United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 2005 0-50218
BEKEM METALS, INC.
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(Exact name of registrant as specified in its charter)
UTAH
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(State or other jurisdiction of incorporation or organization
87-0669131
------------------------------------
(I.R.S. Employer Identification No.)
875 Donner Way, Unit 705, Salt Lake City, Utah 84108
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(Address of principal executive offices)
(801) 582-1881
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to section 12(g) of the Exchange Act:
Common, $0.001 par value
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. (1) Yes [X ] No [ ]
As of August 15, 2005, the issuer had 38,300,000 shares of its $0.001 par value
common stock outstanding.
INDEX
Bekem Metals, Inc.
Form 10-QSB
For The Quarter Ending June 30, 2005
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004 (Unaudited) 3
Consolidated Statements of Operations for the three
and six months ended June 30, 2005, and 2004, and
for the period from March 5, 2004 (Date of
Inception) through June 30, 2005 (Unaudited) 4
Consolidated Statement of Shareholders' Equity
(Deficiency) for the period from March 5, 2004 (Date
of Inception) through June 30, 2005 (Unaudited) 5
Consolidated Statements of Cash Flows for the three
and six months ended June 30, 2005, and 2004 and for
the period from March 5, 2004 (Date of Inception)
through June 30, 2005 (Unaudited) 6
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operations 16
Item 3. Controls and Procedures 19
Part II. Other Information
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
2005 2004
-----------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 124,654 $ 4,190
Prepaid expenses and other current assets 2,786 21,337
Supplies inventory 4,982 -
-----------------------------------------------------------------------------------------------------
Total Current Assets 132,422 25,527
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Mineral property rights (net of $17,683
depletion on asset retirement obligation) 1,170,457 1,182,007
Property, plant and equipment (net of accumulated
depreciation of $5,367 and $1,412) 43,277 45,044
Long-term deferred expenses 19,334 15,117
Patents (net of accumulated amortization of $898) 1,738 -
-----------------------------------------------------------------------------------------------------
Total Assets $ 1,367,228 $ 1,267,695
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable $ 125,903 $ 85,384
Accrued liabilities 60,311 26,959
Short-term notes payable 406,624 -
Short-term advances from related parties 36,000 92,308
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Total Current Liabilities 628,838 204,651
Notes Payable to Related Parties 77,000 -
Asset Retirement Obligation 703,920 675,460
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Total Liabilities 1,409,758 880,111
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Shareholders' Equity (Deficiency)
Common stock; $0.001 par value, 50,000,000 shares
authorized, 38,300,000 and 35,000,000 shares outstanding 38,300 35,000
Additional paid-in capital 704,450 719,456
Deficit accumulated during the development stage (785,280) (366,872)
-----------------------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficiency) (42,530) 387,584
-----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity (Deficiency) $ 1,367,228 $ 1,267,695
=====================================================================================================
The accompanying notes are an integral part of these financial statements.
3
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Period from
For the Three Months Ended For the Six Months Ended March 5, 2004
June 30, June 30, (Date of Inception)
-------------------------------- ------------------------------ Through
2005 2004 2005 2004 June 30, 2005
----------------------------------------------------------------------------------------------------------------------------------
Revenue $ - $ - $ - $ - $ -
----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
Exploration costs 81,759 - 187,566 - 458,665
General and administrative expenses 140,922 - 233,927 4,456 333,436
----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 222,681 - 421,493 4,456 792,101
----------------------------------------------------------------------------------------------------------------------------------
Loss From Operations (222,681) - (421,493) (4,456) (792,101)
Other Income (Expense)
Grant revenue 2,258 - 3,108 - 3,108
Grant expense (2,258) - (3,108) - (3,108)
Exchange gain 2,517 - 3,085 - 6,821
==================================================================================================================================
Net Loss $ (220,164) $ - $ (418,408) $ (4,456) $ (785,280)
==================================================================================================================================
Basic and Diluted Loss per Common Share $ (0.01) $ - $ (0.01) $ (0.00)
=========================================================================================================
Weighted-Average Shares used in
Basic and Diluted Loss per Common Share 38,300,000 14,000,000 38,300,000 14,000,000
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
4
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 5, 2004 (DATE OF INCEPTION)
THROUGH JUNE 30, 2005 (UNAUDITED)
Deficit
Common Stock Accumulated Total
------------------------------ Additional During the Shareholders'
Shares Amount Paid-in Capital Development Stage Equity (Deficiency)
------------------------------------------------------------------------------------------------------------------------------------
Balance - March 5, 2004
(Date of inception) $ - $ - $ - $ -
Shares issued for cash, August 12, 2004,
$0.02 per share 14,000,000 14,000 290,456 - 304,456
Shares exchanged for 60% interest -
in Kaznickel, November 19, 2004,
$0.02 per share 21,000,000 21,000 429,000 - 450,000
Net loss for period - - (366,872) (366,872)
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Balance, December 31, 2004 35,000,000 35,000 719,456 (366,872) 387,584
Shares issued in acquisition of Bekem
Metals, January 28, 2005 3,300,000 3,300 (15,006) - (11,706)
Net loss for period (418,408) (418,408)
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2005 38,300,000 $ 38,300 $ 704,450 $ (785,280) $ (42,530)
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
5
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
For the Period from
For the Three Months Ended For the Six Months Ended March 5, 2004
June 30, June 30, (Date of Inception)
---------------------------- ------------------------- Through
2005 2004 2005 2004 June 30, 2005
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $(220,164) $ - $(418,408) $ (4,456) $ (785,280)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,012 - 4,038 - 5,436
Depreciation and accretion expense on
asset retirement obligation 23,572 - 40,597 - 56,666
Foreign currency exchange gain 2,517 - 3,085 - 6,821
Change in operating assets and liabilities:
Supplies Inventory (806) - (5,134) - (5,134)
Prepaid expenses and other current assets 18,743 - 13,326 - 93,164
Accounts payable and accrued liabilities (28,580) - 52,687 4,456 134,144
Deferred grant revenue (1,716) - (2,565) - (2,565)
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Net Cash Used in Operating Activities (204,422) - (312,374) - (496,748)
---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (335) - (1,487) - (26,128)
Purchase of Kaznickel LLP and Bekem
Metals, Inc., net of cash acquired - - 2,648 - (176,293)
Increase in receivable from related parties 1,061 - - - -
---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 726 - 1,161 - (202,421)
---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from short-term note payable 260,538 - 362,639 - 454,043
Proceeds from accrued liabilities to related parties 60,469 - 81,427 - 81,427
Proceeds from issuance of common stock - - - - 304,456
---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 321,007 - 444,066 - 839,926
---------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (12,149) - (12,389) - (16,103)
---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash 105,162 - 120,464 - 124,654
Cash at Beginning of Period 19,492 - 4,190 - -
---------------------------------------------------------------------------------------------------------------------------------
Cash at End of Period $ 124,654 $ - $ 124,654 $ - $ 124,654
=================================================================================================================================
Supplemental Cash Flow Information
---------------------------------------------------------------------------------------------------------------------------------
Non Cash Investing and Financing Activities:
Acquisitions of Bekem Metals, Inc. and Kaznickel LLP
Fair value of assets acquired $ - $ - $ 4,471 $ - $ 1,445,858
Cash paid for equity interests - - - - (300,000)
Fair value of shares issued for acquisitions - - (11,706) - (461,706)
---------------------------------------------------------------------------------------------------------------------------------
Liabilities Assumed $ - $ - $ 16,177 $ - $ 684,152
=================================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 1 - BASIS OF PRESENTATION, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING
POLICIES
Interim Financial Information -- The accompanying unaudited 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. 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. Operating results for
the six-month period ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005.
Nature of Business -- Bekem Metals, Inc. is engaged through its wholly owned
subsidiary, Kaznickel LLP, (collectively, the "Company") in the acquisition and
exploration of mineral resource properties, specifically the Gornostayevskoye
("Gornostai") nickel and cobalt deposit (the "Deposit") located in the East
Kazakhstan Oblast of the Republic of Kazakhstan. Kaznickel acquired the rights
to explore and develop the Gornostai Deposit on April 22, 2004 and is active in
exploration of the Mineral Property. The Company acquired Kaznickel on September
22, 2004 in a purchase business combination as further described in Note 2.
Bekem Metals, Inc. was formerly named EMPS Research Corporation. The name change
was effected March 16, 2005.
Basis of Presentation and Principles of Consolidation - The consolidated
financial statements of the Company include the accounts of Condesa Pacific S.A.
since its inception and Kaznickel LLP ("Kaznickel"), a Kazakh partnership, since
the date of its acquisition by Condesa, and the accounts of Bekem Metals, Inc.
since its acquisition by Condesa. Condesa was incorporated under the laws of the
British Virgin Islands on March 5, 2004. Condesa acquired Bekem Metals, Inc. in
a reverse acquisition, on January 28, 2005 as further described in Note 3.
Intercompany transactions are eliminated upon consolidation.
Use of Estimates - The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Business Condition - The Company has no proven mineral reserves and has not yet
entered the development stage with respect to its mineral interests, and has no
production. There has been no revenue from operations, and it has incurred a net
loss of $785,820 since inception, including $418,408 for the six months ended
June 30, 2005. In addition, current liabilities exceeded current assets by
$496,416 and $179,124 at June 30, 2005 and December 31, 2004, respectively.
Management expects to generate sufficient cash to fund its current activities by
issuing equity securities and receiving financial assistance, if needed, from
its shareholders. There is no assurance, however, that funds can be raised or
that the shareholders will have the ability to provide financial assistance to
the Company. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
7
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
Exploration Stage Company - The Company is considered to be in the exploration
stage. Since its inception March 5, 2004, the Company has devoted substantially
all of its efforts in raising capital and acquiring Kaznickel, and then
exploring for mineral property under its exploration contract. The mineral
property has not reached a development or production stage and accordingly, no
revenues from production of the property have been recorded. The Company is
considered to be in the development stage for financial reporting purposes. A
separate disclosure of additional information including presentation of
cumulative amounts of revenues and expenses and cash flows from inception, and
deficits accumulated during the development stage are required under FAS 7,
"Accounting and Reporting by Development Stage Enterprises" and are included in
the inception to date column of the financial statements.
Currency Translation - The consolidated financial statements are presented in
U.S. dollars, the functional currency of the Company's subsidiary operating in
Kazakhstan. 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. Results of operations are translated at the average
exchange rates during the reporting period. Exchange gains and losses resulting
from financial statement translation and from holding foreign currencies are
included in the results of operations.
Prepaid Expenses -- Prepaid expenses relate to office rent, subscriptions, and
insurance. Prepaid expenses are charged to operations in the period the related
service or work is performed.
Mineral Property Rights -- Mineral property acquisition costs, site restoration
costs and development costs on mineral properties with proven and probable
reserves are capitalized and will be depleted using the units-of-production
method over the estimated life of the reserves. If there are insufficient
reserves to use as a basis for depleting such costs, they are written off as a
mineral property or mineral interest impairment in the period in which the
determination is made. Site restoration costs are depleted over the term of
their expected life. Interest costs are capitalized on mineral properties and
mineral interests in development. The development potential of mining properties
is established by the existence of proven and probable reserves, reasonable
assurance that the property can be permitted as an operating mine and evidence
that there are no metallurgical or other impediments to the production of
saleable metals.
Exploration costs incurred on mineral interests, other than acquisition costs,
prior to the establishment of proven and probable reserves are charged to
operations as incurred. Development costs incurred on mineral interests with
proven and probable reserves will be capitalized as mineral properties. The
Company regularly performs evaluations of its investment in mineral interests to
assess the recoverability and / or the residual value of its investments in
these assets. All mineral interests and mineral properties are reviewed for
impairment whenever events or circumstances change which indicate the carrying
amount of an asset may not be recoverable, utilizing established guidelines
based upon undiscounted future net cash flows from the asset or upon the
determination that certain exploration properties do not have sufficient
potential for economic mineralization.
Management's estimates of mineral prices, recoverable probable reserves, and
operating, capital and reclamation costs, when available, are subject to certain
risks and uncertainties which may affect the recoverability of mineral property
costs. Although management has made its best estimate of these factors, it is
possible that changes could occur in the near term, which could adversely affect
the future net cash flows to be generated from the properties.
8
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
Property, and Equipment - Property, plant and equipment are carried at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis over
the following estimated useful lives of the assets:
-----------------------------------------------------------
Buildings and constructions 12.5 years
Machinery and equipment 7 years
Vehicles 10 years
Other fixed assets 3 - 10 years
-----------------------------------------------------------
Revenue Recognition - Revenues, which will arise from the sale of cobalt and
nickel ore or processed cobalt and nickel, will be recorded when persuasive
evidence of an arrangement exists, title to product transfers to the customer,
and collectibility is reasonably assured. Produced, but unsold minerals or ore
will be recorded as inventory until sold.
Financial Instruments - The nature of the Company's operation exposes the
Company to fluctuations in commodity prices, foreign currency exchange risk and
credit risk. The Company recognizes these risks and manages its operation in a
manner such that exposure to these risks is minimized to the extent practical.
The Company is not exposed to fluctuations in interest rates because its loans
are interest free, as a general requirement under Kazakh law for non-financial
institutions.
Income taxes - Income taxes are calculated using the liability method of tax
accounting. Under this method, future income tax assets and liabilities are
computed based on temporary differences between the tax basis and carrying
amount on the balance sheet for assets and liabilities. Future income tax assets
and liabilities are calculated using tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse.
NOTE 2 - ACQUISITION OF KAZNICKEL LLP
On July 9, 2004 Condesa entered into an investment agreement under which Condesa
provided a $300,000 convertible loan to Kaznickel LLP, which was immediately
converted into a new 40 percent equity interest in Kaznickel. On September 22,
2004, Brisa Equities, a British Virgin Islands holding company, acquired a
controlling interest in Kaznickel by purchasing 60 percent of the founding
partners' 60 percent interests. As consideration for the purchase, the original
partners' obtained a commitment from Brisa to facilitate a reverse merger with a
U.S. public company, and a commitment to obtain funding enabling Kaznickel to
further develop its mineral property rights. The value of the commitment was
estimated to be $450,000 based on the percent of Kaznickel obtained for the cash
investment of $300,000 previously. On November 19, 2004, Brisa and the remaining
Kaznickel partners exchanged their 60% interest in Kaznickel for a new 60%
interest in Condesa, thereby making Kaznickel a wholly-owned subsidiary of
Condesa. The acquisition of a controlling interest in Kaznickel by Brisa and
Condesa was considered the purchase of Kaznickel with a measurement date of
September 22, 2004, the date Brisa and Condesa obtained control from the
original Kaznickel partners.
Condesa accounted for the acquisition of Kaznickel as a purchase business
combination with a purchase price of $750,000. The purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated fair
values. Negative goodwill was not recognized in connection with the acquisition
of Kaznickel. Instead, the excess of the fair value of the net assets over the
purchase price was allocated as a pro rata reduction of the amounts that
otherwise would have been assigned to the long-term assets. The Company is in
the process of obtaining an independent valuation of the net assets acquired.
9
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
Accordingly the allocation of the purchase price is subject to refinement. At
September 22, 2004, the purchase price was allocated to the assets acquired and
the liabilities assumed as follows:
-----------------------------------------------------------
Current assets $ 231,674
Mineral property rights 713,204
Asset retirement costs of the mineral rights 474,937
Property and equipment 21,572
-----------------------------------------------------------
Total assets acquired 1,441,387
-----------------------------------------------------------
Current liabilities (25,468)
Asset retirement obligation (665,919)
-----------------------------------------------------------
Total liabilities assumed (691,387)
-----------------------------------------------------------
Net Assets Acquired $ 750,000
===========================================================
Intangible assets acquired include the mineral property rights, which are
capitalized until the production phase begins, subject to impairment
considerations. Other intangible assets include the asset retirement costs of
the mineral rights, which has a 20-year estimated life and is subject to
amortization at a planned rate of $24,291 per year, and the asset retirement
obligation is accreted over its 20-year life with a current estimated expense of
$43,274 per year.
NOTE 3 - PLAN AND AGREEMENT OF REORGANIZATION WITH CONDESA
On January 28, 2005 Bekem Metals, Inc. (formerly EMPS Research, Inc.), ("Bekem")
completed a Plan and Agreement of Reorganization with Condesa. Bekem acquired
100% of the outstanding capital stock of Condesa in exchange for the issuance of
35,000,000 common shares. As a result of the issuance, the shareholders of
Condesa owned 91% of the outstanding common stock of Bekem. The transaction
resulted in a change of control of Bekem and a change in the reporting entity to
Condesa.
Bekem had 3,300,000 shares of common stock outstanding prior to the transaction
that remained outstanding. For financial reporting purposes, Condesa was
considered to have been the acquirer. The acquisition was recognized as a
forward stock split of Condesa's 50,000 shares of capital stock outstanding
prior to the reorganization for 35,000,000 common shares, or a 700-for-1 stock
split. These financial statements continue to present its assets and liabilities
at their historical cost and the effect of the stock split is reflected
retroactively since the inception of Condesa. The assets of Bekem were
considered to have been acquired by Condesa in exchange for the assumption of
Bekem's liabilities and the issuance of 3,300,000 common shares. The assets
consisted of cash of $2,648 and intangible assets of $1,823 (net of accumulated
amortization of $813).
10
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 4 - MINERAL PROPERTY RIGHTS
Kaznickel acquired its interest in the Contract on Exploration and Development
of Gornostai Cobalt and Nickel Deposit (the "Contract") issued by the Ministry
of Energy and Mineral Resources of the Republic of Kazakhstan (the "Ministry")
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 cobalt and nickel 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; accordingly, the Company's mineral interest is considered to be an
intangible asset. As more fully described in Note 2, 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. Capitalized costs and related accumulated amortization at
June 30, 2005 is as follows:
Depletion
Mineral of Asset Net Mineral
Property Retirement Property
Rights Costs Rights
--------------------------------------------------------------------------------
Cost as of September 22, 2004 $ - $ - $ -
Acquisitions:
Mineral property 713,204 713,204
Asset retirement obligation 474,936 17,683 457,253
--------------------------------------------------------------------------------
Net Carrying Value $ 1,188,140 $ 17,683 $ 1,170,457
================================================================================
The Contract provides the Company certain rights and also imposes certain
obligations and commitments. The rights include exploration through February
2006, 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 and obligations and commitments of the Contract include
monetary commitments for exploration of $200,000 in 2005 and 2006, and
expenditures to 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 $835,759 of which $4,179 was paid on award of the Contract and $831,580 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.
11
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment consist of the following:
June 30, December 31,
2005 2004
-------------------------------------------------------------------------------
Equipment $ 48,644 $ 46,456
Less: Accumulated Depreciation (5,367) (1,412)
-------------------------------------------------------------------------------
Net Property and Equipment $ 43,277 $ 45,044
===============================================================================
NOTE 6 - LONG TERM DEFERRED EXPENSES
The Company completed a remodel of its Semipalatinsk, Kazakhstan offices, which
costs are applied against monthly office rent charges through May 1, 2007. The
current portion of long term deferred expenses is included in other current
assets.
NOTE 7 - INCOME TAXES
In accordance with the laws and regulations of the Republic of Kazakhstan income
taxes are calculated at the statutory rate of 30 percent. Net operating losses
for development companies in the exploration and development may be carried
forward for the 7 subsequent years from the date the losses are incurred.
Therefore, the Company has deferred tax assets due to the savings of income tax
in future periods. However, the Company assessed the recoverability of these
deferred tax assets and created a provision against them until it has more
evidence of its recoverability in the future periods.
Deferred tax assets and liabilities were as follows:
June 30, December 31,
2005 2004
-------------------------------------------------------------------------------
Tax loss carryforward $ 218,354 $ 106,710
Property and equipment (4,255) (4,457)
Asset retirement obligation 211,172 202,638
Valuation allowance (425,271) (304,891)
-------------------------------------------------------------------------------
Total deferred tax assets $ - $ -
===============================================================================
The following is a reconciliation of the amount of tax that would result from
applying the federal rate to pretax income with the provision for income taxes
at June 30, 2005:
For the Six
Months Ended
June 30, 2005
---------------------------------------------------------------
Tax at US Federal statutory rate (34%) $ (142,442)
Non-deductible expenses 5,305
Deferred tax asset valuation change 120,380
Effect of lower foreign tax rates 16,757
---------------------------------------------------------------
Income tax provision $ -
===============================================================
12
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 8 - RELATED PARTY TRANSACTIONS
On December 2, 2004 the Company borrowed $92,308 from CJSC Kazmorgeophysica, a
Kazakh company related by virtue of several common shareholders. The short-term
loan is denominated in Kazakh Tenge, interest free and was due on its original
terms by December 31, 2004. During the six-month period ending June 30, 2005 the
Company borrowed an additional $99,798 from CJSC Kazmorgeophysica, as a Kazakh
Tenge denominated, interest-free, due on demand note. In addition, during the
six-month period ended June 30, 2005, the Company repaid Kazmorgeophysica the
$192,106 note from proceeds from a third-party lender. In addition, the Company
received short-term advances, payable on demand in the amount of $37,298 from a
shareholder. Because the notes are denominated in Tenge, the balance reported on
the financial statements fluctuates based upon ending exchange rates.
During May and June of 2005 the Company borrowed $77,000 from a shareholder to
fund the U.S. administrative operations. The loans are unsecured and carry an
annual interest rate equal to the LIBOR rate plus two percent; interest and
principal payments are due at maturity, three years after origination.
NOTE 9 - SHORT-TERM NOTES PAYABLE
During the six months ended June 30, 2005 the Company borrowed $406,624 to fund
the exploration and administrative operations in Kazakhstan and to retire a
$192,106 note payable to Kazmorgeophysica. Principal payments on the loans plus
an interest payment equal to five percent of the original balances are due three
to five months after origination.
NOTE 10 - ASSET RETIREMENT OBLIGATION
Upon purchase of Kaznickel, the Company recorded the effects of an asset
retirement obligation in accordance with SFAS No. 143, "Accounting for Asset
Retirement Obligations," and related interpretations, which requires entities to
record the fair value of a liability for an asset retirement obligation when it
is incurred which, for the Company, is obliged as part of Kaznickel's Contract
with the Ministry. Under the Contract, the Company is required to remediate the
property from the effects of the open pit mining process. The standard applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development or normal use of the
asset. The Company's asset retirement obligations relate primarily to the
obligation to fill mining pits and restore surface conditions at the conclusion
of term of the Contract.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. When the liability is initially recorded,
the related cost is capitalized by increasing the carrying amount of the related
mineral interest rights. Over time, the liability is accreted upward for the
change in its present value each period until the obligation is settled. The
initial capitalized cost is amortized as a component of mineral rights interests
as described in Note 1.
13
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
The reconciliation of the asset retirement obligation is as follows:
June 30, December 31,
2005 2004
--------------------------------------------------------------------------------
Balance at beginning of period $675,460 $665,919
Liabilities incurred - -
Accretion expense during the period 28,460 9,541
--------------------------------------------------------------------------------
Balance at End of Period $703,920 $675,460
================================================================================
NOTE 11 - 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, and 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 those in 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.
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.
Operating Leases - The Company rented a number of cars for operational purposes
and has potential commitment of $99,000 in case of loss for any reason, which is
not covered by any insurance.
14
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE 12 - COMMON STOCK
The Company entered into an investment agreement with investors on July 9, 2004
under which the Company issued 14,000,000 common shares for cash proceeds of
$304,456, or $0.02 per share, received through August 12, 2004. The Company
issued 21,000,000 shares, on November 19, 2004 in exchange for 60% of the equity
of Kaznickel as further described in Note 2. The shares issued in exchange for
the equity of Kaznickel were valued at $450,000, or $0.02 per share, based upon
the value for which investors received common shares for cash.
15
Item 2. Management's Discussion and analysis or Plan of Operations
For a complete understanding, this Plan of Operations should be read in
conjunction with the Financial Statements and Notes to the Financial Statements
contained in this Form 10-QSB and our Form 10-KSB for the period ended December
31, 2004.
Forward Looking Information and Cautionary Statement
Certain statements in this quarterly report may be deemed to be
forward-looking statements. Forward-looking statements regarding economic
conditions, effects of corporate initiatives, future profitability, projections,
future revenue opportunities, and their impact on us are forward-looking
statements and not historical facts. These statements are estimates or
projections involving numerous risks or uncertainties, including but not limited
to, consumer demand, acceptance of products and services offered by us, our
ability to control expenses, actions by competitors, changes in market needs and
technology, political or regulatory matters, litigation, general economic
conditions and changes in management strategy.
Actual results or events could differ materially from those discussed
in the forward-looking statements. See our annual report on Form 10-KSB as filed
with the Securities and Exchange Commission for further information. We disclaim
any obligation to publicly update, revise or correct any forward-looking
statements, whether as a result of new information, future events or otherwise.
The information contained in this analysis should be read in
conjunction with the financial statements contained herein and related
disclosures.
Overview
Bekem Metals, Inc., was incorporated as EMPS Research Corporation under
the laws of the state of Utah on January 31, 2001, for the purpose of
researching and developing commercial applications for patented technology for a
high frequency eddy current separator that may be used to separate nonmagnetic
particulate materials from other materials without chemicals, heat or water. The
patented technology was originally acquired by our former parent company, EMPS
Corporation, a Nevada corporation, from Particle Separation Technologies, L.C.,
a Utah limited liability company.
From inception through the end of the 2004 fiscal year, our primary
business focus was the development, marketing and licensing our patented
technology for use in commercially separating nonmagnetic particulate material
by building and testing a high frequency eddy-current separator ("HFECS"). On
January 28, 2005, we acquired Condesa Pacific, S.A., and it's wholly owned
subsidiary Kaznickel, LLP ("Kaznickel") in exchange for 35,000,000 shares of our
common stock. The transaction resulted in a change in control, with the
shareholders of Condesa owning approximately 91% of our outstanding common stock
following the acquisition and a change whereby Condesa became the reporting
entity. For financial reporting purposes, Condesa is considered the acquirer.
16
The primary asset of Condesa is an exploration and production
concession held by Kaznickel. This exploration and production concession, issued
by the government of the Republic of Kazakhstan grants Kaznickel the exclusive
right to explore for and produce nickel, cobalt and other minerals in a 616
hectare (1,522 acre) area known as the Gornostai deposit Through February 26,
2026. The Gornostai deposit is located in northeastern Kazakhstan.
With the acquisition of Condesa, the primary business focus of the
Company has become the exploitation of the exploration and production contract
of Kaznickel. While we will continue to pursue development of our high frequency
eddy current separator technology, it will no longer be our principal business
focus.
Plan of Operations
During the three and six months ended June 30, 2005, we generated no revenue
from operations. We are in the exploratory stage and do not anticipate
generating revenue until we begin production, which, if necessary funding can be
obtained, is estimated to occur in 2007. Moreover, in reaching the production
stage, we expect to incur millions of dollars in costs. Because we are not
currently engaged in revenue generating activities, we are completely dependent
on investment funds to support our operations until such time as production
generates sufficient revenues to cover operating expenses. We do not expect to
begin production until some time in 2007, and we do not anticipate generating
sufficient revenue to cover operating expenses until 2007. There is no assurance
that we can obtain funding on favorable terms, or at all. These factors raise
substantial doubt about our ability to continue as a going concern.
During May and June of 2005 we borrowed $77,000 from a shareholder to
fund our U.S. administrative operations. The loans are unsecured and carry an
annual interest rate equal to the LIBOR rate plus two percent; interest and
principal payment is due three years after origination.
During the six months ended June 30, 2005 we borrowed approximately
$406,624 to fund our exploration and administrative operations in Kazakhstan and
to retire a $192,106 note payable to Kazmorgeophysica. Principal payments on the
short-term loans plus an interest payment equal to five percent of the original
balances are due three to five months after origination.
We have developed a plan of operations that should allow us to begin
production in 2007, assuming adequate funding can be obtained. To fund
operations during 2005, we estimate we need approximately $10,000,000. We plan
to seek this funding through private equity investments. If we are successful in
raising $10,000,000 we intend to allocate the funds as follows.
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Operations
Drilling
We have allocated approximately $2,800,000 to drilling and exploration.
This includes drilling of approximately 5,000 meters of the left bank side of
the Gornostai deposit and 14,000 meters of the right bank side. Estimated
drilling costs include both direct and indirect drilling costs. Indirect
drilling costs include costs related to drilling such as geologist fees, site
supervisors, geological data processors, core sample takers, topographers, site
procurement specialists, etc. As of June 30, 2005, we have drilled 971 meters
and taken 2,659 core samples. During the six months ended June 30, 2005, we have
spent approximately $139,000 in drilling and exploration.
Core Analysis
We anticipate spending approximately $170,000 for core analysis during
the next twelve months. As of June 30, 2005, we have collected and sent 200
cores samples to a third party for analysis. During the six months ended June
30, 2005, we have spent approximately $38,000 for sample processing and sample
analysis.
Transportation costs
Total transportation costs related to operations for the next twelve
months are estimated at $82,000. This includes cost of vehicle leases, drivers,
fuel, and repair and maintenance costs for all vehicles used for site
operations. During the six months ended June 30, 2005, we incurred approximately
$10,000 in transportation costs. Most of these costs were attributable to the
cost of fuel.
Design and Engineering
Over the next twelve months we plan to spend approximately $2,500,000
for pre-feasibility and feasibility studies and to develop and pilot-test a
flowsheet and develop a plant design for ore processing. We will also perform an
independent reserves estimate and valuation.
Independent Reserve Estimate
We have allocated $500,000 to hire an independent mining consulting
firm to provide us with a reserve estimate for the Gornostai deposit.
Feasibility Study
We anticipate spending approximately $500,000 for the preparation of
pre-feasibility and feasibility studies. This is a minimum amount based on
market rates in the Commonwealth of Independent States of the former Soviet
Union. However, the price may increase if we retain an independent western
consulting firm.
18
Detailed Design
Detailed design cost of $1,500,000 represent prospective cost of
detailed engineering and design contract for construction of producing plant on
the territory of Gornostai deposit. This includes flowsheet design and its pilot
testing. This is a rough estimate, which will be subject to future revision
following completion of feasibility studies.
Professional Fees
We anticipate incurring approximately $300,000 in expenses to our
independent auditors and securities attorneys during the next twelve months.
Concession Expenses
Under the terms of the exploration and production contract, if we
discover commercially feasible mineral deposits, we will be required to pay
licensing and other fees and government related costs. We have allocated
$450,000 for this purpose over the next year.
Administrative Expenses
We will allocate approximately $820,000 for administrative expenses
during the next twelve months, which includes expenses of maintaining offices in
the United States and Kazakhstan, salaries and taxes.
Office Equipment
We also anticipate spending approximately $100,000 for office equipment
during the next twelve months.
In the event we are unable to raise $10,000,000, priority will be given
to drilling and design and engineering expenses, with funds being allocated as
management determines in its business judgment to be in the best interest of the
Company.
Item 3. Controls and Procedures
Our principal executive officer and our principal financial officer
(the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Such officers have concluded (based upon their evaluations of
these controls and procedures as of the end of the period covered by this
report) that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by it in this report is accumulated and
communicated to management, including the Certifying Officers as appropriate, to
allow timely decisions regarding required disclosure.
19
The Certifying Officers have also indicated that there were no
significant changes in our internal controls over financial reporting or other
factors that could significantly affect such controls subsequent to the date of
their evaluation, and there were no significant deficiencies and material
weaknesses.
Management, including our Certifying Officers, do not expect that our
disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and may not be detected.
PART II - OTHER INFORMATION
Item 5. Other Information
On May 20, 2005, Terrence Chatwin, our chief executive officer,
president and a director tendered his resignation as chief executive officer,
president and director of the Company. Mr. Chatwin's resignation was not the
result of any disagreement with the Company on any matter relating to our
operations, policies or procedures.
On May 20, 2005, our board of directors approved the appointment of
Marat Cherdabayev, the chairman of our board of directors, to serve as chief
executive officer and president to fill the vacancies created by Dr. Chatwin's
resignation.
A brief description of the business experience and background of Mr.
Cherdabayev follows:
Marat Cherdabayev. From July 2002 to July 2005, Mr. Cherdabayev served
as an officer and director of Caspian Services, Inc., (formerly known as EMPS
Corporation), a U.S. reporting issuer, and former parent company of Bekem
Metals, Inc. Prior to joining EMPS Corporation, Mr. Cherdabayev worked for
Caspian Services Group Limited ("CSGL") in Almaty, Kazakhstan. CSGL is a
wholly-owned subsidiary of Caspian Services, Inc. Mr. Cherdabayev was a Business
Development Manager for CSGL, and was responsible for developing a marketing
plan for CSGL's services. Prior to his employment with CSGL, Mr. Cherdabayev
worked for the Department of Project Finance at OJSC Kazakhtelecom in Almaty,
Kazakhstan. Mr. Cherdabayev served as the Head of Project Planning and
Monitoring, with responsibility for analyzing the financial feasibility of
investment projects. He began working for OJSC Kazakhtelecom in January 2001.
From October 2000 to January 2001, Mr. Cherdabayev served as the Advisor to the
President of TNS Plus, a private telecommunications company in Almaty,
20
Kazakhstan. In that capacity, he developed and advised the president on
marketing strategies, marketing analysis and optimization issues. From January
1999 to June 1999, Mr. Cherdabayev was a Mutual Fund Accountant for State Street
Corporation, in Boston, Massachusetts. His primary duties included producing and
verifying daily financial statements, monitoring general ledger activity and
pricing and reconciling five mutual funds on a daily basis. From January 1998 to
June 1998, Mr. Cherdabayev was a Financial Reporting Assistant at Boston Edison
in Boston Massachusetts. Mr. Cherdabayev graduated with a Bachelor of Science in
Business Administration from Northeastern University in June 2000. Mr.
Cherdabayev is not a director of any other reporting company. Mr. Cherdabayev is
30 years old.
Item 6. Exhibits and Reports on Form 8-K
(A) Reports on Form 8-K
On April 13, 2005, we filed an amended Current Report on Form 8-K
amending the Current Report we filed on February 2, 2005. The purpose of the
amendment was to provide the required financial statements of Condesa Pacific
and the Company and to provide the required pro forma financial information.
(B) Exhibits. The following exhibits are included as part of this
report:
Exhibit No. Exhibit
Exhibit 31.1 Certification of Principal Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Principal Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Principal Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned
thereunto duly authorized.
BEKEM METALS, INC.
August 22, 2005 By: /s/ Marat Cherdabayev
---------------------------
Marat Cherdabayev,
Principal Executive Officer
August 22, 2005 By: /s/ James Gunnell
---------------------------
James Gunnell,
Principal Financial Officer
22