UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A-1
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period Ended
September 30,
2007
o
|
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
0-50218
BEKEM METALS, INC.
(Exact name of registrant as specified in its charter)
Utah
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87-0669131
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(State or other jurisdiction of
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(I.R.S. Employer
|
incorporation or organization)
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|
Identification No.)
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|
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170 Tchaikovsky Street, 4
th
Floor
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Almaty, Kazkahstan
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050000
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(Address of principal executive offices)
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(Zip Code)
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+7 (7272) 582-386
(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
o
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
o
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Accelerated Filer
o
|
Non-accelerated Filer
x
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange
Act.)
Yes
o
No
x
As
of November 5, 2007, the registrant had 124,750,239 shares of common stock, par value
$0.001, issued and outstanding.
BEKEM METALS, INC.
(An Exploration Stage Company)
FORM 10-Q/A-1
TABLE OF CONTENTS
EXPLANATORY NOTE
PART I
— FINANCIAL INFORMATION
Item 1. Financial Statements
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|
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Condensed Consolidated Balance Sheets (Unaudited) as
of
September 30, 2007 and December 31, 2006
(Restated)
|
5
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|
|
|
|
Condensed Consolidated Statements of Operations
(Unaudited) for the
Three Months and Nine Months Ended September 30, 2007
and 2006, and for the Period from March 5, 2004 (Date of Inception)
through September 30, 2007 (Restated)
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6
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Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended September 30, 2007 and 2006, and
for the Period from March 5, 2004 (Date of Inception) through September
30, 2007 (Restated)
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7
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
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8
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Item 2. Management’s Discussion and Analysis of
Financial Condition
and Results of Operations
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17
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Item 3. Qualitative and Quantitative Disclosures About
Market Risk
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30
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Item 4. Controls and Procedures
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31
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PART II — OTHER INFORMATION
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Item 1A. Risk Factors
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32
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Item 6. Exhibits
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32
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Signatures
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33
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2
EXPLANATORY NOTE
Bekem Metals, Inc. (hereinafter referred to as “us,”
“we,” the “Company” or “Bekem”) is filing this
Amendment No. 1 on Form 10-Q/A-1 (the “Amendment”) to its Quarterly Report
for the fiscal quarter endedSeptember 30, 2007, which was filed with the Securities and
Exchange Commission (“SEC”) on November 14, 2007 (the “Original
Report”) in response to certain comments raised by the staff of the SEC. While
the staff commented on several issues, as discussed in more detail herein the primary
issue raised by the staff was whether the presentation of the Company as a
“production stage” enterprise was proper, or whether, it would be more
consistent with SEC Industry Guide 7, “
Description of
Property by Issuers Engaged or to Be Engaged in Significant Mining
Operations
” (“Industry Guide 7”) to present
the Company as an “exploration stage” enterprise.
The disclosure and the financial statements included in the Original
Report present us as a production stage enterprise. At the time we prepared and filed
the Original Report we believed we were a production stage enterprise for a number of
reasons including:
|
•
|
the licenses we hold from the Ministry of Energy and
Mineral Resources of the Republic of Kazakhstan (“MEMR”) to
the Kempirsai and Mamyt deposits are production licenses that require
us to extract certain quantities of nickel, cobalt and brown coal in
order to retain those licenses;
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|
•
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the deposits have a history of commercial production
during the 1980s and 1990s; and
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•
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we had engaged in some limited mineral extraction
activities in accordance with the terms of our licenses.
|
We also considered the fact that we had historical reserve reports
prepared during the Soviet era that both the State Resources Committee and the MEMR
recognized as indicative of commercially producible reserves of nickel and cobalt ores
and brown coal at the Kempirsai and Mamyt deposits.
Following discussion with the staff of the SEC and further research we
now agree that the determination of reserves and production stage activities made by
Kazakhstani governmental authorities is not binding upon or authoritative under
Industry Guide 7. We further agree with the staff’s position that until such time
as we have a reserve report prepared in accordance with the standards recognized by the
SEC, the Company should be presented as an exploration stage enterprise. The purpose of
this Amendment is to, among other things, revise the presentation of the Original
Report to present the Company as an exploration stage enterprise.
The consolidated financial statements and notes to the financial
statements included in Part I, Item 1 “
Financial
Statements
” of the Original Report are hereby revised
to present the Company as an exploration stage enterprise rather than a production
stage enterprise. As a result of this revision,
a column for
transactions from “inception to date” has been added to the statements of
operations and cash flows, stripping costs have been expensed rather than capitalized,
and revenues and costs of products sold have been reclassified to offset certain direct
mining expenses which are included in exploratory costs, depreciation and amortization
expenses were also reclassified as exploratory costs. Also, the other income (expense)
as originally filed included disposals of inventory, which were reclassified as
exploratory costs and revenue from services were reclassified as other
income.
3
As
noted above, the “
Consolidated Statements of
Operations
” has also been revised to correct the
reporting of deferred compensation expense. In addition, the weighted average number of
shares outstanding was corrected in the “
Consolidated
Statements of Operations
.”
The
notes to the financial statements have been revised to:
|
•
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provide clarification regarding the Company’s
disclosure regarding impairments of long-lived assets and long-lived
assets to be disposed of;
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•
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discuss why the Company was able to acquire its interest
in Kyzl Kain Mamyt LLC at a price significantly below the fair value of
its long term assets;
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•
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clarify the restrictions on use of bank
deposits;
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•
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include Note 5
“ Restatement of Financial
Statements”;
and
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|
•
|
include Note 6
“
Subsequent
Events
” regarding litigation between
the Company and the MEMR in connection with the purported unilateral
cancelation of the Company’s contracts and licenses to the
Kempirsai and Mamyt deposits.
|
The revision resulted in decreases in
“
Net Loss
” of $185,517
during the three months ended September 30, 2007 and $0 during the three months ended
September 30, 2006, and increases in “
Net
Loss
” of $758,633 during the nine months ended
September 30, 2007 and $47,179 during the nine months ended September 30, 2006. The
revision did not result in changes to “
Basic Loss Per
Common Share
” during the three months ended September
30, 2007 or 2006 or during the nine months ended September 30, 2006, but did result in
a $0.01 per share increase in “
Basic Loss Per Common
Share
” during the nine months ended September 30,
2007.
Part I, Item 2 “
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
” of the Original Report is hereby revised to
clarify that as of September 30, 2007 the Company was in the exploration stage. The
disclosure in Part I, Item 2 has also been revised to address the changes in operating
results resulting from the restatement of the
“
Consolidated Statements of
Operations.
” The discussion of
“
Critical Accounting
Policies
” has been revised to provide enhanced
discussion and analysis of the Company’s critical accounting policies and
assumptions in accordance with SEC Releases No. 33-8350, 34-48960 and FR-72.
Part I, Item 4 “
Controls and
Procedures
” of the Original Report is hereby revised to
more specifically state the conclusions of the Company’s certifying officers with
respect to whether the Company’s disclosure controls and procedures were
effective during the period covered in this report and to address changes to our
disclosure controls and procedures.
In accordance with Rule 12b-15 under the Securities Exchange Act of
1934, this Amendment also includes currently dated certifications from the
Company’s Chief Executive Officer and Chief Financial Officer as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certification exhibits and
Part II, Item 6
“
Exhibits
” have been
revised accordingly.
This Amendment speaks only of the original filing date of the Original
Report and, except for those Items disclosed in this explanatory note, is unchanged
from the Original Report. This Amendment does not reflect events after the filing of
the Original Report or modify or update those disclosures affected by subsequent
events. Therefore, you should read this Amendment together with our other reports that
update and supersede the information contained in this Amendment.
4
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
BEKEM METALS, INC. AND SUBSIDIARIES
|
CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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2007
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2006
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(Restated)
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(Restated)
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ASSETS
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Current Assets
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Cash
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$ 2,378,425
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$ 8,583,680
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Trade accounts receivable
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|
5,350
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2,776
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VAT recoverable
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209,709
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|
186,915
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Inventories
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352,124
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|
185,063
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Prepaid expenses and other current assets
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|
352,580
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|
139,293
|
Deferred compensation
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|
362,825
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757,920
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Total Current Assets
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3,661,013
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|
9,855,647
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|
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Property, plant and mineral interests (net of
accumulated
|
|
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depreciation of $230,967 and $144,030)
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14,833,026
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13,870,563
|
Non-current deferred compensation
|
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467,234
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1,202,587
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Other assets
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|
189,234
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|
169,130
|
Total Assets
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$ 19,150,507
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$ 25,097,927
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LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
|
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Current Liabilities
|
|
|
|
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Accounts payable
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|
$ 366,854
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|
$ 530,665
|
Accrued expenses
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248,703
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274,739
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Due to related party
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13,347
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|
9,644
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Total Current Liabilities
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|
628,904
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815,048
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Deferred tax liabilities
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-
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|
433,645
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Asset retirement obligation
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|
1,060,515
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|
951,355
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Total Liabilities
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|
1,689,419
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2,200,048
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Commitments and Contingencies
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-
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-
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Shareholders' Equity (Deficit)
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Preferred stock; $0.001 par value, 20,000,000
shares
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authorized, no shares outstanding
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-
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-
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Common stock; $0.001 par value, 150,000,000 shares
authorized,
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-
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-
|
and 124,750,239 and 125,172,011 shares issued and
outstanding
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124,750
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125,172
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Additional paid-in capital
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|
28,203,239
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29,025,272
|
Accumulated deficit
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|
(10,812,413)
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(6,222,349)
|
Accumulated other comprehensive loss
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|
(54,488)
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|
(30,216)
|
Total Shareholders' Equity (Deficit)
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|
17,461,088
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22,897,879
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Total Liabilities and Shareholders' Equity
(Deficit)
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|
$ 19,150,507
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$ 25,097,927
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5
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
BEKEM METALS, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
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|
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For the Period from
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|
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|
March 5, 2004
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|
For the Three Months Ended
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For the Nine Months Ended
|
|
(Date of Inception)
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|
September 30,
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|
September 30,
|
|
through
|
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2007
|
2006
|
|
2007
|
2006
|
|
September 30, 2007
|
|
(Restated)
|
(Restated)
|
|
(Restated)
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Revenue
|
$ -
|
$ -
|
|
$ -
|
$ -
|
|
$ -
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
Cost of product sold
|
-
|
-
|
|
-
|
-
|
|
-
|
General and administrative expenses
|
871,463
|
1,287,652
|
|
3,564,696
|
2,209,740
|
|
7,819,068
|
Research and development costs
|
-
|
-
|
|
-
|
391,307
|
|
792,168
|
Exploratory costs
|
489,230
|
336,211
|
|
2,282,713
|
581,462
|
|
4,450,456
|
Accretion expense on asset retirement
obligations
|
20,189
|
18,758
|
|
60,558
|
54,901
|
|
194,055
|
Grant compensation expense
|
120,941
|
-
|
|
307,993
|
-
|
|
459,576
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
1,501,823
|
1,642,621
|
|
6,215,960
|
3,237,410
|
|
13,715,323
|
|
|
|
|
|
|
|
|
Loss From Operations
|
(1,501,823)
|
(1,642,621)
|
|
(6,215,960)
|
(3,237,410)
|
|
(13,715,323)
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
Interest income
|
89,902
|
17,563
|
|
316,529
|
27,935
|
|
401,866
|
Interest expense
|
-
|
(1,109,062)
|
|
(1,018)
|
(1,474,274)
|
|
(1,677,441)
|
Translation adjustment
|
(77,526)
|
90,045
|
|
(216,913)
|
(30,269)
|
|
(211,295)
|
Exchange loss (gain)
|
361,665
|
(1,031,056)
|
|
1,053,644
|
(140,908)
|
|
818,910
|
Other income (expense)
|
9,953
|
3,709
|
|
32,541
|
(30,639)
|
|
54,402
|
|
|
|
|
|
|
|
|
Net Other Expense
|
383,994
|
(2,028,801)
|
|
1,184,783
|
(1,648,155)
|
|
(613,558)
|
|
|
|
|
|
|
|
|
Net Loss Before Taxes
|
(1,117,829)
|
(3,671,422)
|
|
(5,031,177)
|
(4,885,565)
|
|
(14,328,881)
|
Deferred tax benefit
|
-
|
-
|
|
441,113
|
-
|
|
3,375,260
|
Loss in minority interest
|
-
|
-
|
|
-
|
-
|
|
141,208
|
Net Loss
|
$ (1,117,829)
|
$ (3,671,422)
|
|
$ (4,590,064)
|
$ (4,885,565)
|
|
$ (10,812,413)
|
|
|
|
|
|
|
|
|
Basic Loss per Common Share
|
$ (0.01)
|
$ (0.03)
|
|
$ (0.04)
|
$ (0.05)
|
|
|
Weighted-Average Shares used in
|
|
|
|
|
|
|
|
Basic Loss per Common Share
|
124,750,239
|
120,436,714
|
|
125,028,330
|
106,946,031
|
|
|
|
|
|
|
|
|
|
|
6
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
BEKEM METALS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
March 5, 2004
|
|
|
For the Nine Months Ended
|
(Date of Inception)
|
|
|
September 30,
|
through
|
|
|
2007
|
|
2006
|
September 30, 2007
|
|
|
(Restated)
|
|
(Restated)
|
(Restated)
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net loss
|
|
$ (4,590,064)
|
|
$ (4,885,565)
|
$ (10,812,413)
|
Adjustments to reconcile net loss to
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
99,777
|
|
37,396
|
266,910
|
Accretion expense on asset retirement
obligations
|
|
60,558
|
|
54,901
|
210,124
|
Interest expense from debt discount
|
|
-
|
|
-
|
963,231
|
Shares issued on option modification
|
|
-
|
|
-
|
19,426
|
Deferred tax benefit
|
|
(441,113)
|
|
-
|
(3,375,260)
|
Foreign currency exchange gain and translation
adjustment
|
|
(203,106)
|
|
41,682
|
(406,357)
|
Purchased exploration costs
|
|
|
|
|
251,286
|
Loss on disposal of property and equipment
|
|
150,604
|
|
40,191
|
209,532
|
Stock grant compensation expense
|
|
307,993
|
|
-
|
459,576
|
Loss recognized on minority shareholders'
interest
|
|
-
|
|
-
|
(141,208)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Trade accounts receivable
|
|
(2,949)
|
|
7,370
|
6,019
|
Inventories
|
|
(155,160)
|
|
22,710
|
(76,776)
|
VAT recoverable
|
|
(13,222)
|
|
-
|
(135,720)
|
Prepaid expenses and other current assets
|
|
(225,887)
|
|
(709,570)
|
(144,908)
|
Accounts payable
|
|
(174,605)
|
|
298,512
|
47,362
|
Accrued expenses
|
|
(570,261)
|
|
208,863
|
(657,471)
|
Net Cash From Operating Activities
|
|
(5,757,435)
|
|
(4,883,510)
|
(13,316,647)
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Purchase of property and equipment
|
|
(516,434)
|
|
(2,079,419)
|
(3,134,871)
|
Purchase of intangible assets
|
|
(7,399)
|
|
(31,797)
|
(64,879)
|
Proceeds from disposal of property and
equipment
|
|
-
|
|
-
|
22,941
|
Restricted cash
|
|
-
|
|
(100,000)
|
(100,000)
|
Notes receivable
|
|
-
|
|
-
|
(56,983)
|
Cash acquired in acquisitions
|
|
-
|
|
45,393
|
(152,180)
|
Change in related party receivables /
payables
|
|
(4,619)
|
|
(2,240,525)
|
45,856
|
Net Cash From Investing Activities
|
|
(528,452)
|
|
(4,406,348)
|
(3,440,116)
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Proceeds from notes payable
|
|
-
|
|
869,900
|
14,706,914
|
Payments on notes payable
|
|
-
|
|
(11,260,644)
|
(22,745,753)
|
Proceeds from notes payable related parties
|
|
-
|
|
1,536,044
|
4,326,912
|
Payments on notes payable - related parties
|
|
-
|
|
-
|
(4,326,912)
|
Issuance of shares for cash
|
|
-
|
|
26,401,842
|
26,728,842
|
Net Cash From Financing Activities
|
|
-
|
|
17,547,142
|
18,690,003
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on
Cash
|
|
80,632
|
|
149,573
|
445,185
|
|
|
|
|
|
|
Net Increase in Cash
|
|
(6,205,255)
|
|
8,406,857
|
2,378,425
|
Cash at Beginning of Period
|
|
8,583,680
|
|
89,366
|
-
|
Cash at End of Period
|
|
$ 2,378,425
|
|
$ 8,496,223
|
$ 2,378,425
|
|
|
|
|
|
|
7
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
|
NOTE 1 – BASIS OF PRESENTATION AND NATURE OF
BUSINESS
|
Interim Financial Information
— The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United
States of America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they are condensed
and do not include all of the information and notes required by accounting principles
generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments and reclassifications considered
necessary for a fair and comparable presentation have been included and are of a normal
recurring nature. The accompanying financial statements should be read in conjunction
with the most recent audited financial statements of Bekem Metals, Inc. included in its
annual report on Form 10-KSB filed for the year ended December 31, 2006. Operating
results for the nine-month period ended September 30, 2007 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2007.
Basis of Presentation
On
October 24, 2005, Bekem Metals, Inc. (hereinafter referred to as “us,”
“we,” the “Company”, “BMI” or “Bekem”)
entered into an Acquisition Agreement with Kazakh Metals, Inc., a British Virgin
Islands international business company (“KMI”), under which BMI acquired
100% of the outstanding common shares of KMI in exchange for the issuance of 61,200,000
common shares.
The
KMI shareholders received 61.1% of the BMI common stock outstanding after the
transaction and therefore KMI was considered the acquirer for financial reporting
purposes. Accordingly, the accompanying financial statements include financial
statements of KMI for all periods presented.
Brisa Equities Corporation, a British Virgin Islands holding company
(“Brisa”), together with other entities its owners control, is the
controlling shareholder of KMI and was also the controlling shareholder of BMI.
Accordingly, the transaction was considered to be between entities under common control
and did not result in a change in control of BMI. Following the transaction, entities
over which the controlling shareholder maintained voting and investment control held
51,600,000 BMI common shares, which represented 51.5% of the 100,088,888 outstanding
common shares.
The
acquisition of the portion of the net liabilities of BMI relating to the common shares
owned by the controlling shareholder was recorded at historical cost of $(161,998). The
acquisition of the common shares of BMI purchased from the minority shareholders of BMI
were recorded at $345,000, which was the estimated fair value of those shares on the
date of acquisition. KMI accounted for the purchase of BMI similar to a
pooling.
Bekem Metals, Inc.
– The
consolidated financial statements include the accounts of Condesa and Kaznickel, since
the date of its acquisition by Condesa, and the accounts of BMI since its acquisition
by Condesa. Condesa was incorporated under the laws of the British Virgin Islands on
March 5, 2004. Condesa acquired BMI in a reverse acquisition, on January 28, 2005. On
July 24, 2006, Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel
a wholly-owned subsidiary of Bekem. On September 30, 2006 Bekem sold Condesa to a third
party for a nominal value. Condesa is included in the consolidated financial statements
from the date of acquisition and to the date of disposal.
8
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
Kazakh Metals, Inc.
– The
consolidated financial statements also include the accounts of KMI and its wholly-owned
subsidiary, KKM, which it acquired on May 31, 2005 in a purchase business
combination.
Name Change
– On February 9,
2005, the Board of Directors of EMPS Research Corporation approved, and the
stockholders holding a majority of the outstanding shares of the company approved and
ratified by written consent, a change in the Company’s name from EMPS Research
Corporation to Bekem Metals, Inc. On March 16, 2005, the Company filed an amendment to
its Articles of Incorporation to affect the change.
Currency Translation
– The
consolidated financial statements are presented in U.S. dollars. The functional
currency of the Company’s subsidiaries operating in Kazakhstan is U.S. dollars
for Kaznickel and Kazakh tenge for KKM. Results of operations are translated into U.S.
dollars at the average exchange rates during the reporting period. Non-monetary assets
and liabilities of Kaznickel are translated into U.S. dollars, using historical
exchange rates and monetary assets and liabilities are translated into U.S. dollars
using exchange rates on the date of the financial statements. Translation differences
are included in results of operations. All balance sheet accounts of KKM are translated
at exchange rates on the date of the financial statements and translation differences
are included in stockholders’ equity as cumulative translation
adjustments.
Nature of Business
The
Company is engaged in the exploration of mineral resource properties. Kaznickel owns
the right to the Gornostayevskoye (“Gornostai”) nickel and cobalt deposit
located in the East Kazakhstan Oblast in northeast Kazakhstan. The subsoil use contract
and license is for exploration and production of cobalt and nickel ores and is valid
through February 26, 2026. KKM holds exploration and production subsoil use contracts
and licenses from the government of Kazakhstan to a 575,756 acre parcel, located
approximately 130 kilometers northeast of Aktobe, Kazakhstan. This deposit is referred
to as the Kempirsai deposit. The subsoil use contracts and licenses grant KKM the right
to explore and produce nickel and cobalt from deposits located within the territory
through October 12, 2011, which may be extended upon agreement between KKM and the
Ministry of Energy and Minerals Resources (“MEMR”) of the Republic of
Kazakhstan. KKM also holds a subsoil use contract and a license to explore and produce
Mamyt brown coal from a deposit located within 40 kilometers of its cobalt and nickel
deposit. This subsoil use contract and license expires on December 11, 2018 with
further possible extensions. However, because our deposits are without known reserves,
our operations are considered to be at the exploratory stage.
Business Condition
– The
Company has no proven mineral reserves that conform to U.S. accounting. The Gornostai
and the Kempirsai deposits have not yet entered the development stage with respect to
its mineral interests and have no production. There has been only limited revenue from
the Kempirsai operations, and the Company has incurred net losses of ($4,590,064) and
($4,885,565) for the nine months ended September 30, 2007 and 2006, respectively and
($10,812,413) for the period from March 5, 2004 (date of inception) through September
30, 2007. Current assets exceeded current liabilities by $3,032,109 at September 30,
2007. Management expects that the Company will need significant additional capital to
fund construction of a processing plant in 2007-2008. The Company anticipates it will
need to raise additional capital
9
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
through the sale of its equity securities or debt securities. Certain
shareholders of the Company have indicated a willingness to provide the Company a line
of credit. The Company has no formal agreement with said shareholders to provide this
line of credit and the shareholders are under no obligation to enter into any agreement
or make available any funds to the Company.
Kempirsai Exploration Stage
–
The Kempirsai, or KKM, operations are considered to be in the exploration stage until
the company has the feasibility study.
Gornostai Exploration Stage
–
The Gornostai, or Kaznickel, operations are considered to be in the exploration stage.
Since its inception on March 5, 2004, the Company has devoted a substantial amount of
effort in raising capital, acquiring Kaznickel, and exploring the Gornostai deposit
under its exploration contract. This mineral property has not yet reached development
or production stage and accordingly, no revenues from production have been
recorded.
Corrected Prior Period Financials
During the course of preparing the financial statements the Company
identified certain prior period misstatements whose impact was not material, either
individually or in aggregate, to the Company’s financial statements for the year
ended December 31, 2006. However, these misstatements were considered material to the
Company’s quarterly financial statements related to 2007. The correction of the
misstatements is in accordance with SAB 108. As a result, the Company corrected the
financial statements for the year ended December 31, 2006. The corrected balance sheet
as of December 31, 2006 is included in these financial statements. These misstatements
relate to recognizing an incorrect amount of deferred compensation. The effect of
correcting these misstatements resulted in an increase in deferred compensation
expense, an increase in accumulated deficit, and an increase in net loss of $48,740 for
the year ended December 31, 2006.
NOTE 2 - CASH
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.
Cash
consists of the following:
|
September 30,
|
|
December 31,
|
|
2007
|
|
2006
|
Current accounts (USD)
|
$ 169,121
|
|
$ 479,947
|
Current accounts (Tenge)
|
43,877
|
|
38,379
|
Bank deposit (USD)
|
143,626
|
|
8,065,354
|
Bank deposit (Tenge)
|
2,021,801
|
|
-
|
Total
|
$ 2,378,425
|
|
$ 8,583,680
|
10
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
Bank
deposit accounts are located in a Kazakhstani Bank (Center Credit Bank). Bank deposits
earn interest from 3% to 8% annually based on the length of time the funds are left on
deposit. Of the total bank deposits, $100,000 is restricted until December 20, 2007.
This amount is included in other non-current assets. The remaining balances of the bank
deposits are immediately available to the Company.
NOTE
3 -
PROPERTY, PLANT AND MINERAL INTERESTS
Property, plant and mineral interests consist of the
following:
|
September 30,
|
|
December 31,
|
|
2007
|
|
2006
|
Buildings
|
$ 2,364,257
|
|
$ 2,156,326
|
Machinery and equipment
|
3,846,276
|
|
3,474,858
|
Other fixed assets
|
124,578
|
|
69,665
|
Unproved mineral interests - net
|
8,728,882
|
|
8,313,744
|
|
15,063,993
|
|
14,014,593
|
Accumulated depreciation
|
(230,967)
|
|
(144,030)
|
Net Property and Equipment
|
$ 14,833,026
|
|
$ 13,870,563
|
Unproved mineral interests represent the acquisition costs of the
mineral interests upon the purchase business combinations with Kaznickel and with KKM.
The government of Kazakhstan retains the title to the property upon which the
Company’s mineral rights pertain; however, the Company’s mineral interests
are considered to be tangible assets.
Gornostai Deposit
Kaznickel acquired its interest in the Contract on Exploration and
Development of Gornostai Cobalt and Nickel Deposit (the “Contract”) issued
by the MEMR dated February 26, 2004. By virtue of the Contract, Kaznickel acquired the
right to exploit the mineral property including the right to explore, develop and
produce the nickel and cobalt mineral resources on the Deposit through February 26,
2026. The Company has the right to re-negotiate the contract at that time for an
additional 30 years. The government of Kazakhstan retains the title to the property;
however, the Company’s mineral interests are considered to be tangible assets.
The Company capitalized the acquisition costs of its mineral interest upon the purchase
business combination with Kaznickel. The allocated purchase price included a
capitalized amount of an acquired asset retirement obligation. While the property is
not in production, the asset retirement cost is depleted over the life of the contract
from the date of acquisition.
The
Contract provides the Company certain rights and also imposes certain obligations and
commitments. The rights include exploration through February 2008, and development and
production of minerals through February 26, 2026. The Company may transfer its right to
third parties in accordance with Kazakh laws and regulations and has a right to
renegotiate an extension of the Contract. Significant rights, obligations and
commitments of the Contract include monetary commitments for exploration of $1,576,480,
which have been fulfilled in 2007, and expenditures to
11
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
support social projects amounting to $300,000 during the production
stage. In addition, the Company was required to pay a fee of $2,000 upon award of the
Contract, and a fee for the use of Kazakh owned technical data of $735,400 of which
$4,179 was paid on award of the Contract and $731,221 will be due upon a finding of
commercial deposits. Royalties of 0.5% of ores extracted and sold will be required. The
Contract subjects the Company to pay regular income tax of 30 percent and requires an
excess profits tax of 15 to 60 percent if its net profits exceed 20 percent of gross
profit. Obligations also include the establishment and funding of a reclamation fund
that includes the cost of removing buildings and equipment used in the Deposit area.
The Company is also required to comply with Kazakh environmental laws and
regulations.
Kempirsai Deposit
Bekem acquired two contracts to explore for and extract minerals in
connection with the purchase of KKM. One contract is for the exploration and extraction
of nickel and cobalt ore through October 12, 2011 from deposits located in an
approximately 575,756 acre site in the northwest area of the Republic of Kazakhstan
approximately 130 kilometers northeast of the city of Aktobe, Kazakhstan, near the town
of Badamsha, referred to as the “Kempirsai” deposit. The other contract is
for the exploration and extraction of Mamyt brown coal through December 11, 2018 at a
site located within 40 kilometers of the Kempirsai deposit. The contracts may be
extended upon agreement between KKM and the Geology and Minerals Resources Committee of
the Ministry of Energy and Minerals Resources of the Republic of Kazakhstan. The
Kempirsai contract requires the Company to pay royalty payments equal to 2.21% of gross
ore sales. The Mamyt brown coal contract requires a royalty payment equal to nine
tenths of one percent (0.9%) of gross coal sales. Both contracts require the Company to
pay an excess profits tax ranging from 4 to 30 percent based upon the reaching of an
internal rate of return (as defined in the contracts) ranging from 22 to 30 percent.
The allocated purchase price of the mineral interest included a capitalized amount of
an acquired asset retirement obligation. The asset retirement cost is depleted over the
life of the contract from the date of acquisition. Obligations also include the
establishment and funding of a reclamation fund that includes the cost of removing
buildings and equipment used. The Company is also required to comply with Kazakh
environmental laws and regulations.
NOTE
4 - COMMITMENTS AND CONTINGENCIES
Concentration of Risk Relating to Foreign Mining
Operations
– All of the Company’s properties
are located within the Republic of Kazakhstan in Central Asia. In addition to general
industry risks of nickel and cobalt price fluctuations, and potential lack of economic
viability of the claims, the Company has a concentration of risk related to its foreign
properties and interests which are subject to political uncertainty, changes in
government, unilateral renegotiation of licenses, claims or contracts, nationalization,
or other uncertainties. In addition, the validity of mining claims which constitute the
Company's property holdings in Kazakhstan, may, in certain cases, be uncertain and are
subject to being contested.
Kazakhstan Business Environment
– Kazakhstan, as an emerging market, has a legal and regulatory
infrastructure that is not as mature and stable as those usually existing in more
developed free market economies. As a result, operations carried out in Kazakhstan can
involve risks and uncertainties that are not typically associated with developed
markets. The instability associated with the ongoing transformation process to a market
economy can lead to changes in the business conditions in which the Company currently
operates. Changes in the political, legal, tax or regulatory environment could
adversely impact the Company’s operations.
12
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
Tax Matters
– The local and
national tax environment in the Republic of Kazakhstan is subject to change and
inconsistent application, interpretation and enforcement. Non-compliance with
Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to
the imposition of fines, penalties and interest.
Environmental Matters
–
Extensive national, regional and local environmental laws and regulations in Kazakhstan
affect the Company’s operations. These laws and regulations set various standards
regulating certain aspects of health and environmental quality provide for user fees,
penalties and other liabilities for the violation of these standards and establish, in
some circumstances, obligations to remediate current and former facilities and off-site
locations. The Company believes it is currently in compliance with all existing
Republic of Kazakhstan environmental laws and regulations. However, as new
environmental laws and legislation are enacted and the old laws are repealed,
interpretation, application and enforcement of the laws may become inconsistent.
Compliance in the future could require significant expenditures, which may adversely
affect the Company’s operations.
Due to the Government of the Republic of Kazakhstan
– In connection with the Company’s acquisition of the
exploration contract covering the Gornostai deposit, the Company is required to repay
the Republic of Kazakhstan for historical costs incurred in undertaking geological and
geophysical studies and infrastructure improvements. The repayment terms of this
obligation will not be determined until the Company applies for and is granted a
contract by the Republic of Kazakhstan to engage in commercial production. That amount
is expected to be $731,221 and has not been recorded as a liability. Under the current
contract, once the Company determines the property contains commercially producible
reserves, and desires to commence commercial production, it must apply for such right
prior to the expiration of its exploration and development rights in February 2026. The
Company anticipates it will apply for a commercial production contract within the next
1-3 years. Of course, there is no guarantee when or if the Company will discover
commercially producible reserves within the Gornostai deposit. Should the Company
decide not to pursue a commercial production contract, then it can relinquish the
Gornostai deposit to the Republic of Kazakhstan in satisfaction of this
obligation.
The
Company is required, under its subsoil use contracts and licenses, to submit a proposed
annual work program to the MEMR for approval. Failure to meet the minimum work program
requirements could cause the Company to lose its subsoil use contracts and
licenses.
Operating Leases
– Bekem
leases approximately 400 square feet of office space located at 324 South 400 West,
Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in
the United States. The Company pays annual rents of approximately $7,800 for this space
pursuant to a lease agreement that expires December 31, 2007 with an option to extend
the lease for an additional year.
The
Company also maintains a representative office in Almaty, Kazakhstan, where it leases
approximately 1,575 square feet of office space. The lease agreement expires on
December 31, 2007. In April 2007, our monthly lease payment increased from $5,250 to
$6,125. Under the terms of the lease agreement, the owner of the space could terminate
the lease at any time and require the Company to vacate the premises.
13
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
Kaznickel LLP rents an office (approximately 1,840 square feet) in
Semei, Kazakhstan, for approximately $4,000 per month. Semei is the closest city to the
Gornostai deposit. Kaznickel also rents approximately 4,450 square feet of warehouse
space in Semei for $4,000 per month. Kaznickel uses this space to store test ore. These
spaces are leased on a year-to-year basis. Also, Kaznickel LLP rented an office
(approximately 350 square feet) in Astana, Kazakhstan, for approximately $1,600 per
month. This lease agreement was terminated on August 1, 2007 and will not be renewed as
Kaznickel closed its Astana office effective August 1, 2007.
In
April 2007, KKM increased the size of its offices in Aktobe, Kazakhstan from 1,260
square feet to 1,900 square feet. As a result, KKM’s monthly lease payment
increased from $4,000 per month to $5,400 per month. This space is leased on a
year-to-year basis.
NOTE
5 – RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the December 31, 2006 and 2005 financial
statements, the Company realized that its financial statements needed to be restated to
correct the reporting of mining transactions to be consistent with SEC Industry Guide
7,
Description of Property by Issuers Engaged or to Be Engaged
in Significant Mining Operations
that defines a production
stage enterprise as one that has reserves that are proven or probable as evidenced by
an acceptable reserve report. The Company has not yet received its reserve report,
therefore, under Industry Guide 7 it is an exploration stage enterprise. The Company
had not considered itself a development or exploration stage company due to the history
of production of the sites under mining licenses during the 1980s and 1990s and using
the reports evidencing commercial ore bodies that were developed during the Soviet era
under different methods than those currently used to support the definition of
“reserves” under Industry Guide 7. The Company’s licenses granted by
the MEMR for the Kempirsai and Mamyt deposits are production licenses and require the
Company to extract certain quantities of nickel, cobalt and coal in order to retain the
licenses, which were previously reported as production activity. The Company expects to
obtain acceptable reserve reports early in 2008.
In
order to comply with the reporting under Industry Guide 7, a column for transactions
from “inception to date” has been added to the statements of operations and
cash flows, stripping costs have been expensed rather than capitalized, and revenues
and costs of products sold have been reclassified to offset certain direct mining
expenses which are included in exploratory costs, depreciation and amortization
expenses were also reclassified as exploratory costs. Also, the other income (expense)
as originally filed included disposals of inventory, which were reclassified as
exploratory costs and revenue from services were reclassified as other income. In
addition, the number of weighted-average shares outstanding for the three months and
nine months ended September 30, 2007 was corrected.
The
effects of the restatements are as follows:
Balance Sheet
|
|
|
|
|
|
|
|
September 30, 2007
|
As Previously Reported
|
Effect of Restatement
|
As Restated
|
|
|
|
|
Inventories
|
1,275,941
|
(923,817)
|
352,124
|
Accrued expenses
|
(303,335)
|
54,632
|
(248,703)
|
Accumulated deficit
|
9,916,457
|
895,956
|
10,812,413
|
Accumulated other comprehensive loss
|
81,259
|
(26,771)
|
54,488
|
14
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 (UNAUDITED)
Statements of Operations
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
2007
|
|
|
|
|
As Previously Reported
|
Effect of Restatement
|
As Restated
|
|
|
|
|
Revenue
|
1,882
|
(1,882)
|
-
|
Cost of product sold
|
(2,150)
|
2,150
|
-
|
Exploratory costs
|
(71,534)
|
(417,696)
|
(489,230)
|
Depreciation expense
|
(27,472)
|
27,472
|
-
|
Other income (expense)
|
31,673
|
(21,720)
|
9,953
|
Deferred tax expense
|
(597,193)
|
597,193
|
-
|
Net Loss
|
(1,303,346)
|
185,517
|
(1,117,829)
|
|
|
|
|
Statements of Operations
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
2007
|
|
|
|
|
As Previously Reported
|
Effect of Restatement
|
As Restated
|
|
|
|
|
Revenue
|
38,537
|
(38,537)
|
-
|
Cost of product sold
|
(36,950)
|
36,950
|
-
|
Exploratory costs
|
(1,467,338)
|
(815,375)
|
(2,282,713)
|
Depreciation expense
|
(94,253)
|
94,253
|
-
|
Other income (expense)
|
19,264
|
13,277
|
32,541
|
Deferred tax benefit
|
490,314
|
(49,201)
|
441,113
|
Net Loss
|
(3,831,431)
|
(758,633)
|
(4,590,064)
|
Statements of Cash Flows
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
2007
|
|
|
|
|
As Previously Reported
|
Effect of Restatement
|
As Restated
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
Net loss
|
(3,831,431)
|
(758,633)
|
(4,590,064)
|
Adjustments to reconcile net loss to
|
|
|
|
net cash provided by operating activities:
|
|
|
|
Deferred tax benefit
|
(515,422)
|
74,309
|
(441,113)
|
Stock grant compensation expense
|
333,101
|
(25,108)
|
307,993
|
Change in operating assets and liabilities:
|
|
|
|
Inventories
|
(864,592)
|
709,432
|
(155,160)
|
NOTE
6 – SUBSEQUENT EVENT
In
December 2007, the Republic of Kazakhstan Ministry of Energy and Mineral Resources
(“MEMR”) unilaterally terminated KKM’s contracts and licenses to
explore for nickel, cobalt, brown coal, and other minerals within the Kempirsai and the
Mamyt deposits on the basis that KKM had material failures in execution of the work
programs associated with the contacts and licenses but did not detail those failures.
In January 2008, KKM filed an action in the Court of Astana city against the MEMR
challenging the legality of the unilateral termination of the KKM contracts and
licenses by the MEMR for several reasons, including that the contracts and licenses had
been terminated on grounds not provided for in the subsoil use contracts and
legislation and there were no material failures in the execution of the work programs
associated with the contracts and licenses. In February 2008, the Court of Astana city
acknowledged that the unilateral termination of the contracts and licenses by the MEMR
was illegitimate. The Court canceled the order of the MEMR relating to the unilateral
termination of the licenses and reinstated the KKM contracts and licenses. The MEMR has
appealed the Court’s decision to the Republic of Kazakhstan Supreme
Court.
15
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
For a complete understanding, this Management’s Discussion and
Analysis should be read in conjunction with the
Financial
Statements
and
Notes to the
Financial Statements
contained in this Form 10-Q and our Form
10-KSB for the year ended December 31, 2006.
Forward Looking Information and Cautionary Statement
Certain statements contained herein including, but not limited to those
relating to our plan of operations, future potential revenue, future expenses, future
development of our mineral properties, the development and commercial viability of our
processing technology, our ability to obtain future governmental approvals, expansion
of our operations, our ability to generate cash flow, future demand for nickel, cobalt
and brown coal, future commodity prices, integration of new technologies into
operations, credit facilities, future capital expenditures and working capital,
sufficiency of future working capital, borrowings and capital resources and liquidity,
expectations of timing, satisfaction of contingencies, the impact of any change in
accounting policies on our financial statements, future acquisitions,
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
“
believe
,”
“
expect
,”
“
project
,”
“
intend
,”
“
estimate
,”
“
budget
,”
“
plan
,”
“
forecast
,”
“
predict
,”
“
may
,”
“
will
,”
“
could
,”
“
should
,” or
“
anticipate
” and similar
expressions or the negative thereof, or other variations thereon, or comparable
terminology, or discussions of strategy that involve risk and uncertainties are also
intended to identify forward-looking statements. Such statements involve known and
unknown risks, uncertainties, and other factors that may cause the actual results,
performance or achievements of the Company or industry to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, market
factors, market prices (including regional basis differentials) of nickel, cobalt and
brown coal, results of future exploration and extraction activities, future production
and costs, unsettled political conditions, civil unrest and governmental actions,
foreign currency fluctuations, and environmental and labor laws and other factors
detailed herein. Given these uncertainties, prospective investors are cautioned not to
place undue reliance on such forward-looking statements. These forward-looking
statements are based on current expectations. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
We are engaged in the development and exploration of nickel, cobalt and
brown coal deposits in the Republic of Kazakhstan. We carry out our exploration
activities through our two wholly-owned subsidiaries, Kyzyl Kain Mamyt LLP
(“KKM”) and Kaznickel LLP (“Kaznickel”).
The primary assets of KKM are exclusive subsoil use licenses and
contracts to a 575,756 acre territory in northwestern Kazakhstan referred to herein as
the Kempirsai deposit. The contract grants KKM the right to explore, extract and
process nickel and cobalt ore from the Kempirsai deposit, which is comprised of the
Kara-Obinskoe and Stepninskoye sections (collectively referred to as the
“Kara-Obinskoye section”) and the Novo-Shandashinskoe section. KKM also
holds a subsoil use contract to
16
explore
and produce brown coal from the Mamyt coal deposit, which is located within 40
kilometers of the Kempirsai deposit. Unless otherwise indicated by the context of the
disclosure, the Kara-Obinskoye section, the Novo-Shandashinskoye section and the Mamyt
deposit are collectively referred to herein as the “Kempirsai
deposit.”
The primary asset of Kaznickel is an exclusive subsoil use license and
contract that grants Kaznickel the exclusive right, through February 2008, unless
extended, to explore for nickel, cobalt and other minerals in a 12,232 acre area in
northeastern Kazakhstan known as the Gornostayevskoye (“Gornostai”)
deposit. The concession further provides that if we make a commercial discovery of
nickel, cobalt or other minerals within the concession territory, we can apply for and
receive the exclusive rights to commercially produce and sell nickel and cobalt ore
through February 2026.
The following table provides additional information regarding our
subsoil use contracts:
Territory
Name
|
Size of
Territory
|
Primary Minerals
|
License
Type
|
License or
Contract
#
|
License and
Subsoil Use Contract Term
|
|
|
|
|
|
|
Kempirsai
|
575,756 acres
|
Nickel and cobalt ore
|
Production
|
MG #420
MG #426
|
Expires Oct, 12, 2011 unless extended.
|
|
|
|
|
|
|
Mamyt
|
116 acres
|
Brown coal
|
Production
|
MG #9-D
|
Expires Dec, 11 2018 unless
extended.
|
Gornostai
|
12,232 acres
|
Nickel and cobalt ore
|
Exploration
and
Production
|
1349
|
Exploration period expires Feb. 26, 2008 unless
extended. Production period expires Feb. 26, 2026 unless
extended.
|
As noted above, our subsoil use contract for the Kempirsai nickel and
cobalt deposit and Mamyt brown coal deposit grant us commercial production rights. The
Kempirsai deposit was discovered in 1938 and at its peak in the late 1980’s
produced almost five million tons of ore annually. Since the mid-1990’s, however,
mining activity at the deposit has been insignificant.
We are currently at the exploration stage on the Gornostai deposit. To
retain our subsoil use contract during exploration stage we are required to satisfy a
minimum work program that is approved by the Geology Committee of the MEMR. We are
currently in the third year of a three-year work program. Under this program, we are
required to engage in an exploratory drilling program designed to identify and evaluate
the mineral resources contained within the contract territory. In 2007, we are required
to drill test holes totaling at least 12,961 meters. For 2007, we planned to drill
approximately 615 test holes totaling approximately 15,700 meters during 2007. As of
September 30, 2007 we have drilled a total of 15,625 meters (619 test
holes).
The objective of our drilling program is to complete a detailed study of
the structural characteristics of what we believe to be the two largest ore bodies in
the Gornostai deposit, as well as certain other ore bodies where high grade nickel
deposits have been located. The drilling was conducted on a 50 x 50-100 meter grid,
which will make it possible to convert indicated and inferred resources to proved and
probable reserves as development of the property progresses.
17
When we complete exploration of the Gornostai deposit, assuming we make
commercial discoveries, we will apply to the MEMR to move to commercial
production.
Should we fail to complete the minimum work program imposed by any of
our subsoil use contracts in a given year, the MEMR could review the work program,
request an update and amendment to the work program, impose fines and penalties upon us
or even revoke our subsoil use contracts and licenses.
We currently have no processing facilities at either the Kempirsai or
Gornostai deposits. We plan to construct processing facilities to process our ores at
our Kempirsai deposit. Historically, pyrometallurgy has been the most common processing
procedure utilized to process nickel and cobalt ores. Hydrometallurgical technology has
improved to the point that it is now an acceptable alternative to pyrometallurgy for
processing nickel and cobalt ores. Both technologies require large plants, costly
construction and expensive equipment often requiring capital infusions of hundreds of
millions of dollars.
We have retained the services of an independent engineering firm to
conduct a pre-feasibility study reviewing different technologies to determine the best
processing technology, optimal processing capacity, construction costs and timelines,
etc. to allow us to determine the type of processing facility we will construct at the
Kempirsai deposit. We expect the pre-feasibility study to be completed by the end of
2007.
Results of Operations
Since inception we have generated limited revenue. We have spent
millions of dollars to date and anticipate that we will spend significant additional
capital before we begin to realize significant revenue from operations.
In July 2006 we realized net proceeds of approximately $26,600,000
through a private placement of our equity securities. As of September 30, 2007, we had
spent approximately $24,222,000 of those funds. Approximately $12,200,000 was used to
repay loans, $2,500,000 was used to meet our minimum working program obligations,
approximately $2,200,000 was spent developing our hydrochlorination processing
technology and $7,300,000 was used for working capital. At September 30, 2007, we had
cash on hand of $2,378,425. We expect cash on hand will be sufficient to fund our
activities through the end of the current fiscal year. We also anticipate the need to
seek additional funding by the end of fiscal 2007 to continue our efforts to develop
and exploit our mineral resources. There is no assurance that we will be able to obtain
additional funding in the future on favorable terms, or at all. At this time, we have
no commitments from any parties to provide us additional funding.
Three months ended September 30, 2007 compared to the three months
ended September 30, 2006
Because our deposits are without known reserves we are considered to be
in the exploration stage. Any revenues earned during this stage from sale of ore or
brown coal are recorded against exploratory costs. During the three months period ended
September 30, 2007, such incidental sales amounted to $1,882.
18
|
General and Administrative Expenses
|
Our general and administrative expenses during the three months ended
September 30, 2007 decreased to $871,463 from $1,287,652 during the three months ended
September 30, 2006. During the 2006 quarter we extracted no ore. As a result, expenses
(salaries of workers and other related expenses) of approximately $400,000 were
allocated to general and administrative expenses. By comparison, during the 2007
quarter we extracted 62,065 tons of ore, which allowed us to reduce the amount of
workers’ salaries and other related expenses allocated to general and
administrative expense during the three months ended September 30, 2007.
Research and Development Costs
We engaged in no research and development in connection with the
development and testing of our hydrochlorination processing technology during the third
quarter 2007 or during the third quarter 2006.
We pursued an aggressive exploratory drilling program during the first
half of 2007, which resulted in our nearly satisfying our full year drilling commitment
during the first six months of the year. As a result, during the three months ended
September 30, 2007 we completed drilling of 16 test holes (12 test holes in the South
section of the Gornostai deposit and four test holes in the North section of the
Gornostai deposit). By comparison, during the three months ended September 30, 2006, we
drilled 105 test holes in the South section of the Gornostai deposit. Despite the
reduced scope of drilling activities, the exploratory costs increased to $489,230
during the three months ended September 30, 2007 compared to exploratory costs of
$336,211 during the three months ended September 30, 2006. The increase mainly occurred
due to cost of extracted ore at the Kempirsai deposit. As discussed above, during the
three months ended September 30, 2007 we extracted 62,065 tons of ore which were
included into exploratory costs since the Company is being at the exploratory stage. No
ore was produced during the same period of 2006. Also, as discussed above, because our
activities are considered as exploratory, the exploratory costs are reflected net of
revenues earned from sale of ore or brown coal. During the three month period ended
September 30, 2007, we earned revenue of $1,882. By comparison during the three month
period ended September 30, 2006 we realized no revenue. We will continue to engage in
exploration activities throughout the remainder of the current fiscal year. We do not
expect to realize significant revenue during the remainder of the current fiscal
year.
Accretion expense increased by $1,431 during the three months ended
September 30, 2007 compared to the same period of 2006. Until such time as we engage in
mining and production we believe accretion expense will continue at rates consistent
with those realized during the quarter ended September 30, 2007.
19
Grant Compensation Expense
During the three months ended September 30, 2007 we recognized $120,941
in grant compensation expense for restricted stock grants issued to certain officers
and key employees during the fourth quarter 2006. We had no comparable expense during
the three months ended September 30, 2006 because the restricted stock grants were not
made until the fourth quarter of 2006.
Total Operating Expense and Loss from Operations
Our total operating expense and loss from operations decreased from
$1,642,621 during the three months ended September 30, 2006 to $1,501,823 during three
months ended September 30, 2007. The principal reasons for the decrease are the
following:
|
o
|
Decrease in general and administrative expense of
$416,189 as we extracted ore during the three months ended September
30, 2007 which led to a decrease in allocation of certain costs to
general and administrative expenses. By comparison, no ore was
extracted during the same period of 2006;
|
|
o
|
Increase in exploratory costs of $153,019 mainly due to
increase in cost of ore extracted during the period;
|
|
o
|
Increase in recognition of the stock grant compensation
expenses of $120,941. By comparison, we had no comparable expense
during the three months ended September 30, 2006.
|
Despite the reduction in total operating expenses realized during the
third quarter 2007 compared to 2006, we expect total operating expenses during the
remainder of 2007 to be higher as compared to 2006.
Interest Income
During the three months ended September 30, 2007, we realized interest
on deposits of $89,902. By comparison during the three months ended September 30, 2006
we earned $17,563 interest on deposits. The deposit accounts in which our funds are
held provide for higher rates of return, varying from 3% to 8%, the longer the funds
are left on deposit, with determination of the interest rate and recognition of the
interest earned at the time the funds are withdrawn or upon the maturity date of the
deposit. Certain deposits matured during the third quarter of 2007 which resulted in
the realization of higher rates of return as compared to the third quarter
2006.
Interest Expense
We realized no interest expense during the three months ended September
30, 2007. During the three months ended September 30, 2006 we realized interest expense
of $1,109,062. The interest expense realized during the third quarter 2006 resulted
from retiring notes payable prior to their due dates and the full recognition of the
debt discount of $885,970. Upon acquisition of KKM we assumed certain debts with
interest rates that were considered to be below market rates. These particular debts
with below market interest rates were discounted, for
20
reporting purposes, to arrive at interest rates equivalent to market
rates. The total payout of these debts was not adjusted, just the allocation of
principal and interest payments. Upon the payoff of these debts, the interest expense,
or discount, was recognized in full. The recognition of the debt discount was a
one-time occurrence and we have not and do not expect to recognize a similar charge in
future years. The actual dollar amount of funds paid by us for interest during the
third quarter 2006 was $229,096.
Translation Adjustment
The consolidated financial statements are presented in U.S. dollars. The
functional currency of our subsidiary Kaznickel is U.S. dollars. The functional
currency of our subsidiary KKM is Kazakh tenge. Results of operations are translated
into U.S. dollars at the average exchange rates during the reporting period. All
balance sheet accounts of KKM are translated at exchange rates on the date of the
financial statements and translation differences are included in stockholders’
equity as cumulative translation adjustments. However, non-monetary assets and
liabilities of Kaznickel are translated into U.S. dollars, using historical or average
exchange rates and monetary assets and liabilities are translated into U.S. dollars
using exchange rates on the date of the financial statements where translation
differences are included in results of operations.
Therefore, the translation adjustment in the consolidated financial
statements represents the translation differences from translation of the
Kaznickel’s financial statements. As a result, the translation adjustment is
commonly, but not always, positive if the average exchange rates are lower than
exchange rates on the date of the financial statements and negative if the average
exchange rates are higher than exchange rates on the date of the financial
statements.
As a result of the weakening of the U.S. dollar against the Kazakh
tenge, the average exchange rate during the three months ended September 30, 2007 was
higher than the closing exchange rate, thus resulting in a negative translation
adjustment during the three months ended September 30, 2007.
Exchange Gain/Loss
During the quarter ended September 30, 2007 we realized an exchange gain
of $361,665 compared to an exchange loss of $1,031,056 during the quarter ended
September 30, 2006. As with translation adjustment, we recognize exchange gain or loss
as a result of having subsidiaries operating in foreign countries whose functional
currency may or may not be the U.S. dollar. This requires us to translate results of
operations from a foreign currency, in this case Kazakh tenge, to U.S. dollars at the
average exchange rate, where results of operations include exchange gains or losses on
the U.S. dollar monetary assets and liabilities.
Other Income (Expense)
During the three months ended September 30, 2007 we earned income from
other sales of $9,953 comprising mainly income from renting transport facilities to
third parties. For the same period of 2006 we earned income of $3,709 from similar
services. The services are provided on an irregular basis when assets are not used in
the Company’s primary activities.
21
Net Loss
Because of reductions in operating expenses and our realizing net other
income of $383,994 compared to net other expense of $2,028,801 during the three months
ended September 30, 2007 we experienced a net loss of $1,117,829 or $.01 per share,
compared to a net loss of $3,671,422 or $.03 per share, during the three months ended
September 30, 2006. We anticipate we will continue to experience net losses until we
are able to engage in significant nickel and cobalt ore extraction, processing and
sales. We do not expect to be engaged in significant ore extraction and processing
prior to the 2009 fiscal year.
Nine months ended September 30, 2007 compared to the nine months
ended September 30, 2006
Because our deposits are without known reserves we are considered to be
in the exploration stage. Any revenues earned during this stage from sale of ore or
brown coal are recorded against exploratory costs.
|
General and Administrative Expenses
|
Our general and administrative expenses during the nine months ended
September 30, 2007 increased to $3,564,696 from $2,209,740 during the nine months ended
September 30, 2006. This increase in general and administrative expenses during the
nine months ended September 30, 2007 is mainly attributable to a $700,000 increase in
salary expense and related taxes as a result of an increase in the number of personnel
we employ and salary increases for existing employees, as our subsidiary KKM hired a
number of personnel to carry out development and testing of the pilot plant and
additional geologists, metallurgists and ecology supervisors. We also hired additional
in-house accounting, finance, legal and information technology personnel. We do not
expect to hire a significant number of additional employees until such time as needs or
funding so justify. Therefore, we do not expect to experience significant increases in
salaries and related taxes during the remainder of the 2007 fiscal year. Also, during
second quarter we had a $270,000 increase in transportation and repair services related
to modernization works at KKM’s facilities. Another contributing factor to the
increase in general and administrative expenses was a $447,000 increase in professional
fees, primarily attributable to increased legal and accounting fees and costs
associated with a resource estimation prepared by a third party consulting firm. We
believe this increase in professional fees was more a matter of timing and the one-time
cost of the resource estimation than a trend and we expect professional fees to return
to more traditional levels in upcoming quarters.
Research and Development Costs
We engaged in no research and development in connection with the
development and testing of our hydrochlorination processing technology during the nine
months ended September 30, 2007. During the nine months ended September 30, 2006 we
spent $391,307 in research and development costs, primarily in connection with the
development of our pilot plant. Given our limited funds, we have decided to allocate
the funds budgeted for development and testing of our pilot plant to other uses. We do
not anticipate engaging in additional development and testing of our hydrochlorination
processing technology prior to receipt of the pre-feasibility study.
22
As a result of our aggressive exploratory drilling program for 2007,
during the nine months of 2007 we completed drilling of 619 test holes (611 test holes
in the South section and 8 test holes in the North section of the Gornostai deposit) to
an aggregate depth of 15,625 meters (14,965 meters in the South section and 660 meters
in the North section). We incurred $2,282,713 in exploratory costs through September
30, 2007. By comparison, during the nine months ended September 30, 2006, we drilled
169 test holes in the South section and no holes in the North section of the Gornostai
deposit and incurred exploratory costs of $581,462. Our exploratory drilling program
for our 2007 fiscal year calls for us to drill a total of 615 test holes to an
aggregate depth of approximately 15,700 meters.
The
increase also occurred due to cost of extracted ore at the Kempirsai deposit. During
the nine months ended September 30, 2007 we extracted 79,021 tons of ore while no ore
was extracted during the same period of 2006. The cost of extraction of ore was
included into exploratory costs since the Company is being at the exploratory stage.
Also, as discussed above, because our operations are considered as exploratory, the
exploratory costs are reflected net of revenues earned from sale of ore or brown coal.
During the nine months ended September 30, 2007 we have realized revenue of $38,537. By
comparison, during the nine months ended September 30, 2006 we realized no revenue
from. We do not anticipate realizing significant revenue during 2007.
Accretion expense increased by $5,657 during the nine months ended
September 30, 2007. We believe accretion expense will continue at rates consistent with
those realized during the nine months ended September 30, 2007 until such time as we
begin to engage in significant mining and production activities.
Grant Compensation Expense
During the nine months ended September 30, 2007 we incurred $307,993 in
grant compensation expense for restricted stock grants issued to certain officers and
key employees during the fourth quarter 2006. We had no comparable expense during the
nine months ended September 30, 2006 because, as noted above, the grants were not made
until the fourth quarter 2006.
|
Total Operating Expenses and Loss from
Operations
|
Despite an insignificant decrease in total operating expenses during the
three month period ended September 30, 2007 we realized a 92% increase in total
operating expenses during the nine months ended September 30, 2007 as a result of
higher general and administrative expense, grant compensation expense and exploration
costs, which expenses and costs were only partially offset by a reduction in research
and development costs during the nine months ended September 30, 2007. Our total
operating expenses and loss from operations increased by $2,978,550 during the nine
months ended September 30, 2007. We expect total operating expenses during the balance
of 2007 to remain significantly higher as compared to 2006 and we will continue to
generate losses until such time as we begin significant ore production.
23
Interest Income
During the nine months ended September 30, 2007, we realized interest on
deposits of $316,529. By comparison during the nine months ended September 30, 2006 we
earned $27,935
interest on deposits. As discussed above, the
deposit accounts in which our funds are held provide for higher rates of return,
varying from 3% to 8%, the longer the funds are left on deposit, with determination of
the interest rate and recognition of the interest earned at the time the funds are
withdrawn or upon the maturity date of the deposit. Certain deposits matured during the
third quarter of 2007 which resulted in the realization of higher rates of return as
compared to the third quarter 2006.
Interest Expense
During the nine months ended September 30, 2007 we incurred interest
expense of $1,018 compared to interest expense of $1,474,274 during the nine months
ended September 30, 2006. As discussed above, the interest expense realized during the
first three quarters of 2006 resulted from retiring notes payable prior to their due
dates and the full recognition of the debt discount of $885,970. Upon acquisition of
KKM we assumed certain debts with interest rates that were considered to be below
market rates. These particular debts with below market interest rates were discounted,
for reporting purposes, to arrive at interest rates equivalent to market rates. The
total payout of these debts was not adjusted, just the allocation of principal and
interest payments. Upon the payoff of these debts, the interest expense, or discount,
was recognized in full. The recognition of the debt discount was a one-time occurrence
and we have not and do not expect to recognize a similar charge in future years. The
actual dollar amount of funds paid by us for interest during the nine months ended
September 30, 2006 was $529,096.
Translation Adjustment
As indicated above, the translation adjustment in the consolidated
financial statements represents the translation differences from translation of the
Kaznickel’s financial statements.
As a result of the weakening of the U.S. dollar against the Kazakh
tenge, the average exchange rate during the nine months ended September 30, 2007 was
higher than the closing exchange rate, thus resulting in a negative translation
adjustment during the nine months ended September 30, 2007.
Exchange Loss and Gain
During the nine months ended September 30, 2007 we realize an exchange
gain of $1,053,644 compared to an exchange loss of $140,908 during the quarter ended
September 30, 2006. As with translation adjustment, we recognize exchange gain or loss
as a result of having subsidiaries operating in foreign countries whose functional
currency may or may not be the U.S. dollar. This requires us to translate results of
operations from a foreign currency, in this case Kazakh tenge, to U.S. dollars at the
average exchange rate, where results of operations include exchange gains or losses on
the U.S. dollar monetary assets and liabilities.
24
Other Income (Expense)
During the nine months ended September 30, 2007 we earned income from
other sales of $32,541 comprising mainly income from renting transport facilities to
third parties. For the same period of 2006 we incurred losses of $30,639 from similar
services. The services are provided on an irregular basis when assets are not used in
the Company’s primary activities.
For the foregoing reasons, during the nine months ended September 30,
2007 we experienced a net loss of $4,590,064, or $.04 per share, compared to a net loss
of $4,885,565, or $.05 per share, during the nine months ended September 30, 2006. We
anticipate we will continue to experience increasing net losses until we are able to
engage in significant nickel and cobalt ore extraction, processing and sales. We do not
expect to be engaged in significant ore extraction and processing prior to the 2009
fiscal year.
Liquidity and Capital Resources
Our capital resources have consisted primarily of funds we have borrowed
from related and non-related parties and funds we raised through a private placement of
our equity securities in July 2006. These funds, however, represent only a portion of
the funds we will need to complete exploration and development and move to commercial
production. As of September 30, 2007, we had $2,378,425 of the approximately
$26,600,000 in net proceeds we realized from the private placement. We have used the
money raised in the private offering to reduce debt, acquire equipment, continue
exploration and fund operations. We anticipate the need for substantial additional
capital resources. As discussed above, we are in negotiations with certain third
parties for the sale of our ore, depending on the success of those negotiations, we may
be able to fund our expenses through the sale of our ore. We have received indications
from certain of our primary shareholders that if we are unsuccessful in negotiating ore
sales contracts, they are willing to provide additional funds to us to continue
exploration activities during 2008, most likely in the form of loans. We currently,
however, do not have definitive agreements with any parties to provide us additional
funding.
During the nine months ended September 30, 2007 and September 30, 2006,
cash was primarily used to fund operations and repay notes payable. See below for
additional discussion and analysis of cash flow.
For the Nine Months Ended September
30,
|
2007
|
2006
|
|
|
|
Net cash used in operating activities
|
$(5,757,435)
|
$(4,883,510)
|
Net cash used in investing activities
|
(528,452)
|
(4,406,348)
|
Net cash provided by financing activities
|
-
|
17,547,142
|
Effect of exchange rate changes on cash
|
80,632
|
149,573
|
NET (DECREASE) INCREASE IN CASH
|
$(6,205,255)
|
$ 8,406,857
|
25
During the nine months ended September 30, 2007 net cash used in
operating activities was $5,757,435 compared to net cash used in operating activities
of $4,883,510 during the nine months ended September 30, 2006. This increase in net
cash used in operating activities is primarily attributable to increases in salary and
related taxes, exploratory costs and professional fees.
During the nine months ended September 30, 2007 net cash used in
investing activities was $528,452. By comparison, during the nine months ended
September 30, 2006 we used net cash from investing activities of $4,406,348. The cash
used in investing activities was primarily used to purchase additional
equipment.
During the nine months ended September 30, 2007 no cash was generated in
financing activities compared to $17,547,142 net cash realized in financing activities
during the nine months ended September 30, 2006, as a result of the private placement
of our equity securities.
Plan of Operations
As of September 30, 2007 we had cash on hand of $2,378,425. As discussed
above, we have budgeted to spend all of these funds in exploration and development
activities during remaining three months of 2007. Following is a brief description of
how we anticipate allocating our cash on hand during the next three months.
Drilling and Core Analysis
We have allocated approximately $169,400 to the completion of our
drilling and exploration program for the remainder of the 2007 fiscal year. This
included exploration costs for geologist fees, geological data processors, core sample
takers, topographers etc. The drilling program is completed in July 2007 by drilling
15,625 meters, including 14,965 meters in South section and 660 meters in North
section. We have satisfied our 2007 minimum work program requirements for the Gornostai
deposit. We do not expect to engage in additional drilling activities during the
remainder of 2007. Currently, we are analyzing the results of our drilling and
exploration works in order to prepare and submit an exploration report to the MEMR for
finalizing the reserve estimates and obtaining permission for commercial production of
the nickel ore from the Gornostai deposit.
Feasibility Study
We anticipate spending approximately $315,000 for the preparation of
pre-feasibility studies for the construction of a processing plant at the Kempirsai
deposit. As of September 30, 2007 we had spent $102,000 for the study.
Field Modernization
We have allocated approximately $1,000,000 during 2007 for modernization
of vehicles and equipment at the Kempirsai deposit to allow us to increase our ore
extracting capabilities. As of September 30, 2007 we had spent approximately $563,000
to modernize vehicles and equipment at the Kempirsai deposit.
26
Administrative Expenses
We plan to allocate approximately $1,500,000 for administrative expenses
during the next three months, which include expenses of maintaining offices in the
United States and Kazakhstan, for salaries and taxes.
Professional Fees
We expect to incur approximately $52,000 in expenses for services of our
financial auditors and securities attorneys during the next three months.
Additional Activities
We are currently considering alternatives to a hydrochlorination
processing plant to allow us to begin to generate cash flow from the Kempirsai deposit.
We are considering the economic viability of a pyrometallurgical or hydrometallurgical
processing plant to produce ferronickel at our Kempirsai deposit. As noted above, we
have allocated $315,000 in our 2007 budget for the preparation of pre-feasibility study
to help us determine the appropriate technology for use at the Kempirsai deposit. Once
that determination is made, we plan to undertake a feasibility study. Assuming the
results of those studies are positive, we would like to move to the design phase of a
commercial processing plant, including obtaining detailed engineering and design for
plant construction. This would include flowsheet design and pilot testing. We estimate
the cost to do this will be roughly $2.5 million.
Summary of Material Contractual Commitments
|
The
following table lists our significant commitments as of September 30,
2007:
|
Contractual Commitments
|
Total
|
Payments Due by Fiscal Year
|
Less than
one year
|
2-3 years
|
4-5 years
|
After
5 years
|
|
|
|
|
|
|
Due to the government of Republic of
Kazakhstan
(1)
|
$ 731,221
|
$ -0-
|
$ 731,221
|
$ -0-
|
$ -0-
|
Social projects
(2)
|
321,000
|
-0-
|
14,000
|
307,000
|
-0-
|
Asset retirement obligation
(3)
|
1,060,515
|
-0-
|
-0-
|
-0-
|
1,060,515
|
Operating leases
|
61,900
|
61,900
|
-0-
|
-0-
|
-0-
|
Total
|
$ 2,174,636
|
$61,900
|
$ 745,221
|
$ 307,000
|
$ 1,060,515
|
(1)
In connection with our acquisition
of the exploration contract covering the Gornostai deposit, we are required to repay
the Republic of Kazakhstan 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 a contract to engage in commercial production by the Republic of Kazakhstan.
Under our current contract once we determine the property contains commercially
producible reserves, if we wish to commence commercial production, we must apply for
such right prior to the expiration of our exploration rights in February 2008, unless
we extend our exploration period. We anticipate that we will apply for a commercial
production contract within the next 1-3 years. Of course, there is no guarantee when or
if we will discover commercially producible reserves within the Gornostai deposit.
Should we decide not to pursue a commercial production contract, we can relinquish the
Gornostai deposit to the Republic of Kazakhstan in satisfaction of this
obligation.
27
(2)
Under the terms of our subsoil use
contracts, we are required to make funding for social projects relating to employees of
KKM, including improvements to living conditions, etc., in the amount of $117,906. We
have already satisfied approximately $97,000 of this obligation during 2007 by
transferring an idle building to the Badamsha village administration. We are also
required to donate $300,000 for the ongoing development of Astana and Kurchatov, which
are cities in Kazakhstan.
(3
)
Under the terms of our subsoil use contracts,
we are required to remove all operating equipment and remediate the property. This
remediation work can be done during the term of the subsoil use contract or upon
completion of the terms of the contract.
In July 2007, we completed the minimum exploratory drilling requirements
for 2007 associated with the Gornostai deposit.
Off-Balance Sheet Financing Arrangements
|
As of September 30, 2007, we had no off-balance sheet
financing arrangements.
|
Critical Accounting Policies
We prepare our financial statements in conformity with accounting
principles generally accepted in the United States of America. As such, we are required
to make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of expenses and revenues, to the extent we generated revenue
during the periods presented. Actual results could differ from these estimates. Our
significant accounting policies require us to make difficult, subjective or complex
judgments or estimates. We consider an accounting estimate to be critical if (1) the
accounting estimate requires us to make assumption about matters that were highly
uncertain at the time the accounting estimate was made and (2) changes in the estimates
that are reasonably likely to occur from period to period, or use different estimates
that we reasonably could have used in the current period, would have a material impact
on our financial condition or results of operations.
There are other items within our financial statements that require
estimation, but are not deemed critical as defined above. Changes in estimates used in
these and other items could have a material impact on our financial statements.
Management has discussed the development of these critical accounting estimates with
our board of directors and they have reviewed the foregoing disclosure.
Use of Estimates
– In
connection with the preparation of our financial statements, we are required to make
estimates and assumptions that affect the reported amounts in the financial statements
and accompanying notes. One of the significant areas requiring the use of management
estimates and assumptions relates to environmental reclamation and closure obligations.
Under our licenses with the Republic of Kazakhstan, following completion of exploration
and mining activities we are required to reclaim our licensed territories. To prepare
our financial statements in accordance with accounting principles generally accepted in
the United States of America we are required to account for this obligation. The
determination of the amount of the mine retirement and environmental reclamation
obligation the Republic of Kazakhstan will impose upon us, however, has not yet been
determined. The determination of the mine retirement and environmental reclamation
obligation is based, in significant part, on the size of each deposit. Because we are
still exploring our
28
Gornostai property and do not yet know the full extent of the Gornostai
deposit, the mine retirement and environmental reclamation obligation has not yet been
set by the Republic of Kazakhstan. We base our estimate of this obligation on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Accordingly, actual results may differ
significantly from our estimate.
Income Taxes
– While we are a
Utah corporation, our primary operations are in the Republic of Kazakhstan. The
Republic of Kazakhstan was formed in 1991 following the break-up of the former Soviet
Union. At the time the Republic of Kazakhstan was formed, it adopted a new tax code.
The tax code and the application of tax laws in the Republic of Kazakhstan are still
developing and may not be uniformly applied in all instances.
Item
3. Qualitative and Quantitative 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.
Commodity Price Risk
Our revenues, profitability and future growth will depend substantially
on prevailing prices for nickel and cobalt. If and when we commence commercial
production, commodity prices will affect the amount of cash flow available for capital
expenditures and our ability to either borrow or raise additional capital. Price will
also affect our ability to produce, transport and market the nickel and cobalt we
produce.
Historically, nickel and cobalt prices have been subject to significant
volatility in response to changes in supply, market uncertainty and a variety of other
factors beyond our control. Nickel and cobalt are likely to continue to be volatile in
the future and this volatility makes it difficult to predict future price movements
with any certainty. Any declines in nickel and cobalt prices would reduce the revenues
we could earn when we begin commercial production, and could also reduce the amount of
nickel and cobalt 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. Our Kazakhstani subsidiary
Kaznickel uses the U.S. dollar as its functional currency and KKM uses the Kazakh tenge
as its functional currencies. 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.
When the U.S. dollar strengthens in relation to the Kazakh Tenge, the U.S.
dollar-reported expenses will decrease. We do not engage in hedging transactions to
protect us from such risk.
29
Item
4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to provide reasonable
assurance that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms, and that such information
is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, as appropriate, to allow timely decisions
regarding required financial disclosures. Because of inherent limitations, our
disclosure controls and procedures, no matter how well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of such
disclosure controls and procedures are met.
Subsequent to the filing of the Original Report, and in connection with
the comments of the staff of the SEC, we determined that we had erroneously presented
the Company as being in the “production stage” rather than the
“exploration stage.” As a result of this error, the Company is filing this
Amendment to restate its consolidated financial statements for the periods ended
September 30, 2007 and 2006. Our management and our board of directors determined
on February 5, 2008, with respect to the annual reports for the fiscal years ended
December 31, 2006 and 2005 and the fiscal quarters beginning January 1, 2006 through
September 30, 2007, that we had a material weakness in internal control over financial
reporting because the controls did not identify the error on a timely basis.
In connection with the restatement referred to above, the Company, under
the supervision and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and
operation of the disclosure controls and procedures as of the end of the period covered
by this report, which included consideration of the required restatement. Based on the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of the end of the period
covered by this report and that we had a material weakness in our internal control over
financial reporting because the controls did not identify the error on a timely
basis.
In light of this conclusion, the Company performed additional analysis
and procedures to ensure its consolidated financial statements are prepared in
accordance with U.S. generally accepted accounting principles. Accordingly, management
believes that the financial statements included in this report fairly present in all
material respects the Company’s financial condition, results of operations and
cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
Management had previously concluded that our disclosure controls and
procedures were effective as of September 30, 2007 and reported that there was no
change in the Company’s internal control over financial reporting that occurred
during the quarter ended September 30, 2007 that materially affected, or was
reasonably likely to materially affect, the internal control over financial
30
reporting. However, in connection with the restatements of the
Company’s consolidated financial statements for the fiscal periods ended
September 30, 2007 and 2006, as fully described in Note 5 of this Amendment,
management determined that the material weakness described above existed as of
September 30, 2007 and has, as a result, effected material changes to the
Company’s internal control over financial reporting subsequent to the period
covered by this report. Management has implemented new policies requiring our internal
accounting staff and management to receive ongoing training on accounting for mineral
properties in accordance with generally accepted accounting principles in the United
States and Industry Guide 7. Management believes these additional policies will provide
additional and enhanced internal control over financial reporting and improve the
ability of management to identify any potential errors prior to and during the
Company’s consolidated financial statement close process and prevent recurrence
of future errors of this nature.
PART
II -- OTHER INFORMATION
Item
1A. Risk Factors
There have been no material changes to the risk factors as previously
disclosed in our Annual Report on Form 10-KSB for the year ended December 31,
2006.
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 by the Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Exhibit 32.2
|
|
Certification by the Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
31
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.
BEKEM METALS, INC.
Date: April 2, 2008
|
/s/ Yermek Kudabayev
|
|
Yermek Kudabayev
Chief Executive Officer
|
32