UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended
June 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to _________
Commission File Number 000-28638
BMB MUNAI, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 30-0233726
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
202 Dostyk Ave, 4th Floor
Almaty, Kazakhstan 050051
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
+7 (3272) 375-125
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for any 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 [ ]
Indicate by check mark whether the registrant is a large accelerated filed, an
accelerated filer, or non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act: (Check
one):
Large accelerated Filer [ ] Accelerated Filer [X] Non-accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
At August 2, 2006, the registrant had 43,740,657 shares of Common Stock, par
value $0.001, issued and outstanding.
BMB MUNAI, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2006 and
March 31, 2006 ...................................................... 3
Consolidated Statements of Loss for the Three Months Ended
June 30, 2006 and 2005............................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2006 and 2005......................................... 5
Notes to Consolidated Financial Statements........................... 6
Item 2. Managements' Discussion and Analysis of Financial Condition
and Results of Operations....................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....29
Item 4. Controls and Procedures........................................30
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings..............................................31
Item 1A. Risk Factors...................................................32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....32
Item 4. Submission of Matters to a Vote of Security Holders............33
Item 5. Other Information..............................................34
Item 6. Exhibits.......................................................34
Signatures...............................................................34
2
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Consolidated Financial Statements
BMB MUNAI, INC.
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------
Notes June 30, 2006 March 31, 2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3 $ 14,040,451 $ 18,046,123
Marketable securities 4 33,456,728 33,095,609
Trade accounts receivable 603,511 1,675,202
Inventories 5 4,748,779 3,239,947
Prepaid expenses and other assets, net 6 7,060,199 2,615,417
----------------------- -----------------------
Total current assets 59,909,668 58,672,298
----------------------- -----------------------
LONG TERM ASSETS
Oil and gas properties, full cost method, net 7 72,872,721 66,683,297
Other fixed assets, net 8 1,171,736 1,020,951
Intangible assets, net 43,334 49,656
Restricted cash 156,454 156,454
----------------------- -----------------------
Total long term assets 74,244,245 67,910,358
----------------------- -----------------------
TOTAL ASSETS $134,153,913 $126,582,656
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,271,951 $ 3,629,338
Due to reservoir consultants - 500,000
Taxes payable 112,590 145,406
Accrued liabilities and other payables 142,999 349,231
----------------------- -----------------------
Total current liabilities 5,527,540 4,623,975
----------------------- -----------------------
LONG TERM LIABILITIES
Liquidation fund 964,197 924,592
Deferred income tax liabilities 6,405,285 6,405,285
----------------------- -----------------------
Total long term liabilities 7,369,482 7,329,877
----------------------- -----------------------
COMMITMENTS AND CONTINGENCIES 12 - -
SHAREHOLDERS' EQUITY
Share capital 9 43,691 42,224
Additional paid in capital 9 133,598,388 123,831,007
Accumulated deficit (12,385,188) (9,244,427)
----------------------- -----------------------
Total shareholders' equity 121,256,891 114,628,804
----------------------- -----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $134,153,913 $126,582,656
======================= =======================
See notes to the consolidated financial statements.
3
BMB MUNAI, INC.
CONSOLIDATED STATEMENTS OF LOSS
- ------------------------------------------------------------------------------------------------------------------------
Three months ended Three months ended
Notes June 30, 2006 June 30, 2005
REVENUES 10 $ 2,345,972 $ 662,637
EXPENSES
Oil and gas operating 414,875 80,273
General and administrative 5,367,696 1,001,238
Depletion 240,491 189,778
Amortization and depreciation 35,145 30,438
Accretion expenses 39,605 -
---------------------- -----------------------
Total expenses 6,097,812 1,301,727
---------------------- -----------------------
LOSS FROM OPERATIONS (3,751,840) (639,090)
OTHER INCOME (EXPENSE)
Realized gain on marketable securities 247,285 62,779
Unrealized gain / (loss) on marketable securities 112,666 (7,539)
Foreign exchange gain / (loss), net 158,644 (132,415)
Interest income, net 155,284 12,022
Other (expense) / income, net (62,800) 6,592
---------------------- -----------------------
Total other income / (expense) 611,079 (58,561)
---------------------- -----------------------
LOSS BEFORE INCOME TAXES (3,140,761) (697,651)
INCOME TAX EXPENSE - -
---------------------- -----------------------
NET LOSS $ (3,140,761) $ (697,651)
====================== =======================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 37,626,620 31,750,558
LOSS PER COMMON SHARE (BASIC AND DILUTED) $ (0.08) $ (0.02)
See notes to the consolidated financial statements.
4
BMB MUNAI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------
Three months Three months
ended June 30, ended June 30,
Notes 2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,140,761) $ (697,651)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depletion 7 240,491 189,778
Depreciation and amortization 35,145 30,438
Accretion expenses 39,605 -
Stock based compensation expense 9 4,010,346 -
Unrealized (gain)/loss on marketable securities (112,666) 7,539
Changes in operating assets and liabilities
(Increase)/decrease in marketable securities (248,453) 288,843
Decrease in trade accounts receivable 1,071,691 131,222
Increase in inventories (1,508,832) (649,078)
Increase in prepaid expenses and other assets (4,444,782) (275,174)
Increase/(decrease) in liabilities 903,566 (1,112,797)
---------------- ------------------
Net cash used in operating activities (3,154,650) (2,086,880)
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of oil and gas properties 7 (6,392,577) (6,004,418)
Acquisition of other fixed assets 8 (216,947) (41,281)
Acquisition of intangible assets - (56,745)
---------------- ------------------
Net cash used in investing activities (6,609,524) (6,102,444)
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - 5,221,685
Proceeds from exercise of common stock options and warrants 9 5,758,502 863,933
---------------- ------------------
Net cash provided by financing activities 5,758,502 6,085,618
---------------- ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,005,672) (2,103,706)
CASH AND CASH EQUIVALENTS at beginning of quarter 18,046,123 9,989,632
---------------- ------------------
CASH AND CASH EQUIVALENTS at end of quarter $ 14,040,451 $ 7,885,926
================ ==================
See notes to the consolidated financial statements.
5
BMB MUNAI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
BMB Munai, Inc. (the "Company" or "BMB Munai") 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, Republic of Kazakhstan.
From inception (May 6, 2003) through January 1, 2006 the Company had
minimal operations and was considered to be in the development stage. From
January 1, 2006 the Company started to generate significant revenues and
is no longer 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, 2006, which is derived from
the Company's audited consolidated financial statements for the year ended
March 31, 2006. 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 accounting principles
generally accepted in the United States have been condensed or omitted in
this Form 10-Q 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, 2006 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, 2006.
6
Basis of consolidation
The Company's consolidated financial statements present the consolidated
results of BMB Munai, Inc., and its wholly owned subsidiary, Emir Oil LLP
(hereinafter collectively referred to as the "Company"). All significant
inter-company balances and transactions have been eliminated from the
Consolidated Financial Statements.
All transactions of Emir Oil LLP from the date of its acquisition by BMB
(June 7, 2003) through June 30, 2006 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 US
GAAP 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 year.
Accordingly, actual results could differ from those estimates and affect
the results reported in these Consolidated Financial Statements.
Licences and contracts
Emir Oil LLP is the operator of the Aksaz, Dolinnoe and Emir oil and gas
fields in western Kazakhstan (the "ADE Block", the "ADE Fields"). The
Government of the Republic of Kazakhstan (the "Government") initially
issued the license to Zhanaozen Repair and Mechanical Plant on April 30,
1999. On September 23, 2002, the license was assigned to Emir Oil LLP. On
June 9, 2000, the contract for exploration of the Aksaz, Dolinnoe and Emir
oil and gas fields was entered into between the Agency of the Republic of
Kazakhstan on Investments and the Zhanaozen Repair and Mechanical Plant.
On September 23, 2002, the contract was assigned to Emir Oil LLP. On
September 10, 2004 the Government extended the term of the Contract for
exploration and License from five years to seven years through July 9,
2007. On December 7, 2004 the Government assigned to Emir Oil LLP
exclusive right to explore the additional territory during the remaining
term of the License. To move from the exploration and development stage to
the commercial production stage, the Company must apply for and be granted
a commercial production contract. The Company is legally entitled to
receive this commercial production contract and has an exclusive right to
negotiate this Contract and the Government is obligated to conduct these
negotiations under the Law of Petroleum in Kazakhstan. If the Company does
not move from the exploration and development stage to the commercial
production stage, it has the right to produce and sell oil, including
export oil, under the Law of Petroleum for the term of its existing
contract, which may be extended for an additional two-year term.
7
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 SFAS No. 123, Accounting for Stock-Based
Compensation. Under SFAS 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 Loss.
The Company has a stock option plan as described in Note 9. Compensation
expense for options and stocks granted to employees is determined based on
their fair values at the time of grant, the cost of which is recognized in
the Consolidated Statements of Loss over the vesting periods of the
respective options.
Risks and uncertainties
The ability of the Company to realize the carrying value of its assets is
dependent on being able to develop, transport and market oil and gas.
Currently exports from the Republic of Kazakhstan are primarily dependent
on transport routes either via rail, barge or pipeline, through Russian
territory. Domestic markets in the Republic of Kazakhstan historically and
currently do not permit world market price to be obtained. However,
management believes that over the life of the project, transportation
options will be improved by further increases in the capacity of the
transportation options.
Recognition of revenue and cost
Revenue and associated costs from the sale of oil are charged to the
period when goods were shipped or when ownership title transferred.
Produced but unsold products are recorded as inventory until sold.
8
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 represent debt and equity securities
held-for-trading that are acquired principally for the purpose of
generating a profit from short-term fluctuations in price. Trading
securities are initially recorded at cost, which approximates fair value
of the consideration given, and subsequently measured at fair value. The
Company uses quoted market prices to determine fair value for the
Company's marketable securities. When reliable market prices are not
available fair value is determined by reference to price quotations for
similar instruments traded in different markets or management's estimates
of the amounts that can be realized from an orderly disposition over a
period of time, assuming current market conditions. Fair value adjustment
on trading securities is recognized in profit and loss for the period.
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.
9
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.
The Company periodically assesses its inventories for obsolete or slow
moving stock and records an appropriate provision, if there is any.
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.
Depletion of producing properties is computed using the unit-of-production
method based on estimated proved reserves.
Liquidation fund
Liquidation fund (site restoration and abandonment liability) is related
primarily to the conservation and liquidation of the Company's wells and
similar activities related to its oil and gas properties, including site
restoration. Management assessed an obligation related to these costs with
sufficient certainty based on internally generated engineering estimates,
current statutory requirements and industry practices. The Company
recognized the estimated fair value of this liability. These estimated
costs were recorded as an increase in the cost of oil and gas assets with
a corresponding increase in the liquidation fund. The oil and gas assets
related to liquidation fund are depreciated on the unit-of-production
basis separately for each field. An accretion expense, resulting from the
changes in the liability due to passage of time by applying an interest
method of allocation to the amount of the liability, is recorded as
accretion expenses in the Consolidated Statement of Loss.
10
The adequacies of the liquidation fund are periodically reviewed in the
light of current laws and regulations, and adjustments made as necessary.
Other fixed assets
Other fixed assets are valued at 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 sum
of expected undiscounted cash flows is less than net book value,
unamortized costs of other fixed assets will be reduced to a fair value.
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.
3. CASH AND CASH EQUIVALENTS
As of June 30, 2006 and March 31, 2006 cash and cash equivalents included:
June 30, 2006 March 31, 2006
US Dollars $ 13,811,057 $ 17,863,455
Foreign currency 229,394 182,668
--------------- ---------------
$ 14,040,451 $ 18,046,123
=============== ===============
11
4. MARKETABLE SECURITIES
Marketable securities as of June 30, 2006 and March 31, 2006 were as
follows:
June 30, 2006 March 31, 2006
General Electric Corporation corporate commercial papers $ 22,297,166 $ 22,064,587
Rabobank USA corporate commercial papers 11,159,562 -
Fannie Mae discount notes - 11,031,022
--------------- ---------------
$ 33,456,728 $ 33,095,609
=============== ===============
5. INVENTORIES
Inventories as of June 30, 2006 and March 31, 2006 were as follows:
June 30, 2006 March 31, 2006
Construction material $4,324,289 $ 3,069,144
Spare parts 32,889 13,486
Crude oil produced 12,745 8,840
Other 378,856 148,477
--------------- ---------------
$4,748,779 $ 3,239,947
=============== ===============
6. PREPAID EXPENSES AND OTHER ASSETS, NET
Prepaid expenses and other assets, net, as of June 30, 2006 and March 31,
2006 were as follows:
June 30, 2006 March 31, 2006
Advances for material $3,097,664 $ 712,526
Advances for services 2,069,746 452,839
VAT recoverable 1,891,075 1,335,971
Other 213,189 309,533
Reserves against uncollectible advances and prepayments (211,475) (195,452)
--------------- ---------------
$7,060,199 $2,615,417
=============== ===============
12
7. OIL AND GAS PROPERTIES, FULL COST METHOD, NET
Oil and gas properties, full cost method, net, as of June 30, 2006 and
March 31, 2006 were as follows:
June 30, 2006 March 31, 2006
Subsoil use rights $20,788,119 $20,788,119
Cost of drilling wells 18,258,509 14,895,604
Professional services received in exploration and
development activities 11,106,862 10,600,327
Material and fuel used in exploration and development
activities 7,582,912 6,840,976
Geological and geophysical 1,710,975 1,432,418
Infrastructure development costs 1,425,334 1,412,999
Other capitalized costs 13,637,142 12,109,495
Accumulated depletion (1,637,132) (1,396,641)
--------------- ---------------
$72,872,721 $66,683,297
=============== ===============
8. OTHER FIXED ASSETS, NET
Machinery Office
Construction and equipment Vehicles equipment Other Total
Cost
at March 31, 2006 $ 149,272 $ 372,427 $ 432,121 $ 206,890 $ 148,645 $ 1,309,355
Additions 4,123 27,612 127,311 34,087 23,814 216,947
Disposals - - - - - -
------------------------------ -------------- ---------------------------------------------
at June 30, 2006 153,395 400,039 559,432 240,977 172,459 1,526,302
------------------------------ -------------- ---------------------------------------------
Accumulated depreciation
at March 31, 2006 24,922 26,187 152,719 51,650 32,926 288,404
Charge for the period 5,010 5,695 32,242 18,298 4,917 66,162
Disposals - - - - - -
------------------------------ -------------- ---------------------------------------------
at June 30, 2006 29,932 31,882 184,961 69,948 37,843 354,566
------------------------------ -------------- ---------------------------------------------
Net book value at
March 31, 2006 $ 124,350 $ 346,240 $ 279,402 $ 155,240 $ 115,719 $ 1,020,951
============================== ============== =============================================
Net book value at
June 30, 2006 $ 123,463 $ 368,157 $ 374,471 $ 171,029 $ 134,616 $ 1,171,736
============================== ============== =============================================
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
$37,337 was capitalized to oil and gas properties for the quarter ended
June 30, 2006.
13
9. SHARE AND ADDITIONAL PAID IN CAPITAL
Common and preferred stock as of June 30, 2006 and March 31, 2006 were as
follows:
June 30, 2006 March 31, 2006
------------- --------------
Preferred stock, $0.001 par value
Authorized 20,000,000 20,000,000
Issued and outstanding - -
Common stock, $0.001 par value
Authorized 500,000,000 100,000,000
Issued and outstanding 43,740,657 42,223,685
On June 21, 2006 the Company filed Certificate of Amendment to BMB Munai,
Inc. Articles of Incorporation with the Nevada Secretary of State to
increase the Company's authorized common stock from 100,000,000 to
500,000,000 shares. Authorized preferred stock remained unchanged.
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
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 June 20, 2006 the Company granted common stock to officers and
directors and certain employees and consultants of the Company under the
Plan. The total number of restricted common shares granted was 495,000.
The restricted stock grants were valued at $7.00 per share. All of the
restricted stock grants vested immediately upon grant. Compensation
expense in the amount of $3,465,000 was recognized in the Consolidated
Statements of Loss and Consolidated Balance Sheet.
Stock Options
On June 20, 2006 the Company granted stock options to directors of the
Company under the Plan. The total number of options was 200,000. The
options are exercisable at a price of $7.00 per share. The options will
expire three years from the grant date. All of the options vested
immediately upon grant. Compensation expense for options granted is
determined based on their fair values at the time of grant, the cost of
which in the amount of $545,346 was recognized in the Consolidated
Statements of Loss and Consolidated Balance Sheet.
On November 12, 2004 the Company granted stock options to its former
corporate secretary for 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 vested
immediately and expire five years from the date of grant. In April 2006,
options to acquire 7,200 common shares were exercised.
14
Stock options outstanding and exercisable as of June 30, 2006 were as
follows:
Weighted Average
Number of Shares Exercise Price
----------------- -------------------
As of March 31, 2006 980,783 $ 4.97
Granted 200,000 7.00
Exercised (7,200) 4.00
Expired - -
----------------- -------------------
As of June 30, 2006 1,173,583 $ 5.33
================= ===================
Additional information regarding outstanding options as of June 30, 2006
was as follows:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------------------
Weighted
Weighted Average
Range of Average Contractual Weighted Average
Exercise Price Options Exercise Price Life (years) Options Exercise Price
------------------ ----------------- --------------- ---------------------------------- ------------------
$ 4.00 - $ 7.40 1,173,583 $5.33 4.15 1,173,583 $5.33
The estimated fair value of the stock options issued were determined using
Black-Scholes option pricing model with the following assumptions:
Three months Year ended
ended June 30, 2006 March 31, 2006
Risk-free interest rate 5.23% 4.01% - 4.51%
Expected option life 2 years 2 - 4 years
Expected volatility in the price of the Company's common shares 65% 65% - 74%
Expected dividends 0% 0%
Weighted average fair value of options and warrants granted
during the period $2.73 $2.01 - $3.92
Warrants
On April 12, 2005, the Company granted warrants to placement agents in
connection with funds raised on the Company's behalf. These warrants
granted 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. These
warrants have been offset to the proceeds as a cost of capital. In October
2005, warrants to purchase 60,000 shares were exercised. In April 2006,
the remaining warrants to purchase 50,100 shares were exercised.
15
On December 31, 2005, the Company granted warrants to placement agents in
connection with funds raised on the Company's behalf. These warrants
granted 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. On May 13,
2006 these warrants were exercised.
Warrants outstanding and exercisable as of June 30, 2006 were as follows:
Weighted Average
Number of Shares Exercise Price
----------------- ---------------
As of March 31, 2006 1,109,624 $ 5.63
Granted - -
Exercised (966,767) 5.95
Expired - -
----------------- ---------------
As of June 30, 2006 142,857 $ 3.50
================= ===============
Additional information regarding warrants outstanding as of June 30, 2006
was as follows:
Warrants Outstanding Warrants Exercisable
------------------------------------------------------------------------------------------------------------
Weighted
Weighted Average
Range of Average Contractual Weighted Average
Exercise Price Warrants Exercise Price Life (years) Warrants Exercise Price
------------------ ----------------- --------------- ----------------- --------------- ------------------
$ 3.50 142,857 $3.50 5.01 142,857 $3.50
10. REVENUES
Three months Three months
ended June 30, 2006 ended June 30, 2006
Export sales $ 2,345,972 $ -
Domestic sales - 662,637
------------------- -------------------
$ 2,345,972 $ 662,637
=================== ===================
11. 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 June 30, 2006 and 2005, totaled to $60,514 and $55,240,
respectively. One of our major shareholders is an owner of Term Oil LLC.
16
During the quarters ended June 30, 2006 and 2005, the Company also
retained the services of several companies. Expenses for those services
totaled to $10,426 and $35,769, respectively. The suppliers that rendered
these services are affiliated with one of the major shareholders of the
Company.
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, at the time, shared a major shareholder with
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 major shareholders of the Company.
12. 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 in relation to ADE Block
and $5,350,680 in relation to the Extended Territory. When the Company
applies for and is granted commercial production rights for the ADE Block
and Extended Territory, 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 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. The Company 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
17
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.
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 management.
13. FINANCIAL INSTRUMENTS
As of June 30, 2006 and March 31, 2006 marketable securities of
$33,456,728 and $33,095,609, respectively, are presented by discount bonds
issued by General Electric Corporation and Rabobank USA and discount notes
issued by Fannie Mae.
As of June 30, 2006 and March 31, 2006 cash and cash equivalents include
deposits in Kazakhstan banks in the amount $1,665,031 and $3,881,255,
respectively. As of June 30, 2006 and March 31, 2006 the Company made
advance payments to Kazakhstan companies and government bodies in the
amount $6,854,815 and $2,473,985, respectively. As of June 30, 2006 and
March 31, 2006 trade accounts receivable of $0 and $1,675,202,
respectively, are with the Kazakhstan companies. As of June 30, 2006 and
March 31, 2006 restricted cash reflected in the long-term assets consists
of $156,454 and $156,454, respectively, 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.
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-Q
contain additional information that should be referred to when reviewing this
18
material and this document should be read in conjunction with the Form 10-KSB of
the Company for the year ended March 31, 2006.
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 crude oil and natural gas, results
of 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.
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.
19
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 generate revenue, income and cash flow by producing and marketing
crude oil from production from our oil 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 we deem appropriate based on geological data and findings, we also drill
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.
Until recently, we were deemed to be a development stage company. 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.
Industry and Economic Factors
In managing our business, we must deal with many factors inherent in
our industry. First and foremost is the fluctuation of oil prices. Historically,
oil 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 of predicting those prices or of
controlling them without losing an advantage from a potential upswing. 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.
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 still may not know
conclusively whether 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 discovery of commercially productive
reserves. Moreover, operating costs in 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.
20
Recent Developments
In July 2006 we completed drilling of the Kariman-1 well and started
testing the well. The tests have been conducted in the open wellbore without
perforation in the Upper Triassic formation. Despite the fact that the flows
from this horizon are partially blocked by drilling fluid, preliminary testing
conducted during the first month of testing - yielded results ranging from 250
to 530 barrels per day. When we penetrated the Upper Triassic formation between
a depth of 3,000 and 3,270 meters we discovered a sandstone interval with
intensive oil shows recorded on shaleshakers and ditches along with degassing of
drilling fluid. Although unexpected, this Upper Triassic interval was
subsequently confirmed by electric logging. Based upon our interpretation of a
recently completed 3D seismic study, our original goal was to extend the depth
of the existing well from 3,069 meters to 3,800 meters, through the Middle
Triassic formation. During the reaming of the existing wellbore we discovered
that the technical condition of the well had deteriorated significantly from the
condition described in the original drilling logs. Because of the poor
conditions within the wellbore, we began a sidetrack at 1,660 meters and
essentially drilled a new bore from that depth. When we penetrated the Middle
Triassic formation between 3,356 meters and 3,361 meters we encountered very
high formation pressure, additional intensive oil shows and a substantial
increase in the gas content in drilling fluid. Therefore, as a safety
precaution, we compensated by increasing drilling fluid weight. The increased
weight of the required drilling fluid allowed us to determine that the Middle
Triassic formation is characterized by abnormally high pressure of approximately
600 atmospheres. Due to the high weight of the drilling fluid, beginning at
3,361 meters there was a loss circulation within the wellbore. Analysis of
electric logging data determined that the loss circulation area was located at a
depth between 1,660-1,860 meters. Therefore, we separated the loss circulation
from the inflow by installing a cement plug and running casing to a depth of
3,100 meters. Due to high pressure and strong degassing of drilling fluid in the
penetrated portion of the Middle Triassic formations, we decided to stop
drilling at the depth of 3,361 meters and to commence well completion
operations. In December 2006 we plan to use a drilling rig to deepen the
Kariman-1 well in an effort to determine the potential of the formation in the
Middle Triassic. We plan to line the well to isolate the Middle Triassic
horizons. Then we will perforate the well and test the potential oil bearing
horizons. We expect that these activities will allow us to obtain a preliminary
understanding of the potential of the carbonate formations of the Middle
Triassic, while allowing us to continue testing the Upper Triassic formation.
In July 2006 we commenced re-entry operations on the Borly-2 well
located in the Borly structure in the Extended Territory. The Kazakhstani
National Oil and Gas Company performed the original drilling of the Borly-2 well
in 1995 to a total depth of 3,225 meters. The well targeted the Triassic
formation, which was penetrated at 2,382 meters. The well was then cased to a
depth of 1,900 meters. Despite the presence of hydrocarbonates in the actual
core samples, it was concluded that further work on the well was not warranted
due to instability in the wellbore and the results of the initial well logging.
21
The well logging made in 1995 gave incomplete information. Because of the
limited financial resources available at the time, geologists were under time
constraints to complete their research rapidly, using the limited technologies
available to them. The difficulties in making an appropriate evaluation were
further increased by the crumbling within the wellbore and the lack of means to
respond to this difficulty. Current technology will allow us to get more precise
well logging and gain valuable insight into the Borly structure. Our decision to
re-enter the Borly-2 well was guided by results of interpretation of a 3D
seismic study completed by us in March 2006. Based on the results of the 3D
seismic, we will seek to confirm the presence of oil and gas in the Borly
structure in the carbonate reservoirs of Triassic formation, which we believe
are similar to the carbonate structures located in our nearby Dolinnoe field.
During our first fiscal quarter we continued testing and development
works on Dolinnoe-1, Dolinnoe-2, Dolinnoe-3, Emir-1, Aksaz-1 and Aksaz-4
wells.
In April 2006 we performed acid treatment in the Dolinnoe-1 and
Dolinnoe-2 wells and in July 2006 in the Dolinnoe-3 well.
During our first fiscal quarter, we resumed workover operations at the
Aksaz-1 and Emir-1 wells. In June we also conducted acid treatment in Emir-1
well in an effort to improve production.
Following is a brief description of the production status of each of
our seven wells.
Aksaz-1
This well is currently under workover and is not producing. Prior to
workover, four producing intervals were tested. The single interval test
production rates in Aksaz-1 using a 10 mm diameter choke was 140 bpd.
Aksaz-4
Drilling of this well was completed in August 2005. Two producing
intervals have been tested. Current production rates from single interval
testing using a 6 mm diameter choke ranges from 50 to 125 bpd.
Dolinnoe-1
Currently this well is producing. We recently completed acid treatment
of this well. Current production rates from single interval testing using a 6 mm
diameter choke ranges from 80 to 125 bpd.
22
Dolinnoe-2
Currently this well is also producing. We recently completed acid
treatment of this well. Current production rates from single interval testing
using an 8 mm diameter choke ranges from 100 to 160 bpd.
Dolinnoe-3
This well is currently producing. We completed acid treatment of the
well. Current production rates from single interval testing using chokes between
6 mm - 10 mm diameter choke ranges from 460 and 630 bpd.
Emir-1
This well is currently producing. Current production rates from single
interval testing using a 8 mm diameter choke ranges from 12 to 20 bpd.
Kariman-1
We completed drilling of the Kariman-1 well in July 206 and started
testing the well. The tests have been conducted in the open wellbore without
perforation in the Upper Triassic formation. Despite the fact that the flows
from this horizon are partially blocked by drilling fluid, preliminary testing
conducted during the first month of testing using chokes ranging from 20 mm to
30 mm yielded results ranging from 250 to 530 barrels per day.
Outlook
During the first quarter of the fiscal year we changed our drilling
program and revised annual budget due to unforeseen events occurred including,
but not limited to, technical difficulties faced and delay in mobilization of
drilling rigs to the field and changes of our expectations of oil production
rates from the Extended Territory.
According to our new drilling program, during the current fiscal year,
we plan to drill a total of four exploratory and developmental wells and re-open
one well in the Extended Territory. Instead of drilling an additional four
developmental wells we plan to drill one well in the Dolinnoe field and two
wells in the Emir field of the ADE Block. Development activities under our
revised business plan still include development of our oilfields by constructing
additional electric lines and oil collection units, test and research operations
at the Extended Territory.
In our previous budget we planned to conduct horizontal and directional
drilling at two of our existing wells during 2006. However, due to geological
and technical difficulties with the well bore, we decided to abandon a
directional drilling program at this time.
During the fiscal year, we also will continue workover and research
operations on the existing six wells in the ADE Block.
23
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
prices historically have been volatile and may fluctuate widely in the future.
Sustained periods of low prices for crude oil 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 June 30, 2006, compared to the three months ended
June 30, 2005.
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, 2006 and the three months ended June 30, 2005.
Three months ended
June 30, 2006
to the three months ended
June 30, 2005
-------------------------------
For the three For the three $ %
months ended months ended Increase Increase
June 30, 2006 June 30, 2005 (Decrease) (Decrease)
------------------ ------------------ -------------- -------------
Production volumes:
Natural gas (Mcf) - - - -
Natural gas liquids (Bbls) - - - -
Oil and condensate (Bbls) 50,264 41,456 8,808 21%
Barrels of Oil equivalent (BOE) 50,264 41,456 8,808 21%
24
Average Sales Price
Natural gas ($ per Mcf) - - - -
Natural gas liquids ($ per Bbl) - - - -
Oil and condensate ($ per Bbl) $ 52.58 $ 17.98 $ 34.60 192%
Barrels of Oil equivalent
($ per BOE) $ 52.58 $ 17.98 $ 34.60 192%
Operating Revenue:
Natural gas - - - -
Natural gas liquids - - - -
Oil and condensate $ 2,345,972 $ 662,637 $ 1,683,335 254%
Gain on hedging and derivatives(1) - - - -
- --------------
(1) We did not engage in hedging transactions, including derivatives during the
three months ended June 30, 2006, or the three months ended June 30, 2005.
Revenues. We generate revenue under our contract from the sale of oil
recovered during test production. During the quarter ended June 30, 2006, we
realized revenue from oil sales of $2,345,972 compared to $662,637 during the
quarter ended June 30, 2005. This increase in revenues is primarily the result
of several factors. During the current fiscal quarter we performed acid
treatment in the Dolinnoe-1 and Dolinnoe-2 wells. As a result production rates
increased considerably in those two wells. During the quarter ended June 30,
2006, we also had one additional well in testing or test production as compared
to the quarter ended June 30, 2005. The largest contributing factor to the
increase in revenue, however, was the 192% increase in the price per barrel we
received for oil sales during the quarter ended June 30, 2006 compared to the
fiscal quarter ended June 30, 2005. During the fiscal quarter ended June 30,
2006 we exported our oil to the world markets and realized the world market
price for those sales. By comparison, during the fiscal quarter ended June 30,
2005 all oil sales were to the domestic market in Kazakhstan, where the price
per barrel of oil is significantly lower than the world market price. We
anticipate production will continue to increase in upcoming years. We plan to
continue our drilling activity in the upcoming periods. We also hope to continue
to be granted export quotas, which allow us to realize world market prices. This
should lead to increased revenue from oil sales compared to our prior fiscal
years because of the increased price per barrel we will realize from oil sales
to the world market.
Our revenue is sensitive to changes in prices received for our
products. Our production is sold at the prevailing market price in Kazakhstan
and in the world markets, 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
have an impact on both supply and demand.
25
Costs and Operating Expenses
The following table presents details of our expenses for the three
months ended June 30, 2006 and 2005:
For the three months ended For the three months ended
June 30, 2006 June 30, 2005
------------------------------- ------------------------------
Expenses:
Oil and gas operating(1) $ 414,875 $ 80,273
General and administrative 5,367,696 1,001,238
Depletion 240,491 189,778
Accretion expenses 39,605 -
Amortization and depreciation 35,145 30,438
-------------------- -----------------
Total $ 6,097,812 $ 1,301,727
==================== =================
Expenses ($ per BOE):
Oil and gas operating(1) 9.30 2.18
Depletion (2) 5.39 5.15
- --------------------
(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 June 30,
2006 we incurred $414,875 in oil and gas operating expenses compared to $80,273
during the three months ended June 30, 2005. This increase in oil and gas
operating expenses is the result of increased production. During the first
fiscal quarter 2007 production volume increased by 8,808 bbls or 21% compared to
the three months ended June 30, 2005. Such increase led to hiring more
production and maintenance personnel and a corresponding payroll increase during
the quarter ended June 30, 2006 of 428% compared to the quarter ended June 30,
2005. Increased production also led to an increase in the royalty paid to the
Government of 10% during the quarter ended June 30, 2006 compared to the quarter
ended June 30, 2005. Another result of increased production was a $183,814 or
433% increase in transportation expenses during the quarter ended June 30, 2006
compared to the quarter ended June 30, 2005. While we expect oil and gas
operating expenses to continue to increase in the upcoming fiscal year as
revenue continues to increase we do not expect such increases will be as
significant in the future.
General and Administrative Expenses. General and administrative
expenses during the three months ended June 30, 2006 were $5,367,696 compared to
$1,001,238 during the three months ended June 30, 2005. This represents a 436%
increase in general and administrative expenses. This significant increase is
attributable to an 888% increase in payroll and other compensation, a 77%
increase in professional services fees and 279% increase in taxes as well as
188% increase in business trip expenses. During the quarter ended June 30, 2006
we granted restricted stock and stock options to our directors, officers and key
employees. 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
$4,010,346. Additionally, during the quarter ended June 30, 2006 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 anticipate increases in revenue will outpace the increases in
general and administrative expenses in upcoming quarters.
26
Loss from Operations. As a result of significantly increasing expenses,
which were only partially offset by revenue from oil sales, during the fiscal
quarter ended June 30, 2006 we realized a loss from operations of $3,751,840
compared to a loss from operations of $639,090 during the fiscal quarter ended
June 30, 2005. While we realized a 254% increase in revenue during the quarter
ended June 30, 2006 compared to the comparable period 2005, this increase was
offset by a 417% increase in oil and gas operating expenses, a 27% increase in
depletion expenses and a 436% increase in general and administrative expenses.
This resulted in a 487% increase in loss from operations during the fiscal
quarter ended June 30, 2006 compared to the fiscal quarter ended June 30, 2005.
Until such time as expenses exceed revenue from oil and gas sales we will
continue to generate operating losses. In future periods, we believe production
rates and oil prices will be such that we will be able to generate sufficient
revenue from oil sales to offset our expenses. If, however, production levels or
oil prices were to decrease, we may be unable to offset our operating expenses
with revenue from production and could continue to experience losses from
operations.
Other Income. During the fiscal quarter ended June 30, 2006 we realized
total other income of $611,079 compared to the other expense of $58,561 during
the fiscal quarter ended June 30, 2005. This change from other expense to other
income is largely attributable to $143,262 increase in interest income, $184,506
increase in realized gain on marketable securities, $120,205 increase in
unrealized gains on marketable securities and $291,059 increase in exchange gain
resulting from fluctuations of foreign currency rates against the U.S. Dollar.
This income is partially offset by a $69,392 increase in other expenses. We
anticipate the funds held in deposits and marketable securities will be used to
fund our operations and therefore expect interest income and gains from
marketable securities, both realized and unrealized, to decrease in the next
three months.
Net Loss. During the fiscal quarter ended June 30, 2006 we realized a
net loss of $3,140,761 compared to a net loss of $697,651 during the fiscal
quarter ended June 30, 2005. Notwithstanding the significant increase in revenue
resulting from increased oil production during the quarter ended June 30, 2006
net loss increased significantly. This significant increase in net loss is
largely attributable to 436% increase in general and administrative expenses.
During the quarter ended June 30, 2006 our general and administrative expenses
increased by $4,366,458 compared to the quarter ended June 30, 2005. While
expenses have risen significantly during the 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 net
losses in upcoming quarters will decrease significantly.
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, 2006 we have raised $94,626,926 through the sale of our common
stock. As of June 30, 2006 we had cash and cash equivalents of $14,040,451 and
27
held marketable securities totaling $33,456,728. We anticipate our capital
resources in the upcoming three months will likewise consist primarily of
revenue from the sale of oil recovered.
Our need for capital is primarily to fund our ongoing operations. For
the period from inception on May 6, 2003 through June 30, 2006, we have incurred
capital expenditures of $72,872,721 for exploration, development and acquisition
activities.
Cash Flows
During the fiscal quarter ended June 30, 2006 cash was primarily used
to fund exploration and development expenditures. We had a net decrease in cash
and cash equivalents of $4,005,672 during the current fiscal quarter. See below
for additional discussion and analysis of cash flow.
Three months ended Three months ended
June 30, 2006 June 30, 2005
----------------------- ---------------------
Net cash used in operating activities $ (3,154,650) $ (2,086,880)
Net cash used in investing activities $ (6,609,524) $ (6,102,444)
Net cash provided by financing activities $ 5,758,502 $ 6,085,618
----------------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS $ (4,005,672) $ (2,103,706)
======================= =====================
We continually evaluate our capital needs and compare them to our
capital resources. Our budgeted capital expenditures for the current fiscal year
were about $60 million to $70 million for exploration, development, production
and acquisitions. At the time the budget was prepared, we believed our
production would be sufficient to allow us to generate enough revenue from oil
sales to finance the gap of $10 million to $20 million required for our planned
exploration, development, production and acquisitions. However, the drilling
schedules we initially anticipated have been delayed and production has
developed more slowly than expected. We are currently reviewing the assumptions
made in formulating our budget and considering revisions to our annual budget to
take into account oil production volumes and revenue to ensure we have
sufficient capital to meet our operational needs.
During the quarter ended June 30, 2006, we spent $6 million in
exploration, development and production. We funded these expenditures primarily
from cash on hand and oil sales revenue. We anticipate a significant increase in
revenue during the upcoming year due to drilling of new wells, increasing of
production rate for existing wells and favorable world market prices.
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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, 2006,
excluding current liabilities as listed on our consolidated balance sheet:
Payments Due By Period
----------------------------------------------------------------------------
Less than 1 After 5
Contractual obligations Total year 1-3 years 4-5 years years
---------------- --------------- --------------- ------------- -------------
Capital Expenditure Commitment(1) $ 10,500,000 $ 6,000,000 $ 4,500,000 - -
Due to the Government of the
Republic of Kazakhstan(2) $ 11,344,880 - $11,344,880 - -
Liquidation Fund $ 964,197 $ 964,197 - -
------------ ----------- ------------ ------------ -------------
Total $ 22,809,077 $ 6,000,000 $ 16,809,077 - -
============ =========== ============ ============ =============
- ---------------------
(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. If we fail to do so, we may be subject to the loss
of our exploration license.
(2) In connection with our acquisition of the oil and gas contract covering the
ADE Block and the Extended Territory, 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 or
we must apply for a two-year extension of our exploration license. We are
legally entitled to the two-year extension. We are also 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. At this time, we anticipate that we will apply for a two-year
extension of our exploration license during the first half of the 2007
calendar year. This would give us an additional two years to explore and
prove up our properties before we apply for commercial production rights.
Should we decide not to pursue a commercial production contract, we can
relinquish the ADE Block and Extended Territory to the ROK in satisfaction
of this obligation. Our repayment obligation for the ADE Block is
$5,994,200. Our repayment obligation for the Extended Territory is
$5,350,680.
Off-Balance Sheet Financing Arrangements
As of June 30, 2006, we had no off-balance sheet financing
arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risks are fluctuations in commodity prices and
foreign currency exchange rates. We do not currently use derivative commodity
instruments or similar financial instruments to attempt to hedge commodity price
risks associated with future crude oil production.
29
Commodity Price Risk
Our revenues, profitability and future growth depend substantially on
prevailing prices for crude oil. Prices also affect the amount of cash flow
available for capital expenditures and our ability to either borrow or raise
additional capital. Price affects our ability to produce crude oil economically
and to transport and market our production either through export to
international markets or within Kazakhstan. Our first quarter 2006 crude oil
sales in the international export market were based on prevailing market prices
at the time of sale less applicable discounts due to transportation.
Historically, crude oil prices have been subject to significant
volatility in response to changes in supply, market uncertainty and a variety of
other factors beyond our control. Crude oil prices are likely to continue to be
volatile and this volatility makes it difficult to predict future oil price
movements with any certainty. Any declines in oil prices would reduce our
revenues, and could also reduce the amount of oil that we can produce
economically. As a result, this could have a material adverse effect on our
business, financial condition and results of operations.
Foreign Currency Risk
Our functional currency is the U.S. dollar. Emir Oil, LLP, our
Kazakhstani subsidiary, also uses the U.S. dollar as its functional currency. To
the extent that business transactions in Kazakhstan are denominated in the
Kazakh Tenge we are exposed to transaction gains and losses that could result
from fluctuations in the U.S. Dollar--Kazakh Tenge exchange rate. We do not
engage in hedging transactions to protect the Company from such risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officers and our principal financial officer
(the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 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 it in this report is accumulated and
communicated to management, including the Certifying Officers as appropriate, to
allow timely decisions regarding required disclosure. Based on this evaluation,
our Certifying Officers have concluded that our disclosure controls and
procedures are effective as of June 30, 2006.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting
during the quarter ended June 30, 2006 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
30
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, LLP. The parties mutually agreed to dismiss this lawsuit
without prejudice.
In April 2005, Sokol Holdings, Inc., also filed a complaint in United
States District Court, Southern District of New York alleging that BMB Munai,
Inc., Boris Cherdabayev, Alexandre Agaian, Bakhytbek Baiseitov, Mirgali Kunayev
and Georges Benarroch wrongfully induced Toleush Tolmakov to breach a contract
under which Mr. Tolmakov had agreed to sell to Sokol 70% of his 90% interest in
Emir Oil LLP.
In October 2005, Sokol Holdings amended its complaint in the U.S.
District Court in New York to add Brian Savage and Thomas Sinclair as plaintiffs
and to add 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 by Georges Benarroch,
Alexandre Agaian and Credifinance, conversion, breach of fiduciary duty by Boris
Cherdabayev, Mirgali Kunayev and Bakhytbek Baiseitov, misappropriation of trade
secrets, tortuous interference with fiduciary duty by Mr. Agaian, Mr. Benarroch
and Credifinance and aiding and abetting breach of fiduciary duty by Mr.
Benarroch, Mr. Agaian and Credifinance 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 have not named Toleush Tolmakov as defendant in the
action nor have the plaintiffs ever brought claims against Mr. Tolmakov to
establish the existence or breach of any legally binding agreement between the
plaintiffs and Mr. Tolmakov. 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.
We have retained the law firm of Bracewell & Giuliani LLP in New York,
New York to represent us in the lawsuit. We moved for dismissal of the amended
complaint or for a stay pending arbitration in Kazakhstan. That motion was
denied, without prejudice to renewing it, to enable defendants to produce
documents to plaintiffs relating to the issues raised in the motion. Following
completion of document production, the motion has been renewed. Briefing is
underway on the motion.
31
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 1A. Risk Factors
There have been no material changes in the risk factors previously
described in Items 1 and 2 to Part I of our Form 10-KSB filed on June 29, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In April 2006, Gary Lerner, our former corporate secretary, exercised
options to purchase 7,200 shares of our common stock at a price of $4.00 per
share. The shares were issued without registration in a transaction not
involving a public offering in reliance upon the exemption from registration
provided by Section 4(2) of Securities Act of 1933 (the "1933 Act"). The
certificates for the shares contain a restrictive legend that the shares may not
be offered for sale, sold or otherwise transferred without having first been
registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. There was no underwriter involved in this transaction.
On April 10, 2006, Credifinance Capital Corp., a related company
through a common director, exercised warrants granted in April 2005 to purchase
50,100 shares of our restricted common stock for $250,500. The shares were
issued without registration in a transaction not involving a public offering in
reliance upon the exemption from registration provided in reliance upon the
exemption from registration provided by Regulation S of 1933 Act. The
certificates for the shares contain a restrictive legend that the shares may not
be offered for sale, sold or otherwise transferred without having first been
registered under the 1933 Act or pursuant to an exemption from registration
under the 1933 Act. There was no underwriter involved in this transaction.
On May 13, 2006, Aton Securities, a placement agent exercised warrants
granted in December 2005 to purchase 916,667 shares of our restricted common
stock for $5,500,002. The shares were issued without registration in a
transaction not involving a public offering in reliance upon the exemption from
registration provided by Section 4(2) of Securities Act of 1933 (the "1933
Act"). The certificates for the shares contain a restrictive legend that the
shares may not be offered for sale, sold or otherwise transferred without having
first been registered under the 1933 Act or pursuant to an exemption from
registration under the 1933 Act. There was no underwriter involved in this
transaction.
On June 20, 2006, our Board of Directors approved stock option grants
and restricted stock awards to our officer and directors and certain employees
and consultants of the Company under our 2004 Stock Incentive Plan. The total
number of options and restricted stock grants was 200,000 and 495,000
respectively. The options are exercisable at a price of $7.00 per share, which
32
was the closing price of the Company's common stock on the OTCBB on June 20,
2006. The restricted stock grants were also valued at $7.00 per share. The
options will expire three years from the grant date. All of the options and
restricted stock grants vested immediately upon grant. Among the parties
receiving restricted stock grants were the following executive officers and
directors:
Name Positions with Company Options Granted Restricted Stock Granted
- -------------------- ----------------------- ---------------- ------------------------
Boris Cherdabayev CEO and Director 150,000 80,000
Askar Tashtitov President - 40,000
Sanat Kasymov CFO - 40,000
Gamal Kulumbetov COO - 40,000
Georges Benarroch Director - 10,000
Troy Nilson Director - 10,000
Stephen Smoot Director - 10,000
Valery Tolkachev Director 50,000 40,000
Grants were made to a total of 16 people, 11 of whom are non-U.S.
persons. The option and restricted stock grants were made without registration
in transactions not involving a public offering in reliance upon the exemption
from registration provided by Regulation S and Section 4(2) of the 1933 Act. The
certificates representing the securities issued contain a restrictive legend
that the securities may not be offered for sale, sold or otherwise transferred
without having first been registered under the 1933 Act or pursuant to an
exemption from registration under the 1933 Act. There was no underwriter
involved in this transaction.
Item 4. Submission of Matters to a Vote of Security Holders
On April 18, 2006, we held a special meeting of our stockholder. The
total number of shares entitled to vote at the meeting was 42,198,690. The
number of shares represented at the special meeting of stockholders, present or
by proxy was 23,320,834. At the meeting the shareholders were asked to vote on
the following matter:
1) To ratify the adoption of a corporate policy governing future
acquisitions of additional oil and gas licenses in exchange
for shares of Company common stock; and
2) To amend our Articles of Incorporation to increase the
authorized capital stock of the Company to 500,000,000 common
shares.
23,320,584 shares voted to ratify the acquisitions policy and due
diligence protocol and 250 shares voted against ratification of the acquisitions
policy and due diligence protocol. No shares abstained.
22,968,520 shares voted to approve an amendment to our Articles of
Incorporation to increase our authorized common stock to 500,000,000 and 352,313
shares voted against the amendment to our Articles of Incorporation and one
share abstained from voting.
33
No other items were submitted to a vote of our shareholders at the
meeting.
Item 5. Other Information
In our Annual Report on Form 10-KSB, we incorrectly stated that Mr.
Georges Benarroch was not a nominee or director of any other SEC reporting
issuer. In fact, Mr. Benarroch is a director of two other SEC reporting issuers,
Kyto Biopharma, Inc., Commission file number 000-50390, and Osprey Gold Corp.,
Commision file number 000-28107. Mr. Benarroch has been a director of Kyto
Biopharma since May 2000 and was elected as president and CEO of Kyto Biopharma
in February 2006. Mr. Benarroch has been a director and the president of Osprey
Gold since September 2004.
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.
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 8, 2006 /s/ Boris Cherdabayev
---------------------------
Boris Cherdabayev,
Chief Executive Officer
Date: August 8, 2006 /s/ Sanat Kasymov
---------------------------
Sanat Kasymov,
Chief Financial Officer
34