Item 1. Business
Corporate Structure
Company History
We incorporated in the state of Utah under the name EMPS Research Corporation on January 30, 2001. Until the end of the 2004 fiscal year, our primary business focus was the development, marketing and licensing of our patented technology for use in commercially separating nonmagnetic particulate material by building and testing a high frequency eddy-current separator (“HFECS”).
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 (“Condesa”), and its wholly owned subsidiary Kaznickel, LLP in January 2005. On July 24, 2006 Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel a wholly-owned subsidiary of Bekem. On October 1, 2006 Bekem sold Condesa to a third party for nominal value. With the acquisition of Kaznickel, our primary business focus shifted from the development of our HFECS technology to exploring for nickel and cobalt in Kazakhstan because the primary asset of Kaznickel was an exploration and production concession which granted Kaznickel the exclusive right to explore for nickel, cobalt and other minerals in northeastern Kazakhstan known as the Gornostayevskoye (“Gornostai”) deposit. Declining metal prices and the increasing difficulties in obtaining financing due to the global economic and credit crisis forced us to sell our interest in Kaznickel during 2009. In November 2009 we completed the sale of our interest in Kaznickel to a third party for approximately $1,867 and for repayment of $5,000,000 worth of loans owed to Bekem by Kaznickel.
On October 24, 2005, we acquired Kazakh Metals, Inc. (“KMI”), and its wholly owned subsidiary Kyzyl Kain Mamyt LLP (“KKM”), in exchange for 61,200,000 shares of our common stock. Under applicable accounting reporting rules, KMI was considered the accounting acquirer.
KKM holds the exclusive subsoil use contract to extract and process nickel and cobalt ore from the Kempirsai deposit, which is comprised of the Kara-Obinskoye, and Stepninskoye sections (collectively referred to as the “Kara-Obinskoye section”) and Novo-Shandashinskoye section, and brown coal from its Mamyt deposit. Unless otherwise indicated by the context of the disclosure, the Kara-Obinskoye and the Novo-Shandashinskoye sections are collectively referred to herein as the “Kempirsai deposit.”
Business of the Company
Since acquiring Condesa and KMI in 2005 our primary business focus has been the exploration and development of the Kempirsai and, until November, 2009, the Gornostai deposits. To date, we have mined and sold very little ore from the Kempirsai deposit and none from the Gornostai deposit. We have no proven mineral reserves that conform to the standards established by the United States Securities and Exchange Commission (“SEC”). We have not entered the development stage at any of our deposits, have no current production and have very little ability to generate revenue. Since inception, we have been completely reliant upon equity financing and loans to fund our operations and have incurred an accumulated deficit of $30,229,302 through December 31, 2009. At December 31, 2009 our current liabilities exceeded current assets by $974,506. At December 31, 2009 we had cash on hand of $534,619. We anticipate that cash on hand will be sufficient to meet our general and administrative expenses until approximately June 1, 2010. As discussed in Note 1 to our Consolidated Financial Statements, our limited operating history, being at the exploration stage with respect to our mineral interests and having not started production, declines in nickel prices, and dependence upon debt or equity infusions to meet our work program requirements under our government mineral licenses, combined with the current global financial crisis, raise substantial doubt about our ability to continue as a going concern.
Because of our business and financial condition; difficulties in the broader world economy, including the recent problems in the credit markets; steep declines in world nickel prices and our inability to attract additional funding we sold our interest in the Gornostai deposit during 2009 to help raise funds to meet our ongoing expenses.
There is very little demand for our nickel ore until it has been processed and concentrated because of its low nickel content. Currently, there is no nickel ore processing facility within the region of the Kempirsai deposit. We have spent several years investigating processing technologies and undertaking preliminary feasibility studies (“PFS”) for the construction of a nickel ore processing facility. Based on the results of the PFS, if we are able to secure funding, we intend to focus on the Vanyukov Process for further development of the Kempirsai deposits and construction of a nickel processing plant in the Aktobe region of Kazakhstan, where the Kempirsai deposit is located. The Vanyukov Process, first developed in the 1940’s in Russia, is capable of treating oxide nickel ores to form either a nickel matte (by addition of a sulphur containing compound such as pyrite) or directly to form a ferronickel alloy containing up to 20% nickel. The anticipated cost to construct such a processing plant with the planned annual capacity of 20,000 tons of ferronickel (5,000 tons of nickel) is approximately $160 million.
In 2008 KKM entered into a preliminary consortium agreement, subject to negotiation of the terms of a definitive agreement, with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and Asia-Invest Corporation LLP (“AI”) for the purpose of jointly developing and constructing a processing plant. GRK and AI have exploration and production licenses near our Kempirsai deposit. Because of the proximity of their deposits, the parties felt a consortium between the parties made the project more economically viable. Under the preliminary consortium agreement, KKM is considered to be the operator of the Consortium. The preliminary shares of the parties in the Consortium are the following: KKM - 50%; GRK Koitas - 40%; and AI - 10%. Like us, GRK, AI and their shareholders have been unsuccessful raising funds to finance the Consortium due to the effects of the volatility in the world financial and nickel markets. In 2009 GRK was successful in negotiating with the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (the “MEMR”) an extension of the investment obligations under its license to later periods. Also, in March 2010 AI obtained a similar extension of its investment obligations to later periods. We believe the extension of GRK’s and AI’s licenses make it unlikely that the parties will finalize a definitive consortium agreement or move forward with the joint development of a processing plant.
Given our current financial condition, coupled with current and projected nickel inventories and world nickel prices over the next few years we believe our prospects for securing funding to construct a nickel ore processing plant are limited at best. We do not expect to generate revenue from ore extraction and sales until such time as we are able to secure funding for and construct a nickel processing facility.
As discussed in more detail in the “Annual Work Programs of our Deposits” section of Item 2. Properties of this report, in order to retain our subsoil use contracts we are required to satisfy minimum work program requirements each year. However, because of a lack of funds, KKM did not meet the $6 million annual work program requirement of the Kempirsai deposit for 2009. During 2009 KKM invested $1.7 million in the Kempirsai deposit. We anticipate the need to seek significant additional funding during fiscal 2010 to satisfy the 2010 Kempirsai deposit annual work program obligations (to invest up to $26.5 million) and to satisfy the obligations KKM did not meet in 2009. Given our current financial condition, economic and credit market conditions and the state of the nickel market, our prospects for securing $30.8 million to fulfill our 2009 and 2010 obligations associated with the Kempirsai deposit are limited at best.
Because of our limited prospects for generating revenue or obtaining additional financing, we anticipate that we will be unable to fulfill the 2010 minimum work associated with the Kempirsai deposit. It is unclear how often the Ministry of Industry and New Technologies (the “MINT”), (which was newly created in March 2010 to assume the responsibilities of the MEMR with regard to non-oil-related licenses) will review compliance with minimum annual work program requirements. If the MINT reviews our compliance at a time when we are delinquent in meeting our requirements, we expect the MINT will take action to terminate our subsoil use contract to the Kempirsai deposit, as the MEMR did in 2007. To avoid the loss of this contract, management plans to engage in discussions with the appropriate governmental agencies to revise the terms of its annual work program. The government is under no obligation to negotiate with us and there is no guarantee that we can be successful in renegotiating the terms of our work program.
We may also investigate the possibility of selling our rights to the Kempirsai deposit.
KKM also did not fully meet the 2009 annual work program requirements of the Mamyt deposit to invest up to $1.8 million. KKM invested $400,000. However, as discussed in more detail in the “Annual Work Programs of our Deposits” section of Item 2. Properties of this report, in December 2009 KKM received a letter from the MEMR granting our request to decrease our annual work program for the period from 2009 to 2012. We anticipate an addendum to our license memorializing the changes to the annual work program requirements to be prepared some time in April 2010. We expect that the 2009 and 2010 annual work programs will be reduced significantly to the level that was actually spent by KKM in 2009.
Because of the lack of readily available market in Kazakhstan for low grade brown coal of the quality contained at our Mamyt deposit, historically we had planned to use coal from the Mamyt deposit primarily to provide power for our nickel processing facility. Given the unlikelihood that we will obtain financing to construct a processing plant, we have begun to investigate potential markets and uses for our brown coal with a goal to generating revenue for the Company.
In addition to its contracts to the Kempirsai and Mamyt deposits, KKM also owns fuel tanks, locomotives, rail cars, railway cranes, bridge cranes, railway cisterns, maintenance equipment, excavators, motor graders, passenger vehicles, passenger buses, heavy dump trucks, hoppers, scales, lathes, forging hammers, presses, grinding, milling and boring machines, boilers, electrical substations, office equipment, business machines, portable communication equipment, laboratory equipment and multiple buildings. The machinery was manufactured between 1950 and the present. The buildings were built between the 1940’s and the early 1990’s. Much of our existing equipment and buildings will need repair and refurbishing prior to being put into active operation. We planned to use this equipment to support our nickel mining activities at the Kempirsai deposit. Given the unlikelihood that we will engage in nickel mining activities, we are investigating whether this equipment can be put to other uses to generate capital for the Company. We are also investigating whether there is a market for the sale of this equipment.
Competition in the Nickel Market
Norilsk Nickel is the largest nickel producer in the world followed by CVRD, BHP Billiton Plc, Eramet Group and Xtrata. These five companies account for approximately 60% of the world’s primary nickel production, while more than 30 medium to small size companies produce the remaining 40%. Companies compete with each other generally across the globe and are best categorized by their size, reserve base, ore richness, production method and final product. Competition in this industry focuses largely on price and nickel content, whether it is sold in unwrought or chemical form. High nickel content material is sold at higher prices and is most sought after among customers.
Currently there are no nickel-producing companies in Kazakhstan although there are several companies holding exploration and/or extraction rights to nickel deposits in Kazakhstan. Currently none of these Kazakhstani companies extract nickel ore due to problems related to marketing of the ore and financing and construction of processing plants.
Tax and Royalty Scheme in the Republic of Kazakhstan
In January 2009 Kazakhstan adopted a new tax code. The new tax code invalidates tax stability clauses in existing contracts and eliminated tax stability in future contracts. The government has said that the stability of tax clauses was retained only for existing production sharing agreements that contained stability clauses and had undergone the mandatory tax expert evaluation and subsurface use contracts approved by the President of Kazakhstan.
The new tax code increases the taxes paid by extractive industries while lowering the general tax burden on the entire economy. In this respect, the new tax code decreases the corporate tax rate from 30% to 20% beginning January 1, 2009. The corporate tax rate decreases to 17.5% in 2010, and to 15% starting in 2011. Under the draft amendments planned to be introduced to the Tax Code this year, however, the planned reductions in the corporate income tax rate may be postponed, with rate decreases being postponed to 17.5% in 2013 and to 15% starting from 2014.
The new tax code also increases the tax burden of subsurface users by introducing a new minerals extraction tax (“MET”), while canceling royalty payments. In general, MET applies to the value of produced resources which is calculated based on “world” prices. The current MET rate applicable to nickel is set at 6%. Extractive companies are also liable to pay excess profit tax (“EPT”). EPT liability arises when the ratio of aggregate annual income to deductions allowable for EPT purposes relative to operations under a specific subsurface use contract is more than 1.25 for the reporting tax period which, in most cases, is a calendar year. The tax code provides for an incremental sliding scale of EPT rates ranging from 0% to 60% for various profit levels above the mentioned ratio. The planned amendments to the tax code this year may change the current procedure of EPT calculation.
The new tax code also makes rent tax applicable to exports of coal (previously applicable only to exports of hydrocarbons). The rent tax at the rate of 2.1% applies to value of exported coal calculated on the basis of the sale prices.
Value-added tax (“VAT”), which has decreased every year from 16% in 2006 to 12% in 2009, is expected to stay at its current level. Under the new tax code, the progressive scale of social tax rates imposed on employer’s payroll costs was replaced with a flat rate of 11%. The personal income tax rate for resident individuals is set at 10%. Depending on the specific type of income, income of non-residents working in Kazakhstan is subject to income taxes (withholding) at varying rates ranging from 5% to 20%.
During 2009 KKM received a letter from the MEMR requiring changes/addendums to the taxation provisions of its existing subsurface use contracts to make them consistent with the new tax regime. Despite the fact that KKM’s existing subsurface use contracts include statements of stabilization of the tax regime with regard to subsurface user taxes (such as royalty, excess profit tax), the MEMR letter required the new tax regime to be applied to existing contracts beginning January 1, 2009. In December 2009 KKM signed an addendum to the Kempirsai subsoil use contract replacing the existing tax regime indicated in the subsoil use contact to be in compliance with the new tax code regime in exchange for changes in the annual work program proposed by KKM. A similar addendum is expected to be signed for the Mamyt subsoil use contract some time in April 2010.
Initially, the Kempirsai contract required KKM to pay royalty payments equal to 2.21% of gross ore sales. The Mamyt brown coal contract required a royalty payment equal to nine tenths of one percent (0.9%) of gross coal sales. Both contracts require KKM to pay an excess profits tax ranging from 4 to 30 percent based upon an internal rate of return (as defined in the contracts) ranging from 22 to 30 percent.
As of December 31, 2009, we are subject to the following taxes and royalties payable to the Republic of Kazakhstan:
Class of Tax or Royalty
Basis of Tax
Payable Period
Annual Rate
Corporate Income Tax
Profits
Monthly
20%
Social Tax
Payroll
Monthly
11%
VAT
Value added
Monthly
12%
Property Tax
Property
Quarterly
1%
Minerals Extraction Tax (ore)
Value of extracted resources
Monthly
6%
Rent Tax (brown coal)
Value of exported coal
Monthly
2.1%
Excess Profit Tax
Net income
Annually
0-60%
Employees
We currently employ approximately 148 employees, including part-time and full-time working employees and 70 employees that have been sent on unpaid vacation due to our current financial difficulties. We hire our employees under local labor contracts complying with the governing laws of the Republic of Kazakhstan. We anticipate the need to hire additional personnel only if operations expand. Except for Company initiated work force reductions, we have managed to maintain turnover of our work force at a low level. We believe that future new labor requirements can be satisfied and there is no significant risk of labor shortage.
Reports to Security Holders
We are subject to the reporting requirements of the Securities Exchange Act of 1934. As such, we are required to file annual, quarterly and current reports, any amendments to those reports, proxy and registration statements and other information with the United States Securities and Exchange Commission (“SEC”) in accordance with reporting requirements. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 202-551-8090. We are an electronic filer and the SEC maintains an Internet site that contains reports and other information regarding the Company that may be viewed at http://www.sec.gov.
Item 1A.
Item 1A. Risk Factors
If We are Unable to Obtain Additional Financing in the Near Future, We May be Forced to Terminate Operations. We have no proven mineral reserves that conform to the standards established by the SEC. Our Kempirsai and Mamyt deposits have not yet entered the development stage with respect to their mineral interests and we have no production. We have realized only limited revenue from the Kempirsai and Mamyt deposits and have very little ability to generate revenue. We do not expect this to change until a nickel ore processing plant is built and we have commenced commercial operations. As we currently generate no revenue, we will need to raise additional capital through the sale of our equity and/or debt securities.
Our management has expended significant time and effort trying to obtain additional financing for the Company. To date, we have been unsuccessful in securing sufficient additional financing to meet our needs. We believe this is due to several factors. Since inception we have incurred an accumulated deficit of $30,229,302. At December 31, 2009 our current liabilities exceeded current assets by $974,506. We currently generate no revenue from operations and do not anticipate that to change until such time as we are able to construct an ore processing plant. When coupled with the difficulties in the broader world economy, including the recent problems in the credit markets, steep declines in worldwide nickel prices and volatility and downward trends in the stock market, our prospects for obtaining additional funding in the near term are limited.
If we are unable to obtain additional financing in the near future, we will have insufficient funds to satisfy our operating needs, much less to meet our annual work program obligations to ensure we retain our licenses. If we have insufficient funds to meet our operating needs we may be forced to cease operations.
Failure to Satisfy the Terms of Our Subsoil Use Contracts Could Result in the Loss of our Contracts. Under our subsoil use contracts we are required to satisfy our annual minimum work program requirements. There is no guarantee that we will be able to continue to meet these commitments in the future. If we fail to satisfy these commitments we may be subject to penalties and fines and/or the loss of our subsoil use contracts. The cancellation of our contracts would have a material adverse effect on our business, results of operations and financial condition. Although we would seek waivers of any breaches or seek to renegotiate the terms of our commitments in the event we do not believe we can meet such commitments, we cannot assure you that we would be successful in doing so.
Our Independent Registered Public Accounting Firm has Expressed Substantial Doubt About Our Ability to Continue as a Going Concern. As disclosed in the Report of Independent Registered Public Accounting Firm in our audited Consolidated Financial Statements, given our limited operating history, being at the exploration stage with respect to our mineral interests and having not started production, the decline in nickel prices, and dependence upon debt or equity infusions to meet our work program requirements our government mineral licenses, combined with the current global financial crisis, raise substantial doubt about our ability to continue as a going concern. If we are unable to resolve these issues, it is unlikely we will be able to continue as a going concern.
Fluctuations in Commodity Price and Demand for Nickel and Cobalt Have and Will Likely Continue to Adversely Impact the Company. Commodity prices and demand for nickel and cobalt are cyclical and influenced strongly by world economic growth, particularly in the U.S. and Asia (notably China). Commodity prices have significantly declined recently and prices can fluctuate widely. Such fluctuations could have a material adverse impact on our revenues, earnings, cash flows, asset values and growth in the future. As a result of difficult market and general economic conditions (which may be long lasting and continue to deepen), there is reduced direct and indirect demand for nickel and cobalt and these declines, if they do not reverse are expected to a material adverse impact on our future revenues, earnings, cash flows, asset values and growth.
Due to the significant reduction in nickel prices we were required to recognize an impairment of our mineral interests in 2008. According to our estimates, once we construct a nickel processing facility, we can generate positive cash flows if nickel prices are not lower than $12,000-$12,500 per ton. Nickel prices at December 31, 2008, however, fell below this level, requiring us to recognize an impairment of our mineral interests in the amount of $8,916,265.
Mineral Exploration and Exploitation is Inherently Dangerous. The search for valuable minerals involves numerous hazards. As a result, we may become subject to liability for such hazards, including pollution, cave-ins and other hazards against which we cannot insure or against which we may elect not to insure. At the present time we have no coverage to insure against these hazards. The payment of such liabilities may have a material adverse effect on our financial position.
We are Subject to All the Risks of Operating in a Foreign Country. In recent years, the Republic of Kazakhstan has undergone substantial political and economic change. As an emerging market, Kazakhstan does not possess the well-developed business infrastructure that generally exists in more mature free market economies. As a result, operations carried out in Kazakhstan can involve significant risks that are not typically associated with developed markets. Instability in the market reform process could subject us to unpredictable changes in the basic business infrastructure in which we currently operate. Therefore, we face risks inherent in conducting business internationally, such as:
Ÿ
foreign currency exchange fluctuations or imposition of currency exchange controls;
Ÿ
legal and governmental regulatory requirements;
Ÿ
disruption of tenders resulting from disputes with governmental authorities;
Ÿ
potential seizure or nationalization of assets;
Ÿ
difficulties in collecting accounts receivable and longer collection periods;
Ÿ
political and economic instability;
Ÿ
difficulties and costs of staffing and managing international operations; and
Ÿ
language and cultural differences.
Any of these factors could materially adversely affect our business and financial condition. At this time, we are unable to estimate what, if any, changes may occur or the resulting effect of any such changes on us.
We also face a significant potential risk of unfavorable tax treatment and currency law violations. Legislation and regulations regarding taxation, foreign currency transactions and licensing of foreign currency loans in the Republic of Kazakhstan continue to evolve as the central government manages the transformation from a command to a market-oriented economy. The legislation and regulations are not always clearly written and their interpretation is subject to the opinions of local tax inspectors. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual.
The current regime of penalties and interest related to reported and discovered violations of Kazakhstan’s laws, decrees and related regulations can be severe. Penalties include confiscation of the amounts at issue for currency law violations, as well as fines of generally 100% of the taxes unpaid. Interest is assessable at rates of generally 0.3% per day. As a result, penalties and interest can result in amounts that are multiples of any unreported taxes.
We may be adversely affected by Kazakh political developments, including the application of existing and future legislation and tax regulations.
In December 2008, a new subsoil use legislation of Kazakhstan was submitted to parliament, superseding legislation on oil production and exploration, mineral resources mineral management, and production sharing agreements (“PSAs”). The new subsoil use legislation of Kazakhstan, which is expected to be adopted by parliament and signed by the President in second quarter 2010 and become effective six months after its approval by parliament and the President, allows the government to annul contracts in the extractive sector if they are deemed to be harmful to Kazakhstan's economic security or national interests. The legislation also requires separate contracts for exploration and production operations, puts shorter time limits on exploration contracts, enhances the government’s authority to terminate contracts not in compliance with the law, and requires tax stability clauses in individual contracts to be approved by the President of Kazakhstan. In addition, under the terms of the legislation, no future contracts would be structured as a PSA, companies are required to establish equal terms, conditions, and pay for Kazakhstani and foreign workers, and the government would evaluate subsoil resource bids based on promised social contributions. Also, the latest draft assumes that disputes between subsurface users and the government will be settled in the courts of Kazakhstan, and does not assume international arbitration. Disputes regarding the existing subsurface use contracts would also be settled in the courts of Kazakhstan.
In January 2009, Kazakhstan adopted a new tax code. The new subsoil use and tax legislation of Kazakhstan, which defines the framework and procedures connected with the regulation of activities of subsoil users, introduces significant changes in terms of the regulation of the activities of subsoil users, including the abolition of the existing stabilization regime for all subsoil users. The new tax code increases the taxes paid by extractive industries while lowering the general tax burden on the entire economy. Details of the new tax code are discussed above in Item 1. Business in the section entitled “Tax and Royalty Scheme in the Republic of Kazakhstan” of this report.
In February 2009 Kazakhstan’s National Bank dramatically devalued the Tenge, the local currency, from a range of 117-123 Tenge/U.S. dollar to 145-155 Tenge/U.S. dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports), currency devaluations in Kazakhstan’s neighbors, particularly Russia, and the fledgling state of the domestic banking sector. We have limited confidence in the government’s ability to control prices in the near to medium term, and with the value of Tenge wages falling, purchasing power is declining. The future effect of the devaluation is difficult to project given the present uncertainty on the currency markets and on the government’s policies regarding exchange rates and/or foreign currency regulations. Although devaluation of the local currency generally leads to reduced cost of operations, the foreign exchange rate fluctuations, as well as, the deteriorating overall economic situation in Kazakhstan increase uncertainties peculiar to long-term projects in Kazakhstan.
In April 2009, because of the global economic crisis and to support local producers, the government requested the MEMR to specify the “local content” requirements in every subsoil use contract. The current subsoil use legislation of Kazakhstan requires mining and oil companies to use local goods and services. According to these “local content” regulations, subsurface users in Kazakhstan are obligated to purchase goods and services from Kazakhstan entities, provided that the local goods meet minimum project standards, and to give preference to the employment of local personnel. Therefore, in April 2009 KKM and the MEMR signed an addendum # 3 to its nickel subsoil use contract whereby KKM is obliged to the following commitments:
Ÿ
Until 2013, at least 30% of KKM’s total procurements of equipment, materials and other products, must be of goods produced in Kazakhstan, during 2013 and 2014, this percentage shall increase to 40%, after 2014, at least 50% of KKM’s total procurements must have been of equipment, materials and other products produced in Kazakhstan;
Ÿ
Of the total percentage of nickel mining related services retained by KKM until 2013, at least 70% shall be provided by Kazakhstani companies, between 2013 and 2014 that percentage shall increase to 80%, after 2014 the percentage shall increase to 90%;
Ÿ
Kazakhstan citizens shall be given priority in personnel hiring, and depending upon the type of position within KKM, Kazakhstani citizens should account for 80-100% of total KKM personnel until 2013, between 2013 and 2014 the percentages increase to between 90 and 100%, and after 2015, 100% of KKM employees shall be Kazakhstani citizens.
On March 12, 2010, the Oil and Gas Ministry and a Ministry of Industry and New Technologies were created by decree of the President of the Republic of Kazakhstan. It is expected that these two ministries will replace the MEMR. Also, it is expected that Ministry of Industry and New Technologies will be responsible for development of the non-oil branch of the MEMR, which will include the electric power industry, mining, nuclear, and manufacturing industries.
We are Subject to Strict Environmental Regulations. We are subject to stringent federal, state and local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of permits before extraction activities commence, restrict the types, quantities and concentration of substances that can be released into the environment in connection with extraction and production activities and impose substantial liabilities for pollution resulting from our operations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, incurrence of investigatory or remedial obligations or the imposition of injunctive relief. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to maintain compliance, and may otherwise have a material adverse effect on us as well as the industry in general. Under these environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible.
Liquidity of Common Shares. Our common stock has limited trading volume on the Over-the-Counter Bulletin Board and is not listed on a national exchange. Moreover, a significant percentage of our outstanding common stock is “restricted” and therefore subject to the resale restrictions set forth in Rule 144 of the rules and regulations promulgated by the U.S. Securities and Exchange Commission under the Securities Act of 1933. These factors could adversely affect the liquidity, trading volume, price and transferability of our common shares.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
As discussed above, through our subsidiary, we hold the rights to the Kempirsai nickel and cobalt deposits and the Maymt brown coal deposit, which are located in northwestern Kazakhstan.
Location and Access to our Deposits
The Kempirsai deposit is located in the Khromtausky region of northwestern Kazakhstan, approximately 130 kilometers northeast of Aktobe, Kazakhstan and approximately 35 kilometers south of Badamsha village, Aktobe region, Kazakhstan. The Mamyt deposit is located approximately 30 kilometers east of Badamsha village, Aktobe region, Kazakhstan. Badamsha is a village of approximately 6,000 people. The Aktubinsk-Karabutak asphalt highway runs within 14 kilometers to the south of the nickel and cobalt deposit. The nickel, cobalt and brown coal deposits can be accessed through a network of country roads. The Orsk-Kandagash state railway runs nearby the Kempirsai deposit and we own 55 kilometers of our own railway. Our railway connects our deposits to a reloading station and to a Russian railway.
Our Subsoil Use Contracts
The following table provides additional information regarding our subsoil use contracts.
Territory Name
Size of Territory
Primary Minerals
License
Type
License or Contract #
License and
Subsoil Use Contract Term
Kempirsai
575,756 acres
Nickel and cobalt ore
Production
MG #420
MG #426
Expires Oct, 12, 2020 unless extended.
Mamyt
acres
Brown coal
Production
MG #9-D
Expires Dec, 11 2018 unless extended.
The Kempirsai and Mamyt licenses are independent of one another. The loss of one would not trigger a loss of the other. Under our contracts we have the right to negotiate with the government for extensions of the terms of those contracts. If we are unsuccessful in negotiating extensions, upon the expiration of our contracts our interest in and rights to those deposits terminates and reverts back to the government of the Republic of Kazakhstan, but we retain the rights to all tangible and intangible assets we acquire for exploration, extraction and production at these deposits.
For additional details regarding the terms and obligations associated with our subsoil use contracts and licenses, please see “Tax and Royalty Scheme in the Republic of Kazakhstan” in Item 1 “Business”, “Annual Work Programs of our Deposits” in this Item 2 “Properties”, “Summary of Material Contractual Commitments” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 3 - Property, Plant and Mineral Interests”, “Note 6 - Asset Retirement Obligations” and “Note 9 - Commitments and Contingencies” contained in the Notes to our Consolidated Financial Statements.
Annual Work Programs of our Deposits
The Kempirsai and Mamyt deposits were discovered and actively explored during the Soviet era. In the 1980s the State Reserves Committee approved the reserves (based on Soviet standards) and approved the Kempirsai deposit for commercial production. The Kempirsai deposit was actively mined during the 1980s and early 1990s. Active mining ceased in 1996.
The subsoil use contracts and licenses for the Kempirsai and Mamyt deposits are production contracts and do not require us to undertake significant exploration activities. While we do not have fixed exploration obligations, in order to retain our licenses, we are required to engage in certain activities. Each year we must submit an annual work program to the government. The annual work program indicates the scope of exploration and/or production works and finance costs we are required to incur each year.
Our contracts and licenses call for KKM to extract the following amounts of ore from the Kempirsai deposit and brown coal from the Mamyt deposit and make the following investments in the ore mining and processing technology:
(1)
In December 2008, KKM received a notice from the MEMR that it has agreed to suspend ore mining requirements until the end of 2012 to allow KKM to focus on the construction of an ore processing facility. The notice indicated that under the annual work program, KKM is required to invest $135,000,000 in its mining and ore processing technology during the period from 2006 to 2020 (or $123.4 million for the remaining period). In December 2009, KKM signed an addendum to the nickel and cobalt ore production contract memorializing the amendments to KKM’s subsoil use contract to incorporate the changes set forth in the notice received in December 2008. The above table represents extraction and investment obligations indicated in the December 2009 addendum.
(2)
In December 2009 KKM received a letter from the MEMR granting KKM’s request to decrease the coal volume production requirements of its work program from 200,000 tons per year to 5,000 tons per year for the period from 2009 to 2012. We anticipate an addendum to this license memorializing the changes to the annual work program requirements to be prepared some time in April 2010. These changes are not reflected in the above table and will be reflected when these changes are legally approved by the government by signing the new addendum to the existing subsoil use contract.
Geology and Mineralization of the Kempirsai Deposit
Nickel ferrous laterites make up approximately 70% of all land-based nickel resources, though currently they constitute about 45% of the primary nickel production. Nickel laterite deposits are formed as a result of prolonged weathering of ‘ultramafic’ rocks containing ferromagnesian silicate minerals. Under conditions of warm temperatures and high, frequent rainfall, nickel leaches from the upper layers and precipitates in the lower layers in a lattice of silicate and iron oxide minerals.
If an ore deposit is outcropping or occurs near the surface, it can be extracted using open cut methods. Open cut methods allow for lower extraction and operating costs, which can allow low-grade deposits to be economically viable. The topsoil and overburden are removed and stockpiled for later rehabilitation and, as the mine increases in depth, the walls of the excavation are left at an angle to avoid collapse. Open cut mines use large mobile machinery that enables high production rates. Large haul trucks carry the ore and waste to surface stockpiles. Rapid rates of mining in shallow weathered parts of the deposits slow down as the depths increase due to the increased hardness of the material. Nickel laterites are generally mined by surface operations up to 60 meters deep.
The Kempirsai nickel and cobalt deposit is comprised of two deposits: Kara-Obinskoye, and Novo-Shandashinskoye. These deposits are located approximately 5-10 kilometers from each other. The results of exploration carried out during the Soviet era show that nickel and cobalt ore is located within the Kempirsai ultramafic massif. The minerals are found in laterite form and are associated with leached nontronized serpentinites. The ore bodies have a blanket-like shape and tend to lie conformably on the underlying rocks. The depth of ore bodies from the surface is 0-40 meters. In vertical section they are mainly horizontal in attitude and show variable thickness. Thickness varies from 2.0 meters to 30.0 meters, with an average thickness of 6.0 meters. Average stripping ratio is 1.5 cubic meters per ton. The nickel content of the ore within the Kempirsai deposit varies from 0.8% to 3.0% and cobalt - from 0.025% to 0.08%. The average nickel and cobalt content for the Kara-Obinskoye are 1.1% and 0.066% respectively. The average nickel and cobalt content for the Novo-Shandashinskoye deposit are 1.38% and 0.045%.
Reserves
In accordance with SEC Industry Guide 7 mineral deposits qualify as “reserves” only to the extent some part of the deposit can be economically and legally extracted or produced at the time of the reserve determination based on the bankable feasibility study. At the present time, we have completed a preliminary feasibility study for the Kempirsai deposit and, if and when funds allow, we plan to retain Wardell Armstrong International to conduct a bankable feasibility study of our Kempirsai deposit to provide detailed information on mining, processing, metallurgical, economic and other relevant factors. Because our deposits are without known reserves, our proposed programs should be considered exploratory in nature.
Our Offices
Bekem leases approximately 400 square feet of office space located at 324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in the United States. We pay annual rent of approximately $7,800 for this space pursuant to a lease agreement that expired in October 2009. We are currently renting this space on a month-to-month basis at the same rate while we negotiate the terms of a new one-year lease. We anticipate we will be successful in negotiating a new lease on terms comparable to our previous lease, but if negotiations are unsuccessful, we anticipate we will be able to find a replacement space under similar terms.
We maintain a representative office in Almaty, Kazakhstan, where we lease approximately 645 square feet of office space. The lease agreement expires on August 31, 2010. The monthly lease payment is $921. Following our policy of cutting expenses where possible, we are in the process of closing the representative office in Almaty. We expect that the representative office will be officially closed by August 31, 2010 due to certain applicable legal requirements in Kazakhstan.
KKM rents approximately 1,796 square feet of office space in Aktobe, Kazakhstan. KKM pays approximately $1,400 per month for this space. The lease agreement expires on July 20, 2010. The agreement may be extended beyond its term upon mutual agreement of the parties.
We believe the various office spaces we rent are suitable and adequate for our needs.
Item 3.
Item 3. Legal Proceedings
We may, from time to time, be a party to ordinary routine litigation incidental to our business. We are not currently aware of any pending, or threatened litigation or proceedings that could have a material adverse effect on our results of operations, cash flows or financial condition.
Item 4.
Item 4. Reserved
PART II
Item 5.
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Our shares are currently traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol “BKMM.” The following table presents the high and low bid quotations for the fiscal years ended December 31, 2009 and 2008. The published high and low bid quotations were furnished to us by Pink OTC Markets Inc. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
High
Low
Oct. 1 thru Dec. 31
$0.07
$0.07
July 1 thru Sept. 30
0.12
0.02
Apr. 1 thru June 30
0.05
0.017
Jan. 1 thru Mar. 31
0.017
0.012
Oct. 1 thru Dec. 31
$0.18
$0.007
July 1 thru Sept. 30
0.54
0.16
Apr. 1 thru June 30
0.54
0.54
Jan. 1 thru Mar. 31
1.01
0.54
Record Holders
As of March 31, 2010 we had approximately 156 shareholders holding 125,172,011 shares of our common stock. The number of record holders was determined from the records of our stock transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing houses.
Dividend Policy
We have not declared a cash dividend on any class of common equity during the past two fiscal years. Our ability to pay dividends is subject to limitations imposed by Utah law. Under Utah law, dividends may not be made if, after giving it effect: a) the company would not be able to pay its debts as they become due in the usual course of business; or b) the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy the rights of any holders of preferential rights. Our board of directors does not, however, anticipate paying any dividends in the foreseeable future; it intends to retain the earnings that could be distributed, if any, for the operations, expansion and development of its business.
Performance Graph
We are a smaller reporting company, as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, and accordingly are not required to provide this information.
Recent Sales of Unregistered Securities
During the quarter ended December 31, 2009 we did not sell any unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Neither we, nor any affiliated purchasers, purchased any of our equity securities during the year ended December 31, 2009.
Item 6.
Item 6. Selected Financial Data
The selected consolidated financial information set forth below is derived from our consolidated balance sheets and statements of operations as of and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis” and the consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For a complete understanding, this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
Some of the statements set forth in this section are forward-looking statements relating to our future results of operations. Our actual results may vary from the results anticipated by these statements. Please see “Information Concerning Forward-Looking Statements” on page 4.
Results of Operations
Comparison of the years ended December 31, 2009 and 2008
While reading this Results of Operations section, it is important to keep in mind that during most of 2009 we had insufficient financial resources to fund our activities.
During 2009 we sold our interest in Kaznickel to a third party for approximately $1,867 and for repayment of $5,000,000 worth of loans owed to Bekem Metals by Kaznickel. We received an initial payment of $500,000 in March 2009. The balance was paid in November 2009. As a result, the operations of Kaznickel are consolidated in our consolidated financial statements until the date we closed this transaction. The Kaznickel operations were reported in the consolidated statements of operations as income (loss) from discontinued operations.
General and Administrative Expenses
Our general and administrative expenses decreased from $4,068,004 during 2008 to $2,363,977 during 2009. This 42% decrease was primarily the result of lower payroll expenses. During 2009 payroll expense decreased by approximately $743,000. We currently employ approximately 148 employees, including part- and full-time working employees and 70 employees that have been sent on unpaid vacation due to our current financial difficulties. General and administrative expenses also decreased as a result of the Tenge devaluation which occurred in the beginning of February 2009. The total estimated effect of the Tenge devaluation on our general and administrative expenses is approximately $474,000, including the effect of devaluation on payroll expenses of approximately $276,000. The balance of the decrease (approximately $211,000) resulted from the reduced scope of our operations during 2009 due to our current financial difficulties.
Research and Development Costs
During 2008 we incurred research and development cost of $240,832, which was related to preparation of the preliminary feasibility study on the Kempirsai deposits. During 2009 we did not incur any research and development costs.
Exploratory Costs
Our exploratory costs decreased from $763,405 during the twelve months ended December 31, 2008 to $124,886 during the twelve months ended December 31, 2009.
During the twelve months ended December 31, 2009 we extracted 2,835 tons of coals. No ore was extracted during 2009. By comparison, during the twelve months ended December 31, 2008, we extracted 146,107 tons of ore and 4,668 tons of coal. The extraction costs of $44,664 and $393,018 (including stripping costs) for 2009 and 2008, respectively, were included in exploratory costs since we are in the exploration stage.
The balance of exploratory cost of $80,222 and $370,387 for 2009 and 2008, respectively, represent the cost of maintenance and repair works of KKM assets.
Loss from Impairment of Property
During 2008, due to the global financial crisis and sharp fall in nickel prices on the world market, we reassessed our assets and recognized impairment of mineral interests of $8,077,787. According to our estimates, once we have built a processing facility that would allow us to produce a marketable product (a ferronickel alloy containing 20% nickel) we can generate positive cash flows if nickel prices are not lower than $12,000-$12,500 per ton. Nickel prices at December 31, 2008, however, fell below this level, requiring us to recognize an impairment of our mineral interests. We also recognized impairment for other property in the amount of $565,171 for assets used in our hydrochlorination technology pilot plant that will not be used in the Vanyukov’s technology to be used at the nickel processing plant. Although nickel prices have improved, we have recognized an additional impairment of $556,500 in 2009 for equipment to be used in the Vanyukov’s technology. The impairment was recognized for about 40% of pilot plant cost due to our current poor financial condition.
Accretion Expense
We realized accretion expense of $52,184 during the twelve months ended December 31, 2009. During the twelve months ended December 31, 2008 we realized accretion expenses of $10,755. This increase in accretion expense is due to the normal increase in the asset retirement obligation balance over time.
Due to our poor financial condition and the potential likelihood that our subsoil use contract could be revoked, we estimated cost of liquidation and reclamation of the KKM mines. As of December 31, 2009 the liquidation cost was estimated to be up to $911,297, which is higher than the previously recognized asset retirement obligations by $513,971. This amount was immediately recognized in 2009.
We believe accretion expense during the upcoming fiscal year will be approximately 3.8 times higher due to revision of asset retirement obligation made for KKM in 2009.
Grant Compensation Expense
During the year ended December 31, 2009 we incurred $301,028 in grant compensation expense for restricted stock grants issued to certain officers and key employees. The amount is less than initially expected by $45,301 due to the anticipated resignation of Zhassulan Bitenov who has been serving as our Chief Financial Officer since January 2008. Half of the shares granted to Mr. Bitenov will not vest because he has informed the Company he intends to resign his position with the Company in April 2010, which is prior to the vesting date of one-half of his stock grant. During 2008 grant compensation expense amounted to $585,745. The reduction in grant compensation expense resulted from the vesting of a significant portion of shares granted in 2008 and reversal of shares granted to Mr. Bitenov which were expected to vest in 2011. As a result, we anticipate deferred grant compensation of $6,390 to be fully expensed next year, i.e., the whole amount reported on the balance sheet as of December 31, 2009 is to be expensed next year.
Total Operating Expenses and Loss from Operations
As a result of the factors described above, our total expenses and loss from operations decreased by 73%, from $14,311,699 during fiscal 2008 to $3,912,546 during fiscal 2009. The principal reason for this decrease is that we recognized impairment losses of $556,500 in 2009 while in 2008 loss from impairment of property amounted to $8,642,958, which occurred mainly due to the sharp fall in world nickel prices in the second half of 2008. Also, as a result of our financial difficulties, we significantly reduced the scope of our operations and recognized additional asset retirement costs of $513,971. As a result of our lack of financial resources and the Tenge devaluation, general and administrative expenses and exploratory costs in 2009 decreased by $2,342,546 compared to the prior year and we incurred no research and development costs in 2009. We expect we will continue to generate losses until we engage in significant revenue generating activities, which most likely will not occur before we construct the nickel ore processing plant and put it into operations.
Translation Adjustment and Exchange Gain/Loss From Remeasurement
Our consolidated financial statements are presented in U.S. dollars. The functional currency of Kaznickel was U.S. dollars. The functional currency of KKM is Kazakh tenge. Results of operations are translated into U.S. dollars at the average exchange rates during the reporting period. All balance sheet accounts of KKM are translated at exchange rates on the date of the financial statements, except equity which is translated at weighted-average historical rates. The translation differences are included in stockholders’ equity as cumulative translation adjustments.
Non-monetary assets and liabilities of the Almaty representative office, as well as the related expense accounts, 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 and the resulting balance sheet item differences are included in the results of operations as exchange gains/losses from remeasurement. The same approach was applied for the ten-month operations of Kaznickel before its disposal date. The exchange difference from remeasurement is commonly, but not always, positive (gain) if the average exchange rates are lower than exchange rates on the date of the financial statements and negative (loss) if the average exchange rates are higher than exchange rates on the date of the financial statements.
On February 4, 2009, Kazakhstan’s National Bank dramatically devalued the Tenge, the local currency, from a range of 117-123 Tenge/U.S. dollar to 145-155 Tenge/U.S. dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports), currency devaluations in Kazakhstan’s neighbors, particularly Russia, and the fledgling state of the domestic banking sector. This currency devaluation was the main cause of the exchange gain from remeasurement recognized by us during 2009.
Exchange Loss and Gain
During 2009 we realized an exchange loss of $2,521,226 compared to an exchange loss of $22,659 during 2008. As with the gain/loss from remeasurement, we recognize exchange gain or loss as a result of having subsidiaries operating in foreign countries whose functional currency may or may not be the U.S. dollar. This requires us to translate results of operations from a foreign currency, in this case Kazakh tenge, to U.S. dollars at the average exchange rate, where results of operations include exchange gains or losses on the U.S. dollar monetary assets and liabilities. The currency devaluation discussed above was the main cause of the foreign exchange loss incurred by the Company during the twelve months ended December 31, 2009.
Interest Income
During the twelve months ended December 31, 2009, we realized interest income of $75,853, including $1,353 of interest earned on short-term bank deposits and $74,500 accrued on the note receivable from Latimer. By comparison, during the twelve months ended December 31, 2008 we earned $221,084 of interest, including $54,756 of interest earned on short-term bank deposits and $166,328 accrued on the note receivable from Latimer.
Other Income, net
During the twelve months ended December 31, 2009, we realized $320,989 of other income compared to $486,064 realized during the same period of the prior year. This amount mainly includes income from the rendering railway services and renting railway facilities.
Gain from sale of subsidiary
As discussed above, in November 2009 we sold our interest in Kaznickel. As a result, November 3, 2009 was treated as the measurement date for accounting of the discontinued operations. The amount of gain from discontinued operations represents mainly accumulated loss of Kaznickel written off at the measurement/disposal date less net assets and costs directly related to execution of the sale-purchase transaction. It also includes income of approximately $1,867 received from the acquirer for Kaznickel’s charter capital.
Net Income / Loss
For all of the foregoing reasons, during the twelve months ended December 31, 2009 we experienced a net income of $43,572 compared to a net loss of $15,348,975 during the twelve months ended December 31, 2008. We anticipate we will continue to experience annual net losses until we are able to engage in nickel and cobalt ore extraction, processing and sales.
Liquidity and Capital Resources
Since inception we have generated no revenue. Our capital resources have consisted primarily of funds we have borrowed from related and non-related parties and the sale of our equity securities and funds received from the sale of Kaznickel. As of December 31, 2009 we had cash on hand of $534,619. We earned net income of $43,572 for the year ended December 31, 2009 and incurred net losses of $15,348,975 for the year ended December 31, 2008 and $30,229,302 for the period from March 5, 2004 (date of inception) through December 31, 2009. Our current liabilities exceeded our current assets by $974,506 and $3,520,764 as of the year ended December 31, 2009 and 2008, respectively.
As discussed above in Item 1 “Business” we have no proven mineral reserves that conform to the standards established by the United States Securities and Exchange Commission. Our deposits have not yet entered the development stage and we have no production. We have realized only limited revenue from our Kempirsai and Mamyt deposits and have very little ability to generate revenue. We do not expect this to change until we build and begin operating a nickel ore processing plant.
Due to our lack of revenue and our inability to obtain equity or debt funding, partially as a result of the financial crisis impacting the global economy, during 2009 we sold our wholly-owned subsidiary Kaznickel LLP to a third party for approximately $1,867 and for repayment of $5,000,000 worth of loans owed to Bekem by Kaznickel. $2,500,000 of these funds were spent for partial repayment of notes payable to related parties and $1,965,382 was used for working capital. The proceeds from the sale will not provide us adequate funding to meet our minimal operational needs, much less fulfill the annual work program requirements associated with our deposits through the end of 2010.
Because of a lack of funds, we were unable to meet our 2009 annual work program requirements to invest up to $6 million into development of the Kempirsai deposit and a processing plant. We anticipate the need to seek significant additional funding during fiscal 2010 to satisfy our 2010 annual work program obligations (to invest up to $26.5 million) and to satisfy the obligations we did not meet in 2009. We also anticipate the need for up to $400,000 to satisfy the 2010 work program requirements associated with our Mamyt deposit if we are successful in negotiations with the government to reduce the 2009 annual work program to the level that was actually spent in 2009. There is no assurance that we will be able to obtain additional funding on favorable terms, or at all. If we are unsuccessful in obtaining additional funding during 2010, we will likely have insufficient funds to continue operations.
Because of our limited prospects for generating revenue or obtaining additional financing, we anticipate that we will not be able to fulfill the 2010 minimum work associated with the Kempirsai deposit. If we fail to satisfy our minimum work program requirements, we expect the government will take action to terminate our subsoil use contract to the Kempirsai deposit, as they did in 2007. To avoid the loss of this contract, management plans to engage in discussions with the appropriate governmental agencies to revise the terms of its annual work program. However, the government is under no obligation to negotiate with us and there is no guarantee that we can be successful in renegotiating the terms of our work program.
Cash Flow
During the 2009 and 2008 fiscal years, cash was primarily used to fund operations. See below for additional discussion and analysis of cash flow.
December 31,
Net cash used for operating activities
$
(2,151,169)
$
(5,185,567)
Net cash from investing activities
5,007,050
(15,153,828)
Net cash from financing activities
(2,500,000)
19,698,150
Effect of exchange rate changes on cash
63,094
(54)
NET INCREASE (DECREASE) IN CASH
$
418,975
$
(641,299)
In fiscal 2009 net cash used in operating activities was $2,151,169, compared to net cash used in operating activities of $5,185,567 in fiscal 2008. This decrease in net cash used in operating activities primarily occurred due to reduced exploratory activities as a result of the financial difficulties we have experienced.
Net cash provided by investing activities during the twelve months ended December 31, 2009 was $5,007,050. The cash inflow was primarily comprised of the amount received as a repayment of loans under a sale-purchase agreement of our subsidiary, Kaznickel. By comparison, during the twelve months ended December 31, 2008, we used net cash in investing activities of $15,153,828. The cash outflows in investing activity during the twelve months ended December 31, 2008 mainly occurred due to the loan provided to Latimer, one of the owners of the other parties to the consortium.
Net cash used for financing activities during twelve months ended December 31, 2009 was $2,500,000 compared to net cash provided by financing activities of $19,698,150 in fiscal 2008. This net cash used for financing activities in 2009 was a payment of $2,500,000 under the preliminary Consortium agreement. The 2008 cash inflow occurred due to proceeds received by KKM under the preliminary Consortium agreement.
Summary of Material Contractual Commitments
The following table lists our significant commitments as of December 31, 2009:
(1)
The current terms of the Kempirsai contract require KKM to invest $135 million to be applied to its mining and ore processing technology during the period 2006-2020 (or around $123.4 million for the remaining period). Also, the estimates include $950,000 for removal of all equipment and to remediate the property. This remediation work can be done during the term of the subsoil use contract or upon completion of the terms of the contract.
(2)
In March 2008 KKM entered into a preliminary consortium agreement with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and Asia-Invest Corporation LLP (“AI”), who also have exploration and production licenses near the Company’s Kempirsai deposit in northwestern Kazakhstan. Under the preliminary consortium agreement, which was amended in November 2009, the parties are obliged to jointly contribute approximately $9.2 million for financing the construction of the processing plant. Of this amount, KKM is obligated to contribute approximately $4.6 million. Contributions made by the parties into the consortium are accounted for in the annual work programs of these parties. As of December 31, 2009 contributions of GRK equal KZT 192 million ($1,293,565) and contributions of AI equal KZT 122 million ($820,925), which were to be used for construction of a processing plant.
For more information regarding this requirement please see the “Annual Work Programs of our Deposits” section of Item 2 “Properties”.
Off-Balance Sheet Financing Arrangements
As of December 31, 2009 and 2008 we had no off-balance sheet financing arrangements.
Recent Accounting Pronouncements
For details of applicable new accounting standards, please, refer to Note 1 to our Consolidated Financial Statements.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses and revenues, to the extent we generated revenue during the periods presented. Actual results could differ from these estimates. Our significant accounting policies require us to make difficult, subjective or complex judgments or estimates. We consider an accounting estimate to be critical if (1) the accounting estimate requires us to make assumption about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimates that are reasonably likely to occur from period to period, or use different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
There are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. Management has discussed the development of these critical accounting estimates with our board of directors and they have reviewed the foregoing disclosure.
Use of Estimates - In connection with the preparation of our financial statements, we are required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. One of the significant areas requiring the use of management estimates and assumptions relates to environmental reclamation and closure obligations. Under our licenses with the Republic of Kazakhstan, following completion of exploration and mining activities we are required to reclaim our licensed territories. To prepare our financial statements in accordance with accounting principles generally accepted in the United States of America we are required to account for this obligation. The determination of the amount of the mine retirement and environmental reclamation obligation the Republic of Kazakhstan will impose upon us, however, has not yet been determined. The determination of the mine retirement and environmental reclamation obligation is based, in significant part, on the size of each deposit. We base our estimate of this obligation on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from our estimate.
Income Taxes - While we are a Utah corporation, our primary operations are in the Republic of Kazakhstan. The Republic of Kazakhstan was formed in 1991 following the break-up of the former Soviet Union. At the time the Republic of Kazakhstan was formed, it adopted a new tax code. The tax code and the application of tax laws in the Republic of Kazakhstan are still developing and may not be uniformly applied in all instances.
Item 7A.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
Our primary market risks are fluctuations in commodity prices and foreign currency exchange rates. We do not currently use derivative commodity instruments or similar financial instruments to attempt to hedge commodity price risks associated with future nickel production.
Commodity Price Risk
Historically, nickel and cobalt prices have been subject to significant volatility in response to changes in supply, market uncertainty and a variety of other factors beyond our control. Nickel and cobalt are likely to continue to be volatile in the future and this volatility makes it difficult to predict future price movements with any certainty. As a result, commodity price fluctuations affect our ability to borrow funds or raise additional capital because declines in nickel and cobalt prices would reduce the revenues we could earn if we begin commercial production. Commodity prices for nickel and cobalt have a material effect on our business and financial condition.
Foreign Currency Risk
Our functional currency is the U.S. dollar. Our Kazakhstani subsidiary KKM uses the Kazakh tenge as its functional currency. To the extent that business transactions in Kazakhstan are denominated in the Kazakh tenge we are exposed to transaction gains and losses that could result from fluctuations in the U.S. dollar-Kazakh tenge exchange rate. When the U.S. dollar strengthens in relation to the Kazakh tenge, the U.S. dollar-reported expenses will decrease. We do not engage in hedging transactions to protect us from such risk.
Our foreign-denominated monetary assets and liabilities are revalued on a monthly basis with gains and losses on revaluation reflected in net income. A hypothetical 10% favorable or unfavorable change in foreign currency exchange rate at December 31, 2009 would have affected our net income by approximately $180,000.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements listed in the accompanying index to the Consolidated Financial Statements on Page herein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
During the fiscal year ended December 31, 2009 there were no changes in and disagreements with our independent registered public accounting firm on accounting and financial disclosure.
Item 9A(T).
Item 9A(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2009, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this assessment, our management concluded that as of December 31, 2009, our internal control over financial reporting is effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
The following table sets forth as of March 31, 2010 our directors and executive officers, promoters and control persons, their ages, and all offices and positions held. Directors are elected for a period of one year and thereafter serve until their successor is duly elected by the stockholders and qualified. Officers and other employees serve at the will of the board of directors.
Name of Director or
Executive Officer
Age
Positions with
the Company
Director Since
Officer Since
Yermek Kudabayev
Chief Executive Officer, President and Director
December
April
Zhassulan Bitenov
Chief Financial Officer
January
James Kohler
Independent Director
May
Timothy Adair
Independent Director
May
Valery Tolkachev
Independent Director
May
Nurlan Tajibayev
Vice President of Metallurgy and Director
October
October
Dossan Kassymkhanuly
Vice President and Director
August
August
The above individuals currently serve as the Company’s officers and/or directors. A brief description of their background and business experience follows:
Yermek Kudabayev. In December 2007, the Company’s board of directors appointed Yermek Kudabayev as the Chief Executive Officer, President of the Company and Chairman of the board of directors. Mr. Kudabayev served as the Company’s Chief Financial Officer from April 2006 until December 2007 and as interim Chief Executive Officer and interim President from May 2007 to December 2007. Mr. Kudabayev earned a Bachelors degree in Engineer-Economics from the Moscow Institute of Steel and Alloys in 1993. He earned an MBA degree from the Kazakhstan Institute of Management, Economics and Strategic Research in 1996. Mr. Kudabayev is a past member of the Association of Chartered Certified Accountants, an international accountancy body. He was issued a Certified Accounting Practitioner Certificate from the International Counsel of Certified Accountants and Auditors in 2002. He has been a Kazakhstani Certified Accountant since 1998 and a Certified Kazakhstani Auditor since 2000. Prior to joining the Company in 2006, Mr. Kudabayev served as the Finance Director for Kazkhoil Aktobe LLP from 2003 to April 2006. As the Finance Director, Mr. Kudabayev was responsible for budgeting, planning, cash flow forecasting and management, strategic research accounting, taxation and reporting. From 2002 to 2003, Mr. Kudabayev served as the Director of the Astana, Kazakhstan office of Ernst & Young, where he was responsible for auditing and coordination of projects in the Astana, Karaganda and Pavlodar regions of Kazakhstan. From 1997 to 2002, Mr. Kudabayev worked for Arthur Andersen as a Senior Auditor and as a Manager. Mr. Kudabayev was appointed the Chief Financial Officer of Bekem Metals, Inc. in April 2006. Mr. Kudabayev is not currently, nor has he in the past five years been, a director or nominee of any other SEC registrant.
Zhassulan Bitenov. In January 2008, Mr. Bitenov accepted appointment as the Company’s Chief Financial Officer. In 1999, Mr. Bitenov earned a Masters of Arts in Economics from Kazakhstan Institute of Management, Economics and Strategic Research in Almaty, Kazakhstan, with a specialization in international economics. He earned a Bachelors degree in International Economics from the International Kazakh -Turkish University in Turkestan, Kazakhstan in 1997. Mr. Bitenov passed the U.S. CPA exam in 2001. Mr. Bitenov served in various positions with the Almaty office of the accounting firm of Ernst & Young from November 2001 to October 2003 and from December 2004 through December 2007. While at Ernst & Young, Mr. Bitenov worked as a Senior auditor, Audit manager and Senior manager. Among other things, he was responsible for clients’ audits, preparation of audit reports, management of current engagements and negotiations with clients. From October 2003 to April 2004, he served as the Vice President of JSC AstanaEnergoService where he was responsible for the daily management and supervision of several company departments including the accounting, planning, sales, legal and marketing departments. From June 2004 to December 2004, he served as the finance director of JSC Interfarma-K. Mr. Bitenov is not currently, nor has he in the past five years been, a director or nominee of any other SEC registrant. In December 2009 Mr. Bitenov informed the Company of his intent to resign as the Company’s Chief Financial Officer in April 2010.
James F. Kohler. Mr. Kohler received a B.S. in geology in 1970 and an M.S. in geology in 1980 from Utah State University. Mr. Kohler is currently self-employed as a geological consultant. From 2001 through 2008 Mr. Kohler was employed with the U.S. Bureau of Land Management in Salt Lake City, Utah. Prior to leaving the BLM, Mr. Kohler was serving as the Branch Chief of Solid Minerals in Salt Lake City, where he oversaw all mining activity on public lands within the State of Utah. He began working at the U.S Bureau of Land Management in 1988 as a Senior Geologist, providing geologic support for all federal solid mineral leasing actions to establish a basis for economic evaluation of leasing tracts. From 1987-1988, Mr. Kohler served as Senior Geologist with the Utah Office of High Level Nuclear Waste in Salt Lake City, Utah, where he provided oversight for high-level nuclear waste repository characterization in Nevada, Texas, and Washington. From 1981-1986, he was the senior geologist and Manager of coal development and mining geology for Anaconda Minerals/ARCO Coal Company in Denver, Colorado supervising geologic support for operating coal mines and acquisitions in the U.S., Indonesia and China. From 1977 to 1981, Mr. Kohler was a Supervisory Geologist with the U.S. Geological Survey in Salt Lake City, Utah. In 2000, Mr. Kohler was awarded the Utah Governor's Medal for Science and Technology. Mr. Kohler is not currently, nor has he in the past five years been, a director or nominee of any other SEC registrant.
Timothy Adair. Mr. Adair received a Masters in Business Administration (MBA) from Brigham Young University, located in Provo, Utah, in 1990. Mr. Adair also received a Bachelors of Science from the same university in Mechanical Engineering with a minor in Mathematics in 1988. Since 2005, Mr. Adair has been principally engaged as the Owner/President of Cube Office Designs located in Salt Lake City, Utah where he has successfully transferred company ownership and management. Mr. Adair also acted, since 2005, as an Internal Human Resources Consultant for Avalon Health Care specializing in Affirmative Action/Equal Opportunity Employment and Financial Analysis. Prior to purchasing Cube Office Designs, from 1989 through 2004, Mr. Adair was principally engaged as the Human Resources Productivity / Efficiency Manager with Intermountain Health Care (IHC) of Salt Lake City, Utah. IHC is a health care provider with 25,000+ employees and annual revenue of 2.5 + billion USD. While with IHC Mr. Adair consistently implemented cost savings improvements, such as the standardizing and automating of employee transactions which resulted in annual savings of $200k. Mr. Adair is also a licensed real estate agent and has been an avid real estate investor and property manager since 1989 as a partner of ADLAW. Mr. Adair was a member of the Oracle Applications User Group (OAUG) and the Intermountain Compensation and Benefits Association (ICBA). Mr. Adair is not currently, nor has he in the past five years been, a director or nominee of any other SEC registrant.
Valery Tolkachev. Since March 2009, Mr. Tolkachev been employed with Maxwellbank in Moscow, Russia, where he serves as the Deputy CEO. From 1991 to 2009, Mr. Tolkachev served in various positions with various employers including Slaviansky Bank, UniCreditAton, MDM Bank, InkomBank, InkomCapital and others. Mr. Tolkachev graduated with Honors from the High Military School in Kiev, USSR in 1989. In 2005, he completed his studies at the Academy of National Economy, as a qualified lawyer. Mr. Tolkachev also serves as a director of Caspian Services, Inc., and BMB Munai, Inc. Both are SEC registrants.
Nurlan Tajibayev. Mr. Tajibayev has worked in the metallurgy industry since earning a Bachelors degree in Engineer-Metallurgy from the Kazakh State Technical University in 1973. Prior to joining Bekem Metals, Mr. Tajibayev served as the Executive Director of Kyzyl Kain Mamyt, LLP, a wholly-owned subsidiary of Bekem Metals. Before joining Kyzyl Kain Mamyt in 2003, Mr. Tajibayev served as Chairman of Canat UK Ltd., a supplier of metallurgical equipment from Europe and the United States to Kazakhstan, for six years. Mr. Tajibayev also spent twenty years serving in various capacities, including Senior Engineer, for Aktyubinsk Ferroalloys Plant and President of Kazchrome Corporation. Mr. Tajibayev is not currently, nor has he in the past five years been, a director or nominee of any other SEC registrant.
Dossan Kassymkhanuly. In August 2007, the board of directors appointed Mr. Kassymkhanuly as a director. The board also appointed Mr. Kassymkhanuly as a vice-president of the Company. Mr. Kassymkhanuly served as the Business Manager for Gauhar-Tas Centre from December 1992 to February 1999. Gauhar-Tas Centre was engaged in foreign-economic activity with China, including exportation of non-ferrous metals and importation of building materials and mining engineering. From February 1999 to November 2003, Mr. Kassymkhanuly served as Director of the Semey FPG JSC regional office in Ust-Kamenogorsk. He was responsible for coal sales in Eastern Kazakhstan. Mr. Kassymkhanuly also took part in the development of the Gornostai nickel-cobalt deposit, as well as in the pilot industrial smelting for ferronickel at the Pavlodar tractor plant. He was also responsible for negotiations with the Geology Committee of the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan, including overseeing amendments and addendums to contracts for subsoil use. Mr. Kassymkhanuly chairmanned a group on implementation of new technology. In particular, he took part in the construction project for a briquette plant to produce briquette coal at the Karazhira coal deposit, Eastern Kazakhstan. Mr. Kassymkhanyly served as the Director of the Representative Office of Kaznickel LLP in Astana, Kazakhstan from March 2004 to August 2007. In that position he was primarily responsible for negotiations with various government entities and committees on behalf of Kaznickel. Mr. Kassymkhanuly also served as a member of the board of directors of Bekem Metals, Inc. from August 2005 to October 2006. Mr. Kassymkhanuly earned a degree in Engineer-Construction from Semipalatinsk College of Civil Engineering in 1989. He earned a Bachelors degree in Engineer-Economics from the Eastern Kazakhstan Technical University in 2002. At present, he is a candidate for a PhD degree in Engineering Sciences at the Semey State Institute. Mr. Kassymkhanuly is not a director or nominees of any other SEC registrant. Other than serving as a director of Bekem Metals, Mr. Kassymkhanuly has not been a director or nominees of any other SEC registrant during the past five years.
When determining whether it is appropriate for a director to serve on the board of directors, the Company focuses primarily on the information provided in each of the director’s individual biographies set forth above and its knowledge of the character and strengths of the sitting directors. With regard to Mr. Kudabayev, the Company considered his experience as the Company’s chief executive officer and former chief financial officer, as well as his strong accounting, audit and financial budgeting background. With regard to Mr. Kohler, the Company considered his years of service with the United States Bureau of Land Management as the Director of Solid Minerals in Utah, where he oversaw all mining activities in the State of Utah, as well as his more than 30 years experience as a geologist. With regard to Mr. Adair, the Company considered his experience as a Human Resource Productivity/Efficiency Manager for a $2.5 billion a year in revenue, 25,000+ employee, health insurance company, as well as his experience in running his own company. With regard to Mr. Tolkachev, the Company considered his extensive investment experience and his related finance and banking background. With regard to Mr. Tajibayev the Company considered his extensive experience in the metallurgy industry in Kazakhstan, as well as his experience as the Executive Director of the Company’s subsidiary KKM. With regard to Mr. Kassymkhanuly, the Company considered his extensive experience with the Gornostai development and his experience and strong relationships within the mining industry in Kazakhstan.
Board Leadership Structure and Risk Oversight
The board of directors has chosen to combine the principal executive officer and board chairman positions and has not appointed a separate lead director. Mr. Yermek Kudabayev has served as the principal executive officer and board chairman since December 2007. At the present time, the independent directors believe that Mr. Kudabayev’s in-depth knowledge of our operations and vision for its development make him the best-qualified director to serve as Chairman.
The board of directors is responsible for consideration and oversight of risks facing the Company, and is responsible for ensuring that material risks are identified and managed appropriately. The board of directors administers its oversight functions by reviewing the operations of the Company, by overseeing the executive officers’ management of the Company, and also oversees related party transactions, requiring pre-approval of any such transactions with the Company.
Family Relationships
There are no family relationships among any of our executive officers and/or directors.
Involvement in Certain Legal Proceedings
During the past ten years none of our executive officers, directors or persons nominated to become a director has been involved in any of the following events that could be material to an evaluation of his ability or integrity, including:
(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting the following activities:
(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity poll operator, floor broker, leverage transaction merchant, and other person regulated by the Commodity Futures Trading Commission (“CFTC”), or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliate person, director or employee of any investment company, bank savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
(ii) Engaging in any type of business practice; or
(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws.
(4) Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the rights of such person to engage in any activity described in (3)(i) above, or to be associated with persons engaged in any such activity.
(5) Being found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not be subsequently reversed, suspended or vacated.
(6) Being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated.
(7) Being the subject of, or a party to any Federal or State judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
(i) Any Federal or State securities or commodities law or regulations; or
(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(8) Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26)))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Committees of the Board of Directors
Audit Committee
We do not currently have a standing audit committee or other committee performing similar functions, nor have we adopted an audit committee charter. Given the size of the Company, its available resources and the fact that the OTCBB does not require us to have an audit committee, the board of directors has determined that it is in the Company’s best interest to have the full board fulfill the functions that would be performed by the audit committee, including selection, review and oversight of the Company’s independent accountants, the approval of all audit, review and attest services provided by the independent accountants, the integrity of the Company’s reporting practices and the evaluation of the Company’s internal controls and accounting procedures. The board is also responsible for the pre-approval of all non-audit services provided by its independent auditors. Non-audit services are only provided by our independent accountants to the extent permitted by law. Pre-approval is required unless a “de minimus” exception is met. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than 5% of the total amount of fees paid by us to our independent auditors during the fiscal year in which the non-audit services are provided; such services were not recognized by us at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the board and approved prior to the completion of the audit by the board or by one or more members of the board to whom authority to grant such approval has been delegated.
As we do not currently have a standing audit committee, we do not at this time have an “audit committee financial expert” as defined under the rules of the Securities and Exchange Commission. The board does believe, however, that should the Company form a standing audit committee in the future, Mr. Timothy Adair, an independent director, could qualify as an audit committee expert.
Nominating Committee
Given the small size of the Company, we do not have a standing nominating committee or nominating committee charter. Instead, the full board of directors performs the functions that would be performed by a nominating committee.
The procedures by which our security holders may recommend nominees to the Company’s board of directors have not changed during the current fiscal and are the same as reported in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC on April 15, 2009.
Board Diversity
While we do not have a formal policy regarding the consideration of diversity in identifying and evaluating potential director candidates, the board considers the interplay of a candidate's knowledge, expertise, skills and experience with that of the other members of the board of directors in order to build a board of directors that is effective, collegial and responsive to the needs of the Company. We believe this analysis results in a board of directors that is diverse in knowledge, expertise, skills, experience and viewpoint.
Our board may establish committees from time to time to facilitate our management.
Compliance with Section 16(a) of the Exchange Act
Directors, executive officers and holders of more than 10% of our outstanding common stock are required to comply with Section 16(a) of the Securities Exchange Act of 1934, which requires generally that such persons file reports regarding ownership of and transactions in securities of the Company on Forms 3, 4, and 5. Based solely on management’s review of these reports during the year ended December 31, 2009, it appears that GLG Partners LP, a greater than 10% shareholder of the Company, filed a Form 4 disclosing the sale of all its shares of our common stock several days late. To date, the acquirer(s) of the shares held by GLG Partners have not made any Section 16(a) filing disclosing their acquisition of the shares. It also appears the Mirbulat Abuov, White Hill Trust and Central Asian Metals, Inc. who jointly hold greater than 10% of the outstanding common stock of the Company, late filed an amended Form 4 disclosing three transactions in shares of our common stock.
Code of Ethics
Our board of directors has adopted a code of ethics that applies to all of our officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. Our code of ethics is posted on our website which can be found at www.bekemmetals.com.
Item 11.
Item 11. Executive Compensation
Compensation Discussion and Analysis
We do not have a standing compensation committee. Our Chief Executive Officer (“CEO”) makes recommendations to our board of directors regarding employee benefit programs and officer and employee compensation. Historically, our CEO has not made recommendations to the board of directors regarding his own compensation, although we have no policy prohibiting the CEO from doing so. Our board of directors may seek input from the CEO as to his compensation, but CEO compensation must be approved by a majority of our board of directors. Currently our CEO is a member of our board of directors. Our CEO does not vote on any matter relating to his own compensation.
Objectives and philosophy of our executive compensation program
The primary objectives of our executive compensation programs are to:
Ÿ
attract, retain and motivate skilled and knowledgeable individuals;
Ÿ
ensure that executive compensation is aligned with our corporate strategies and business objectives;
Ÿ
promote the achievement of key strategic and financial performance measures by linking short-term and long-term cash and equity incentives to the achievement of measurable corporate and individual performance goals; and
Ÿ
align executives’ incentives with the creation of stockholder value.
To achieve these objectives, our CEO and board of directors evaluate our executive compensation program with the objective of setting compensation at levels they believe will allow us to attract and retain qualified executives. In addition, a portion of each executive’s overall compensation may be tied to key strategic, financial and operational goals set by our board of directors. We have also provided a portion of our executive compensation in the form of equity awards that vest over time, which we believe helps us retain our executives and align their interests with those of our stockholders by allowing the executives to participate in our longer term success as reflected in asset growth and stock price appreciation.
Components of our executive compensation program
At this time, the primary elements of our executive compensation program are:
Ÿ
base salaries;
Ÿ
non-equity incentive compensation;
Ÿ
bonuses;
Ÿ
equity incentive awards; and
Ÿ
benefits and other compensation.
We do not have any formal or informal policy or target for allocating compensation between short-term and long-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, the appropriate level and mix of the various compensation components has typically been determined subjectively based on negotiation on a case-by-case basis. We do not rely on benchmarking against our competitors in making compensation related decisions.
Named executive officers
The following table identifies the persons who, during the 2009 fiscal year, served as our principal executive officer, and our most highly paid executive and non-executive officers whose total compensation exceeded $100,000 during fiscal 2009. For purposes of this compensation disclosure and analysis only, such individuals are referred to herein as the “named executive officers.”
Name
Corporate Office
Yermek Kudabayev
Chief Executive Officer, President and Chairman of the Board of Directors(1)(2)
Zhassulan Bitenov
Chief Financial Officer(3)
Dossan Kassymkhanuly
Vice President and Director(2)
(1)
In December 2007, Mr. Kudabayev was appointed Chief Executive Officer, President, a director and as Chairman of the Board of Directors.
(2)
Mr. Kudabayev and Mr. Kassymkhanuly have served as members of the board of directors and received no compensation for services rendered as a director. All compensation amounts paid to these individuals was paid as compensation for services rendered as an employee of the Company.
(3)
Mr. Bitenov joined the Company and was appointed Chief Financial Officer of the Company in January 2008.
Employment agreements
We maintain employment agreements with each of the named executive officers. The employment agreement we have with Mr. Kassymkhanuly is the standard statutorily required employment agreements for all employees in the Republic of Kazakhstan. These employment agreements are limited in their terms and primarily provide for statutory requirements related to the rights of employees, base salary, payment of income and social taxes and pension fund obligations.
We maintain more detailed employment contracts with Mr. Kudabayev and Mr. Bitenov. As discussed in more detail below, in addition to base salary and payment of income and employment-related taxes, these employment agreements cover a range of other components of the executive’s compensation package.
Base salaries
Base salaries are used to recognize the experience, skills, knowledge and responsibilities required of our named executive officers. Base salaries for our named executive officers typically have been set in our offer letter to the individual at the outset of employment. Under the terms of these employment agreements base salary and other components of compensation, may be evaluated by our board of directors for adjustment based on an assessment of the individual’s performance and compensation trends in our industry.
The board did not consider salary increases for any of the named executive officers during fiscal years ended December 31, 2009 and 2008.
Nonequity incentive compensation
From time to time we may make cash awards to our employees, including the named executive officers. Such awards may be designed to incentivize employees over a specified period of time pursuant to pre-established, performance-based criteria, the accomplishment of which is substantially uncertain at the time the criteria are established. In the event this type of cash award were made, it would be reflected in the “Summary Compensation Table” under a separate column entitled “Nonequity Incentive Plan Compensation.” We may use non-equity incentive compensation to incentivize our employees. The criteria for earning such non-equity incentive bonuses may be based on corporate financial performance measures that would be developed by our board of directors at the time such non-equity incentive plan is established. Our board has discretion to determine the applicable performance measures and the appropriate weighting of such measures at the time it establishes any non-equity incentive plan. Our board of directors did not establish a non-equity incentive compensation plan during the fiscal year ended December 31, 2009 and no non-equity incentive compensation was awarded during the year.
Bonuses
We may also make cash awards to employees that are not part of any pre-established, performance-based criteria. Awards of this type are completely discretionary and subjectively determined by our board of directors at the time they are awarded. Such awards are reported in the “Summary Compensation Table” in the column entitled “Bonus.” Our board of directors did not award any bonuses during fiscal years ended December 31, 2009 and 2008.
Equity incentive compensation
Our equity award program is the primary vehicle for offering long-term incentives to our named executive officers. Our equity awards have typically been made in the form of restricted stock grants. We believe that equity grants provide our named executive officers with a direct link to our long-term performance, create an ownership culture and align the interests of our executives and our stockholders. In the past, we have included a restricted stock grant award as part of the executive employee’s compensation package at the time we hire the individual. We do not use a formula to determine the size of our restricted stock grants. This determination is left to the discretion of the board of directors and is made on a case-by-case basis, although the board does consider past awards in making such determination. Historically, these restricted stock awards have vested over time, typically three years, with one-quarter vesting in each of the first two years and the final one-half vesting in the third year. Vesting of such awards has typically been contingent on some performance measure directly tied to the responsibilities of the employee, and may also be tied to certain Company landmark events. Should those vesting requirements not be met, the associated shares would not vest to the individual without further review of the vesting conditions and performance of the named executive by the board of directors. Should the individual leave employment with the Company for any reason, any shares that have not vested at that time shall be forfeited back to the Company. While pecuniary interest in and the right to dispose of the shares awarded under our restricted stock grants does not vest to the individual until he has satisfied the vesting conditions, the individual is allowed to vote all of the shares included in the grant and to enjoy all the other benefits associated with ownership of the shares. We believe the vesting features further our objective of executive retention because this feature provides an incentive to our executives to remain in our employ during the vesting period.
As a result of general market and economic conditions and the Company’s performance during the 2009 fiscal year, the board of directors did not award any equity incentive compensation during the 2009 fiscal year.
Benefits and other compensation
Under the terms of their employment contracts, our named executive officers are permitted to participate in such health care, disability insurance and other employee benefits plans as may be in effect with the Company from time to time to the extent the executive is eligible under the terms of those plans.
For example, under the terms of their respective employment agreements Mr. Kudabayev and Mr. Bitenov are allowed to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical and other employee benefit plans that may be in effect from time to time and to the extent he is eligible to participate under the terms of the particular plan. They are each also entitled to 28 days of paid vacation per year.
Under all of our employment agreements we agree to pay all income and social taxes and government pension fund payments due under the applicable laws of Kazakhstan for our named executive officers. This does not include the officer’s home base income or other taxes in the case of expatriates.
Income tax
As is the custom in Kazakhstan, we pay the income taxes of our employees, including the named executive officers. The income tax rate for individuals in Kazakhstan is currently 10%.
Social tax
We make payments of mandatory Kazakhstani social taxes at rate of 11% of an employee’s wages. These costs are recorded in the period when they are incurred and presented as salary related tax expense in the income statement.
Summary Compensation Table
The table below summarizes compensation paid to or earned by our principal executive officer and our two most highly compensated executive officers in addition to our principal executive officer, who we refer to collectively as our “named executive officers.” Except for the listed named executive officers, we had no other employee whose total compensation exceeded $100,000 during the year ended December 31, 2009.
Name and
Principal Position
Year
Salary(1)
Stock
Awards(2)
All Other
Compensation
Total
Yermek Kudabayev(3)
$160,600
$ 0
$47,612
$208,212
CEO, President and Director
$180,000
$ 30,674
$53,161
$263,835
Zhassulan Bitenov(4)
$98,200
$ 0
$31,325
$129,525
CFO
$108,000
$306,743
$30,985
$445,728
Dossan Kassymkhanuly
$101,300
$ 0
$31,498
$132,798
Vice-President and Director
$120,000
$ 0
$34,024
$154,024
(1)
The legislation of the Republic of Kazakhstan requires reflecting the base salaries in standard statutorily required employment agreements and making payments of the salaries and other compensations in Tenge, the local currency. As a result, the base salary amounts indicated in the employment agreements are in Tenge at the fixed exchange rate of 127 Tenge/US Dollar which was adopted in 2005 when the representative office in Kazakhstan was established while the table above represents US Dollar amounts at the actual rates at the date of payments. On February 4, 2009 Kazakhstan’s National Bank dramatically devalued the Tenge, from a corridor of 117-123 Tenge/US Dollar to 145-155 Tenge/US Dollar. As a result of the devaluation, the US Dollar value of base salaries decreased accordingly. However, because of financial difficulties due to global financial crisis, the management decided not to increase base salaries in order to reflect the US Dollar value prior to the Tenge devaluation.
Valuation of Stock Awards
On March 25, 2008, the board awarded a 38,343 share restricted stock grant to Yermek Kudabayev and a 383,429 share restricted stock grant to Zhassulan Bitenov with an estimated fair value of $337,418 at the closing market price of common stock on the date of grant ($0.80 per share).
As of December 31, 2009, there was $6,390 of total unexpensed compensation cost. The cost is expected to be recognized over a period of one year. 184,510 and 184,510 shares vested during 2009 and 2008, respectively. The Company recognized $301,028 and $585,745 of compensation expense for the years ended December 31, 2009 and 2008, respectively.
A summary of the non-vested stock under the Stock Option Plan follows:
Non-Vested
Shares
Weighted-Average
Grant Date
Fair Value
Non-vested at December 31, 2007
496,013
$ 1.95
Stock Granted
421,772
0.80
Stock Vested
(184,510)
1.83
Stock Cancelled
-
-
Non-vested at December 31, 2008
733,275
$ 1.32
Stock Granted
-
-
Stock Vested
(445,703)
1.60
Stock Cancelled
(191,715)
0.80
Non-vested at December 31, 2009
95,857
$ 0.80
Stock cancelled is that portion of the shares granted to Mr. Bitenov that have not yet vested and are not expected to vest due to the anticipated resignation of Mr. Bitenov in April 2010.
All Other Compensation
The table below provides additional information regarding “all other compensation” awarded to the named executive officers as disclosed in the “All Other Compensation” column of the “Summary Compensation Table” above.
Name
Year
Income
Tax
Social
Tax
Medical
Insurance
Pension
Fund
Total
Yermek Kudabayev
$ 18,235
$ 19,211
$ 1,930
$ 8,236
$ 47,612
25,998
15,048
3,684
8,431
53,161
Zhassulan Bitenov
$ 10,919
$ 11,517
$ 653
$ 8,236
$ 31,325
12,839
8,468
1,247
8,431
30,985
Dossan Kassymkhanuly
$ 10,670
$ 12,006
$ 1,176
$ 7,646
$ 31,498
14,200
9,149
2,244
8,431
34,024
Base Salary
As discussed above, our employment agreements provide for an annual salary. Base salary may be increased from time to time with the approval of the board of directors. Base salary may not be decreased without the written consent of the named executive officer. The agreements provide for statutory requirements related to the rights of employees, base salary, payment of income and social taxes and pension fund obligations.
Due to the significant decrease of the Company’s activity caused by sale of Kaznickel and Company’s inability to obtain financing, the current involvement of Mr. Kassymkhanuly in our day-to-day operations has decreased significantly. As a result, Mr. Kassymkhanuly has agreed to terminate his annual salary, effective from March 1, 2010. Commencing March 1, 2010, he will be compensated only the annual director fees and other fees and compensation paid to the members of our board of directors for their service.
Grants of Plan-Based Awards Table for Fiscal Year 2009
No grants of any plan-based awards were made to any of the named executive officers during the 2009 fiscal year.
Outstanding Equity Awards at Fiscal Year End
None of the named executive officers held unexercised stock options at December 31, 2009. The following table sets forth information concerning all unvested restricted stock grants and equity incentive plan awards for each of the named executive officers as of December 31, 2009.
(1)
In March 2008 the board of directors voted to grant restricted stocks to Mr. Bitenov. His shares vest as follows: one-fourth (95,857 shares) in January 2009 and one-fourth (95,857 shares) in January 2010, provided that the Company has timely filed its reports with Securities and Exchange Commission. The final one-half (191,715 shares) will vest in January 2011. Vesting during each year is contingent upon the Company timely filing of its reports with the Securities and Exchange Commission each year. Moreover, vesting in the third year is also contingent upon the Company having commenced commercial operations. Any unvested shares at the time Mr. Bitenov’s employment with the Company ceases, for any reason, shall be forfeited back to the Company. All shares underlying the award were issued at the time of grant and are being held in escrow by the Company subject to the vesting schedule placed on the grant. Mr. Bitenov have the right to vote the shares, receive dividends and enjoy all other rights of ownership over the entire grant amount, except for the right to dispose of or otherwise encumber the shares prior to satisfying the applicable vesting requirement. In December 2009 Mr. Bitenov informed the Company of his intention to resign as the Company’s Chief Financial Officer in April 2010. As a result, 191,715 shares were forfeited back to the Company. The table above represents only shares of Mr. Bitenov vested in January 2010.
(2)
The market value of the unearned shares is computed by multiplying the closing market price of the Company’s stock at the end of the last completed fiscal year ($0.07 per share) by the number of unearned shares that have not vested.
Option Exercises and Stock Vested
None of the named executive officers exercised options during the 2009 fiscal year. The following table sets forth the number of restricted stock awards that vested to our named executive officer during fiscal 2009 and the aggregate dollar amount realized by our named executive officer on vesting.
(1)
These shares vested on April 7, 2009. Value realized on vesting was calculated based on a closing market price of $0.02 per share, which was the closing market price of the Company’s common stock on April 7, 2009.
(2)
These shares vested on January 3, 2009, which was a Saturday. Value realized on vesting was calculated based on a closing market price of $0.01 per share for the Company’s common stock on January 5, 2009, the first trading day following the vesting date.
Pension Benefits
In accordance with the legislative requirements of the Republic of Kazakhstan during 2009 we paid government mandated pension fund payments for each of the named executive officers. We do not have any other liabilities related to any supplementary pensions, post retirement health care, insurance benefits or retirement indemnities for any of the named executive officers.
We offer no pension or other specified retirement payments or benefits, including but not limited to tax-qualified deferred benefit plans and supplemental executive retirement plans to its named executive officers.
Nonqualified Deferred Compensation
We offer no defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified to any of our employees including the named executive officers.
Potential Payments upon Termination or Change-in-Control
Termination of Employment Agreements
With the exception of the employment agreements of Mr. Kudabayev and Mr. Bitenov, none of the other named executive officers employment agreements provide for potential payments upon the termination of their employment.
Should we terminate the employment agreements of Mr. Kudabayev or Mr. Bitenov for good reason, they shall be entitled to salary for the month in which he is terminated and for the succeeding three calendar months. An additional month will be added up to a maximum of twelve months for each year of completed service beginning after two full years of service. This amount may be reduced in the event Mr. Kudabayev or Mr. Bitenov obtains new employment prior to the completion of the payment period. If either is terminated for cause he shall only be entitled to compensation through the date of termination. If either is terminated for disability he shall be compensated for the remainder of the month and for three succeeding months or until disability insurance benefits commence. If employment is terminated because of death Mr. Kudabayev or Mr. Bitenov shall be entitled to compensation through the end of the calendar month in which his death occurs. The phrase “for good reason” means any of the following: (a) the Company’s material breach of the employment agreement; (b) the assignment of the executive without his consent to a position, responsibilities, or duties of a materially lesser status or degree of responsibility than his position, responsibilities, or duties; or (c) the relocation of the Company’s principal executive offices outside the Kazakhstan area; or (d) the requirement by the Company that the executive be based anywhere other than the Company’s principal executive offices, without the executive’s consent.
Change-in-Control
None of the employment agreements of our named executive officers provide for potential payouts or other change in control benefits.
Compensation of Directors
We offer cash compensation to attract and retain candidates to serve on our board of directors. We do not compensate directors who are also our employees for their service on our board of directors. Therefore, during 2009 Mr. Kudabayev, Mr. Kassymkhanuly and Nurlan Tajibayev did not receive any compensation for their service on our board of directors. However, due to the significant decrease of the Company’s activity caused by sale of Kaznickel and Company’s inability to obtain financing, the current involvement of Mr. Tajibayev and Mr. Kassymkhanuly in the Company’s operations has decreased significantly. As a result, Mr. Tajibayev and Mr. Kassymkhanuly have agreed to terminate their annual salary, effective from March 1, 2010. Commencing March 1, 2010, they will be compensated only the annual director fees and other fees and compensation paid to the members of our board of directors for their service.
Meeting Fees
Members of the board of directors who are not employees of the Company or one of its subsidiaries are paid a $16,000 stipend per year, payable quarterly. Non-employee directors are paid $1,000 for each board meeting attended in person plus reimbursement for travel expenses.
Equity Compensation
We do not currently have a fixed plan for the award of equity compensation to our non-employee directors.
Director Compensation Table
The following table sets forth a summary of the compensation we paid to our directors for services on our board during our 2009 fiscal year.
Name
Fees Earned or
Paid in Cash ($)
All Other Compensation ($)
Total ($)
Timothy Adair
$16,000
$16,000
James Kohler
$16,000
$16,000
Valery Tolkachev
$16,000
$16,000
Yermek Kudabayev(1)
$208,212
$208,212
Dossan Kassymkhanuly(1)
$132,798
$132,798
Nurlan Tajibayev(2)
$70,211
$70,211
(1)
In addition to being directors Mr. Kudabayev and Mr. Kassymkhanuly are also Company employees, and therefore do not qualify for compensation paid to our non-employee directors. For details regarding compensation paid to Mr. Kudabayev and Mr. Kassymkhanuly in their capacity as employees of the Company please see the Summary Compensation Table above.
(2)
In addition to being a director, Mr. Tajibayev was also employed as the Company’s Vice President of Metallury during fiscal 2009, and therefore did not qualify for compensation paid to our non-employee directors. The compensation paid to Mr. Tajibayev during our 2009 fiscal year consisted of salary of $51,000 and all other compensation of $19,211. All other compensation consisted of income tax paid of $5,744; social tax paid of $6,432; medical insurance premiums of $653 and pension fund payment of $6,382. Due to the significant decrease of the Company’s activity, the current involvement of Mr. Tajibayev in our day-to-day operations has decreased significantly. As a result, Mr. Tajibayev has agreed to terminate his annual salary, effective from March 1, 2010. Commencing March 1, 2010, he will be compensated only the annual director fees and other fees and compensation paid to the members of our board of directors for their service.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth as of March 4, 2010 the name and the number of shares of our common stock, par value of $0.001 per share, held of record or beneficially by each person who held of record, or was known by us to own beneficially, more than 5% of the 125,172,011 issued and outstanding shares of our common stock, and the name and shareholdings of each director and of all officers and directors as a group.
Type of Security
Name and Address
Amount & Nature of Beneficial Ownership
% of Class
Common
Hsuih Chi Hun(1)
33,404,080
27%
1/F., Chap Biu Building
Tai Po Market, 15 On Fu Road
New Territories, Hong Kong, S.A.R.
China
Common
Brisa Equities Corporation(1)
21,000,000
17%
East 900 South
Bountiful, Utah 84010
Common
White Hill Trust(2)
21,482,941
17%
Azerbayev Street
Office
Almaty, Kazakhstan 050099
Common
Central Asian Metals, Inc.(2)
20,400,408
16%
P.O. Box 5251
CH
Lugano, Switzerland
Common
Unicredit Bank AG
21,000,000
17%
London Wall
London EC2Y E5T
United Kingdom
Common
Jamestown Financial, Inc. (3)
21,093,880
17%
Akara Building, 24 de Castro St.
Wickhams Cay I, PO Box 36
Road Town, Tortola, BVI
Common
Yermek Kudabayev(4) (5)
421,772
*
Tchaikovsky Street
4th Floor
Almaty, Kazakhstan 050000
Common
Zhassulan Bitenov(4) (5)
383,429
*
Tchaikovsky Street
4th Floor
Almaty, Kazakhstan 050000
*
Less than 1%.
(1)
Mr. Hsuih Chi Hun owns no shares in his own name. However, he maintains voting and investment control over 21,000,000 shares held of record by Brisa Equities, Inc., as well as 5,110,200 shares held of record by Landsgate Marketing Limited, 5,097,960 shares held of record by Comodidad y Fantasia en Tierra, S.A. and 2,195,920 shares held of record by Las Tierras del Deleite, S.A., and therefore may be deemed to be the beneficial owner of the shares held by these entities.
(2)
The shares attributable to the White Hill Trust. include 20,400,408 held of record by Central Asian Metals, Inc. and 1,082,445 shares held of record by Munivac Global Ventures Inc. The White Hill Trust is the sole shareholder of Central Asian Metals, Inc., and the sole owner of Munivac Global Ventures Inc. Mr. Mirbulat Abuov is the settlor of the White Hill Trust. Brilliance Investments Ltd., as trustee of the White Hill Trust, maintains the voting and investment control over the shares attributable to White Hill Trust, and therefore, may be deemed to be the beneficial owner of the shares held by that entity. Mr. Abouv is the beneficial owner of the shares attributable to the White Hill Trust.
(3)
Jamestown Financial, Inc. is a wholly-owned subsidiary of Stockton Properties Ltd. As the parent company of Jamestown Financial, Inc., Stockton Properties Ltd. may be deemed to have voting and investment power over the shares held of record by Jamestown Financial and therefore may be deemed to be the beneficial owner of the shares held by that entity.
(4)
On October 20, 2006 our board of directors awarded a restricted stock grant to Mr. Kudabayev in the amount of 383,429 shares and to Mr. Tajibaev in the amount of 191,715 shares. On March 25, 2008 the board of directors increased Mr. Kudabayev’s restricted stock grant by an additional 38,343 shares and awarded a restricted stock grant in the amount of 383,429 shares to Mr. Bitenov. The awards vest over a period of three years. As of the date of this report 421,772 shares of Mr. Kudabayev award had vested, 191,715 shares of Mr. Tajibaev’s award had vested and 191,714 shares of Mr. Bitenov’s award had vested. The shares have been issued and are outstanding and are being held in escrow by the Company subject to the applicable vesting schedule for each grant. The grantees have the right to vote the shares, receive dividends and enjoy all other rights of ownership over the entire grant amount from the grant date, except for investment control of the shares, which will not pass to these individuals until the shares vest. Shares will vest to the grantee only if the grantee is employed by the Company on the applicable vesting date. Any unvested shares at the time a grantee’s employment with the Company ceases, for any reason, shall be forfeited back to the Company. For additional information regarding vesting dates and conditions see the section entitled “Securities Authorized for Issuance Under Equity Compensation Plans” below.
(5)
Mr. Kudabayev, Mr. Bitenov, Mr. Tajibaev and Mr. Kassymkhanuly are officers of the Company. Mr. Kudabayev, Mr. Tajibaev, Mr. Kassymkhanuly, Mr. Kohler, Mr. Adair and Mr. Tolkachev are directors of the Company.
Change in Control
To the knowledge of the management, there are no present arrangements or pledges of our securities the operation of which may at a subsequent date result in a change in control of the Company.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
$-0-
1,916,877
Equity compensation
plans not approved by security holders
$-0-
Total
$-0-
1,916,877
In March 2003, we adopted the EMPS Research Corporation 2003 Stock Option Plan (the "Plan") reserving 5,000,000 common shares for distribution under the Plan. The purpose of the Plan is to allow us to offer key employees, officers, directors, consultants and sales representatives an opportunity to acquire a proprietary interest in the Company. The various types of incentive awards which may be provided under the Stock Option Plan enable us to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of our business.
On October 20, 2006 and March 25, 2008 the board agreed to award restricted stock grants to the following four officers or employees of the Company;
Name
Position with the Company
Number of Shares
Yermek Kudabayev
Chief Executive Officer, President, Director
421,772
Zhassulan Bitenov
Chief Financial Officer
383,429
Nurlan Tajibayev
Vice President, Director
191,715
Alexander Rassokhin
Exploration Manager
86,207
The stock grants approved in October 2006 were valued at $1.95 per share, which represented the closing market price of our stock on October 20, 2006. The stock grants approved in March 2008 were valued at $0.80 per share. The stock grants were made under our 2003 Stock Option Plan. The shares have been issued and are outstanding and are being held in escrow by the Company subject to the applicable vesting schedule for each grant. The grantees have the right to vote the shares, receive dividends and enjoy all other rights of ownership over the entire grant amount from the grant date, except for the right to dispose of or otherwise encumber the shares prior to satisfying the applicable vesting schedule. Shares will only vest to the grantee if the grantee is employed by the Company on the applicable vesting date. Any unvested shares at the time a grantee’s employment with the Company ceases, for any reason, shall be forfeited back to the Company.
As of the date of this report, all shares awarded to Mr. Kudabayev, Mr. Tajibayev and Mr. Rassokhin have vested. 191,714 shares have vested to Mr. Bitenov. The remaining 191,715 shares will not vest because he has informed the Company he intends to resign his position with the Company in April 2010, which is prior to the vesting date of the stock grant.
We have issued no other securities under the Plan.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
During 2009 and 2008 we did not engage in any transaction with any related person as defined by Rule 404 (Instructions to Item 404(a)) that exceeded the lesser of $120,000 or 1% of our average total assets at December 31, 2009 and 2008 in which any related person had or will have a direct or indirect material interest.
In accordance with our written policies and procedures our management and board of directors are charged with monitoring and reviewing issues involving potential conflicts of interests and reviewing and approving all related party transactions. In general, for purposes of our policy, a related party transaction is a transaction, or a material amendment to any such transaction, involving a related party and the Company that exceeds the lesser of $120,000 or 1% of our average total assets at our fiscal year end. Our policy requires our management or our board of directors to review and approve related party transactions. In reviewing and approving any related party transaction or material amendment to any such transaction, management or the board of directors must satisfy themselves that they have been fully informed as to the related party’s relationship to the Company and interest in the transaction and as to the material facts of the transaction, and must determine that the related party transaction is fair to the Company.
Director Independence
The board has determined that Timothy Adair, James Kohler and Valery Tolkachev would each qualify as an independent director as that term is defined in the listing standards of the NYSE Amex. Such independence definition includes as series of objective tests, including that the director is not an employee of the company and has not engaged in various types of business dealings with the company. In addition, as further required by the NYSE Amex listing standards, the board of directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Item 14.
Item 14. Principal Accountant Fees and Services
Hansen, Barnett and Maxwell, P.C. served as our independent registered public accounting firm for the years ended December 31, 2009 and 2008 and is expected to serve in that capacity for the 2010 fiscal year. Principal accounting fees for professional services rendered for us by Hansen, Barnett & Maxwell, P.C. for the years ended December 31, 2009 and 2008, are summarized as follows:
Audit
$97,719
$143,055
Tax
4,886
-
Total
$102,605
$143,055
Audit Fees. Audit fees were for professional services rendered in connection with the Company’s annual financial statement audits and quarterly reviews of financial statements for filing with the Securities and Exchange Commission.
Tax Fees. Tax fees related to services for tax compliance and consulting.
Board of Directors Pre-Approval Policies and Procedures. At its regularly scheduled and special meetings, the Board of Directors, in lieu of an established audit committee, considers and pre-approves any audit and non-audit services to be performed by our independent registered public accounting firm. The Board of Directors has the authority to grant pre-approvals of non-audit services.
The board of directors has not, as of the time of filing this Annual Report on Form 10-K with the Securities and Exchange Commission, adopted policies and procedures for pre-approving audit or permissible non-audit services performed by our independent auditors. Instead, the board of directors as a whole has pre-approved all such services. In the future, our board of directors may approve the services of our independent registered public accounting firm pursuant to pre-approval policies and procedures adopted by the board of directors, provided the policies and procedures are detailed as to the particular service, the board of directors is informed of each service, and such policies and procedures do not include delegation of the board of director’s responsibilities to our management.
The board of directors has determined that the services provided by Hansen, Barnett & Maxwell, P.C. described above are compatible with maintaining its independence as our independent registered public accounting firm.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)
Documents filed as part of this report:
(1) Financial Statements
The following financial statements of the registrant are included in response to Item 8 of this annual report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets - December 31, 2009 and 2008.
Consolidated Statements of Operations for the years ended December 31, 2009and 2008 and for the period from March 5, 2004 (Date of Inception) through December 31, 2009.
Consolidated Statements of Shareholders’ Equity (Deficit) for the years ended December 31, 2009 and 2008, and for the period from March 5, 2004 (Date of Inception) through December 31, 2009.
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008, and for the period from March 5, 2004 (Date of Inception) through December 31, 2009.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules
None.
(b) Exhibits:
Exhibit No.
Exhibit Description
3.1
Articles of Incorporation(1)
3.2
Amended Articles of Incorporation(1)
3.3
Bylaws(1)
3.4
Amendment to Articles of Incorporation(2)
3.5
Articles of Amendment to Articles of Incorporation*
4.1
Stock Option Plan(1)
9.1
Voting Trust Agreement(3)
10.1
Assignment of Patents(1)
10.2
Subcontract Agreement(1)
Exhibit No.
Exhibit Description
10.3
Private Equity Credit Agreement(4)
10.4
Plan and Agreement of Reorganization among EMPS Research Corporation and Condesa Pacific S,A. and the Shareholders of Condesa Pacific S.A. dated December 3, 2004(5)
10.5
Acquisition Agreement among Bekem Metals, Inc. and Kazakh Metals Inc. and the Shareholders of Kazakh Metals Inc. dated October 24, 2005(6)
10.6
Registration Rights Agreement(7)
10.7
Employment Agreement - Yermek Kudabayev(8)
10.8
Restricted Stock Grant Agreement - Marat Cherdabayev(8)
10.9
Restricted Stock Grant Agreement - Yermek Kudabayev(8)
10.10
Restricted Stock Grant Agreement - Nurlan Tajibayev(8)
10.11
Restricted Stock Grant Agreement - Alexandr Rassokhin(8)
10.12
Amended Employment Agreement - Yermek Kudabayev(9)
10.13
Amended Restricted Stock Grant Agreement - Yermek Kudabayev(9)
10.14
Amended Restricted Stock Grant Agreement - Nurlan Tajibayev(9)
10.15
Employment Agreement - Zhassulan Bitenov(9)
10.16
Restricted Stock Grant Agreement - Zhassulan Bitenov(9)
10.17
Loan Agreement(10)
10.18
Addendum No. 1 to Loan Agreement(10)
10.19
Pledge Agreement(10)
10.20
Addendum No. 1 to Pledge Agreement(10)
10.21
Memorandum of Understanding(11)
10.22
Sale and Purchase Agreement between Bekem Metals, Inc. and Ertis Ferronickel Works LLP, dated November 3, 2009(12)
10.23
Money Obligations Offset Agreement dated 11 November 2009(13)
10.24
Assignment and Assumption Agreement dated, 13 August 2009, between Bekem Metals, Inc., Kyzyl Kain Mamyt LLP, GRK Koitas LLP and Latimer Assets, Inc. (13)
10.25
Contract of nickel-cobalt ores extraction at Novo-Shandashinsky, Vostochno Shandashinsky, III-Shandashinsky, Shirpakainsky, Kara-Obinsky and Steninsky Deposits in Aktyubinsk oblast of the Rebulic of Kazakhstan (English translation)*
10.26
Addendum to the Contract as of 15 July 1997 for mining of nickel-cobalt ore at Novo-Shandashinsk, East - Shandashinsk, III - Shandashinsk, Shirpakainsk, Kara-Obinsk and Stepninsk deposits in Aktyubinsk oblast of the Republic of Kazakhstan in accordance with the Licenses series MG Nos. 414, 415, 420, 421, 425 and 426 as of 12 October 1995 between the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan and Joint Venture “Kempirsaisk Mine Group” (English translation)*
10.27
Addendum No. 2 to the Contract for mining of nickel-cobalt ore at Novo-Shandashinsk and Kara-Obinsk deposits in Aktyubinsk oblast of the Republic of Kazakhstan in accordance with the Licences No.420 and No.426 as of 12.10.95 (English translation)*
Exhibit No.
Exhibit Description
10.28
Addendum No. 3 to the Contract as of 15 July 1997 for mining of nickel-cobalt ore at Novo-Shandashinsk and Kara-Obinsk deposits in Aktyubinsk oblast (English translation)*
10.29
Addenda No.4 to the Contract dated 15 July 1997 for mining of nickel-cobalt ore at Novo-Shandashinsk and Kara-Obinsk deposits in Aktyubinsk oblast of the Republic of Kazakhstan(14)
10.30
Contract on work on Extraction of brown coal on East - Ural a deposit
(A site East - Ural) Located in the Aktyubinsk area Kazakhstan Republic (English translation)*
14.1
Code of Ethics(15)
21.1
List of Subsidiaries*
31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*
31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*
32.1
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002*
32.2
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002*
* Filed herewith.
(1) Incorporated by reference to registrant’s Registration Statement on Form 10-SB as filed with the Commission on March 25, 2003.
(2) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on March 16, 2005.
(3) Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2005 as filed with the Commission on April 17, 2006.
(4) Incorporated by reference to Registrant’s Quarterly Report on Form 10-QSB for the quarter September 30, 2003 as filed with the Commission on November 14, 2003.
(5) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on February 2, 2005.
(6) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on October 28, 2005.
(7) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on July 18, 2006.
(8) Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2006 as filed with the Commission on April 2, 2007.
(9) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on March 28, 2008.
(10) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 as filed with the Commission on August 14, 2008.
(11) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on February 17, 2009.
(12) Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on November 5, 2009.
(13) Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 as filed with the Commission on November 13, 2009.
(14) Incorporated by reference to Registrant’s Current Report on Form 8-K/A-1 as filed with the Commission on December 29, 2009.
(15) Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the year ended December
31, 2004 as filed with the Commission on April 15, 2005.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.
BEKEM METALS, INC.
Date: April 13, 2010
By:
/s/ Yermek Kudabayev
Yermek Kudabayev
Chief Executive Officer and President
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dated indicated.
Signatures
Title
Date
/s/ Yermek Kudabayev
Chief Executive Officer,
April 13, 2010
Yermek Kudabayev
President and Director
/s/ Zhassulan Bitenov
Chief Financial Officer
April 13, 2010
Zhassulan Bitenov
/s/ Timothy Adair
Director
April 13, 2010
Timothy Adair
/s/ Dossan Khassymkhanuly
Director
April 13, 2010
Dossan Khassymkhanuly
/s/ James Kohler
Director
April 13, 2010
James Kohler
/s/ Nurlan Tajibayev
Director
April 13, 2010
Nurlan Tajibayev
/s/ Valery Tolkachev
Director
April 13, 2010
Valery Tolkachev
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AND
FINANCIAL STATEMENTS
December 31, 2009 and 2008
HANSEN, BARNETT & MAXWELL, P.C.
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
HANSEN, BARNETT & MAXWELL, P.C.
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
AND
BUSINESS CONSULTANTS
Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
Bekem Metals, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Bekem Metals, Inc. and Subsidiaries (an Exploration Stage Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for the years ended December 31, 2009 and 2008, and for the period from March 5, 2004 (Date of Inception) through December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bekem Metals, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years ended December 31, 2009 and 2008, and for the period from March 5, 2004 (Date of Inception) through December 31, 2009 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a limited operating history and is at the exploration stage with respect to mineral interests, having not started production. The Company is dependent upon debt or equity infusions to meet its work program requirements under certain government mineral licenses. These factors, combined with the current global financial crisis and the decline in nickel prices, raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
April 12,
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
NOTE 1 - BASIS OF PRESENTATION, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING POLICIES
Company History - The Company was incorporated in the State of Utah under the name EMPS Research Corporation. The name was changed to Bekem Metals, Inc. on February 9, 2005 following the reverse acquisition with Condesa Pacific, S.A. discussed below. The Company’s primary business focus has been exploring for nickel, cobalt and other minerals in Kazakhstan. The Company’s operations are considered to be at the exploratory stage.
Bekem Metals, Inc. - Condesa and its wholly owned subsidiary Kaznickel, LLP acquired Bekem in a reverse acquisition on January 28, 2005. On July 24, 2006, Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel a wholly-owned subsidiary of Bekem. On September 30, 2006, Bekem sold Condesa to a third party for a nominal value. Condesa is included in the consolidated financial statements from the date of acquisition to the date of disposal.
During 2009 Bekem sold Kaznickel to a third party for 280,000 Kazakh tenge (approximately $1,867) and for repayment of $5,000,000 worth of loans owed to Bekem by Kaznickel. Kaznickel is also included in the consolidated financial statements from the date of acquisition to the date of disposal.
Kazakh Metals, Inc. - On October 24, 2005, Bekem Metals, Inc. entered into an Acquisition Agreement with Kazakh Metals, Inc., a British Virgin Islands international business company, under which BMI acquired 100% of the outstanding common shares of KMI in exchange for the issuance of 61,200,000 common shares.
The KMI shareholders received 61.1% of the BMI common stock outstanding after the transaction and therefore KMI was considered the acquirer for financial reporting purposes. Accordingly, the accompanying financial statements include financial statements of KMI for all periods presented.
Brisa Equities Corporation, a British Virgin Islands holding company (“Brisa”), together with other entities its owners control, was the controlling shareholder of KMI and was also the controlling shareholder of BMI. Accordingly, the transaction was considered to be between entities under common control and did not result in a change in control of BMI. Following the transaction, entities over which the controlling shareholder maintained voting and investment control held 51,600,000 BMI common shares, which represented 51.5% of the 100,088,888 outstanding common shares.
The acquisition of the portion of the net liabilities of BMI relating to the common shares owned by the controlling shareholder was recorded at historical cost of $(161,998). The acquisition of the common shares of BMI purchased from the noncontrolling shareholders of BMI were recorded at $345,000, which was the estimated fair value of those shares on the date of acquisition. KMI accounted for the purchase of BMI similar to a pooling.
Basis of Presentation - The accompanying consolidated financial statements include the accounts of Bekem Metals, Inc. (“BMI”, “Bekem” or the “Company”) and its wholly owned subsidiaries Kazakh Metals, Inc. (“KMI”), Kyzyl Kain Mamyt LLP (“KKM”) and the results of operations for 10 months of Kaznickel, LLP (“Kaznickel”). Intercompany accounts and transactions have been eliminated in consolidation. The results of operations of KMI and BMI were combined for all periods prior to the acquisition, with recognition of the noncontrolling interest in BMI; the operations of BMI and KMI are consolidated from October 24, 2005.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Foreign Currency Transactions - The consolidated financial statements are presented in U.S. dollars. The functional currency of Bekem Metals, Inc. is United States Dollars (USD).
Kaznickel made its principal investing and financing transactions in USD, which was also its functional currency. Transactions and balances denominated in other currencies were translated into USD using historical exchange rates. Exchange gains and losses from holding foreign currencies and having liabilities payable in foreign currencies were included in the results of operations.
The Kazakh Tenge (KZT) is the functional currency of the operating subsidiary, KKM. The respective balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The respective statements of operations have been translated into USD using the average exchange rates prevailing during the periods of each statement. The corresponding translation adjustments are part of accumulated other comprehensive income and are shown as part of shareholders’ equity.
Nature of Business
The Company is engaged in the exploration of mineral resource properties.
Kyzyl Kain Mamyt LLP (“KKM”) - KKM holds exploration and production licenses from the government of Kazakhstan to a 575,756 acre parcel, located approximately 130 kilometers northwest of Aktobe, 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, 2020, which may be extended upon agreement between KKM and the Ministry of Energy and Mineral Resources (MEMR). 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. Because the Company does not have a reserve estimate for its deposits that conforms to the standards of Industry Guide 7 issued by the U. S. Securities and Exchange Commission, its operations were considered to be at the exploratory stage for 2009 and 2008.
KKM contracts and licenses call for the extraction of the following amounts of ore from the Kempirsai deposit and brown coal from the Mamyt deposit and the following investments in the ore mining and processing technology:
(1)
In December 2008, KKM received a notice from the MEMR that it has agreed to suspend ore mining requirements until the end of 2012 to allow KKM to focus on the construction of an ore processing facility. The notice indicated that under the annual work program, KKM is required to invest $135,000,000 in its mining and ore processing technology during the period from 2006 to 2020 (or $123.4 million for the remaining period). In December 2009, KKM signed an addendum to the nickel and cobalt ore production contract memorializing the amendments to KKM’s subsoil use contract to incorporate the changes set forth in the notice received in December 2008. The above table represents extraction and investment obligations indicated in the December 2009 addendum.
(2)
In December 2009 KKM received a letter from the MEMR granting the Company’s request to decrease the coal volume production requirements of its work program from 200,000 tons per year to 5,000 tons per year for the period from 2009 to 2012. We anticipate an addendum to this license memorializing the changes to the annual work program requirements to be prepared some time in April 2010. These changes are not reflected in the above table and will be reflected when these changes are legally approved by the government by signing the new addendum to the existing subsoil use contract.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
On December 10, 2007, the MEMR unilaterally terminated KKM’s contracts and licenses to explore for nickel, cobalt, brown coal, and other minerals within the Kempirsai and the Mamyt deposits on the basis that KKM had material failures in execution of the work programs associated with the contacts and licenses and did not detail those failures. In January 2008, KKM filed an action in the Court of Astana city against the MEMR challenging the legality of the unilateral termination of the KKM contracts and licenses by the MEMR for several reasons, including that the contracts and licenses had been terminated on grounds not provided for in the subsoil use contracts and legislation and there were no material failures in the execution of the work programs associated with the contracts and licenses. In February 2008, the Court of Astana city acknowledged that the unilateral termination of the contracts and licenses by the MEMR was illegitimate. The Court canceled the order of the MEMR relating to the unilateral termination of the licenses and reinstated the KKM contracts and licenses. In March 2008, the MEMR appealed the decision of the Court of Astana city to the Republic of Kazakhstan Supreme Court. On April 22, 2008 the Supreme Court cancelled the MEMR’s unilateral termination and reinstated the Company’s contracts and licenses to the Kempirsai deposit. On February 18, 2009 the General Prosecutor of the Republic of Kazakhstan lodged a protest to the Supervisory board under the Supreme Court against the judgment of the Court of Astana city and the Supreme Court canceling the unilateral termination of the KKM contracts and licenses. Pursuant to the Code of Civil Procedure of the Republic of Kazakhstan, the General Prosecutor may protest the decision of the Supreme Court within one year of its determination. The General Prosecutor asserts that the Court of Astana city and the Supreme Court wrongly applied the substantive law and requests an order cancelling the decisions of the Court of Astana city and the Supreme Court and reinstating the order unilaterally cancelling the KKM contracts and licenses. The Company filed a formal objection to the protest of the General Prosecutor. On March 18, 2009, the Supervisory board under the Supreme Court rejected the protest of the General Prosecutor.
Kaznickel, LLP (“Kaznickel”) - Kaznickel owns the right to the Gornostayevskoye (“Gornostai”) nickel and cobalt deposit located in the East Kazakhstan Oblast in northeast Kazakhstan. The license is for exploration and production of cobalt and nickel ores and is valid through February 26, 2026 providing commercial discoveries are made before the end of the exploration period.
On November 3, 2009 the Company and Ertis Ferronickel Works LLP (“Ertis”) executed a definitive sale-purchase agreement. As a result, in November 2009 Kaznickel was sold to Ertis. Ertis acquired 100% of the outstanding charter capital of Kaznickel for 280,000 Kazakh tenge (approximately $1,867) and for repayment of $5,000,000 of loans owed to Bekem Metals by Kaznickel. Initial payment of $500,000 was made on March 20, 2009. The remaining amount was paid in November, 2009 after the Company signed a definitive sale-purchase agreement on November 3, 2009. The ten-month operations of Kaznickel during 2009 were included in the Company’s consolidated financial statements.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
The Company recognized a gain on disposal of Kaznickel during 2009 as follows:
Proceeds
$
5,001,867
Plus liabilities transferred
2,097,769
Less assets sold
(105,854)
Less intercompany loans written off
(861,392)
Less costs directly related to the sale
(50,000)
Gain on Disposal of Kaznickel
$
6,082,390
Business Condition - The financial crisis impacting the global economy has had a material effect on the Company’s business. Metal prices fell sharply in 2008, making future forecasts problematic and projected financial models unprofitable. Although prices have recovered some during 2009, turning the projected financial models to positive expected outcomes, they still remain vulnerable due to the continuing global economic crisis making the Company’s access to equity and/or debt financing temporarily impossible. In light of the uncertain economic environment, the Company has been looking for private investors and/or potential purchasers of some of the Company’s assets.
The Kempirsai deposits have not yet entered the development stage with respect to their mineral interests and have no production. The Company has realized only limited revenue from the Kempirsai deposits and has very little ability to generate revenue. The Company does not expect this to change unless it builds and begins operating a nickel ore processing plant. As discussed above, the Company sold Kaznickel, however, the Company will need to raise significant additional capital in order to maintain its current level of operations and to fund construction of a processing plant.
Because of a lack of funds, KKM did not fully meet the 2009 annual work program requirements to invest up to $6 million into development of the Kempirsai deposit, including construction of the processing plant. The Company anticipates the need to seek significant additional funding during fiscal 2010 to satisfy the 2010 annual work program obligations (to invest up to $26.5 million) and to satisfy the obligations KKM did not meet in 2009. There is no assurance that the Company will be able to obtain additional funding on favorable terms, or at all. If the Company is unsuccessful in obtaining additional funding during 2010, the Company will likely have insufficient funds to continue operations. If the Company cannot fulfill the work program requirements, the Company could be subjected to the possible forfeiture of the subsoil use contracts and licenses and current remediation of approximately $950,000.
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Exploration Stage Company
The Company is currently an exploration stage company. As an exploration stage enterprise, the Company discloses the deficit accumulated during the exploration stage and the cumulative statements of operations and cash flows from inception through the current balance sheet date. The Company has incurred net losses of $30,229,302 and used net cash in operations of $22,050,659 for the period from March 5, 2004 (date of inception) through December 31, 2009. An entity remains in the exploration stage until such time as proven or probable reserves have been established for its deposits.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Significant Accounting Policies
Use of Estimates - The preparation of the Company’s consolidated 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 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.
Revenue Recognition - Since the Company is in the exploration stage, any incidental sales of ore and Mamyt brown coal are recorded as a reduction of the exploratory costs. Income from such sales is recognized when persuasive evidence of an arrangement exists, title to product transfers to the customer, and collectability is reasonably assured.
Inventories - Inventory consists of materials and spare parts, miscellaneous goods, fuel and some raw materials. Spare parts, goods and fuel are recorded at the lower cost or estimated service value. The Company applies the weighted average method of inventory costing.
Prepaid Expenses - Prepaid expenses relate to office rent, subscriptions, insurance and advance drilling costs. Prepaid expenses are charged to operations in the period the related service or work is performed.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed - 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. During 2008, the Company recognized impairment of $565,171 on its property and equipment used in the pilot plant under the previously applied hydrochlorination technology that is no longer needed for the Vanyukov’s process and $8,916,265 on its mineral interests, which included $838,478 related to Kaznickel. No further impairment of mineral interests was required during 2009. During 2009, the Company recognized impairment of $556,500 on its property and equipment to be used in the pilot plant under the Vanyukov’s process.
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 - Costs incurred to develop new properties will be capitalized as incurred, when it has been determined that the property can be economically developed based on the existence of proven and probable reserves. All such costs will be 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.
Depreciation of equipment used in exploration activities is calculated using the straight-line method based on the estimated useful lives of the assets and is charged to exploratory costs.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Expenditures for new facilities or equipment and expenditures not related to exploration activities and used for administrative and other operation purposes or 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 as the useful lives of these assets are considered to be limited to the life of the relevant mine.
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 estimated for depreciation, depletion and amortization calculations.
The estimated useful lives for the property, plant and mineral interests are as follows:
Useful Life (Years)
Buildings
Machinery and equipment
5-8
Other fixed assets
5-10
Mineral Interests - 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 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 interests. The Company regularly evaluates the investments in mineral interests to assess the recoverability and / or the residual value of the investments in these assets. All mineral interests 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.
The estimates of mineral prices and operating, capital and reclamation costs, when available, are subject to certain risks and uncertainties, which may affect the recoverability of mineral interest costs. Although the Company makes its best estimates 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. As of December 31, 2008, due to the sharp fall of prices for nickel in 2008, the Company recognized impairment of its mineral interests of $8,916,265, which included $838,478 related to Kaznickel mineral interests. No further impairment of mineral interests was required during 2009.
Exploratory Costs - Since the Company is deemed to be in the Exploration stage, all costs related to operating activities are classified as Exploratory costs, which mainly consist of costs of drilling exploration works at the Gornostai deposits, costs of blasting, stripping, excavation and ore extracting works at the Kempirsai deposits, as well as salaries and wages, depreciation charges and other expenses directly related to these works. All exploratory costs are expensed as incurred.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Financial Instruments - The nature of the Company’s operation exposes the Company to fluctuations in commodity prices and foreign currency exchange 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 the credit risk fluctuations in interest rates because certain of its loans are interest free, as a general requirement under Kazakh law for non-financial institutions.
Basic and Diluted Loss Per Share - Basic loss per share is calculated by dividing net loss by the weighted-average number of shares outstanding, including shares issued under equity award program. Diluted loss per share is calculated by dividing net loss by the weighted-average number of shares and all dilutive potentially issuable shares, except during loss periods when those potentially issuable shares are anti-dilutive.
The following data shows the amounts used in computing basic and diluted weighted-average number of shares outstanding at December 31, 2009 and 2008:
For the Years Ended December 31,
Basic weighted average common shares outstanding
$
125,172,011
$
125,074,058
Dilutive effect of outstanding options / warrants
-
-
Diluted Weighted Average Common Shares Outstanding
$
125,172,011
$
125,074,058
Comprehensive Income - Total comprehensive income represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders. Accumulated other comprehensive income comprises accumulated foreign currency translation adjustments.
Recent Accounting Pronouncements
Consolidation of Variable Interest Entities - In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity. This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted. The Company does not expect that the adoption of adoption of this guidance will have a material impact on its financial statements.
Disclosures about Fair Value Measurements - In June 2009, the FASB issued accounting guidance which will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets, and requires additional disclosures. This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted. The Company does not expect that the adoption of adoption of this guidance will have a material impact on its financial statements.
In January 2010, the FASB issued guidance requires an entity to disclose the following:
·
Separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe reasons for the transfers.
·
Present separately information about purchases, sales, issuances and settlements, on a gross basis, rather than on one net number, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).
·
Provide fair value measurement disclosures for each class of assets and liabilities.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
·
Provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or level 3.
This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. The Company does not expect that the adoption of adoption of this guidance will have a material impact on its financial statements.
Reclassifications - Certain reclassifications have been made to the 2008 financial information to conform to the current period presentation.
NOTE 2 - CASH
The Company considers all demand deposits, money market accounts and marketable securities purchased with an original maturity of three months or less to be cash and cash equivalents. The fair value of cash and cash equivalents approximates their carrying amounts due to their short-term maturity.
Cash consists of the following:
NOTE 3 - PROPERTY, PLANT AND MINERAL INTERESTS
Property, plant and mineral interests consist of the following:
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Unproved mineral interests represent the acquisition costs of the mineral interests upon the purchase business combinations with Kaznickel and with KKM. The government of Kazakhstan retains the title to the property upon which the Company’s mineral interests pertain; however, the Company’s mineral interests are considered to be tangible assets.
In 2008 the Company recognized an impairment of mineral interests of $8,916,265, which included $838,478 related to Kaznickel mineral interests. According to management’s estimates, the Company can generate positive cash flows if nickel prices are not lower than $12,000-$12,500 per ton. However, at the end of 2008 nickel prices fell below this level making the Company recognize impairment of the Company’s mineral interests. Also, in 2008 impairment of machinery and equipment was recognized for the amount of $565,171. This amount represents assets used in the pilot plant under the previously applied hydrochlorination technology and no longer needed for the planned Vanyukov’s process. During 2009, the Company recognized impairment of $556,500 on its property and equipment to be used in the pilot plant under the Vanyukov’s process.
Bekem acquired two contracts to explore for and extract minerals in connection with the purchase of KKM made in October 24, 2005. 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), which is valid through October 12, 2020. The other contract is for the exploration and extraction of Mamyt brown coal at a site located within 40 kilometers of the Kempirsai deposit, which is valid 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 (0.9%) of gross coal sales. Royalty payments during 2008 and 2009 have been insignificant. 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.
NOTE 4 - INCOME TAXES
In accordance with the laws and regulations of the Republic of Kazakhstan income taxes for 2008 fiscal year were calculated at the statutory rate of 30 percent. On December 10, 2008 a new Tax Code was adopted, which is effective from January 1, 2009. According to the new Tax Code, the corporate income tax rate was reduced from 30% to 20% for 2009, 17.5% for 2010 and 15% for 2011. However, due to the experienced economic crisis, the gradual reduction in the tax rate from 20% to 17.5% and 15% was postponed in October, 2009 until 2013.
Deferred tax assets and liabilities were adjusted for the effect of the change in the tax laws and rates. The deferred tax previously provided on items that will become taxable or deductible in any future year affected by the rate change was adjusted downward to reflect the new rates. The deferred tax assets and liabilities were calculated using the 15% rate since that is the future rate that will most likely be applicable, if no changes in legislation occur, when the deferred tax assets and liabilities are recognized.
Net operating losses for development companies in exploration and development may be carried forward for the seven 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.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Deferred tax assets and liabilities were as follows:
December 31,
Tax loss carryforwards
$
3,344,835
$
3,375,142
Property and equipment
(161,377)
(221,613)
Asset retirement obligations
136,695
20,144
Grant compensation expense
220,094
174,939
Valuation allowance
(3,540,247)
(3,348,612)
Net Deferred Tax Liabilities
$
-
$
-
The valuation allowance was recognized for the amount of loss carry forward balance which is estimated to be unrecoverable.
The following is a reconciliation of the amount of tax that would result from applying the U.S. federal rate to pretax income with the provision for income taxes at December 31, 2009 and 2008:
For the Years Ended December 31,
Tax at US Federal statutory rate (34%)
$
14,814
$
(5,218,652)
Change in valuation allowance
191,635
1,057,911
Effect of changes in effective tax rates
(206,449)
4,160,741
Deferred Tax Benefit
$
-
$
-
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.
The Company has an uncertain tax position related to a $30,000 penalty assessed by the IRS for the late filing of Form 5471. The Company submitted a penalty abatement request to the IRS, which was recently denied. The Company is now formally appealing the penalty. Based on the Company’s assessment, it is probable that the penalty will be appealed. Consequently, the financial statements at December 31, 2009 do not include an adjustment for this uncertain tax position.
NOTE 5 - RELATED PARTY TRANSACTIONS
In March 2008, KKM entered into a preliminary consortium agreement, subject to negotiation of the terms of a definitive agreement, with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and Asia-Invest Corporation LLP (“AI”). GRK and AI are related parties of the Company through a common stockholder. These companies also have exploration and production licenses near the Company's Kempirsai deposits in northwestern Kazakhstan. This agreement provides for the joint development and construction of a nickel processing plant in the area for joint use by the parties. Under the preliminary consortium agreement, KKM is considered to be the operator of the Consortium. The preliminary shares of the parties in the Consortium are the following: KKM - 50%; GRK Koitas - 40%; and Asia-Invest - 10%.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Under the preliminary consortium agreement, the parties were obliged to jointly contribute approximately $40 million for financing the construction of the processing plant. Of this amount, KKM was obligated to contribute approximately $20 million. KKM received advances of KZT 2.278 billion ($18,862,300 as of December 31, 2008) from GRK, and KZT 97.4 million ($806,492 as of December 31, 2008) from AI, which were to be used for construction of a processing plant. The parties have the right to withdraw from the Consortium subject to three months written notice. Consequently, these advances have been classified as current notes payable to related parties and bear no interest since they represent contributions to the Consortium.
When the Company received the advance payments from GRK and AI, the parties had not yet selected the technology to be implemented for processing the Kempirsai ore and therefore, they had not yet developed the Consortium’s detailed plan for capital expenditures. The technology (Vanyukov process) for the processing plant was selected in September 2008 only after completion of the initial pilot testing of various technologies capable of processing nickel ore. The technology was selected based on the results of the testing and the preliminary feasibility study report. In addition, KKM was in dispute with the MEMR in relation to unilateral termination of the subsoil use contract as disclosed in Note 1. Therefore, in May 2008 Latimer, one of the major shareholders in GRK and AI, applied to the Company with a request for a loan. On May 22, 2008 the Company signed a Note Agreement with Latimer Assets Inc. Pursuant to the terms of the Note Agreement, the Company loaned $7,400,000 to Latimer Assets Inc. (“Latimer”). The note was originally interest free. Latimer owns substantial interests in GRK and AI.
On June 19, 2008 the Company and Latimer entered into Addendum # 1 to the Note Agreement whereby the Company agreed to loan an additional $7,500,000 to Latimer, increasing the total note amount to $14,900,000. The total note was provided at an interest rate of 2% per annum. Interest was charged on a monthly basis and was payable as a lump-sum payment at the date of the note repayment. The Company ceased accruing interest on the note since March 31, 2009 upon consent of both parties. The balance of the note receivable from related party at that time was $15,140,828.
Pursuant to a Pledge Agreement dated May 22, 2008 between the Company, its subsidiary, KKM, GRK and AI, the Latimer note receivable was secured by a pledge of a cumulative 39% interest in the Consortium. The 39% interest consists of 31% of GRK’s 40% interest in the Consortium and 8% of AI’s 10% interest in the Consortium.
On September 15, 2009 Bekem, KKM, GRK and Latimer Assets Inc. executed an Assignment and Assumption Agreement, dated August 13, 2009 (the “Assignment Agreement”). Pursuant to the Assignment Agreement, the Company’s receivable from Latimer was satisfied with a corresponding reduction in the payable to GRK.
On November 11, 2009 KKM and GRK entered into the Offset Agreement. Pursuant to the terms of the Offset Agreement, GRK and KKM agreed to partially offset KZT 2,282,328,413 (equivalent to $15,136,811 at the currency conversion rate of KZT 150.78 per $1 on November 11, 2009) owed by GRK to KKM.
On November 11, 2009 KKM, GRK and AI also executed an Addendum #2 to the Joint Activity Agreement (Addendum #2”) to reflect certain changes in connection with the Offset Agreement. The main difference was a change in the amounts each party was required to invest in the consortium. KKM’s investment obligation decreased from KZT 2,333,000,000 (equivalent to $15,690,362 on November 11, 2009) to KZT 686,936,015 (equivalent to $4,619,921 on November 11, 2009). GRK’s investment obligation decreased from KZT 2,235,600,000 (equivalent to $15,707,849 on November 11, 2009) to KZT 565,143,597 (equivalent to $3,800,818 on November 11, 2009). And AI’s investment obligation increased from KZT 97,400,000 (equivalent to $655,054 on November 11, 2009) to KZT 121,792,418 (equivalent to $819,103 on November 11, 2009). In connection with Addendum #2, the parties also agreed to extend the period for final determination of the ownership interests of the parties in the Consortium to March 1, 2010. However, in March 2010 AI was successful in negotiating with the MEMR an extension of the investment obligations under its license to later periods while GRK obtained a similar extension in 2009. As a result, the parties further agreed to extend the period for final determination of the ownership interests of the parties in the Consortium to June 1, 2010.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
In November 2009 KKM made partial repayment of the notes payable to GRK in the amount of $2,500,000. As a result, as of December 31, 2009 the notes payable to GRK were KZT 181,813,534 (equivalent $1,225,489) and to AI was KZT 119,651,105 (equivalent $806,492).
NOTE 6 - ASSET RETIREMENT OBLIGATIONS
FASB guidance 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 interests. 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 interests as described in Note 3.
The reconciliation of the asset retirement obligation is as follows:
December 31,
Balance at the beginning of the year
$
424,431
$
130,682
Revision of liability
513,971
283,544
Accretion expense during the year
52,184
10,755
Effect of the foreign exchange gain/loss
(79,289)
(550)
Asset Retirement Obligation
$
911,297
$
424,431
Due to Company’s poor financial conditions and likelihood of having the subsoil use license revoked, management estimated cost of liquidation and reclamation of KKM mines as of December 31, 2009. The estimated liquidation cost amounted to $911,297, which is higher than the previously accrued asset retirement obligations by $513,971. This amount was immediately additionally recognized in 2009 books as an increase in asset retirement obligations and related increase in accretion expenses.
During 2008 the Company recalculated its asset retirement obligations. The amount of the obligations has increased for KKM by $283,544 due to toughened environmental legislation in Kazakhstan. In revised calculations, inflation and credit risk adjusted rates were assumed to be 8% and 15%, respectively. These assumptions were significantly affected by the global economic crisis in general as well as the current situation in Kazakhstan. The amount was recognized as a cost of mining assets and was immediately fully impaired due to low probability of assets’ recoverability.
NOTE 7 - SHAREHOLDERS’ EQUITY
Shares issued for cash - On July 14, 2006, the Company closed a private placement of 8,000,000 units at $3.50 per unit, each unit consisting of three shares of restricted common stock and one warrant to purchase one share of common stock for two dollars. The warrants were immediately exercisable and expired twenty-four months from the date granted, i.e., in July 2008. The private placement resulted in the issuance of 24,000,000 restricted common shares and warrants to purchase 8,000,000 common shares to two non-U.S. investors for $28,000,000. These issuances did not result in a change in control of the Company.
From the total proceeds, the Company paid the placement agent, Aton Securities, Inc., a cash fee totaling 5% of the total proceeds raised, or $1,400,000 and redeemed the agent’s overhead expenses of $24,127. Also, the Company incurred legal and consulting expenses of $153,487 in connection with this private placement. The Company also issued to the placement agent a warrant to purchase up to 2,400,000 shares of restricted common stock. The exercise price of this warrant was $1.17 per share. The warrant was immediately exercisable and expired eighteen months from the date granted, i.e., in January 2008. The warrants were not exercised.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
The following summarizes warrant activity for the year ended December 31, 2008:
Weighted
Average
Warrants
Exercise Price
Balance, December 31, 2007
$
10,400,000
$
1.81
Issued
-
-
Expired
(10,400,000)
1.81
Exercised
-
-
Balance, December 31, 2008
$
-
$
-
Stock grants and shares cancelled - On October 20, 2006, under the Company’s 2003 Stock Option Plan and pursuant to the board of directors desire to attract and retain experienced and educated executives, the Board agreed to award to certain executives and key employees of the Company restricted stock grants (1,083,123 shares). The vesting of the shares is contingent upon meeting various company-wide performance goals, including timely filing of reports with the Securities and Exchange Commission, meeting the yearly deadlines for the pilot plant construction, operations as dictated by the Board of Directors, timely performing of the drilling work program requirements as dictated by the Republic of Kazakhstan’s Ministry of Energy and Mineral Resources, and start of commercial operations. The shares under the restricted stock grant scheme are held and released by the Company to awarded employees based on the approval of the Board and analysis of employee’s performance. If these performance conditions are not met, the Company will reverse compensation expense, unless approved by the Board of Directors, and will reverse any previously recognized compensation expenses. The fair value of the restricted stock grants was valued at $1.95 per share, which represented the closing market price of the Company’s stock on October 20, 2006, or $2,112,090. These restricted shares were expensed over the expected term of the performance condition, which was three years.
During 2007, the Company reversed the amount of deferred compensation of $822,455 (421,772 shares) due to the resignation of Mr. Cherdabayev, the previous CEO and President of the Company.
On March 25, 2008, the board agreed to award to certain executives and key employees of the Company additional restricted stock grants (421,772 shares) with an estimated fair value of $337,418 at the closing market price of common stock on the date of grant ($0.80 per share). Out of this amount, $45,301 (191,715 shares) was reversed in 2009 due to anticipated resignation of Mr. Bitenov, the CFO of the Company.
As of December 31, 2009, there was $6,390 of total unexpensed compensation cost. The cost is expected to be recognized over a period of one year. 445,703 and 184,510 shares vested during 2009 and 2008, respectively. The Company recognized $301,028 and $585,745 of compensation expense for the years ended December 31, 2009 and 2008, respectively.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
A summary of the non-vested stock under the Stock Option Plan follows:
NOTE 8 - OTHER INCOME, NET
Other income earned during 2009 and 2008 comprised the following:
For the year ended December 31,
Income (loss) from sale of property and equipment
$
(38,232)
$
196,115
Income from rent and other services
359,221
289,949
$
320,989
$
486,064
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Concentration of Risk Relating to Foreign Mining Operations - All of the Company’s properties are located within the Republic of Kazakhstan in Central Asia. In addition to general industry risks of nickel and cobalt price fluctuations, and potential lack of economic viability of the claims, the Company has a concentration of risk related to its foreign properties and interests which are subject to political uncertainty, changes in government, unilateral renegotiation of licenses, claims or contracts, nationalization, or other uncertainties. In addition, the validity of mining claims which constitute the Company's property holdings in Kazakhstan, may, in certain cases, be uncertain and are subject to being contested.
Failure to Satisfy the Terms of the Subsoil Use Contracts - Under the subsoil use contracts, the Company is required to satisfy the annual minimum work program requirements. If the Company fails to satisfy these commitments, it may be subject to the loss of one or more of the subsoil use contracts. The cancellation of the contracts would have a material adverse effect on the Company’s business, results of operations and financial condition. While the Company does not expect any other penalties and fines, except the loss of one or more of the subsoil use contracts, KKM is required to remove all equipment and remediate the property where the remediation costs are currently estimated at the level up to $950,000.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Annual Work Program - Historically, it has been the practice of the MEMR that if a subsurface user could not fulfill certain conditions for a specific year, for any reason, then the work program requirements of that year would be extended to the next year. This was done because the obligations of subsoil users were typically set forth on the basis of the full duration of the subsoil use contract, rather than on an annual basis. In December 2008, a new subsoil use legislation of Kazakhstan was submitted to parliament, superseding legislation on oil production and exploration, mineral resources mineral management, and production sharing agreements (PSAs). The new subsoil use legislation of Kazakhstan, which is expected to be adopted by parliament and signed by the President in second quarter 2010 and become effective six months after its approval by parliament and the President, allows the government to annul contracts in the extractive sector if they are deemed to be harmful to Kazakhstan's economic security or national interests. The legislation also requires separate contracts for exploration and production operations, puts shorter time limits on exploration contracts, enhances the government’s authority to terminate contracts not in compliance with the law, and requires tax stability clauses in individual contracts to be approved by the President of Kazakhstan. Also, the latest draft assumes that disputes between subsurface users and the government will be settled in the courts of Kazakhstan, and does not assume international arbitration. Disputes regarding the existing subsurface use contracts would also be settled in the courts of Kazakhstan. This change in practice has created great uncertainty as to how the government will proceed in the future. Currently, there is no legislatively fixed mechanism governing the development of annual work programs or for the independent determination of compliance by the subsurface user with the parameters of the annual work program. The determination is currently being made at the discretion of officials employed by the authorized governmental body. Based solely on their own discretion, these officials have the authority to suspend the activities of the subsurface user even for a minor breach of the detailed annual work program. These facts, coupled with the right of the competent body to unilaterally terminate a subsoil user’s contract if the contractor materially breaches the subsoil use contract obligations, indicates there is a risk that one or more of the subsoil use contracts could be cancelled. While the Company does not expect any other penalties and fines, except the loss of one or more of the subsoil use contracts, KKM is required to remove all equipment and remediate the property where the remediation costs are currently estimated at the level up to $950,000.
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.
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 and impose 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.
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Required Annual Work Program Due to the Government of the Republic of Kazakhstan - The Company is required, under its licenses, to submit a proposed annual work program to the MEMR for approval. Failure to meet the minimum work program requirements could cause the Company to lose its licenses.
Operating Leases - Bekem leases approximately 400 square feet of office space located at 324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in the United States. The Company pays annual rents of approximately $7,800 for this space pursuant to a lease agreement that expired in October 2009. The Company is currently renting this space on a month-to-month basis at the same rate while negotiating the terms of a new one-year lease. The Company anticipates that it will be successful in negotiating a new lease on terms comparable to our previous lease.
The Company also maintains a representative office in Almaty, Kazakhstan, where it leases approximately 645 square feet of office space. The lease agreement expires on August 31, 2010. The monthly lease payment is $921. Upon consent of both parties, the agreement may be prolonged further. To minimize its operating expenses, in March, 2010 the Company decided to close the office. For details, please refer to Note 10 “Subsequent events”.
KKM rents approximately 1,706 square feet of office space in Aktobe, Kazakhstan. KKM pays approximately $1,400 per month for this space under a one-year lease agreement. This space is leased on a year-to-year basis.
Rent expense for the years ended December 31, 2009 and 2008 was $87,784 and $285,366, respectively.
NOTE 10 - SUBSEQUENT EVENTS
On March 11, 2010 the Company’s Board of Directors made a decision on closure of the representative office in Kazakhstan. The decision to cease activity (to liquidate) and withdraw from state registration the representative office of Bekem Metals Inc. in Kazakhstan was made in order to minimize the Company’s operating expenses due to lack of financial resources. Withdrawal from the state registration is expected to take 3-6 months. Closure of the representative office will help to reduce the expenses by approximately $50,000 per month.
The Company has evaluated subsequent events through April 12, 2010, the date these consolidated financial statements were issued.