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
March 31, 2006 0-50218
BEKEM METALS, INC.
(Exact name of registrant as specified in its charter)
UTAH
(State or other jurisdiction of incorporation or organization
87-0669131
(I.R.S. Employer Identification No.)
170 Tchaikovsky Street, 4th Floor, Almaty, Kazakhstan 050000
(Address of principal executive offices)
+7 3272 582 386
(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 May 15, 2006, the issuer had 100,088,888 shares of its $0.001 par value
common stock outstanding.
INDEX
Bekem Metals, Inc
Form 10-QSB
For The Quarter Ending March 31, 2006
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of March 31, 2006 and December 31, 2005 2
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended
March 31, 2006 and 2005 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended
March 31, 2006 and 2005 4
Notes to the Unaudited Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis 15
Item 3. Controls and Procedures 27
Part II. Other Information
Item 6. Exhibits 28
Sgnatures 28
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BEKEM METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2006 2005
---------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 134,392 $ 89,366
Trade accounts receivable 17,267 18,657
Prepaid expenses 11,873 -
Related party receivables 54,733 42,393
Inventories 366,457 337,030
VAT Recoverable 86,408 61,936
---------------------------------------------------------------------------------------------------------
Total Current Assets 671,130 549,382
---------------------------------------------------------------------------------------------------------
Mineral property rights - net 8,185,024 7,877,078
Property, plant and equipment (net of accumulated
depreciation of $37,644 and $25,436) 3,204,328 3,061,290
Long term deferred expenses 39,445 37,606
Other assets 3,830 1,635
---------------------------------------------------------------------------------------------------------
Total Assets $ 12,103,757 $ 11,526,991
---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 335,487 $ 424,306
Accrued expenses 380,308 276,291
Due to related party 2,314 5,518
Current portion of long-term notes payable 4,529,791 3,660,230
---------------------------------------------------------------------------------------------------------
Total Current Liabilities 5,247,900 4,366,345
Deferred tax liabilities 2,439,240 2,304,285
Long-term notes payable, net of discount 849,991 797,178
Long-term notes payable - related parties 4,175,012 4,075,012
Asset Retirement Obligation 886,971 833,840
---------------------------------------------------------------------------------------------------------
Total Liabilities 13,599,114 12,376,660
---------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred stock; $0.001 par value, 20,000,000 shares
authorized, no shares outstanding - -
Common stock; $0.001 par value, 150,000,000 shares
authorized, 100,088,888 and 100,088,888 shares outstanding 100,089 100,089
Additional paid-in capital 515,879 515,879
Deficit accumulated during the development stage (2,064,542) (1,448,344)
Cumulative transulation adjustment (46,783) (17,293)
---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity (1,495,357) (849,669)
---------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 12,103,757 $ 11,526,991
=========================================================================================================
The accompanying notes are an integral part of these financial statements.
2
BEKEM METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 2006 2005
------------------------------------------------------------------------------------------------------------------
Revenue $ 64,642 $ -
------------------------------------------------------------------------------------------------------------------
Operational Expenses
Cost of products sold 29,410 -
General and administrative expenses 357,538 93,005
Exploratory costs 60,929 86,756
Accretion expense 17,544 17,025
Depreciation expense 18,158 2,026
Research and development 293,009 -
------------------------------------------------------------------------------------------------------------------
Total Expenses 776,588 198,812
------------------------------------------------------------------------------------------------------------------
Loss From Operations (711,946) (198,812)
Other Income (Expense)
Other income (35,947) -
Interest expense (64,898) -
Transulation adjustment (43,462) -
Exchange rate gain (loss) 240,055 568
------------------------------------------------------------------------------------------------------------------
Net Other Income (Expense) 95,748 568
==================================================================================================================
Net Loss $ (616,198) $ (198,244)
==================================================================================================================
Basic and Diluted Loss per Common Share $ (0.01) $ (0.01)
==================================================================================================================
Weighted-Average Shares used in
Basic and Diluted Loss per Common Share 100,088,888 38,300,000
==================================================================================================================
The accompanying notes are an integral part of these financial statements.
3
BEKEM METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
For the Three Months Ended March 31, 2006 2005
---------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $ (616,198) $ (198,244)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 18,158 2,026
Depreciation and accretion expense on
asset retirement obligation 17,544 17,025
Interest expense from debt discount 46,734 -
Foreign currency exchange loss (gain) 289,765 (7,334)
Change in operating assets and liabilities:
Accounts receivable (1,390) -
Inventory (29,427) (4,328)
Prepaid expenses and other current assets (40,379) (5,417)
Accounts payable and accrued liabilities 11,994 89,169
Deferred grant revenue - (849)
---------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (303,199) (107,952)
---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (469,142) (1,152)
Purchase of Kaznickel and Bekem
Metals, Inc., net of cash acquired - 2,648
Increase in receivable from related parties (12,340) (1,061)
---------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (481,482) 435
---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from notes payable 1,084,914 102,101
Proceeds from notes payable - related parties 100,000 20,958
Payments on notes payable (353,213) -
---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 831,701 123,059
---------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (1,995) (240)
---------------------------------------------------------------------------------------------------------------
Net Increase in Cash 45,025 15,302
Cash at Beginning of Period 89,366 4,190
---------------------------------------------------------------------------------------------------------------
Cash at End of Period $ 134,391 $ 19,492
===============================================================================================================
Supplemental Cash Flow Information
---------------------------------------------------------------------------------------------------------------
Non Cash Investing and Financing Activities:
Fair value of assets acquired $ - $ 4,471
Fair value of shares issued for acquisitions - (11,706)
---------------------------------------------------------------------------------------------------------------
Liabilities Assumed $ - $ 16,177
===============================================================================================================
The accompanying notes are an integral part of these financial statements.
4
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - BASIS OF PRESENTATION AND NATURE OF BUSINESS
Interim Financial Information -- The accompanying unaudited condensed
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 Company's most recent audited financial
statements included in the Company's annual report on Form 10-KSB filed for the
year ended December 31, 2005. Operating results for the three-month period ended
March 31, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.
Basis of Presentation
On October 24, 2005, Bekem Metals, Inc. ("BMI") entered into an Acquisition
Agreement with Kazakh Metals, Inc., a British Virgin Islands international
business company ("KMI"), under which Bekem 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, together
with other entities its owners control, is the controlling shareholder of KMI
and was also the principal 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
shareholder maintains voting and investment control held 51,600,000 BMI common
shares, which represent 51.5% of the 100,088,888 outstanding common shares.
The acquisition of the portion 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 their estimated fair value on the
transaction date of $345,000. KMI accounted for the purchase of BMI similar to a
pooling.
The accompanying consolidated financial statements include the accounts of Bekem
Metals, Inc. ("BMI", "Bekem," or the "Company") and its wholly subsidiaries,
Kazakh Metals, Inc. ("KMI"), Kyzyl Kain Mamyt LLP ("KKM"), Condesa Pacific, S.A.
("Condesa"), and Kaznickel, LLP ("Kaznickel"). Intercompany accounts and
transactions have been eliminated in consolidation. The results of operations of
the previously separate KMI and BMI were combined for all periods prior to the
acquisition, with recognition of the minority interest in BMI, and the
operations of BMI and KMI are consolidated from October 24, 2005.
5
Bekem Metals, Inc. - The combined financial statements include the accounts of
Condesa Pacific S.A. 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.
Kazakh Metals, Inc. - The combined financial statements also include the
accounts of Kazakh Metals, Inc. and its wholly-owned subsidiary, Kyzyl Kain
Mamyt LLP ("KKM") a Kazakh partnership, which it acquired on June 1, 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.
Nature of Business
The Company is engaged in the acquisition, exploration, and production of
mineral resource properties. Kaznickel owns the right to the Gornostayevskoye
("Gornostai") nickel and cobalt deposit (the "Deposit") located in the East
Kazakhstan Oblast located in northeast Kazakhstan. KKM holds exploration and
production licenses from the government of Kazakhstan to a 163,770 hectare
(404,682 acres) parcel, in the Aktobe Oblast located in northwestern Kazakhstan.
This deposit is referred to as the Kempirsai deposit. The licenses grant KKM the
right to explore for 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 Geology and Minerals Resources Committee of the Ministry of
Energy and Minerals Resources (MEMR) of the Republic of Kazakhstan. KKM also
holds a license to explore for and produce Mamyt brown coal from a deposit
located within 40 kilometers of its cobalt and nickel deposit. This license
expires on December 11, 2018 with further possible extensions.
Business Condition - The Company has no proven mineral reserves that conform to
U.S. accounting standards and has only limited ore and Mamyt brown coal
production from its Kempirsai deposit since its acquisition on May 31, 2005. The
Gornostai deposit has not yet entered the development stage with respect to its
mineral interests, and has no production. There has been only limited revenue
from the Kempersai operations, and the Company has incurred a net loss of
$616,198 and $198,244 for the quarters ended March 31, 2006 and 2005,
respectively. In addition, current liabilities exceeded current assets by
$4,576,770 and $3,816,963 at March 31, 2006 and 2005, 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 raise the capital or 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.
Kempirsai Production Stage - The Kempirsai, or KKM, operations are considered to
be in the production stage.
Gornostai Exploration Stage - The Gornostai, or Kaznickel, operations are
considered to be in the exploration stage. Since its inception March 5, 2004,
the Company has devoted a substantial amount of effort in raising capital and
6
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. Therefore, these operations are considered to be in the
development stage.
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.
NOTE 2 - ACQUISITIONS
Purchase of Minority Interest in Bekem Metals, Inc. - On October 24, 2005 the
Company issued 17,888,888 shares of common stock to acquire the minority
shareholders' interests of BMI. Acquisition of the minority interests was
accounted for under the purchase method. The incremental increase in the assets
acquired and liabilities assumed related to the Kaznickel property, and were
recorded at their estimated fair values as follows:
----------------------------------------------------------------
Mineral interest rights $ 132,432
Purcdhased exploration costs 251,286
Deferred tax liability (38,718)
----------------------------------------------------------------
Minority Shareholders' Interests Acquired $ 345,000
================================================================
The value assigned to the intangible purchased exploration costs was written off
and charged to operations on the date of the acquisition as exploration costs.
Intangible mineral interest rights assets acquired include the mineral property
rights, which are capitalized until the production phase begins, subject to
impairment considerations.
Acquisition of Kyzyl Kain Mamyt, LLC - On June 1, 2005, Kazakh Metals acquired
100% of the equity interests of Kyzyl Kain Mamyt, LLC (KKM) for the cash
purchase price of $100,000. The former equity holders of KKM were not related
parties. KKM operates in the Aktyubinsk region of northwestern Kazakhstan and
licenses to explore for, and is engaged in the production and sale of nickel and
cobalt ore and Mamyt brown coal. KKM has been actively involved in mining cobalt
and nickel ore since its inception and operating in the Soviet Union since 1938.
The height of production occurred in the late 1980's. Limited production has
occurred since that time. KKM's primary assets are its rights to exploit
unproved reserves and its infrastructure of buildings, machinery and equipment,
including a rail spur.
Kazakh Metals accounted for the acquisition of KKM as a purchase business
combination with a purchase price of $100,000. The purchase price was allocated
to the assets acquired and liabilities assumed based on their estimated fair
values. The Company has estimated a fair value of $40,000,000 for the mineral
interests and obtained an independent appraisal of the buildings and equipment
of $17,693,795 on the acquisition date, and is in the process of obtaining
third-party valuations of the mineral assets; accordingly, the allocation of the
purchase price is subject to refinement. Negative goodwill was not recognized in
connection with the acquisition of KKM. 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.
7
Notes payable assumed in the acquisition with a stated value of $7,445,197 are
due to third parties generally within three years, including $4,432,290 to a
bank, and were recorded based upon their fair values on the acquisition date,
resulting in a discount to the notes that will be recognized as interest expense
through maturity. The operations and cash flows of KKM are included in the
Company's consolidated financial statements since the date of the acquisition.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
--------------------------------------------------------------------
Current Assets $ 469,379
Unproved mineral property rights 7,034,321
Asset retirement costs of the mineral rights 86,852
Buildings, constructions machinery and equipment 3,068,786
--------------------------------------------------------------------
Total assets acquired 10,659,338
--------------------------------------------------------------------
Current liabilites 717,527
Asset retirement obligation 97,223
Notes payable, net of discount of $917,737 6,541,670
Deferred tax liabilities assumed 3,202,918
--------------------------------------------------------------------
Total liabilites assumed 10,559,338
--------------------------------------------------------------------
Net Assets Acquired $ 100,000
====================================================================
Intangible assets acquired include the mineral property rights, which are
capitalized and amortized on a units-of-production method, subject to impairment
considerations. Other intangible assets include the asset retirement costs of
the mineral rights, which have a 20-year estimated life and are subject to
amortization at a planned rate of $4,311 per year, and the asset retirement
obligation, which is accreted over its 20-year life, with a current estimated
expense of $7,680 per year.
Acquisition of EMPS Research, Inc. - On January 28, 2005, EMPS Research, Inc.
("EMPS") completed a Plan and Agreement of Reorganization with Condesa, wherein
EMPS acquired 100% of the outstanding capital stock of Condesa in exchange for
the issuance of 35,000,000 common shares of which 21,000,000 were held by the
controlling shareholder of KMI and 14,000,000 were issued to minority
shareholders in Condesa. EMPS then changed its name to Bekem Metals, Inc. As a
result of that reorganization, the shareholders of Condesa owned 91% of the
outstanding common stock of EMPS at that reorganization date. The combined
entities were referred to after that reorganization as Bekem.
EMPS had 3,300,000 shares of common stock outstanding prior to that transaction
that remained outstanding, were classified as minority interests, and were
valued at $0. The transaction resulted in a change of control of EMPS. For
financial reporting purposes, Condesa was considered the acquirer. The
acquisition was recognized as a forward stock split of Condesa's 30,000 shares
of capital stock held by the controlling shareholder of KMI that were
outstanding prior to the reorganization into 21,000,000 common shares, or a
700-for-1 stock split. The accompanying financial statements have been restated
for the effects of the stock split for all periods presented. Condesa's assets,
liabilities and minority interests were recorded at their historical cost and
the effect of the stock split was reflected retroactively since the inception of
Condesa. The assets of EMPS were considered to have been acquired by Condesa in
exchange for the assumption of EMPS's net liabilities. The net assets consisted
of cash of $2,648 and intangible assets of $1,823 and current liabilities of
$15,077. The operations of Condesa are included for all periods presented and
the operations of EMPS are included from the acquisition of EMPS.
Purchase of Kaznickel LLP - On July 9, 2004 Condesa, which was owned 60% by
Brisa holding 8,400,000 of 14,000,000 shares of outstanding common stock,
entered into an investment agreement under which Condesa provided a $300,000
8
convertible loan to Kaznickel LLP, which was immediately converted into a new 40
percent equity interests in Kaznickel. On September 22, 2004, Brisa acquired an
interest in Kaznickel by purchasing 60 percent of the equity interest of the
founding partners' remaining 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 $270,000 based on the percent of Kaznickel
obtained for Condesa's original cash investment of $300,000.
On November 19, 2004, Brisa and the remaining Kaznickel partners exchanged their
combined 60% interest in Kaznickel for a new 60% interest, equal to 21,000,000
shares of Condesa, thereby making Kaznickel a wholly-owned subsidiary of
Condesa. Brisa received 12,600,000 shares of Condesa in the transaction. The
remaining 8,400,000 common shares issued in the acquisition were recognized as
minority shareholders' interests. 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 $304,456. 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.
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 267,660
Asset retirement costs of the mineral rights 474,936
Property and equipment 21,573
--------------------------------------------------------------------
Total assets acquired 995,843
--------------------------------------------------------------------
Current liabilites (25,468)
Asset retirement obligation (665,919)
--------------------------------------------------------------------
Total liabilites assumed (691,387)
Minority Shareholders' interests (121,782)
--------------------------------------------------------------------
Net Assets Acquired $ 182,674
====================================================================
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 have a 20-year estimated life and are subject to
amortization at a planned rate of $24,291 per year, and the asset retirement
obligation, which is accreted over its 20-year life, with a current estimated
expense of $43,274 per year.
NOTE 3 - MINERAL PROPERTY RIGHTS
The government of Kazakhstan retains the title to the property upon which the
Company's mineral rights pertain; accordingly, the Company's mineral interests
9
are considered to be intangible assets. The Company capitalized the acquisition
costs of its mineral interests upon the purchase business combinations with
Kaznickel and with KKM.
Gornostai Deposit
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. 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
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.
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 from deposits located in an approximately 575,756 acre
site in the northwest area of the Republic of Kazakhstan approximately 130
kilometers northwest of the city of Aktobe, Kazakhstan, near the town of
Badamsha, referred to as the "Kempirsai" deposit through October 12, 2011. The
other contract is for the exploration and extraction of Mamyt brown coal at a
site located within 40 kilometers of the Kempirsai deposit through December 11,
2018. 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 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.
10
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, were as follows:
March 31, December 31,
2006 2005
--------------------------------------------------------------------------------
Buildings $ 2,150,069 $ 2,062,865
Machinery and equipment 1,086,255 970,005
Other fixed assets 5,648 53,856
--------------------------------------------------------------------------------
3,241,972 3,086,726
Less: Accumulated Depreciaiton (37,644) (25,436)
--------------------------------------------------------------------------------
Net Property and Equipment $ 3,204,328 $ 3,061,290
================================================================================
NOTE 5 - 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 March 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 quarter ended March
31, 2005, the Company received advances in the amount of $26,883 from certain
owners, which are short-term in nature and payable upon demand.
On 18 January 2006, the Company signed the financial aid agreement with Balmont
Trading S.A (see Note 7).
Because the notes are denominated in Tenge, the balance reported on the
financial statements fluctuates based upon ending exchange rates.
11
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
2006 2005
---------------------------------------------------------------------------------------------
Note payable to a company bearing interest at 0%;
imputed interest of 22%; denominated in U.S.
dollars; due April 2009; unsecured; $ 497,818 $ 497,818
Note payable to a company bearing interest at 3%;
imputed interest of 22%; denominated in U.S.
dollars; due April 2010; unsecured; 550,000 550,000
Note payable to a company bearing interest at 0%;
imputed interest of 22%; denominated in U.S.
dollars; due August 2008; unsecured; 485,951 485,951
Note payable to a company bearing interest at
LIBOR plus 2% (6.39% at December 31, 2005);
imputed interest of 22%; denominated in U.S.
dollars; due March 2010; unsecured; 100,000 60,000
Notes payable to companies bearing interest at 0%;
imputed interest of 22%; due on demand; unsecured; 3,638,583 3,018,032
Bank overdraft bearing interest at 14%;
due on demand; unsecured; 30,918 29,709
Note payable to a company bearing interest at 16%;
due on demand; unsecured; - 52,286
Note payable to a company bearing interest at 5%;
due on demand; unsecured; 697,548 560,203
Note payable to a company bearing interest at 0%;
due on demand; unsecured; 150,000 -
---------------------------------------------------------------------------------------------
Total Long-term Debt 6,150,818 5,253,999
Less: Current Portion (4,517,049) (3,660,230)
Less: Debt discount (783,778) (796,591)
---------------------------------------------------------------------------------------------
Long-term Debt - Net of Current Portion $ 849,991 797,178
=============================================================================================
12
NOTE 7 - LONG-TERM DEBT - RELATED PARTIES
Long-term debt to related parties consists of the following:
March 31, December 31,
2006 2005
---------------------------------------------------------------------------------------------
Notes payable to related companies bearing interest
at 6.29%; due August 2008; unsecured; $ 1,710,012 $ 1,710,012
Note payable to related company bearing interest
at 6.29%; due August 2010; unsecured; 2,288,000 2,288,000
Notes payable to related companies bearing interest
at 6.29%; due May 2008; unsecured; 77,000 77,000
Notes payable to related company bearing interest
at 0%, due on 18 May 2007 100,000
---------------------------------------------------------------------------------------------
Total Long-term Debt 4,175,012 4,075,012
Less: Current Portion
---------------------------------------------------------------------------------------------
Long-term Debt - Net of Current Portion $ 4,175,012 $ 4,075,012
=============================================================================================
The above amounts have been loaned to the Company per an agreement dated August
8, 2005, between Kazakh Metals, Inc. and its wholly owned subsidiary, Kyzyl Kain
Mamyt ("KKM"), for up to $10,000,000 for the purpose of assisting KKM in funding
its work requirements, including generation of geological data, under the
mineral extraction contract with the Ministry of Energy and Mineral Resources of
the Republic of Kazakhstan. Funds borrowed on this agreement bear interest at
the rate of 6.29% (the August 8, 2005 LIBOR plus 2%) per annum. Terms currently
range from three to five years with no prepayment penalties. The notes are not
collateralized. At December 31, 2005 $3,998,012 had been borrowed. The former
owners of Kazakh Metals, Inc. are funding this agreement.
On 18 January 2006, the Company signed the financial aid agreement with Balmont
Trading S.A. Under this agreement the Company borrowed $100,000 for the period
of 16 months from the date of signing the agreement which may be reduced or
extended.
The Company has agreed to repay these loans out of the first funds raised by
BMI.
NOTE 8 - 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
13
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.
NOTE 9 - SUBSEQUENT EVENTS
In May 2006, the Company purchased equipment from a third party for
$2,000,000, which will be used in KKM's pilot plant. The Company anticipates
capitalizing the equipment and placing it in service on June 15, 2006, the date
the pilot plant is scheduled to begin production. In connection with the
equipment acquisition, the Company issued the third party a note payable for
$2,000,000.
14
Item 2. Management's Discussion and Analysis
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 year ended December
31, 2005, as amended.
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., (hereinafter referred to as "us," "we," the
"Company" or "Bekem") is engaged in the exploration, extraction, refining and
marketing of nickel, cobalt and brown coal in the Republic of Kazakhstan.
We incorporated in the state of Utah under the name EMPS Research
Corporation on January 30, 2001. We changed our name to Bekem Metals, Inc., on
March 16, 2005 following our acquisition of Condesa Pacific, S.A., a British
Virgin Islands international business company, and its wholly owned subsidiary
Kaznickel, LLP ("Kaznickel") in January of 2005. The primary asset of Kaznickel
is an exploration and production concession issued by the government of the
Republic of Kazakhstan which grants Kaznickel the exclusive right, through
February 2026, to explore for and engage in test production of nickel, cobalt
and other minerals in a 4,950 hectare (12,232 acre) area in northeastern
Kazakhstan known as the Gornostai deposit.
On October 24, 2005, we entered into an agreement whereby we acquired
Kazakh Metals, Inc., a British Virgin Islands international business company,
("KMI") in exchange for 61,200,000 of our common shares. KMI has a wholly owned
subsidiary Kyzyl Kain Mamyt LLP, a Kazakhstan limited liability partnership,
("KKM"), which holds the exclusive licenses to extract and process nickel and
cobalt ore from its Kempirsai deposit and brown coal from its Mamyt deposit in
northwestern Kazakhstan. Under the applicable accounting reporting rules, KMI
was considered the accounting acquirer.
15
Results of Operations
Three months ended March 31, 2006 compared to the three months ended
March 31, 2005
Since inception we have generated only limited revenue from operations.
We do not anticipate generating significant revenues until we begin commercial
production, which, if necessary funding can be obtained, is estimated to occur
in 2007. Moreover, in reaching commercial production stage, we anticipate
incurring millions of dollars in costs. Because we are not currently generating
significant revenues we will be completely dependent on investment funds to
support our operations until such time as production generates sufficient
revenues to cover our operating expenses. We do not expect to begin production
until the fourth quarter 2007, and we do not anticipate generating sufficient
revenue to cover operating expenses until 2008. 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.
As you read this Results of Operations section it is important to keep
in mind that during the fourth quarter of fiscal 2005 we acquired KMI and its
operating subsidiary KKM. While KKM has not engaged in significant operations in
recent years, it has engaged in significantly greater operations than Bekem or
Kaznickel. Prior to the acquisition of KMI, we were engaged in exploration of
our Gornostai deposit. However, because of a lack of funds our exploration
activities were limited. The increases in revenue and expenses during the three
months ended March 31, 2006 compared to the three months ended March 31, 2005 is
the result of acquisition of KKM and not the result of increased operations of
Bekem or Kaznickel.
16
Revenue
During first quarter 2006 we earned revenue of $64,642 primarily from
the sale of brown coal and providing different services by using existing
machinery and equipment. By comparison, in first quarter 2005 we realized no
revenue. During the first quarter 2005 we acquired our first nickel property and
our operations during the quarter were limited to exploratory drilling of our
Gornostai deposit. By comparison, with the acquisition of KMI and its
wholly-owned, operating subsidiary, KKM during the fourth quarter 2005, we
engaged in the extraction and sale of ore and brown coal, which resulted in the
generation of revenue. We anticipate revenue during the 2006 fiscal year will be
lower throughout the year as compared to the 2005 fiscal year because we do not
expect to sell any significant quantities of ore or coal in 2006.
Cost of Product Sold
We realized cost of product sold of $29,410 during the three months
ended March 31, 2006 and no cost of product sold during the comparable 2005
period. This increase in cost of product sold is the direct result of our
acquisition of KKM and its active operations. As discussed above, during the
first quarter 2005 we engaged in very limited mining operations. We anticipate
cost of product sold during the balance of the 2006 fiscal year to be lower than
during the 2005 fiscal year because we do not expect to sell any significant
quantities of ore or coal during the 2006 fiscal year.
General and Administrative Expenses
With the acquisition of KKM during the fourth quarter 2005, our general
and administrative expenses during the three months ended March 31, 2006
increased to $357,538 from $93,005 during the first quarter 2005. This
significant increase in general and administrative expenses in the first quarter
2006 is attributable to the significant increase in employees and
employee-related costs due to the acquisition of KKM, as well as costs
associated with having operations in both northeastern and northwestern
Kazakhstan, including increased office rents and travel expenses. During the
remainder of the 2006 fiscal year we expect general and administrative expenses
will continue to increase at about the same or a more accelerated rate as we
continue our efforts to ramp up mining and processing operations.
Accretion Expense
Accretion expense was nearly unchanged during the three months ended
March 31, 2006 compared to the three months ended March 31, 2005 increasing 3%.
We believe accretion expense will continue to remain fairly constant in upcoming
fiscal quarters.
17
Depreciation Expenses
During the first quarter 2006 we realized depreciation expense of
$18,158 compared to $2,206 during the first quarter 2005. With the acquisition
of KKM, we also acquired the assets of KKM, which includes equipment, buildings,
machinery, etc. that we did not own during the first quarter 2005. We expect
increases in depreciation expense during the second and third quarter of fiscal
2006 to remain at levels more or less consistent with the increased experienced
during the first quarter 2006.
Research and development costs
We realized research and development costs of $293,009 during the first
quarter 2006 related to the development of our pilot processing plant. By
comparison, we incurred no research and development costs during the first
quarter 2005. We expect our research and development costs to increase by more
than $500,000 as we plan to start testing the pilot processing plant
Total Expenses
As a result of our acquisition of KKM our total expenses increased from
$198,812 during the three months ended March 31, 2005 to $776,588 during three
months ended March 31, 2006. We expect our total expenses during the rest of
2006 will continue to increase as we ramp up our business.
Loss from Operations
During the three months ended March 31, 2006 we experienced a loss from
operations of $711,946 compared to a loss of $198,812 during the three months
ended March 31, 2005. This dramatic increase in loss from operations during the
first quarter 2006 is the result of our acquisition of KKM and its active
operations during the first quarter 2006, whereas in the first quarter 2005 we
engaged in limited operations and incurred fewer expenses. We expect we will
continue to generate losses from operations until such time as we engage in
significant ore production.
Net Loss
For all of the foregoing reasons, during the three months ended March
31, 2006 we experienced a net loss of $616,198 compared to a net loss of
$198,244 during the three months ended March 31, 2005. 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
2008 fiscal year.
Liquidity and Capital Resources
Our capital resources have consisted primarily of funds we have
borrowed from related and non-related parties. We anticipate the need for
substantial additional capital resources in the upcoming twelve months, which
will likewise consist primarily of funds raised in financing activities and
debt.
18
During the first quarter 2006 and 2005 cash was primarily used to fund
operations. See below for additional discussion and analysis of cash flow.
Three months ended Three months ended
March 31, 2006 March 31, 2005
------------------ ------------------
Net cash used in operating activities $(303,199) $(107,952)
Net cash provided by/(used) in investing
activities (481,482) 435
Net cash provided by financing activities 831,701 123,059
--------- ---------
NET INCREASE IN CASH $ 45,052 $ 15,302
========= =========
During the three months ended March 31, 2006 net cash used in operating
activities was $303,199, compared to net cash used in operating activities of
$107,952 during the three months ended March 31, 2005. This increase in net cash
used in operating activities is primarily attributable to increases in general
and administrative expenses and research and development costs, which are
largely attributable to our acquisition of KMI and its operation subsidiary KKM.
During the first quarter 2006 we used $481,482 in investing activities,
most of which was used to acquire property and equipment. By comparison, during
the first quarter 2005 we realized net cash from operating activities of $435.
This change in net cash provided by investing activities is again related to our
acquisition of KKM during the fourth quarter 2005. Subsequent to the quarter
end, in May 2006, we purchased equipment for the KKM pilot plant from a third
party for $2,000,000. We anticipate capitalizing the equipment and placing it in
service on June 15, 2006, the date the pilot plant is scheduled to begin
production. In connection with the equipment acquisition, we issued the third
party a note payable for $2,000,000.
Net cash provided by financing activities in during the three months
ended March 31, 2006 was $831,701 compared to net cash provided by financing
activities of $123,059 during the three months ended March 31, 2005. During the
first quarter 2006 borrowing from related and non-related parties increased
significantly as we sought loans to fund the development of our pilot processing
plant.
Plan of Operations
We have developed a plan of operations that should allow it to begin
production in 2007, assuming adequate funding can be obtained. To fund
operations during 2006, we estimate we will need approximately
$14,000,000-28,000,000. We plan to seek this funding through private equity
investments. If we are successful in raising $28,000,000 we intend to allocate
the funds as follows.
19
Operations
Drilling
We will allocate approximately $3,500,000 to drilling and exploration.
This includes drilling of approximately 34,500 meters of the left and right
banks of the Gornostai deposit. Estimated drilling costs include both direct and
indirect drilling costs, including geologist fees and costs for site
supervisors, geological data processors, core sample takers, topographers, site
procurement specialists, etc.
Core Analysis
We anticipate spending approximately $250,000 for core analysis during
the next twelve months.
Design and Engineering
Assuming we have available funds, over the next twelve months we plan
to spend approximately $3,500,000 for pre-feasibility and feasibility studies
and to develop a commercial processing plant design for ore processing at the
Kempirsai deposit. We will also perform an independent resource and reserves
estimate and valuation.
Independent Resource and Reserve Estimate
We will allocate $1,000,000 to hire an independent mining consulting
firm to provide us with a resource and reserve reclassification and estimate for
the Gornostai deposit and the Kempirsai deposits.
Feasibility Study
We anticipate spending approximately $1,000,000 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.
Detailed Design
Detailed design costs of $1,500,000 represent the prospective costs of
detailed engineering and design contract for construction of a commercial
processing plant on the territory of Kempirsai 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.
20
Acquisitions
We plan to spend approximately $3,000,000 to acquire additional nickel
and cobalt ore deposits in Northeastern and Northwestern Kazakhstan.
Professional Fees
We expect to incur approximately $300,000 in expenses to our financial
auditors and securities attorneys during the next twelve months.
Administrative Expenses
We plan to allocate approximately $3,000,000 for administrative
expenses during the next twelve months, which include expenses of maintaining
offices in the United States and Kazakhstan, for salaries and taxes.
Loan Repayment
We will allocate approximately $10,000,000 to retire loans provided to
us through notes payable by related and non-related parties to finance operation
and construction of the pilot plant.
Working Capital
We plan to allocate $2,800,000 for working capital for the next twelve
months. This will be used to finance our operations at the Kempirsai and
Gornostai deposits.
In the event we are unable to raise the full $28,000,000, 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. For additional details, please see Use of Proceeds on
page 30.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of December
31, 2005:
Payments Due by Fiscal Year
------------------------------------------------
Less than 1-3 3-5
Contractual Commitments Total 1 year years years Thereafter
-----------------------------------------------------------------------------------------------------------------------
Notes Payable $ 5,253,999 3,660,230 983,769 610,000 -0-
Notes Payable - Related Party $ 4,075,012 -0- 1,787,012 2,288,000 -0-
Due to the Government of the
Republic of Kazakhstan(1) $ 831,580 -0- 831,580 -0- -0-
Operating Leases $ 103,160 96,660 6,500 -0- -0-
----------- ---------- ---------- ---------- ------
Total $10,263,751 $3,756,890 $3,602,361 $2,898,000 -0-
=========== ========== ========== ========== ======
21
(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 and development rights
in February 2026. 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.
For us to maintain our rights under the exploration license held by
Kaznickel and the production license held by KKM, we must satisfy the work
program requirements of the MEMR. Each year we must submit a proposed annual
work program under each license to the MEMR. This annual work program must be
reviewed and approved by the MEMR. If we fail to meet the minimum work program
requirements, we could lose our licenses. Under the current work program for
Kaznickel, we must drill at least 17,498 meters in 2006. The current work
program under the KKM licenses calls for KKM to extract the following amounts of
ore for processing and brown coal through 2011.
Tons of Ore Tons of Brown Coal
----------- ------------------
2006 -0- 20,000
2007 175,000 60,000
2008 350,000 200,000
2009 1,000,000 200,000
2010 1,000,000 200,000
2011 1,000,000 200,000
To date, we have met the minimum obligations under the minimum work
programs of our subsidiaries. Should we fail to complete the minimum work
program in some year, the MEMR could review the work program, request an update
and amendment to the work program or even recall our license.
We are confident of our ability to satisfy the obligations of the
minimum work programs of our subsidiaries in the future.
Off-Balance Sheet Financing Arrangements
As of March 31, 2006 and 2005 we had no off-balance sheet financing
arrangements.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting
standards generally accepted in the United States requires management to make
estimates and assumptions that affect both the recorded values of assets and
liabilities at the date of the financial statements and the revenues recognized
22
and expenses incurred during the reporting period. Our estimates and assumptions
affect our recognition of deferred expenses, bad debts, income taxes, the
carrying value of our long-lived assets and our provision for certain
contingencies. We evaluate the reasonableness of these estimates and assumptions
continually based on a combination of historical information and other
information that comes to our attention that may vary our outlook for the
future. Actual results may differ from these estimates under different
assumptions.
We suggest that our Summary of Significant Accounting Policies, as
described in Note 1 of Notes to Consolidated Financial Statements, be read in
conjunction with this Management's Discussion and Analysis of Financial
Condition and Results of Operations. We believe the critical accounting policies
that most impact our consolidated financial statements are described below.
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. The more significant areas requiring
the use of management estimates and assumptions relate to mineral reserves that
are the basis for future cash flow estimates and units-of-production
depreciation, depletion and amortization calculations; environmental,
reclamation and closure obligations; asset impairments; write-down of inventory
to net realizable value; valuation allowances for deferred tax assets; reserves
for contingencies and litigation; and the fair value and accounting treatment of
financial instruments. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
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.
Revenue Recognition - For its operating mine, revenues currently arise
from the limited sale of ore and Mamyt brown coal. Revenue is 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 are recorded as inventory until sold.
Trade Receivables -- In the normal course of business, the company
extends credit to its customers on a short-term basis. The principal customers
23
are local companies and government agencies. Although credit risks associated
with these customers are considered minimal, the company routinely reviews its
accounts receivable balances and makes provisions for doubtful accounts.
Related Party Receivables - Related party receivables consists of
short-term advances to employees. No allowance has been provided due to the
historic short-term nature and recoverability of such advances.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
-- Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
At December 31, 2005, we reviewed our long-lived assets as disclosed above and
determined no impairment was necessary.
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.
Depreciation, Depletion and Amortization - Expenditures for new
facilities or equipment and expenditures that extend the useful lives of
existing facilities or equipment are capitalized and depreciated using the
straight-line method at rates sufficient to depreciate such costs over the
estimated future lives of such facilities or equipment. These lives do not
exceed the estimated mine life based on proven and probable reserves as the
useful lives of these assets are considered to be limited to the life of the
relevant mine.
Costs incurred to develop new properties are capitalized as incurred,
where it has been determined that the property can be economically developed
based on the existence of proven and probable reserves. At our surface mines,
these costs include costs to further delineate the ore body and remove
overburden to initially expose the ore body. All such costs are amortized using
the units-of-production ("UOP") method over the estimated life of the ore body
based on recoverable minerals to be mined from proven and probable reserves.
Major development costs incurred after the commencement of production
are amortized using the UOP method based on estimated recoverable minerals to be
mined from proven and probable reserves. Depending upon whether the development
is expected to benefit the entire remaining ore body, or specific ore blocks or
areas only, the UOP basis is either the life of the entire ore body, or the life
of the specific ore block or area.
The calculation of the UOP rate of amortization, and therefore the
annual amortization charge to operations, could be materially impacted to the
extent that actual production in the future is different from current forecasts
24
of production based on proven and probable reserves. This would generally occur
to the extent that there were significant changes in any of the factors or
assumptions used in determining reserves. These factors could include: (i) an
expansion of proven and probable reserves through exploration activities; (ii)
differences between estimated and actual cash costs of mining, due to
differences in grade, mineral recovery rates and foreign currency exchange
rates; and (iii) differences between actual commodity prices and commodity price
assumptions used in the estimation of reserves. Such changes in reserves could
similarly impact the useful lives of assets depreciated on a straight-line
basis, where those lives are limited to the life of the mine, which in turn is
limited to the life of the proven and probable reserves.
The expected useful lives used in depreciation, depletion and
amortization calculations are determined based on applicable facts and
circumstances, as described above. Significant judgment is involved in the
determination of useful lives, and no assurance can be given that actual useful
lives will not differ significantly from the useful lives assumed for purpose of
depreciation, depletion and amortization calculations.
Stripping Costs - In general, mining costs are allocated to production
costs, stockpiles, and inventories, and are charged to costs applicable to sales
when minerals are sold. However, the mining industry, generally, defers and
amortizes certain mining costs on a units-of-production basis over the life of
the mine. These mining costs, which are commonly referred to as "deferred
stripping" costs, are incurred in mining activities that are normally associated
with the removal of waste rock. The deferred stripping accounting method is
generally accepted in the mining industry where mining operations have diverse
grades and waste-to-ore ratios; however, industry practice does vary. Deferred
stripping matches the costs of production with the sale of minerals, where this
procedure is employed, by assigning each quantity of mineral with an equivalent
amount of waste removal cost. When stripping costs are expensed as incurred,
there might be greater volatility in a company's period-to-period results of
operations. We did not acquire any deferred stripping costs in the acquisition
of KKM.
In March 2005, the FASB ratified Emerging Issues Task Force Issue No.
04-6, "Accounting for Stripping Costs Incurred during Production in the Mining
Industry," (EITF 04-6) which addresses the accounting for stripping costs
incurred during the production phase of a mine and refers to these costs as
variable production costs that should be included as a component of inventory to
be recognized in costs applicable to sales in the same period as the revenue
from the sale of inventory. As a result, capitalization of stripping costs is
appropriate only to the extent product inventory exists at the end of a
reporting period and the carrying value is less than the net realizable value.
We will adopt the provisions of EITF 04-6 on January 1, 2006. We have had very
limited production activity in the recent period, so the full effect of this
adoption will be felt as production increases in the future periods.
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
25
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. We
regularly perform evaluations of our 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.
Our 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 we have made our 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.
Recently Issued Accounting Pronouncements
Inventory Costs - In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, which is an amendment of ARB No. 43. SFAS No. 151 requires idle
facility expenses, freight, handling costs and wasted material (spoilage) costs
to be recognized as current-period charges. It also requires that allocation of
fixed production facilities. SFAS No. 151 will be effective for us beginning
January 1, 2006 and resulting adjustments will be made on prospective basis. The
Company does not anticipate that the adoption of this standard will have a
significant impact on our business, results of operations or financial position.
Share Based Payment - In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which is a revision to SFAS No. 123. SFAS No. 123R
established standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. Primarily, SFAS No. 123R
focuses on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments.
SFAS No. 123R requires us to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award,
which is usually the vesting period. No compensation cost is recognized for
equity instruments for which employees do not render the requisite service.
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In accordance with the Securities and Exchange Commission's Staff
Accounting Bulleting 107, SFAS No. 123R is effective as of the beginning of the
annual reporting period that begins after December 15, 2005. Under these
guidelines, the company will adopt SFAS 123R as of January 1, 2006. We do not
expect that the adoption of this standard will have a material impact on our
future results of operations.
Accounting Changes and Error Corrections - In May 2005, the FASB issued
SFAS No. 154, Accounting Changes and Error Corrections, which is a replacement
of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS No. 154 changes the requirements
for the accounting for and reporting a change in an accounting principle.
Previously, most voluntary changes in accounting principle required recognition
of a cumulative effect adjustment in the results of operations of the period of
change. SFAS No. 154 requires retrospective application to prior periods unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective for accounting
changes and corrections of errors made in years beginning after December 15,
2005; however, it does not change the transition provisions of any existing
accounting pronouncements, such as SFAS No. 123R. We do not believe the adoption
of SFAS No. 154 will have a material effect on our business, results of
operations, or financial position.
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.
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
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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 6. Exhibits
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEKEM METALS, INC.
May 19, 2006 By: /s/ Marat Cherdabayev
---------------------------
Marat Cherdabayev,
Principal Executive Officer
May 19, 2006 By: /s/ Yermek Kudabayev
---------------------------
Yermek Kudabayev,
Principal Financial Officer
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