
we still lack sufficient capital to complete exploration and development of our
properties. We are currently using more cash in operations than we generate. We
anticipate the need for additional funding before our revenue from oil and
natural gas production will be sufficient to meet our operating needs.
In managing our business, we must deal with many factors inherent in
our industry. First and foremost is the fluctuation of oil and gas prices.
Historically, oil and gas markets have been cyclical and volatile, with future
price movements, which are difficult to predict. While our revenues are a
function of both production and prices, wide swings in commodity prices will
likely have the greatest impact on our results of operations. We have no way to
predict those prices or to control them without losing some advantage of the
upside potential. The oil and gas industry has continued to experience high
commodity prices in 2005, which has positively impacted the entire industry as
well as our Company.
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
20
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 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. In particular, our activities are
subject to stringent operational and environmental regulations. These
regulations affect our costs of planning, designing, drilling, installing and
operating oil and gas wells and related facilities. These regulations may become
more demanding in the future.
Recent Developments
-------------------
During the quarter we completed construction of Dolinnoe-3 well, which
commenced on January 26, 2005. Preliminary tests indicated the presence of five
oil bearing zones. Inside the producing intervals core sampling, hydrodynamic
and field geophysical research and formation testing were completed and oil and
gas flow was discovered. Works for more extensive testing are currently under
way. To start test production on the Dolinnoe-3 well, we constructed a flow line
from the well to the oil collection center in the Dolinnoe field and installed a
wellhead heater. Presently, we have penetrated two bearing zones in Dolinnoe-3
well. We plan to perforate and test the other productive zones.
Subsequent to construction of the Dolinnoe-3 well, we undertook
operations to reenter the Aksaz-4 well which was drilled to a depth of 4,080
meters, but abandoned during the Soviet Union period due to lack of financing.
We performed initial underground workover of Aksaz-4 well with the purpose of
examining the condition of the drilled well bore and its preparation for further
drilling. On May 13, 2005, we commenced drilling operations on the Aksaz-4 well.
While drilling, we performed geophysical, geological and technical studies and
core sampling of Triassic formations. On the basis of available geological
information including the data obtained from the 3D seismic survey, a structure
with a probability of oil bearing capacity was discovered in Paleozoic
formations. As of August 2, 2005 drilling of the well has almost been completed.
During the first quarter we also continued workover of four wells which
are currently under testing and test production. We removed geophysical
21
equipment abandoned in the Dolinnoe-1 well and penetrated to deeper productive
horizons perforating two additional oil bearing zones.
At the Dolinnoe-2 well we perforated the second, third and fourth
horizons using high-powered perforating charges. On June 14, 2005 the well was
put on test production.
In June 2005 we performed a second perforation on the Emir-1 well to
provide more penetration capability and preparations for hydraulic fracturing of
this well with acid treatment were performed.
Repair works are also under way on the Aksaz-1 well to liquidate the
drill string-casing annulus and isolate a water-bearing horizon.
Outlook
-------
During the remainder of the fiscal year, we will continue work over and
research operations on the existing five wells in the ADE Block. During the
upcoming quarter we also plan to complete construction of the Aksaz-4 well and
put it into test production.
In order to increase production rates in existing wells we plan to
employ new technological methods, including the use of specially formulated
acidic compositions for use when conducting hydraulic fracturing and treatment
on the wells of Dolinnoe and Emir fields. By utilizing acidic compositions that
are specifically adjusted to the properties of the geological structures, oil
content and downhole temperatures at each well, we anticipate improved results
from fracturing and increased oil production. During the upcoming quarters we
plan conduct hydraulic fracturing on the Emir-1 and Dolinnoe-2 wells. We plan to
undertake similar operations on Dolinnoe-1 and Dolinnoe-3 wells as well.
We also plan to explore opportunities for radial and horizontal
drilling and have retained the services of several leading scientific and
research project institutes to assist us.
During the first quarter we retained Chapman Petroleum Engineering LTD
("Chapman") to perform reserve and economic evaluations of oil and gas
properties in the Extended Territory. Chapman will perform the evaluation based
on the results of reinterpretation of 2D seismic data. Additionally in April
2005, we concluded a contract on 3D seismic field works in the Extended
Territory. Results of reserve evaluation by Chapman and the 3D seismic survey
will allow us to have sufficient information to evaluate the oil and gas
reserves of the Extended Territory, and prepare an efficient work program for
further exploration and development of the Extended Territory. We have commenced
well inspection and hydro-testing of a production string at Kariman-1 well
drilled during Soviet times in the Extended Territory to the depth of Jurassic
formations with the purpose of its probable deepening down to the oil-bearing
Triassic deposits.
22
We invested approximately $6 million in exploration and development of
our properties during the three months ended June 30, 2005. We expect to invest
an additional $4 million to $8 million in exploration and development during the
remainder of the current fiscal year. We anticipate the need to raise an
additional $40,000,000 to support exploration and development activities before
we expect income from oil production to be sufficient to meet our needs for
operating capital.
Our outlook as described above is subject to change based upon factors
that include, but are not limited to, drilling results, commodity prices, access
to capital and other factors referred to in "Forward Looking Statements."
We have and will continue to seek to increase our proven reserves
through continued exploration of our properties, as well as the acquisition of
other properties with exploration and production potential.
For us to operate profitability and grow in the future we need to
obtain additional capital either through additional fund raising or through
significantly increased production. Our revenue, profitability and future growth
depend substantially on factors beyond our control, such as economic, political
and potential regulatory and competition from other sources of energy. Oil and
natural gas prices historically have been volatile and may fluctuate widely in
the future. Sustained periods of low prices for oil or natural gas could
materially and adversely affect our financial position, results of operations,
the quantities of oil and natural gas reserves that we can economically produce,
the markets into which we can sale 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
---------------------
This section includes discussion of our results of operations for the
three-month period ended June 30, 2005 as compared to the same period of the
prior year.
Three months ended June 30, 2005, compared to the three months ended
June 30, 2004
Revenue and Production
----------------------
The following table summarizes production volumes, average sales prices
and operating revenue for our oil and natural gas operations for the three
months ended June 30, 2005 and the three months ended June 30, 2004.
23
[Enlarge/Download Table]
Three months ended
June 30, 2005
to the three months ended
June 30, 2004
-----------------------------
For the three For the three $ %
Months ended months ended Increase Increase
June 30, 2005 June 30, 2004 (Decrease) (Decrease)
------------------ -------------------- ------------ -------------
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 41,456 11,405 30,051 263
Barrels of Oil equivalent (BOE) - - - -
Average Sales Price
Natural gas ($ per Mcf) $ - $ - $ -
-
Natural gas liquids ($ per Bbl) $ - $ - $ -
-
Oil and condensate ($ per Bbl) $ 17.98 $ 13.22 $ 4.76 36
Barrels of Oil equivalent
($ per BOE) $ - $ - $ -
-
Operating Revenue:
Natural gas $ - $ - $ - -
Natural gas liquids - - - -
Oil and condensate 662,637 118,949 543,688 457
Gain on hedging and derivatives(1) - - - -
------------------ -------------------- ------------ -------------
Total $662,637 $118,949 $543,688 457
================== ==================== ============ =============
-------------------
(1) We did not engage in hedging transactions, including derivatives during
the three months ended June 30, 2005, or the three months ended June
30, 2004.
Revenues. We generate revenue under our contract from the sale of oil
and natural gas recovered during test production. During the three months ended
June 30, 2005 and 2004, 100% of our revenue was generated from the sale of crude
oil. During our first fiscal quarter 2005 we realized revenue from oil and gas
sales of $662,637 compared to $118,949 during our first fiscal quarter of 2004.
This increase in revenues is primarily the result of two facts. First, we
performed workover of re-entered wells and drilled two additional wells, both of
which led to increased production volume. Second, oil price in the domestic
market increased 36% during the three months ended June 30, 2005. We anticipate
production will continue to increase in the upcoming fiscal quarters. If
production increases and oil prices remain constant or continue to increase, we
expect revenue will continue to increase in the upcoming quarters. At the
present time, however, it is unclear the rate at which our production and
corresponding revenues may increase.
Our revenue is sensitive to changes in prices received for our
products. Our production is sold at the prevailing market price in Kazakhstan,
which fluctuates in response to many factors that are outside our control.
Imbalances in the supply and demand for oil can have a dramatic effect on the
prices we receive for our production. Political instability, the economy,
weather and other factors outside our control could impact supply and demand.
24
Costs and Operating Expenses
----------------------------
The following table presents a detail of our expenses for the three
months ended June 30, 2005 and 2004:
[Enlarge/Download Table]
For the three months ended For the three months ended
June 30, 2005 June 30, 2004
----------------------------- ---------------------------------
Expenses:
Oil and gas operating(1) $ 37,811 $ 24,322
Selling 42,462 8,436
Depreciation, depletion and
amortization 60,367 9,125
General and administrative 1,001,238 550,950
Total $1,141,878 $ 592,833
============================= =================================
Expenses ($ per BOE):
Oil and gas operating(1) 1.03 2.70
Depreciation, depletion and
amortization(2) 0.81 -
-------------------
(1) Includes lease operating costs and production and ad valorem taxes.
(2) Represents depreciation, depletion and amortization of oil and gas
properties only.
Production Expenses. During the three months ended June 30, 2005, we
incurred $67,740 in production expenses compared to $24,322 during the three
months ended June 30, 2004. A significant portion of the increase in production
expenses is attributable to accrual of depletion. During the first quarter we
accrued $29,929 depletion expenses of oil and gas properties. Additionally
production cost increased as a result of hiring more production and maintenance
personal and repair overhead. We expect production expenses to continue to
increase in the upcoming fiscal quarters. At the present time, however, it is
unclear the rate at which our production expenses may increase in upcoming
fiscal quarters.
Selling Expenses. We incurred selling expenses of $42,462 during the
three months ended June 30, 2005 compared to $8,436 during the three months
ended June 30, 2004. The increase in selling expenses is nearly proportional to
the increase in revenue during the comparable quarters as we incurred. We
transport oil produced in oilfields to railway terminals in oil tankers which
are under operational lease. Consequently we use more gasoline and incur more
overhead. We expect selling expenses to continue to increase in the upcoming
fiscal quarters as revenue continues to increase. At the present time, however,
it is unclear the rate at which our production expenses may increase in the
upcoming fiscal year.
General and Administrative Expenses. General and administrative
expenses during the three months ended June 30, 2005 were $1,001,238 compared to
$550,950 during the three months ended June 30, 2004. This represents a 82%
25
increase in general and administrative expenses. This significant increase is
attributable to a 140% increase in payroll and other compensation, a 139%
increase in rent expenses, a 89% increase in professional services fees, a 22%
increase in taxes, a 52% increase in transportation, a 1,314% increase in
insurance expense, a 19% increase in communication expenses and a 80% increase
in other expenses. The significant increase in general and administrative
expenses is largely the result of hiring more personnel to operate our business,
using services of technicians, engineers, accountants and lawyers, as well as
incurring other general corporate expenses. We anticipate general and
administrative expenses will increase in the upcoming fiscal quarters. However,
we do not expect general and administrative expenses to increase at such a
significant rate in the upcoming quarters. We anticipate increases in revenue,
operating costs and selling costs will outpace the increase in general and
administrative expenses in the upcoming quarters.
In April 2005 we elected to relocate our U.S. offices to Salt Lake
City. Consequently we plan to sublease our office space in New York City to
another company. We also reduced the number of employees we have in our U.S.
office. We believe these measures will reduce our rent, taxes and other relevant
expenses in the upcoming fiscal quarters.
Loss from Operations. During the three months ended June 30, 2005 we
realized a loss from operations of $479,241 compared to a net loss from
operations of $473,884 during the three months ended June 30, 2004. We realized
a 457% increase in revenue during the three months ended June 30, 2005 compared
to the comparable period 2004. This increase was offset by a 179% increase in
production cost and an 82% increase in general and administrative expenses,
which resulted in a 1% increase in loss from operations during the quarter ended
June 30, 2005 compared to the quarter ended June 30, 2004. Until such time as
revenue from oil and gas sales exceeds expenses we will continue to generate
operating losses. At this time, it is unclear when we will generate sufficient
oil and gas to offset our expenses.
Other Expense. During the three months ended June 30, 2005 we realized
total other expense of $58,561 compared to total other expense $168,224 for the
three months ended June 30, 2004. This decrease in other expense is largely
attributable to $7,864 increase in realized gains on marketable securities, a
$296,158 increase in unrealized gain on marketable securities and our realizing
interest income of $9,138, partially offset by a $210,069 decrease in exchange
gain resulting from fluctuations of foreign currency rates against the U.S.
Dollar. Also during the three months ended June 30, 2005 we received
approximately $5.2 million for securities sold during a private placement
transaction completed on March 31, 2005. Therefore, at times during the quarter,
we had funds that were not being used in operations that we invested in
marketable securities. We anticipate the funds held in marketable securities
will be used to fund our operations and therefore expect gains from marketable
securities, both realized and unrealized, to decrease in upcoming quarters.
Net Loss. During the three months ended June 30, 2005 we realized a net
loss of $537,802 compared to a net loss of $602,206 for the three months ended
26
June 30, 2004. This reduction in net loss is largely attributable to the
significant increase in revenue resulting from increased oil and gas production
during the quarter ended June 30, 2005. While our production and revenues are
increasing, we will continue to realize net losses from operations until such
time as revenues generated from oil and gas production and sales and other
income offset our expenses. At this time, it is unclear when, or if, that may
occur.
Liquidity and Capital Resources
-------------------------------
Funding for our activities has historically been provided by funds
raised through the sale of our common stock. From inception on May 6, 2003
through June 30, 2005, we have raised $44,437,719 through the sale of our common
stock and proceeds from the issuance of convertible debt. As of June 30, 2005,
we had cash and cash equivalents of $7,885,926. We anticipate our capital
resources in the upcoming quarters will likewise consist primarily of funds
raised in financing activities and revenue from the sale of oil and gas
recovered during test production.
Our need for capital, in addition to funding our ongoing operations, is
primarily related to the exploration and development of our properties as
required under our contract, and the potential acquisition of additional oil and
gas properties. For the period from inception on May 6, 2003 through June 30,
2005, we have incurred capital expenditures of $48,955,938 for exploration,
development and acquisition activities.
Cash Flows
----------
During the three months ended June 30, 2005 cash was primarily used to
fund exploration and development expenditures. We had a net decrease in cash and
cash equivalents of $2,103,706 during the quarter. See below for additional
discussion and analysis of cash flow.
[Enlarge/Download Table]
Three months ended Three months ended
June 30, 2005 June 30, 2004
------------------- ---------------------
Net cash used in operating activities $(2,086,880) $ (839,491)
Net cash used in investing activities (6,102,444) (982,087)
Net cash provided by financing activities 6,085,618 -
------------------- ---------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $(2,103,706) $(1,821,578)
=================== =====================
Our primary source of cash has been cash proceeds from equity
offerings. During the three months ended June 30, 2005 we received cash proceeds
of $5,221,685 from the subscriptions received during our private placement that
concluded on March 31, 2005. We primarily used this cash to fund our capital
expenditures. At June 30, 2005 we had cash on hand of $7,885,926.
27
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the fiscal 2005 year
are $10 million to $14 million for exploration, development, production and
acquisitions. We expect to fund these expenditures primarily from additional
capital we will seek and cash on hand. In the event we are not successful in
raising the anticipated funds from the sale of our securities, we nevertheless
believe capital expenditures of approximately $10 million to $14 million could
be financed through cash on hand, the sale of marketable securities and revenues
from anticipated oil production. The minimum level of capital expenditures on
our properties is dictated by the contract. The amount of funds we devote to any
particular activity in excess of the minimum required capital expenditures may
increase or decrease significantly depending on available opportunities, cash
flows and development results, among others.
If we are not successful in obtaining funding, we anticipate that we
will instead seek to develop existing wells and infrastructure in hopes of
generating sufficient revenue to finance our operations. This development would
be funded by cash and cash equivalents and the sale of marketable securities we
currently hold. If the funding is limited to these sources, our anticipated
development activities would be significantly more limited than anticipated
under our present business plan.
We hold marketable securities consisting of short-term repurchase
agreements for securities issued by Kazakhstan banks and Kazakhstan financial
institutions. Additionally, certain operating cash flows are denominated in
local currency and are translated into U.S. dollars at the exchange rate in
effect at the time of the transaction. Because of the potential for civil
unrest, war and asset expropriation, some or all of these matters, which impact
operating cash flow, may affect our ability to meet our short-term cash needs.
Contractual Obligations and Contingencies
-----------------------------------------
The following table lists our significant commitments at June 30, 2005
as listed on our consolidated balance sheet:
[Enlarge/Download Table]
Payments Due By Period
--------------------------------------------------------------------------
Contractual obligations Total Less than 1 1-3 years 4-5 years After 5
year years
--------------- -------------- --------------- -------------- ------------
Capital Expenditure $19,800,000 $9,300,000 $10,500,000 - -
Commitment(1)
Due to the Government of
the Republic of Kazakhstan(2)(3) $ 5,994,200 - $ 5,994,200 - -
Due to Reservoir Consultants $ 500,000 $ 278,000 $ 222,000 - -
Liquidation Fund $ 100,973 - - - $100,973
Office Lease $ 165,010 $ 82,505 $ 82,505 - -
----------------------
(1) Under the terms of our contract with the ROK, we are required to spend
a total of at least $19.8 million dollars in exploration, development
and improvements within the ADE Block, as extended during the term of
the license, including $9.3 million in the 2005 calendar year, $6
million in the 2006 calendar year and $4.5 million in the 2007 calendar
year. If we fail to do so, we may be subject to the loss of our
exploration license.
28
(2) In connection with our acquisition of the oil and gas contract covering
the ADE Block, we are required to repay the ROK for historical costs
incurred by it in undertaking geological and geophysical studies and
infrastructure improvements. The repayment terms of this obligation
will not be determined until such time as we apply for and are granted
commercial production rights by the ROK. Under our contract, if we wish
to commence commercial production, we must apply for such right prior
to the expiration of our exploration and development rights in June
2007. We are legally entitled to receive commercial production rights
and have the exclusive right to negotiate such with the ROK, and the
ROK is required to conduct the negotiations under the Law of Petroleum
in Kazakhstan. Although we can apply for commercial production rights
at any time, we enjoy certain benefits under our contract that
currently make it more economically advantageous for us to continue
exploration and development activities at this time. We anticipate that
we will apply for commercial production rights sometime during the
first half of the 2007 calendar year. Should we decide not to pursue a
commercial production contract, we can relinquish the ADE Block to the
ROK in satisfaction of this obligation.
(3) As with the ADE Block, we will also be required to repay the ROK its
historical costs for access to and use of geological and geophysical
data 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 June 30, 2005, we had no off-balance sheet financing
arrangements.
Recently Issued Accounting Pronouncements
-----------------------------------------
In May 2005, the FASB issued Statement 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion 20, "Accounting Changes" and
FASB Statement 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. Opinion 20 previously required
that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing to
the new accounting principle. This statement requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless it is impracticable to determine either the period specific effects or
the cumulative effect of the change. This statement is effective for accounting
changes and corrections of errors made in fiscal periods that begin after
December 15, 2005 and will not impact the our financial position or 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.
29
The Certifying Officers have also indicated that there were no
significant changes in our internal controls over financial reporting or other
factors that could significantly affect such controls subsequent to the date of
their evaluation, and there were no significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In December 2003, a complaint was filed in the 15th Judicial Court in
and for Palm Beach County, Florida, naming, among others, us, Georges Benarroch
and Alexandre Agaian, current or former BMB directors, as defendants. The
plaintiffs, Brian Savage, Thomas Sinclair and Sokol Holdings, Inc., allege
claims of breach of contract, unjust enrichment, breach of fiduciary duty,
conversion and violation of a Florida trade secret statute in connection with a
business plan for the development Aksaz, Dolinnoe and Emir oil and gas fields
owned by Emir Oil, LLC. The plaintiffs seek unspecified compensatory and
exemplary damages.
We will vigorously defend ourselves in this action and challenge the
merit of each claim alleged by plaintiffs. We have retained the law firm of
Gunster, Yoakley & Stewart, P.A., located in Fort Lauderdale, Florida to
represent the defendants in connection with this litigation. We have filed
motions to dismiss the plaintiffs' complaint on jurisdictional grounds. The
motions were scheduled for hearing in late August 2004, however, that hearing
has been stayed by stipulation of the parties to allow the parties to conduct
jurisdictional discovery. The hearing has not yet been rescheduled by the
parties. No discovery on the merits of the claims has begun and no trial date
has been set by the court.
Based on the same set of facts alleged in the Florida case, in April
2005, Sokol Holdings, Inc., also filed a complaint in United States District
Court, Southern District of New York alleging that the Company, Boris
Cherdabayev, Alexandre Agaian, Bakhytbek Baiseitov, Mirgali Kunayev and Georges
Benarroch, wrongfully induced Toleush Tolmakov to breach a contract under which
Tolmakov had agreed to sell to Sokol 70% of his 90% interest in Emir Oil LLP. In
the complaint, Sokol 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 and such other relief as the court finds
just and reasonable.
We have retained the law firm of Bracewell & Giuliani located in New
York, New York to represent us in the lawsuit. We intend to answer the complaint
and to vigorously defend ourselves on jurisdictional grounds and on the merits.
30
The plaintiff has not named Tolmakov as a defendant in the action nor has the
plaintiff ever brought claims against Tolmakov to establish the existence or
breach of any legally binding agreement between the plaintiff and Tolmakov. A
scheduling conference has been set for August 12, 2005.
In the opinion of management, the resolution of this lawsuit will not
have a material adverse effect on our financial condition, results of operations
or cash flows.
Other than the foregoing, to the knowledge of management, there is no
other material litigation or governmental agency proceeding pending or
threatened against the Company or our management.
Item 2. Changes in Securities
In May and June 2005, Credifinance exercised warrants granted in
December 2003 to purchase 275,050 common shares for $2.15 per share and 109,030
common shares for $2.50 per share, for an aggregate purchase price of $863,933.
The shares were issued without registration pursuant to Regulation S of the
rules and regulations promulgated by the Securities and Exchange Commission
under the Securities Act of 1933. There was no underwriter involved in these
transactions.
Item 5. Other Information
On July 13, 2005, Mr. Alexandre Agaian tendered his resignation as a
director, co-chief executive officer and president of the Company. Mr. Agaian's
resignation was not the result of any disagreement with the Company on any
matter relating to our operations, policies or procedures. We recently concluded
negotiation of a separation agreement with Mr. Agaian, under which he will
receive six monthly payments of $19,476 commencing on July 15, 2005, and 70,526
shares of restricted Company common stock.
Mr. Boris Cherdabayev has been appointed by our board of directors to
serve as chief executive officer and president of the Company to fill the
vacancies created by Mr. Agaian's resignation.
Item 6. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K.
None.
31
(b) Exhibits. The following exhibits are included as part of this
report:
Exhibit 31.1 Certification of Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Principal Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Principal Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
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: August 9, 2005 /s/ Boris Cherdabayev
--------------------------------------------
Boris Cherdabayev, Chief Executive Officer,
President and Director
Date: August 9, 2005 /s/ Anuar Kulmagambetov
--------------------------------------------
Anuar Kulmagambetov, Chief Financial Officer
32
Dates Referenced Herein and Documents Incorporated by Reference
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