Business context and reporting period
The supplied filing is BMB Munai, Inc.’s unaudited Form 10-Q for the quarter and six months ended September 30, 2011—not a Freedom Holding Corp. filing. The filing says BMB Munai sold its wholly owned oil-and-gas subsidiary, Emir Oil, on September 19, 2011. Emir Oil’s results are presented as discontinued operations; BMB Munai had no continuing revenue-generating operations after the sale.
Financial results and position
- Revenue: Continuing operations reported no revenue. Discontinued operations, principally Emir Oil, generated $16.6 million in the quarter and $41.6 million for six months, versus $12.3 million and $25.1 million in the comparable 2010 periods.
- Profit and expenses: Continuing-operations loss was $19.0 million for the quarter and $23.3 million for six months. The filing separately records a $127.1 million loss on the Emir Oil sale and income from discontinued operations of $3.2 million and $11.9 million, respectively. Total net loss was $142.9 million for the quarter and $138.5 million for six months; six-month 2010 net income was $0.3 million. The filing’s EPS note presents a different continuing-operations loss measure that includes the sale loss; investors should reconcile the presentation.
- Costs and margins: Continuing general and administrative expense rose to $17.5 million for the quarter and $19.7 million for six months, from $2.7 million and $4.6 million. Management attributed the increase mainly to sale-related termination payments, the chairman’s consulting fee, and selling expenses. No continuing revenue was reported, so a continuing-operations margin is not meaningful.
- Cash flow: For six months, net cash provided by operating activities was $20.7 million, including $33.1 million from discontinued operations; continuing operations used $12.3 million. Investing activities provided $136.3 million, primarily from the sale, while financing activities used $66.3 million, including debt redemption.
- Liquidity and debt: At September 30, cash and cash equivalents totaled $87.8 million, including $36.0 million restricted in escrow; unrestricted cash was $51.8 million. Current liabilities were $8.3 million, including $7.9 million of accrued consulting and extraordinary-event payments. The $61.4 million principal amount of 10.75% convertible notes was redeemed, with $62.6 million paid including accrued interest; no notes remained outstanding.
- Balance sheet: Total assets were $88.4 million and shareholders’ equity $80.1 million, compared with $320.5 million and $218.6 million at March 31, 2011, largely reflecting the disposal of Emir Oil and the related sale accounting.
Material changes, outlook, and risks
- The Emir Oil sale had an initial stated price of $170 million, subject to $10.4 million of purchase adjustments; the filing reports net sale proceeds of $159.6 million. A $36 million escrow is held for 12 months to cover specified indemnification claims; the stated maximum obligation is generally $39 million, with exceptions for fraud or criminal misconduct.
- On October 24, 2011, after the reporting period, the company paid an initial cash distribution of $1.04 per share, totaling approximately $45.0 million. A further distribution, if any, depends on escrow claims, the chairman’s deferred payment, and funds remaining after liabilities and costs.
- Management expects general and administrative expense to decline and interest expense to cease following note redemption, but also expects continuing net losses because the company no longer has operating revenue. It said it would continue operating during the indemnification period and explore opportunities to use management’s Kazakhstan oil-and-gas expertise; no specific financial guidance was provided.
- Management states that the absence of continuing operations generating positive cash flow raises substantial doubt about the company’s ability to continue as a going concern. Other notable exposures include escrow indemnification claims and uninsured bank deposits. The filing reports that the long-running Savage/Sinclair/Sokol litigation was dismissed and affirmed on appeal; a request for $26,207 in costs remained pending.
- The company voluntarily delisted from NYSE Amex after the sale; its shares were quoted on OTCQB. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and filing identity: the supplied document names BMB Munai, Inc., while the request identifies Freedom Holding Corp.
- Reconcile the reported continuing-operations loss and EPS note, including how the $127.1 million sale loss is classified.
- Verify the sale price adjustments, escrow restrictions and claims, and the timing and amount of any additional shareholder distribution.
- Assess post-sale cash needs, accrued obligations, continuing losses, and the going-concern uncertainty.
- Review the company’s plans and resources for any future business activity after disposing of its principal operating subsidiary.