Freedom Holding Corp. - Quarter Report: 2012 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2012
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OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
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Commission File Number 001-33034
BMB MUNAI, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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30-0233726
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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324 South 400 West, Suite 250
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Salt Lake City, Utah
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84101
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(Address of principal executive offices)
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(Zip Code)
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(801) 355-2227
(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 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.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated Filer ¨ | Accelerated filer ¨ |
| Non-accelerated Filer ¨ (Do not check if smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
¨ Yes x No
As of February 15, 2013, the registrant had 55,787,554 shares of common stock, par value $0.001, issued and outstanding.
BMB MUNAI, INC.
FORM 10-Q
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION
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Page
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Item 1. Unaudited Condensed Consolidated Financial Statements
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Condensed Consolidated Balance Sheets as of December 31, 2012 and March 31, 2012
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3
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Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2012 and 2011
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4
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2012 and 2011
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5
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Notes to Condensed Consolidated Financial Statements
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7
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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15
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Item 3. Qualitative and Quantitative Disclosures About Market Risk
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21
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Item 4. Controls and Procedures
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21
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PART II — OTHER INFORMATION
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Item 1A. Risk Factors
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21
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Item 6. Exhibits
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22
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Signatures
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23
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2
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Condensed Consolidated Financial Statements
BMB MUNAI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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Notes
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December 31, 2012 | March 31, 2012 | ||||
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ASSETS
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||||||
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CURRENT ASSETS
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||||||
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Cash and cash equivalents
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3
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$ |
10,789,458
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$ |
3,370,177
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Promissory note receivable
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4
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-
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220,875
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|||
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Prepaid expenses and other assets, net
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5
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-
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1,616,915
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|||
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Restricted cash
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3
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-
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36,002,101
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|||
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Total current assets
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10,789,458
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41,210,068
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||||
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LONG TERM ASSETS
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||||||
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Other fixed assets, net
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127,338
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214,280
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Total long term assets
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127,338
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214,280
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||||
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TOTAL ASSETS
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$ |
10,916,796
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$ |
41,424,348
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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||||||
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CURRENT LIABILITIES
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||||||
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Accounts payable
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$ |
55,129
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$ |
18,712
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Taxes payable, accrued liabilities and other payables
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5,661
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11,497
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Deferred consulting and distribution payments
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7
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8,781,165
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20,016,556
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Total current liabilities
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8,841,955
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20,046,765
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COMMITMENTS AND CONTINGENCIES
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9
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-
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-
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|||
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SHAREHOLDERS’ EQUITY
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||||||
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Preferred stock - $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding
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-
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-
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||||
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Common stock - $0.001 par value; 500,000,000 shares authorized;
55,787,554 and 55,787,554 shares outstanding, respectively
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55,788
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55,788
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||||
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Additional paid in capital
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89,363,319
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106,099,585
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Accumulated deficit
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(87,344,266)
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(84,777,790)
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Total shareholders’ equity
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2,074,841
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21,377,583
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ |
10,916,796
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$ |
41,424,348
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
BMB MUNAI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three months ended December 31, | Nine months ended December 31, | |||||||||||
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Notes
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2012 (unaudited) |
2011 (unaudited) |
2012 (unaudited) |
2011 (unaudited) |
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REVENUES
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$ |
-
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$ |
-
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$ |
-
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$ |
-
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COSTS AND OPERATING EXPENSES
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General and administrative
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759,904
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283,857
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2,498,098
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19,964,085
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Interest expense
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-
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-
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-
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3,551,022
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Amortization and depreciation
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28,982
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29,408
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86,944
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72,533
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Total costs and operating expenses
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788,886
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313,265
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2,585,042
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23,587,640
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LOSS FROM OPERATIONS
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(788,886)
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(313,265)
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(2,585,042)
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(23,587,640)
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OTHER INCOME/(EXPENSE)
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||||||||||||
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Foreign exchange gain/(loss), net
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-
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(225)
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31
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(33,216)
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Interest income
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7,492
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9,273
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11,690
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30,243
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Other income/(expense), net
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-
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-
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6,845
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(9,550)
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Total other income/(expense)
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7,492
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9,048
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18,566
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(12,523)
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LOSS FROM CONTINUING OPERATIONS
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(781,394)
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(304,217)
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(2,566,476)
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(23,600,163)
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DISCONTINUED OPERATIONS
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Loss on sale of Emir Oil, net of tax benefit of $0, $0,
$0,and $3,977,385
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6
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-
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-
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-
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(127,147,771)
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Income from discontinued operations (net of tax)
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6
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-
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-
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-
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11,899,714
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NET LOSS
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$ |
(781,394)
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$ |
(304,217)
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$ |
(2,566,476)
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$ |
(138,848,220)
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BASIC AND DILUTED NET LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS
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8
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$ |
(0.01)
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$ |
(0.01)
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$ |
(0.05)
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$ |
(0.42)
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BASIC AND DILUTED NET LOSS ON SALE OF EMIR OIL
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8
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$ |
-
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$ |
-
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$ |
-
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$ |
(2.28)
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BASIC AND DILUTED NET INCOME PER COMMON SHARE FROM DISCONTINUED OPERATIONS
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8
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$ |
-
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$ |
-
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$ |
-
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$ |
0.21
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
BMB MUNAI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine months ended December 31,
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Notes
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2012
(unaudited)
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2011
(unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$
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(2,566,476)
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$
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(138,848,220)
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Adjustments to reconcile net income to net cash provided
by operating activities:
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Income from discontinued operations
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6
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-
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(11,899,714)
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Depreciation and amortization
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86,944
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72,533
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||||
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Interest expense
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-
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3,551,022
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||||
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Provision expense for notes receivable
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4
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220,875
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-
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Loss on sale of Emir Oil
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-
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127,147,771
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Changes in operating assets and liabilities
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Decrease/(increase) in prepaid expenses and other assets
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1,616,915
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30,807
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Increase/(decrease) in accounts payable
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(4,963,585)
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(444,639)
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Increase/(decrease) in taxes payables and accrued liabilities
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(5,836)
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4,985,074
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Net cash used in operating activities – continuing operations
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(5,611,163)
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(15,405,366)
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Net cash provided by operating activities – discontinued operations
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6
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-
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33,067,626
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Net cash (used in)/provided by operating activities
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(5,611,163)
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17,662,260
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Investment in short term notes receivable
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4
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-
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(66,150)
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Proceeds from sale of Emir Oil
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-
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159,601,000
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||||
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Purchase of other fixed assets
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-
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(153,308)
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||||
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Net cash provided by investing activities – continuing operations
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-
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159,381,542
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||||
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Net cash used in investing activities – discontinued operations
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6
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-
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(23,126,407)
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|||
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Net cash provided by investing activities
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-
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136,255,135
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||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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||||||
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Payment related to redemption of convertible notes
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-
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(61,400,000)
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||||
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Cash paid for convertible notes coupon
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-
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(4,546,796)
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||||
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Cash distribution
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7
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(22,971,657)
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(43,002,498)
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|||
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Intercompany advances(1)
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-
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6,303,531
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||||
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Net cash used in financing activities – continuing operations
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(22,971,657)
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(102,645,763)
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||||
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Net cash used in financing activities – discontinued operations(2)
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6
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-
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(6,623,936)
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|||
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Net cash used in financing activities
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(22,971,657)
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(109,269,699)
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||||
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-
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||||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS
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(28,582,820)
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44,647,696
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||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS from discontinued operations
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-
|
3,317,283
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||||
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NET CHANGE IN CASH AND CASH EQUIVALENTS from continuing operations
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(28,582,820)
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41,330,413
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||||
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CASH AND CASH EQUIVALENTS at beginning of period
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39,372,278
|
426,045
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||||
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CASH AND CASH EQUIVALENTS at end of period
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$
|
10,789,458
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$
|
41,756,458
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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(1)
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Intercompany advances represent payments and receipts between BMB Munai and Emir and are shown to break out the activity between continuing and discontinuing operations. Intercompany advances are eliminated and do not appear on the condensed consolidated balance sheets.
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(2)
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Includes intercompany advances activity.
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5
BMB MUNAI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
| Nine months ended | |||||
| December 31, 2012 | December 31, 2011 | ||||
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Reconciliation of cash and cash equivalents at end of
|
|||||
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period to Condensed Consolidated Balance Sheet
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|||||
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Cash and cash equivalents
|
$ |
10,789,458
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$ |
5,755,268
|
|
|
Restricted cash
|
-
|
36,001,190
|
|||
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Cash and cash equivalents at end of period
|
$ |
10,789,458
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$ |
41,756,458
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| Nine months ended December 31, | ||||||
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Notes
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2012 (unaudited) |
2011 (unaudited) |
||||
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Non-Cash Investing and Financing Activities
|
||||||
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Transfer of inventory and prepayments for materials used in oil and gas projects to oil and gas properties
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6
|
$ |
-
|
$ |
1,198,675
|
|
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Depreciation on other fixed assets capitalized as oil and gas properties
|
6
|
-
|
479,227
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|||
|
7
|
8,781,165
|
15,016,556
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||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 1 – DESCRIPTION OF BUSINESS
BMB Munai, Inc., (the “Company” or “BMB Munai”) is a Nevada corporation that originally incorporated in the State of Utah in 1981. From 2003 to 2011 the Company’s business activities focused on oil and natural gas exploration and production in the Republic of Kazakhstan (also referred to herein as the “ROK” or “Kazakhstan”).
On February 14, 2011 the Company entered into a Participation Interest Purchase Agreement (the “Purchase Agreement”) with MIE Holdings Corporation (HKEx: 1555), (“MIE”), and its subsidiary, Palaeontol B.V., (“Palaeontol”), pursuant to which the Company agreed to sell all of its interest in its wholly owned subsidiary Emir Oil, LLP (“Emir Oil”) to Palaeontol (the “Sale”). The initial purchase price of $170 million was subject to various closing adjustments and the deposit of $36 million in escrow to be held for a period of twelve months following the closing for indemnification purposes.
On September 19, 2011 the Company completed the sale of all of its interests in Emir Oil.
In connection with the closing of the Sale, on September 21, 2011, the Company completed the mandatory redemption (the “Redemption”) of its $61.4 million in principal amount of 10.75% Convertible Senior Notes due 2013.
Since September 2011 the Company’s principal business operations have been focused on satisfying its post-closing undertakings to the MIE subsidiary in accordance with the Purchase Agreement and exploring opportunities to exploit the expertise of the Company’s management staff and return value to the Company’s stockholders.
The Company does not anticipate generating revenue until such time as it is able to identify and exploit new business opportunities. No assurance can be given that the Company will be able to identify or exploit any new business opportunity, or that the Company will have the funds then available to it that will enable it to seek to take advantage of any such opportunity. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
7
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company’s unaudited condensed consolidated financial statements present the consolidated results of BMB Munai, Inc., which includes the results of its wholly owned subsidiary, Emir Oil until September 19, 2011. All significant inter-company balances and transactions have been eliminated from the unaudited condensed consolidated financial statements.
The unaudited interim condensed consolidated financial information of the Company has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying interim condensed consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of December 31, 2012 and results of its operations for the nine months ended December 31, 2012 and 2011. These financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2012. The results of operations for the nine months ended December 31, 2012 may not be indicative of the results for the fiscal year ending March 31, 2013.
Going concern
With the Sale of Emir Oil, the Company has no continuing operations that result in positive cash flow, which raises substantial doubt about its ability to continue as a going concern.
Subsequent event
The Company’s management has evaluated the subsequent events through the date the financial statements were issued and has found no subsequent events to report.
Use of estimates
The preparation of unaudited condensed 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 unaudited condensed 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 unaudited condensed consolidated financial statements.
8
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash. The Company places its cash with high credit quality financial institutions.
Functional currency
The Company makes its principal investing and financing transactions in U.S. Dollars and the U.S. Dollar is therefore its functional currency.
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 unaudited condensed consolidated statements of operations.
Fair value of financial instruments
The carrying values reported for cash equivalents, notes receivable, accounts payable and accrued liabilities approximate their respective fair values in the accompanying balance sheet due to the short-term maturity of these financial instruments.
Cash and cash equivalents
The Company considers all demand deposits, money market accounts and marketable securities 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.
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.
9
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
Depreciation of other fixed assets is calculated using the straight-line method based upon the following estimated useful lives:
|
Vehicles
|
3-5 years
|
|
Office equipment
|
3-5 years
|
|
Software
|
3-4 years
|
|
Furniture and fixtures
|
2-7 years
|
Maintenance and repairs are charged to expense as incurred. Renewals and betterments are capitalized as leasehold improvements, which are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease.
Other fixed assets of the Company are evaluated annually 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. Based on the Company’s analysis at December 31, 2012, no impairment of other assets is necessary.
Income (Loss) per common share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if all contracts to issue common stock were converted into common stock, except for those that are anti-dilutive.
Recent accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements are expected to cause a material impact on the Company’s financial condition or the results of operations.
NOTE 3 – CASH AND CASH EQUIVALENTS
As of December 31, 2012 and March 31, 2012 cash and cash equivalents included:
| December 31, 2012 | March 31, 2012 | ||||
|
U.S. Dollars
|
$ |
10,789,458
|
$ |
39,363,094
|
|
|
Foreign currency
|
-
|
9,184
|
|||
|
Total cash and cash equivalents
|
10,789,458
|
39,372,278
|
|||
|
Less restricted cash
|
-
|
36,002,101
|
|||
|
Cash and cash equivalents – unrestricted
|
$ |
10,789,458
|
$ |
3,370,177
|
|
10
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 4 – PROMISSORY NOTES RECEIVABLE
On December 17, 2010 the Company entered into agreement with Montclair Technology, LLC (the “Borrower”) and Michael Williams (the “Guarantor”) to loan funds to the Borrower in an amount of up to $200,000. The Guarantor owns a patent and has proprietary know-how to develop oil refining and regeneration plants and Borrower desires to grant the Company a license to use and employ the technology in Kazakhstan. As further inducement for the Company to loan funds to the Borrower, Guarantor has agreed to guarantee Borrower’s obligations under any promissory note made by Borrower pursuant to this agreement.
On December 17, 2010 Borrower issued the Company a promissory note for $50,000 with an interest rate of 18% per annum. After the first transfer in December 2010, the Company made additional transfers from January 19, 2011 to September 27, 2011 in the amount of $150,000. The outstanding principal and unpaid accrued interest under this promissory note was due one year after the transfer.
As a result, the Company treated the loan as a promissory note receivable in its financial statements. At December 31, 2012 the promissory note receivable amounted to $220,875, with $200,000 principal amount and $20,875 representing the amount of interest accrued.
Because as of September 30, 2012 the initial advance of $200,000 plus interest is in default, the Company created a 100% provision for the outstanding principal and interest on the notes in the amount of $220,875. The timing of the collection of the promissory note is uncertain and the ability to collect the principal and interest in full is unlikely from either the Borrower or the Guarantor. Due to the timing uncertainty, accrual of interest income stopped in the quarter ended December 31, 2011.
NOTE 5 – PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets as of December 31, 2012 and March 31, 2012 were as follows:
| December 31, 2012 | March 31, 2012 | ||||
|
Advances for services
|
$ |
-
|
$ |
1,616,915
|
|
| $ |
-
|
$ |
1,616,915
|
||
11
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
On February 2, 2012 the Company entered into a Management and Services Agreement, dated as of February 2, 2012, between BMB Munai, Inc. and Lakeview International, LLC (the “Services Agreement”). Pursuant to the Services Agreement, the Company engaged Lakeview International, LLC (“Lakeview”) to provide management, administrative and support personnel and services to the Company in furtherance of fulfilling its obligations pursuant to the Purchase Agreement, and other activities, including the winding down of the Company’s representative office in Kazakhstan. Lakeview is a company controlled by a former Company director.
The Services Agreement commenced on February 2, 2012 and continued through December 31, 2012. In exchange for the services under the Services Agreement, the Company paid $1,947,500 to Lakeview, which included anticipated out-of-pocket expenses required to perform the services through the term of the Agreement in the amount of $1,900,000 and a management fee of $47,500. The full amount was due and payable upon execution of the Services Agreement. The Services Agreement provides that in the event of early termination, Lakeview will be required to return to the Company any portion of the $1,900,000 that has not been paid to cover out-of-pocket expenses as of the date the Services Agreement is terminated.
From February 2, 2012 (the date the Services Agreement became effective) to December 31, 2012 the Company has accrued and expensed consulting services in the amount of $1,947,501. For the three and nine months ended December 31, 2012, $536,099 and $1,608,296 was expensed as general and administrative expense.
NOTE 6 – DISCONTINUED OPERATIONSAND SALE OF EMIR OIL
Emir Oil LLP
On September 19, 2011 the Company completed the sale of all of its interests in Emir Oil LLP to a subsidiary of MIE Holdings Corporation. In anticipation of the Sale, all operations of Emir Oil have been reclassified as discontinued operations.
The sale of Emir Oil was valued at $170 million in cash, net of $10.4 million in purchase adjustments. In accordance with the Purchase Agreement, $36 million in cash was placed in escrow for one year for indemnification purposes. On September 20, 2012 the escrow period expired and the entire $36 million held in escrow was released to the Company without any depletion.
12
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
The components of discontinued operations for three and nine months ended December 31, 2012 and 2011 were as follows:
| Three months ended | Nine months ended | ||||||||||
| December 31, 2012 | December 31, 2011 | December 31, 2012 | December 31, 2011 | ||||||||
|
Revenue
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
41,633,064
|
|||
|
Operating expenses
|
-
|
-
|
-
|
29,914,188
|
|||||||
|
Other income
|
-
|
-
|
-
|
(180,838)
|
|||||||
|
Discontinued operations
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
11,899,714
|
|||
NOTE 7 – SHAREHOLDERS’ EQUITY
Shareholder distributions
On October 24, 2011 the Company made an initial cash distribution of $1.04 per share to common stockholders of record on October 10, 2011. The total amount calculated for this distribution to common stockholders was $58,019,056.
On October 30, 2012 the Company declared and made a second cash distribution of $0.30 per share to common stockholder of record on October 15, 2012. The total amount distributed to common stockholders in connection with this second cash distribution was $16,736,266.
As of December 31, 2012, the amount paid from the first distribution was $51,294,433 with $6,724,623 payable, and the amount paid from the second distribution was $14,679,723 with $2,056,543 payable. These payables have been accrued and included in deferred consulting and distribution payments on the balance sheet.
13
BMB MUNAI, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
NOTE 8 – EARNINGS PER SHARE INFORMATION
The calculation of the basic earnings per share is based on the following data:
| Three months ended | Nine months ended | ||||||||||
| December 31, 2012 | December 31, 2011 | December 31, 2012 | December 31, 2011 | ||||||||
|
Net loss from continuing operations
|
$ |
(781,394)
|
$ |
(304,217)
|
$ |
(2,566,476)
|
$ |
(23,600,163)
|
|||
|
Net loss on sale of Emir Oil
|
-
|
-
|
-
|
(127,147,771)
|
|||||||
|
Net income from discontinued operations
|
-
|
-
|
-
|
11,899,714
|
|||||||
|
Basic weighted-average common shares outstanding
|
55,787,554
|
55,787,554
|
55,787,554
|
55,787,554
|
|||||||
|
Basic loss per common share from continuing operations
|
$ |
(0.01)
|
$ |
(0.01)
|
$ |
(0.05)
|
$ |
(0.42)
|
|||
|
Basic loss per common share on sale of Emir Oil
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
(2.28)
|
|||
|
Basic income per common share from discontinued operations
|
$ |
-
|
$ |
-
|
$ |
-
|
$ |
0.21
|
|||
|
Total basic loss per common share
|
$ |
(0.01)
|
$ |
(0.01)
|
$ |
(0.05)
|
$ |
(2.49)
|
|||
As of December 31, 2012 and 2011, there were no options, warrants, or restricted stock grants outstanding.
NOTE 9 – COMMITMENTS AND CONTINGENCIES – CONTINUING OPERATIONS
Consulting Agreement with Boris Cherdabayev
On December 31, 2009 the Company entered into a Consulting Agreement with Boris Cherdabayev, the Chairman of the Company’s board of directors. The Consulting Agreement became effective on January 1, 2010. The Consulting Agreement provided for an extraordinary event payment equal to the greater of $5,000,000 or the base compensation fee for the remaining initial term of the Consulting Agreement. Pursuant to the terms of the Consulting Agreement the Sale constituted an extraordinary event. During the quarter ended December 31, 2012 the $5,000,000 payment was paid in full to Mr. Cherdabayev.
NOTE 10 – FINANCIAL INSTRUMENTS
As of March 31, 2012 cash and cash equivalents included deposits in Kazakhstan banks in the amount $15,755. As of December 31, 2012 the Company did not have cash and cash equivalents deposited in any Kazakhstan banks. As of December 31, 2012 and March 31, 2012 cash and cash equivalents included deposits in U.S. banks in the amount of $10,789,458 and $3,370,177, respectively. The Company’s deposits in U.S. banks are in non-FDIC insured accounts which means they are not insured to the $250,000 FDIC insurance limit. To mitigate this risk, the Company has placed all of its U.S. deposits in a money market account that invests in U.S. Government backed securities.
14
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 unaudited condensed consolidated financial statements and the accompanying notes included in this quarterly report on Form 10-Q contain additional information that should be referred to when reviewing this material and this document should be read in conjunction with our annual report on Form 10-K for the year ended March 31, 2012.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) that are based on management’s beliefs and assumptions and on information currently available to management. For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including, but not limited to, a potential second cash distributions to our shareholders, our ability to identify or pursue other opportunities in the oil and gas industry within the Republic of Kazakhstan, or elsewhere, our results of operations, cash flows, capital resources and liquidity and future actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “budget,” “plan,” “forecast,” “predict,” “may,” “should,” “could,” “will” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve known and unknown risks and uncertainties and other factors that may cause actual results and outcomes to differ materially depending on a variety of factors, many of which are not within our control. These factors include, but are not limited to, completion of all closing conditions, including receipt of all required regulatory approvals, satisfaction of outstanding obligations, costs and expenses, economic conditions, competition, legislative requirements, sufficiency of working capital, capital resources and liquidity 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.
Forward-looking statements are predictions and not guarantees of future performance or events. Forward-looking statements are based on current industry, financial and economic information, which we have assessed but which by their nature are dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements.
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.
15
Throughout this report, unless otherwise indicated by the context, references herein to the “Company”, “BMB”, “we”, our” or “us” means BMB Munai, Inc., a Nevada corporation, and its corporate subsidiaries and predecessors. Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations all references to dollar amounts ($) refers to U.S. dollars unless otherwise indicated.
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Securities and Exchange Commission.
Overview
As discussed in this report in Note 1 – Description of Business and Note 6 – Discontinued Operations and Sale of Emir Oil of the notes to our unaudited condensed consolidated financial statements accompanying this report, on September 19, 2011 we sold all our interest in our wholly-owned subsidiary Emir Oil, LLP to Palaeontol, B.V. a subsidiary of MIE Holdings Corporation. Currently, we are working to complete the winding down of our operations in Kazakhstan, and identify new business opportunities that will allow us to take advantage of the expertise of our management staff and return additional value to our stockholders.
Historically, the assets and operations of Emir Oil have represented the major portion of our consolidated total assets and results of operations. The results of our operations, that are solely operations of BMB Munai, excluding the operations of Emir Oil, are reported and discussed as results of continuing operations. This discussion and analysis of financial condition and results of operations has been retroactively reclassified and subdivided to results from continuing operations and results from discontinued operations.
This discussion summarizes the significant factors affecting our continuing and discontinued operating results, financial condition, liquidity and capital resources during the quarters ended December 31, 2012 and 2011. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and Notes to the condensed consolidated financial statements accompanying this report.
Results of Continuing Operations
Three months ended December 31, 2012 compared to the three months ended December 31, 2011.
Revenue
We did not generate any revenue during the three months ended December 31, 2012 and 2011.
16
Expenses
The following table presents details of our expenses for the three months ended December 31, 2012 and 2011:
| For the three months ended December 31, 2012 | For the three months ended December 31, 2011 | ||||
|
Costs and Operating Expenses:
|
|||||
|
General and administrative
|
$ |
759,904
|
$ |
283,857
|
|
|
Interest expense
|
-
|
-
|
|||
|
Amortization and depreciation
|
28,982
|
29,408
|
|||
|
Total
|
$ |
788,886
|
$ |
313,265
|
|
General and Administrative Expenses. General and administrative expenses from continuing operations during the three months ended December 31, 2012 were $759,904 compared to $283,857 during the three months ended December 31, 2011. General and administrative expenses were higher during the December 31, 2012 period because of the increased work required to fulfill our obligations to the MIE subsidiary under the PIPA.
Amortization and Depreciation. Amortization and depreciation expense from continuing operations for the three months ended December 31, 2012 did not change significantly. We anticipate amortization and depreciation expense to remain on the same level during upcoming fiscal quarters.
Loss from Operations. During the three months ended December 31, 2012 we recognized a loss from operations of $ 788,886 compared to a loss from operations of $313,265 during the three months ended December 31, 2011. This increase in loss from continuing operations during three months ended December 31, 2012 is the result of the 168% increase in general and administrative expenses.
Total Other Income/Expense. During the three months ended December 31, 2012 we recognized total other income from continuing operations of $7,492 compared to total other income from continuing operations of $9,048 during the three months ended December 31, 2011. The decrease resulted from lower interest income on our cash balances.
Net Loss/Income. For all of the foregoing reasons, during the three months ended December 31, 2012 we incurred a net loss of $781,394 compared to a net loss of $304,217 for the three months ended December 31, 2011. With the sale of Emir Oil, we are no longer generating revenues. Therefore, we expect to continue to realize net losses in upcoming fiscal quarters.
Nine months ended December 31, 2012 compared to the nine months ended December 31, 2011.
Revenue
We did not generate any revenue during the nine months ended December 31, 2012 and 2011 except from oil and gas sales through Emir Oil.
17
Expenses
The following table presents details of our expenses for the nine months ended December 31, 2012 and 2011:
| For the nine months ended December 31, 2012 |
For the nine months ended December 31, 2011 |
||||
|
Costs and Operating Expenses:
|
|||||
|
General and administrative
|
$ |
2,498,098
|
$ |
19,964,085
|
|
|
Interest expense
|
-
|
3,551,022
|
|||
|
Amortization and depreciation
|
86,944
|
72,533
|
|||
|
Total
|
$ |
2,585,042
|
$ |
23,587,640
|
|
General and Administrative Expenses. General and administrative expenses from continuing operations during the nine months ended December 31, 2012 were $2,498,098 compared to $19,964,085 during the nine months ended December 31, 2011. This represents an 89% decrease. During the nine months ended December 31, 2011 general and administrative expenses mainly included termination payments in the total amount of $7,886,648 accrued and paid to executive officers of the Company upon termination of their employment agreements, coupled with the accrued termination fee expense for Mr. Cherdabayev’s Consulting Agreement in the amount of $5,000,000 and selling expenses in the amount of $3,989,531 incurred and paid. These expenses were incurred in connection with the Sale.
Interest Expense. During the nine months ended December 31, 2011 we incurred interest expense from continuing operations of $3,551,022. As a result of retiring our outstanding convertible notes during the quarter ended December 31, 2011, we incurred no interest expense during the nine months ended December 31, 2012.
Amortization and Depreciation. Amortization and depreciation expense from continuing operations for the nine months ended December 31, 2012 did not change significantly. We anticipate amortization and depreciation expense to remain on the same level during upcoming fiscal quarters.
Loss from Operations. During the nine months ended December 31, 2012 we recognized a loss from continuing operations of $2,585,042 compared to a loss from continuing operations of $23,587,640 during the nine months ended December 31, 2011. This decrease in loss from continuing operations during nine months ended December 31, 2012 is the result of the 89% decrease in general and administrative expenses and the 100% decrease in interest expense.
Total Other Income/Expense. During the nine months ended December 31, 2012 we recognized total other income from continuing operations of $18,566 compared to total other expense of $12,523 during the nine months ended December 31, 2011. The change from total other expense to total other income was mainly due to the fact that our exploration and production operations in Kazakhstan have ceased during the quarter ended December 31, 2012 and, as a result we did not recognize any foreign exchange loss.
Loss from Continuing Operations. During the nine months ended December 31, 2012 we recognized a loss from continuing operations of $2,566,476 compared to a loss from continuing operations of $23,600,163 during the nine months ended December 31, 2011. This reduction in loss from continuing operations was primarily attributable to the reductions in general and administrative expenses and interest expense during the nine months ended December 31, 2012.
18
Loss on Sale of Emir Oil. During the nine months ended December 31, 2011 we incurred a loss on the Sale in the amount of $127,147,771. This loss was the result of the sale of the net assets of Emir Oil LLP which totaled $290,726,156, for net proceeds from the sale of $159,601,000 (after giving effect to purchase adjustments) and recognizing the tax effect of the sale of $3,977,385.
Income from Discontinued Operations. During the nine months ended December 31, 2012 we realized no income from discontinued operations compared to $11,899,714 during the nine months ended December 31, 2011. With the completion of the Sale during the quarter ended September 30, 2011 we did not realize income from discontinued operations during the nine months ended December 31, 2012, nor do we expect to realize income from discontinued operations in future periods.
Net Loss/Income. For all of the foregoing reasons, during the nine months ended December 31, 2012 we incurred a net loss of $2,566,476 compared to a net loss of $138,848,220 for the nine months ended December 31, 2011. With the sale of Emir Oil, we are no longer generating revenues. Therefore, we expect to continue to realize net losses in upcoming fiscal quarters.
Liquidity and Capital Resources
As noted throughout this report, in September 2011 we completed the sale of our wholly-owned operating subsidiary Emir Oil. As a condition to the sale, we were required to place $36 million of the sale proceeds into escrow for a period of twelve months from the date of closing to indemnify Palaeontol.
On September 20, 2012 the escrow period expired and the entire $36 million was released to the Company. On October 30, 2012 the Company declared and made a second cash distribution of $0.30 per share to common stockholders of record on October 15, 2012, the top end of the range per share contemplated by the Company when the Sale was initially announced. The second cash distribution amount was determined after giving effect to required fund allocations to Messrs. Cherdabayev and Tolmakov, actual costs incurred and other factors.
We are currently working to complete the winding down of our operations in Kazakhstan. We anticipate that for the foreseeable future we will continue our efforts to identify new business opportunities that will allow us to capitalize on the expertise of the Company’s management staff and return additional value to our stockholders.
We do not currently generate revenue and do not anticipate generating revenue until such time as we are able to identify and exploit a new business opportunity. No assurance can be given that we will be able to identify or exploit any new business opportunity, or that we will have the funds then available to us that we will enable us to take advantage of any such opportunity. These factors raise substantial doubt about our ability to continue as a going concern.
19
Cash Flows
During the nine months ended December 31, 2012, cash was primarily used to make the second distribution to our shareholders and settle the accounts payable of the Almaty office. See below for additional discussion and analysis of cash flow.
| Nine months ended December 31, 2012 |
Nine months ended December 31, 2011 |
||||
|
Net cash provided by/(used in) operating activities
|
$ |
(5,611,163)
|
$ |
17,662,260
|
|
|
Net cash provided by investing activities
|
$ |
-
|
$ |
136,255,135
|
|
|
Net cash used in financing activities
|
$ |
(22,971,657)
|
$ |
(109,269,699)
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
$ |
(28,582,820)
|
$ |
44,647,696
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS–CONTINUING OPERATIONS
|
$ |
(28,582,820)
|
$ |
41,330,413
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS–DISCONTINUED OPERATIONS
|
$ |
-
|
$ |
3,317,283
|
|
Our principal source of liquidity during the nine months ended December 31, 2012 was cash and cash equivalents. At March 31, 2012 cash and cash equivalents from continuing and discontinued operations totaled to approximately $39.4 million. At December 31, 2012 cash and cash equivalents from continuing operations totaled to approximately $10.8 million. Of this amount $8,781,165 is held for distribution to shareholders who have not yet claimed their distributions pursuant to the first and/or second stockholder distributions as reflected in the table of Contractual Obligations and Contingencies below.
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 December 31, 2012, excluding current liabilities as listed on our condensed consolidated balance sheet:
| Payments Due By Period | ||||||||||||||
|
Contractual obligations
|
Total | Less than 1 year | 2-3 years | 4-5 years | After 5 years | |||||||||
|
Initial cash distribution payable(1)
|
$ |
6,724,623
|
$ |
6,724,623
|
$ |
-
|
$ |
-
|
$ |
-
|
||||
|
Second cash distribution from escrow account(1)
|
2,056,542
|
2,056,543
|
-
|
-
|
-
|
|||||||||
|
TOTAL
|
$ |
8,781,165
|
$ |
8,781,165
|
$ |
-
|
$ |
-
|
$ |
-
|
||||
(1) See Note 7 – Shareholders’ Equity for additional information regarding the initial cash distribution payable and the second cash distribution.
20
Off-Balance Sheet Financing Arrangements
As of December 31, 2012, we had no off-balance sheet financing arrangements.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
As a smaller reporting company, as defined in Rule 12b-2 promulgated under the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of December 31, 2012. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2012, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and form and (ii) accumulated and communicated to our management, including our principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
We believe there are no additions to the risk factors disclosed in our annual report on Form 10-K for the year ended March 31, 2012.
21
Item 6. Exhibits
|
Exhibit No.
|
Description of Exhibit
|
||
|
Exhibit 31.1
|
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)
|
||
|
Exhibit 31.2
|
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)
|
||
|
Exhibit 32.1
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
|
||
|
Exhibit 32.2
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
|
||
|
Exhibit 101.INS
|
XBRL Instance Document
|
||
|
Exhibit 101.SCH
|
XBRL Taxonomy Extension Schema Document
|
||
|
Exhibit 101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
||
|
Exhibit 101.DEF
|
XBRL Taxonomy Definition Linkbase Document
|
||
|
Exhibit 101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
||
|
Exhibit 101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
22
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this Report to be signed on its behalf, thereunto duly authorized.
|
BMB MUNAI, INC.
|
||||
| Date: February 19, 2013 |
/s/ Askar Tashtitov
|
|||
|
Askar Tashtitov
President
|
||||
| Date: February 19, 2013 |
/s/ Evgeniy Ler
|
|||
|
Evgeniy Ler
Chief Financial Officer
|
||||
23