Filing summary
Entity and period mismatch: The request identifies Freedom Holding Corp., but the supplied Form 10-Q is for BMB Munai, Inc. The filing reports the quarter and nine months ended December 31, 2011; it does not identify Freedom Holding as the registrant.
Business context and reporting period
BMB Munai sold its wholly owned oil and gas subsidiary, Emir Oil, on September 19, 2011. The sale ended the company’s operating oil and gas business; Emir Oil’s results are presented as discontinued operations. BMB Munai’s remaining activities included post-sale undertakings and exploring possible new business opportunities. The financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2011 |
|---|---|---|
| Revenue from continuing operations | $0 | $0 |
| Operating loss | $313,265 | $23.6 million |
| Net income (loss) | $(304,217) | $(138.8) million |
| Basic earnings (loss) per share | $(0.01) | $(2.49) |
- The nine-month net loss included a $127.1 million loss on the Emir Oil sale. Discontinued operations contributed $11.9 million of income during the period.
- Nine-month general and administrative expense was $20.0 million, up from $6.5 million in the comparable 2010 period. The filing attributes much of the increase to executive termination payments, the chairman’s consulting-agreement payment, and sale-related expenses.
- At December 31, 2011, total assets were $42.3 million, including $5.8 million of unrestricted cash and $36.0 million of restricted escrow cash. Current liabilities were $20.5 million, including $20.0 million of deferred consulting and distribution payments. The balance sheet reported no remaining convertible notes; the $61.4 million principal notes were redeemed in September 2011.
- For the nine months, total operating cash flow was $17.7 million, comprising $33.1 million from discontinued operations and $(15.4) million from continuing operations. Investing activities provided $136.3 million, primarily reflecting sale proceeds; financing activities used $109.3 million. The cash-flow statement reports ending cash and cash equivalents of $41.8 million, including restricted cash.
Material changes, outlook, and risks
- The Emir Oil sale had an initial price of $170 million, subject to $10.4 million of purchase adjustments. The filing reports adjusted sale proceeds of $159.6 million and a $127.1 million accounting loss. BMB Munai also redeemed its 10.75% convertible notes for approximately $62.6 million.
- The company made an initial shareholder distribution of $1.04 per share. As of December 31, $43.0 million had been paid, with $2.0 million payable and $13.0 million deferred or placed at risk in connection with escrow arrangements.
- The $36 million escrow secures buyer indemnification claims for matters including representations and warranties, litigation, contract and asset-transfer issues, and environmental matters. The stated maximum indemnification obligation is $39 million, with exceptions for fraud or criminal misconduct. Escrow release and any further shareholder distribution depend on claims and other obligations.
- Management stated that the company had no continuing operations generating positive cash flow and no anticipated revenue until it identifies new business opportunities. The filing says this raises substantial doubt about the company’s ability to continue as a going concern and anticipates future net losses.
- A February 2, 2012 subsequent event disclosed a management and services agreement with Lakeview International, a company controlled by a former director. BMB Munai paid $1.9475 million in advance, including anticipated expenses and a management fee.
- Management reported effective disclosure controls as of December 31, 2011 and no material change in internal control during the quarter. The filing states there were no additions to the risk factors in the prior annual report.
Investor facts to verify
- Confirm the registrant: the supplied filing is for BMB Munai, Inc., not Freedom Holding Corp.
- Review the status, release conditions, and potential claims against the $36 million escrow and the related $39 million indemnification cap.
- Verify the amounts and priority of accrued distributions, consulting obligations, and other liabilities relative to any future shareholder distribution.
- Assess the company’s liquidity and going-concern risk given the absence of operating revenue and negative continuing-operations cash flow.
- Review the related-party Lakeview services agreement, including its advance payment and expense accounting.