United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 2006 000-33215
CASPIAN SERVICES, INC.
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization
87-0617371
------------------------------------
(I.R.S. Employer Identification No.)
257 East 200 South, Suite 340, Salt Lake City, Utah 84101
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(Address of principal executive offices)
(801) 746-3700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to section 12(g) of the Exchange Act:
Common, $0.001 par value
Check whether the Issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check whether the Issuer is a shell company (as defined by Rule 12b-2 of the
Exchange Act) Yes [ ] No [X]
As of August 10, 2006 we had 41,302,890 shares of our $0.001 par value, common
stock outstanding.
CASPIAN SERVICES, INC., AND SUBSIDIARIES
FORM 10-QSB
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of
June 30, 2006 and September 30, 2005 .............................
Condensed Consolidated Statements of Operations (Unaudited)
for the three and nine months ended June 30, 2006 and 2005........
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended June 30, 2006 and 2005..................
Notes to Condensed Consolidated Financial Statements (Unaudited)....
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................
Item 3. Controls and Procedures........................................
PART II -- OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities........................
Item 6. Exhibits.......................................................
Signatures..............................................................
2
CASPIAN SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands except share and per share data)
June 30, September 30,
2006 2005
------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 3,283 $ 2,600
Trade accounts receivable, net of allowance of $5 and $42, respectively 6,936 5,140
Other receivables, net of allowance of $397 and $352, respectively 1,119 613
Accounts receivable from related parties, net 781 189
Inventories 703 500
Prepaid taxes 511 177
Advances paid 7,689 3,111
Prepaid expenses and other current assets 230 206
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Total Current Assets 21,252 12,536
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Vessels, equipment and property, net 27,807 20,711
Drydocking costs, net 309 399
Goodwill 2,911 2,911
Intangible assets, net 113 89
Investments - 303
Notes receivable from related parties 1,118 1,109
------------------------------------------------------------------------------------------
Total Assets $ 53,510 $ 38,058
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 4,317 $ 3,194
Other payables and accrued expenses 1,041 1,259
Current tax liabilities 2,299 599
Deferred revenue 2,326 2,703
Accounts payable to related parties 305 336
Notes payable to related parties 517 -
Current portion of notes payable 1,346 55
------------------------------------------------------------------------------------------
Total Current Liabilities 12,151 8,146
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Long-Term liabilities
Long-Term Debt - Net of Current Portion 590 -
Deferred income tax liability 1,196 -
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Total Long-Term liabilities 1,786 -
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------------------------------------------------------------------------------------------
Minority Interest 3,252 2,442
------------------------------------------------------------------------------------------
Shareholders' Equity
Common stock, $0.001 par value, 150,000,000 shares authorized,
41,302,890 and 38,858,446 shares issued and outstanding, respectively 41 39
Additional paid-in capital 36,520 26,595
Accumulated other comprehensive income (loss) 2,011 (37)
Retained earnings/ accumulated (deficit) (2,251) 873
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Total Shareholders' Equity 36,321 27,470
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Total Liabilities and Shareholders' Equity $ 53,510 $ 38,058
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CASPIAN SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except share and per share data)
For the Three months For the Nine months
Ended June 30, Ended June 30,
------------------------ ------------------------
2006 2005 2006 2005
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Revenues
Vessel revenues $ 3,112 $ 2,417 $ 7,187 $ 5,431
Geophysical service revenues 6,819 4,961 19,522 7,320
Product sales 303 296 838 738
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Total Revenues 10,234 7,674 27,547 13,489
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Operating Expenses
Vessel operating costs 3,667 1,557 8,033 4,425
Geophysical costs of revenues 3,242 1,913 8,972 2,833
Cost of product sold 287 172 476 412
Depreciation 747 527 1,983 1,042
Selling, general and administrative 3,111 1,438 7,548 4,311
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Total Operating Expenses 11,054 5,607 27,012 13,023
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Income from Operations (820) 2,067 535 466
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Other Income (Expense)
Interest expense (109) (56) (251) (711)
Exchange gain (loss) (50) (103) (37) (30)
Interest income - 12 0
Income (loss) from equity method investees (108) 63 28 90
Other 125 46 122 61
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Net Other Expense (142) (50) (126) (590)
-----------------------------------------------------------------------------------------------------------
Net Income Before Income Tax and Minority Interest (962) 2,017 409 (124)
(Provision) benefit for income tax (836) ((2,969) (301)
Minority interest 205 (9) (564) 48
-----------------------------------------------------------------------------------------------------------
Net Income/(loss) $ (1,593) $ 1,839 $ (3,124) $ (377)
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Income (Loss) Per Common Share
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Basic $ (0.04) $ 0.05 $ (0.08) $ (0.01)
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Diluted $ (0.04) $ 0.05 $ (0.08) $ (0.01)
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Weighted Average Common Shares Outstanding Basic 41,302,890 38,858,446 39,915,019 34,313,874
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Diluted Weighted Average Common Shares Outstanding 41,302,890 39,018,331 39,915,019 34,313,874
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4
CASPIAN SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands, except share and per share data)
For the Nine months
Ended June 30,
-------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (3,124) $ (377)
Adjustments to reconcile net loss to net cash from operating activities:
(Gain)/loss on disposal of equipment (387) 11
Depreciation and amortization 2,249 1,109
Minority interest 564 (48)
Net income in equity method investees (28) (91)
Provision for loss on related party receivables - 41
Foreign currency exchange gain 46 (38)
Compensation from issuance of options 14 47
Changes in current assets and liabilities:
Trade accounts receivable (1,734) (3,704)
Trade accounts receivable - related (573) 310
Other receivables 1,067 363
Inventories (127) (248)
Prepaid expenses and other current assets (4,423) (2,757)
Accounts payable and accrued expenses (4,496) (2,673)
Income tax payable 2,703 (668)
Deferred revenue (846) 3,814
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Net cash used in operating activities (9,095) (4,985)
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Cash flows from investing activities:
Loans given to related parties (1,170) (433)
Loans given to other entities - (600)
Advances to Equity Method investees - (2,300)
Repayments of loans given to related parties 511 4
Other receivables - related - 94
Payment of drydocking costs - (75)
Proceeds from sale of Ishimgeophysica 350 -
Cash paid for investments in subsidiaries (306) -
Proceeds from sale of assets 1,879 4
Purchase of vessels and equipment (2,187) (1,712)
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Net cash used in investing activities (923) (5,018)
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Cash flows from financing activities:
Proceeds from issuance of common stock 7,922 21,795
Proceeds from issuance of short-term debt to related parties 510 3,822
Proceeds from issuance of debt 5,229 957
Change in advances to/from related parties - (22)
Principal payments on short-term debt to related parties - (7,970)
Principal payments on notes payable (3,322) (8,122)
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Net cash provided by financing activities 10,340 10,460
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Effect of exchange rate changes on cash 362 73
Net change in cash 683 530
Cash at beginning of period 2,600 359
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Cash at end of period $ 3,283 $ 889
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5
CASPIAN SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands, except share and per share data)
For the Nine months
Ended June 30,
-------------------------------------
2006 2005
------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 79 $ 477
Cash paid for income tax $ 1,769 $ 52
Supplemental disclosure of non-cash investing and financing information: $ -
Refinance notes payable $ - $ 4,900
Issuance of stock for investment in Balykchi $ 2,000 $ -
6
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION
Interim Financial Information -- The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they are condensed and do not
include all of the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation have been included
and are of a normal recurring nature. The accompanying financial statements
should be read in conjunction with the Company's most recent audited financial
statements included in the Company's annual report on Form 10-KSB filed on
January 12, 2006. Operating results for the three and nine month periods ended
June 30, 2006 are not necessarily indicative of the results that may be expected
for the year ending September 30, 2006.
Principles of Consolidation -- The accompanying consolidated financial
statements include operations and balances of Caspian Services, Inc. and its
wholly owned subsidiaries Caspian Services Group Limited ("Caspian"), TatArka
LLP ("TatArka"), Caspian Real Estate, Ltd ("CRE"), Caspian Geophyzica, Ltd
("CGEO"), Balykchi LLP ("Balykchi") and majority owned subsidiaries, CJSC Bauta,
("Bauta") and Kazmorgeophysica CJSC ("KMG"), collectively ("Caspian" or the
"Company"). Caspian has non-controlling 50% interests in Bautino Development
Company, LLC ("Bautino"), Veritas Caspian LLP ("Veritas") and Ishimgeophysica
for which it accounts by the equity method. Investment in Ishymgeophysica has
been sold in June 2006. Intercompany balances and transactions have been
eliminated in consolidation.
Nature of Operations -- The Company's operations consist of a fleet of shallow
draft vessels operating in the Kazakh Sector of the North Caspian Sea; providing
seismic data acquisition and interpretation services to oil and gas companies
operating both onshore in Kazakhstan and offshore in the Kazakhstan sector of
the North Caspian Sea and the adjacent transition zone; operation of a water
desalinization and bottling plant in the Port of Bautino on the Caspian Sea;
operation of a hotel located at the Port of Bautino; and the development of a
marine base located at the Port of Bautino.
Reclassifications -- Certain reclassifications have been made in the 2005
financial statements to conform to the current presentation. The
reclassifications had no effect on net income.
Net Income Per Common Share - Basic and Diluted - Basic income (loss) per common
share is calculated by dividing net income (loss) by the weighted-average number
of common shares outstanding. Diluted income per common share is calculated by
dividing net income by the weighted-average number of common shares outstanding
giving effect to potentially issuable common shares, except during loss periods
when those potentially issuable shares are anti-dilutive. As of June 30, 2006
and 2005, there were 1,000,000 and 200,000 options outstanding respectively and
1,765,845 and 765,845 warrants outstanding respectively that were not included
in the computation of diluted net loss per common share as their effect would be
anti-dilutive.
Stock-based Compensation Plans - The Company accounts for stock options issued
to directors, officers and employees under Accounting Principles Board Opinion
7
No. 25 and related interpretations ("APB 25"). The Company accounts for options
and warrants issued to non-employees at their fair value in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
During the three and nine months ended June 30, 2006 and 2005, the Company
recognized $14 and $47 of compensation expense related to options issued to
employees. Had the Company determined compensation cost based on the fair value
at the grant date for stock options under SFAS No. 123, the Company's net loss
would have increased to the pro forma amounts indicated below:
For the Three months For the Six months
Ended June 30, Ended June 30,
---------------------- ----------------------
2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders, as reported $ (1,593) $ 1,839 $ (3,124) $ (377)
Add: Total stock-based employee compensation expense
recorded 9 47 14 47
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (507) (91) (1,025) (443)
-----------------------------------------------------------------------------------------------------------------
Pro Forma Net Income $ (2,091) $ 1,795 $ (4,135) $ (773)
-----------------------------------------------------------------------------------------------------------------
Income per share:
As reported:
Basic $ (0.04) $ 0.05 $ (0.08) $ (0.01)
Pro forma:
Basic $ (0.05) $ 0.05 $ (0.10) $ (0.02)
NOTE 2 -- DEVELOPMENT OF MARINE BASE
During August 2005, the Company entered into a contract to acquire 3 separate
adjoining parcels of land on the port of Bautino, totaling 4.97 hectares of
waterfront property for $3,950 on which the marine base will be located. At
September 30, 2005, the Company had paid $1,700 down on the land, and the
remaining $250 plus 444,444 shares of common stock valued at $2,000 was paid
upon closing in November 2005. In connection with this land purchase, the
Company acquired 100% of the ownership interests in Balykchi LLP, the holding
company of the real estate.
The present construction schedule anticipates construction to commence in
October 2006, with final completion and hand-over in April 2008. This is
dependant on receiving main project financing approvals by September 2006.
NOTE 3 - VESSELS, EQUIPMENT AND PROPERTY
During April 2006, the Company entered into an agreement to purchase geophysical
equipment for total proceeds of $2,413. In accordance with the agreement the
Company made a 100% advance payment on the equipment. The equipment was received
in July 2006.
During May 2006, the Company entered into an agreement to purchase an
accommodation/work barge for total proceeds of $3,420. In accordance with the
agreement, the Company made a 50% advance payment on the vessel with the
remaining amount due on delivery of the vessel, which is to be delivered within
twelve months.
During the third quarter of 2006, the Company sold the Caspian Yelena to an
unrelated third party for net proceeds of $1,868. The Yelena had a book value of
$1,489 and the Company recognized a gain of the sale in the amount of $379.
8
NOTE 4 - NOTES PAYABLE
During March and April 2006, Tat-Arka borrowed from a bank two loans totaling
$2,580. As of June 30, 2006 $700 had been paid on one of the loans. The notes
are collateralized by equipment and bear interest at 14%. A $700 payment is due
September 2006 and $1,180 payments will be repaid every three month. Final
payment is due March 2007.
During the nine months ended June 30, 2006, Bauta repaid $57 of notes payable
and entered into additional notes payables for $56. The notes bear interest at
18% and are due September and December 2006.
NOTE 5 -- STOCKHOLDERS' EQUITY
Common Stock - As discussed in Note 2, the Company issued 444,444 shares of
common stock valued at $2,000 or $4.50 per share as partial compensation for the
acquisition of Balykchi LLP.
During March 2006, the Company completed a private placement of 1,000,000 units
at $8 per unit. Each unit consisted of two shares of common stock and a warrant
to purchase an additional share of common stock. The warrant is exercisable for
three years at $5 per share. The Company received $7,922 after offering costs of
$78. The warrant had a fair value of $4,730 on the date of issuance and was
recorded as part of the offering costs.
Options - The following table summarizes information about fixed stock options
outstanding at June 30, 2006:
Weighted-
Options Average Number
Outstanding at Remaining Weighted- Exercisable at
June 30, Contractual Average Exercise June 30,
Exercise Price 2006 Life Price 2006
------------------------------------------------------------------------------------------------------------
$ 3.00 1,000,000 8.05 $ 3.00 125,000
Warrants - The following table summarizes information about warrants outstanding
at June 30, 2006:
Weighted-
Warrants Average Number
Outstanding at Remaining Weighted- Exercisable at
June 30, Contractual Average Exercise June 30,
Exercise Price 2006 Life Price 2006
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
$3.00 - $5.00 1,765,845 1.65 $ 4.13 1,765,845
9
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Economic Environment -- In recent years, Kazakhstan has undergone substantial
political and economic change. As an emerging market, Kazakhstan does not
possess a well-developed business infrastructure, which generally exists in a
more mature free market economy. As a result, operations carried out in
Kazakhstan can involve significant risks, which are not typically associated
with those in developed markets. Instability in the market reform process could
subject the Company to unpredictable changes in the basic business
infrastructure in which it currently operates. Uncertainties regarding the
political, legal, tax or regulatory environment, including the potential for
adverse changes in any of these factors could significantly affect the Company's
ability to operate commercially. Management is unable to estimate what changes
may occur or the resulting effect on such changes on the Company's financial
condition or future results of operations.
Legislation and regulations regarding taxation, foreign currency translation,
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 various legislation and regulations are not
always clearly written and their interpretation is subject to the opinions of
the local tax inspectors. Instances of inconsistent opinions between local,
regional and national tax authorities are not unusual.
Environmental Uncertainties -- Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated based on ongoing engineering studies, discussions with the
environmental authorities and assumptions as to the areas that may have to be
re-mediated along with the nature and extent of the remediation that may be
required. Ultimate cost to the Company is primarily dependent upon factors
beyond its control such as the scope and methodology of the remedial action
requirements to be established by environmental and public health authorities,
new law or government regulations, and the outcome of any potential related
litigation.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company received services from another entity owned by a shareholder and
officer of The Company in the amount of $192 and $667 for the nine months ended
June 30, 2006 and 2005, respectively, for services related to statutory tax
audit, corporate travel, Kazakh visas, and entry and exit services. The Company
received seismic works for $1,654 and $0 and generated income from the vessels
rented by the co-owner of the subsidiary in the amount of $848 and $0 for the
nine months ended June 30, 2006 and 2005, respectively.
Accounts receivable from related parties consist of the following:
Related party's Name Description June 30, 2006 September 30, 2005
----------------------------- -------------------------- -------------------------- -------------------------
KazakhstanCaspiShelf Rent of vessel and $67 -
received seismic works
----------------------------- -------------------------- -------------------------- -------------------------
Veritas Caspian Rent of vessel $688 -
----------------------------- -------------------------- -------------------------- -------------------------
Others Travel expenses, sales $26 $189
of fixed assets
----------------------------- -------------------------- -------------------------- -------------------------
TOTAL $781 $189
----------------------------- -------------------------- -------------------------- -------------------------
10
Accounts payable due to related parties consist of the following:
---------------------------- --------------------------- ------------------------- --------------------------
Related party's Name Description June 30, 2006 September 30, 2005
---------------------------- --------------------------- ------------------------- --------------------------
Emir Oil Geological work $203 $180
---------------------------- --------------------------- ------------------------- --------------------------
VIP International Legal and transport $63 -
Kazakhstan services received
---------------------------- --------------------------- ------------------------- --------------------------
Others Services received $39 $156
---------------------------- --------------------------- ------------------------- --------------------------
TOTAL $305 $336
---------------------------- --------------------------- ------------------------- --------------------------
NOTE 8 - SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information."
The Company has operations in four segments of its business, namely: Vessel
Operations, Geophysical Services, Infrastructure and Corporate Administration.
The vessel operations, infrastructure and geophysical services are located in
the Republic of Kazakhstan. The administration operations are located in the
United States of America. Further information regarding the operations and
assets of these reportable business segments follows:
For the nine months
ended June 30, 2006 Vessel Operations Geophysical Services Infrastructure Corporate Administration Total
------------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 7,187 $ 19,522 $ 852 $ - $ 27,548
Intersegment revenues - 92 14 - 106
Depreciation and amortization 664 1,213 103 3 1,983
Interest expense 30 212 9 - 251
Income from equity method investee - (28) - - (28)
Provision for income tax - 2,969 - - 2,969
Minority interest - 609 (45) - 564
Segment income (loss) (3,900) 1,736 (256) (405) (3,124)
Segment assets 17,015 26,283 10,110 30,819 84,227
Investments in equity method
investees - - - - -
11
For the nine months
ended June 30, 2005 Vessel Operations Geophysical Services Infrastructure Corporate Administration Total
------------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 5,431 $ 7,320 $ 738 $ - $ 13,489
Intersegment revenues - - - 120 120
Depreciation and amortization 675 252 113 2 1,042
Interest expense 484 232 3 (8) 711
Income from equity
method investee (33) 123 - - 90
Provision for income tax (332) 633 - - 301
Minority interest - - (48) - (48)
Segment income (loss) (1,650) 1,780 (83) (424) (377)
Segment assets 16,579 13,558 2,561 25,269 57,967
Investments in equity
method investees - 3,016 - - 3,016
For the three months
ended June 30, 2006 Vessel Operations Geophysical Services Infrastructure Corporate Administration Total
------------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,112 $ 6,819 $ 303 $ - $ 10,234
Intersegment revenues - 92 7 - 99
Depreciation and amortization 266 447 33 1 747
Interest expense 15 91 3 - 109
Income from equity
method investee - (108) - - (108)
Provision for income tax - 836 - - 836
Minority interest - (194) (11) - (205)
Segment income (loss) (2,187) 934 (124) (216) (1,593)
Segment assets 17,015 26,283 10,110 30,819 84,227
Investments in equity
method investees - - - - -
12
For the three months
ended June 30, 2005 Vessel Operations Geophysical Services Infrastructure Corporate Administration Total
------------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,417 $ 4,961 $ 296 $ - $ 7,674
Intersegment revenues - - - - -
Depreciation and amortization 409 91 26 1 527
Interest expense - 54 2 - 56
Income from equity
method investee - 63 - - 63
Provision for income tax (14) 183 - - 169
Minority interest - - 9 - 9
Segment income (loss) 49 2,096 (10) (296) 1,839
Segment assets 16,579 13,558 2,561 25,269 57,967
Investments in equity
method investees - 3,016 - - 3,016
13
Consolidated Revenues
For the nine months ended June 30, 2006 2005
---------------------------------------------------------------------------------------------------------------
Total revenues for reportable segments $ 27,654 $ 13,609
Elimination of intersegment revenues (107) (120)
---------------------------------------------------------------------------------------------------------------
Consolidated Revenues $ 27,547 $ 13,489
---------------------------------------------------------------------------------------------------------------
Consolidated Total Assets
June 30, 2006 2005
---------------------------------------------------------------------------------------------------------------
Total assets for reportable segments $ 84,227 $ 57,967
Elimination of intersegment assets (30,716) (20,989)
---------------------------------------------------------------------------------------------------------------
Consolidated Total Assets $ 53,510 $ 36,978
---------------------------------------------------------------------------------------------------------------
Consolidated Revenues
For the three months ended June 30, 2006 2005
---------------------------------------------------------------------------------------------------------------
Total revenues for reportable segments $ 10,333 $ 7,674
Elimination of intersegment revenues (99) -
---------------------------------------------------------------------------------------------------------------
Consolidated Revenues $ 10,234 $ 7,674
---------------------------------------------------------------------------------------------------------------
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All dollar amounts stated in this Item 2 are presented in thousands,
unless stated otherwise.
Recent Developments
In April we completed a private placement of Units raising $8,000. The
Units offered in the private placement consisted of two shares of restricted
common stock and a warrant to purchase an additional share of common stock at an
exercise price of $5.00. The warrant contained in each Unit is immediately
exercisable and has a three-year term. The price per Unit was $8.00. The funds
raised in the offering will be used to fund development of our marine base and
to acquire vessels and seismic equipment.
On April 28, 2006 the Environmental and Social Impact Assessment
submitted by the Company in connection with its preliminary design for its
marine base was awarded final approval by the Ministry of Environmental
Protection of the Republic of Kazakhstan. We are now proceeding with the final
design of the marine elements of the construction project and tender packages
have been issued. We anticipate construction to commence in October 2006, with
final completion and hand-over in April 2008. This schedule is dependant upon
receipt of approval for the main project financing packages, which we believe
will occur in September 2006.
During June the fleet associated with the State Geophysical Survey of
the Republic of Kazakhstan came on charter in preparation for mid-August
commencement target of the seismic acquisition program.
In June we sold one of our shallow draft landing craft supply vessels,
the Caspian Yelena. We purchased the vessel in September 2001. In October 2004
the vessel completed a three-year charter with Agip KCO. Since that time,
utilization of the Caspian Yelena has been marginal owing to the vessel's
maneuverability characteristics. The vessel was purchased for $2,375 and sold
for $1,868 less agents' fees.
Business Review
During the third fiscal quarter of 2006, we operated four business
segments: Vessel Operations, Geophysical Services, Infrastructure Development
and Corporate Administration. The following discussion and analysis of results
of operations should be read in conjunction with the Condensed Consolidated
Financial Statements and notes thereto.
15
(Stated in thousands)
----------------------------------------------------------------------------------------------------------
Third Quarter Nine Months
------------- -----------
% %
2006 2005 Change 2006 2005 Change
---- ---- ------ ---- ---- ------
VESSEL OPERATIONS
Operating Revenue $ 3,112 $ 2,417 29% $ 7,187 $ 5,431 32%
Pretax Operating Income/(Loss)(1) $ (2,187) $ 35 6,348% $(4,199) $ (1,978) 112%
GEOPHYSICAL SERVICES
Operating Revenue $ 6,819 $ 4,961 37% $19,522 $ 7,320 167%
Pretax Operating Income/(Loss)(1) $ 1,576 $ 2,279 31% $ 5,314 $ 2,412 120%
INFRASTUCTURE DEVELOPMENT
Operating Revenue $ 303 $ 296 2% $ 838 $ 738 14%
Pretax Operating Income/(Loss)(1) $ (136) $ (1) 13,462% $ (302) $ (131) 130%
CORPORATE ADMINISTRATION
Operating Revenue $ - $ - n/a $ - $ - n/a
Pretax Operating Income/(Loss)(1) $ (217) $ (296) 27% $ (405) $ (424) 5%
--------
1 Pretax operating income/(loss) represents income before taxes and minority
interest.
16
Three months ended June 30, 2006 compared to the three months ended June 30,
2005
Revenue
Total revenue during the three months ended June 30, 2006 was $10,235
compared to $7,674 during the three months ended June 30, 2005, an increase of
33%. Total operating expenses increased by $5,448 or 97% to $11,055 in the three
months ended June 30, 2006 compared to the same period ended June 30, 2005.
During the third fiscal quarter 2006 we realized a loss from operations of $820
compared to income from operations of $2,067 during the third fiscal quarter of
2005. Net loss during the three months ended June 30, 2006 was $1,593 compared
to net income of $ 1,839 during the same period 2005.
Revenue from vessel operations of $3,112 during the third fiscal
quarter 2006 increased 29% compared to the third fiscal quarter 2005. Vessel
revenue less vessel operating costs during the quarter ended June 30, 2006 was
($555) compared to $860 during the quarter ended June 30, 2005.
During the three months ended June 30, 2006 revenue from geophysical
services was $6,819 an increase in revenue of 37% compared to the three months
ended June 30, 2005. Geophysical services revenue less costs of providing
geophysical services during the three months ended June 30, 2006 was $3,577
compared to $3,048 during the three months ended June 30, 2005.
Infrastructure revenue of $303 increased 2% year-on-year. Revenue from
Infrastructure less costs of product sold was $16 during the quarter ended June
30, 2006 compared to $124 during the quarter ended June 30, 2005.
The corporate administration segment of our business refers primarily
to the administration of our corporate affairs in Kazakhstan and the United
States and may include executive officer compensation and marketing, accounting
and legal services provided by that segment to the other segments of our
operations. Corporate Administration generated a pretax operating loss of $217
during the third fiscal quarter 2006 compared to $296 during the third fiscal
quarter 2005.
Vessel Operations
As discussed above, third fiscal quarter revenue from vessel operations
of $3,112 increased 29% year-on-year. The increase in operating revenue in the
third fiscal quarter 2006 was primarily attributable to the fact that the Saipem
pipeline contract commenced in December 2005. Pursuant to this contract we
provide Saipem five vessels.
During the third fiscal quarter we realized a pretax operating loss of
$2,187 compared to pretax operating income of $35 during the third fiscal
quarter 2006 as vessel operating costs increased $2,110 or 136% compared to the
three months ended June 30, 2005. This increase is primarily the result of
increased vessel rental rates we pay to Rederij Waterweg. Of the eleven vessels
in our fleet, four are owned by Rederij Waterweg. Pursuant to our agreement with
Rederij Waterweg we pay them a day rate for the vessels they own. During the
three months ended June 30, 2006, vessel rental costs increased $595, which
accounted for 28% of the increase in our vessel operating costs compared to the
three months ended June 30, 2005, when we had only one Rederij Waterweg vessel
in our fleet. While it costs us more to operate the Rederij Waterweg vessels
than to operate our own vessels we are willing to operate these vessels at a
reduced profit margin to gain access to Rederij Waterweg's large fleet of
shallow draft vessels. This relationship makes it possible for us to provide
turnkey solutions to clients that require a variety of vessels.
In June 2006, we also chartered four laying vessels and a seismic
energy source vessel from Kazaskhcaspishelf, JSC, on a short-term basis to
satisfy the requirements of Veritas Caspian in connection with the fulfillment
the State Geophysical Survey of the Republic of Kazakhstan.
Other factors that have contributed to the increase in our vessel
operating costs during the third quarter of fiscal 2006 include the increased
size of our vessel fleet and increasing fuel costs in the Republic of
Kazakhstan. Fuel costs accounted for $116, or 6% of the increase in our vessel
operating costs. The structure of an increasing number of our vessel charters
require us to provide fuel for our vessels. These costs are then reimbursed to
us by the client. As a result of this change we may incur fuel expenses in one
quarter that may not be reimbursed to us until a subsequent quarter.
17
During the 2006 fiscal quarter we also realized less revenue than
anticipated as a result of delays in the operational start of one of our major
clients. This resulted in us receiving seasonal standby rates longer than
expected during the quarter. While the contract provides for a minimum number of
operating days over the two-year term of the contract, the delay has caused a
shift in revenues to later quarters, resulting in less operational revenue
during the three months ended June 30, 2006.
As of the date of this report all eleven vessels we operate are under
charter. Nine of the eleven vessels are under long-term charter until the end of
the 2007 work season. The other two vessels, the Caspian Dinara, an
accommodation vessel,, and the Caspian Maria, a multi-purpose utility vessel,
are on charter through the end of this current work season. We are in
negotiations for follow on work with another party to charter these vessels. As
a result of increasing demand and a scarcity of suitable vessels, charter rates
in general in the region are escalating. In some instances we have been able to
negotiate rate increase of up to 30%.
Geophysical Services
We did not acquire a controlling interest in Kazmorgeophysica until the
beginning of the current fiscal year. Therefore, we were unable to consolidate
the results of Kazmorgeophysica operations into our financial statements during
the 2005 fiscal year. Therefore, the comparison of the results of our
geophysical operations in 2006 and 2005 may be of limited benefit.
Revenue from Geophysical Services and costs of geophysical revenue
increased 37% and 69% respectively during the three months ended June 30, 2006
compared to the three months ended June 30, 2005. These increases are the result
of several factors.
With the acquisition of the controlling interest in Kazmorgeophysica in
the current fiscal year, we are able to consolidate the financial results of
Kazmorgeophysica in the current fiscal quarter. Kazmorgeophysica realized
revenue of $2,643 during the third fiscal quarter 2006. We were unable to
consolidate the financial results of Kazmorgeophysica during the third quarter
2005.
As a result of new contracts, TatArka's business grew in the third
fiscal quarter 2006 compared to the same fiscal quarter 2005. As TatArka's
business continues to mature and expand, we anticipate revenues to be more
consistent and less volatile.
With the anticipated increase in proprietary exploration activities in
the Caspian Sea region in 2006 and the rights of Veritas Caspian to conduct
non-proprietary surveys, we anticipate revenue and the costs of providing
geophysical services will continue to increase in upcoming quarters.
As of the date of this report the Veritas Caspian non-proprietary 2D
survey has completed the mobilization phase and is targeting acquisition
production to commence in mid August. The initial program will be 660 linear
kilometers over the highly prospective Chagala block.
18
Infrastructure
Revenue from Infrastructure, which was primarily attributable to water
desalinization, increased from $296 to $303, or by 2% during the three months
ended June 30, 2006 compared to the same three month period ended June 30, 2005.
During the three months ended June 30, 2006, however, costs related to
infrastructure increased 67% as a result of increased costs related to the
production of water, particularly increased payroll costs and costs of chemicals
and electricity. Exchange rate fluctuation also contributed to the increase in
cost of water production. Our water production costs are fixed in Kazakh Tenge.
During the quarter the U.S. Dollar weakened against the Kazakh Tenge.
Corporate Administration
During the quarter ended June 30, 2006 net loss from corporate
administration was $216 compared to $296 during the quarter ended June 30, 2005.
This decrease in net loss is mainly attributable to decreased compensation and
travel expenses incurred in connection with a private placement of our equity
securities in the 2005 fiscal quarter. Corporate administration realized no
intersegment revenue during the third fiscal quarter of 2006 and 2005,
respectively.
Consolidated Results
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $1,673, or
116%, for the quarter ended June 30, 2006, compared to the same period ended
June 30, 2005. The primary contributing factors to the increase in general and
administrative expense were consolidation of Kazmorgeophysica and increased VAT
expense incurred in TatArka. These increases were partially offset by a decrease
in marketing expenses. We expect general and administrative expenses will
increase in upcoming quarters as a result of hiring additional officers and
administrative personnel.
Depreciation
Depreciation expense increased by $220 or 42% to $747 during the third
fiscal quarter 2006 compared to the same quarter 2005. This increase in
depreciation is primarily attributable to the consolidation of Kazmorgeophysica
and the acquisition of seismic equipment by Tatarka and a new vessel acquired by
Caspian during the first quarter 2006, which was put into operations in the
third quarter. We expect depreciation expense will continue at higher rates in
the current fiscal year as compared to the 2005 fiscal year.
Interest Expense
Interest expense increased from $56 during the third quarter 2005 to
$109 during the third quarter 2006. During March and April 2006 TatArka borrowed
$2,580 from a local bank. The increase in interest expense is the result of the
increased debt load we carried during the three months ended June 30, 2006
19
compared to the three months ended June 30, 2005. We expect interest expense to
decrease until such time as we borrow additional funds for real estate
development, which we anticipate will occur after the end of our 2006 fiscal
year.
Nine months ended June 30, 2006 compared to the nine months ended June 30, 2005
Revenue
Total revenue during the nine months ended June 30, 2006 was $27,548
compared to $13,489 during the nine months ended June 30, 2005, an increase of
104%. Total operating expenses increased by $13,990 or 107% to $27,013 in the
nine months ended June 30, 2006 compared to the same period ended June 30, 2005.
During the nine month period ended June 30, 2006, we realized income from
operations of $535 compared to income from operations during the same period
2005 of $466. Net loss during the nine months ended June 30, 2006 was $3,124
compared to a net loss during the same period 2005 of $377.
Income taxes are the significant contributing factor to our realization
of a net loss during the nine months ended June 30, 2006. Income tax of $1,871
was accrued in TatArka and Kazmorgeophysica based on profit generated in the
nine months ended June 30, 2006. Deferred income tax expense was estimated for
TatArka and Kazmorgeophysica in the amount of $1,098. This resulted in total
income tax, including current and future income tax accrued, in these two
entities of $2,969.
Revenue from vessel operations of $7,187 during the nine months ended
June 30, 2006 increased 32% compared to the nine months ended June 30, 2005.
Vessel revenue less vessel operating costs during the nine month period ended
June 30, 2006 was ($846) compared to $1,006 during the nine months ended June
30, 2005.
During the nine months ended June 30, 2006 revenue from geophysical
services was $19,522, with revenues less cost of revenues totaling $10,550. By
comparison, during the nine months ended June 30, 2005 revenues from geophysical
services was $7,320 and revenues less cost of revenues equaled $4,487.
Water Desalinization revenue of $838 increased 14% year-on-year.
Revenue from water desalinization less cost of product sold was $362 during the
nine months ended June 30, 2006 compared to $326 during the nine months ended
June 30, 2005.
The corporate administration segment of our business refers primarily
to the administration of our affairs in the United States and includes marketing
services provided by that segment to the other segments of our operations.
Corporate Administration generated a pretax operating loss of $405 during the
nine months ended June 30, 2006, which represents a 5% decrease in pretax
operating loss compared to the nine months ended June 30, 2005.
Vessel Operations
As discussed above, revenue for the nine months ended June 30, 2006
increased 32% year-on-year, primarily as a result of the commencement of the
Saipem, Agip and Veritas Caspian contracts.
20
Vessel operating costs during the nine months ended June 30, 2006 were
$8,033 compared to $4,425 during the nine months ended June 30, 2005. Pretax
operating loss of $4,199 during the nine months ended June 30, 2006, was 112%
greater compared to the nine months ended June 30, 2005. As discussed above,
these increases in vessel operating costs and pretax operating loss were
primarily attributable to the increased size of our fleet, the increase in the
number of vessels we operate under our agreement with Rederij Waterweg,
increasing fuel costs and the cost of transporting, crewing and maintenance of
our landing craft vessel, Caspian Yelena, awaiting sale in the United Arab
Emirates. During the nine months ended June 30, 2006, we also incurred
approximately $100 in vessel certification costs to certify our vessels with ISM
and ISPS. We did not incur similar expenses during the nine months ended June
30, 2005.
One of our major clients delayed the operational start of their project
which resulted in lengthened seasonal standby this year. While the contract
provides for a minimum number of operating days over the two year term of the
contract, the delay has caused a shift in revenues to later quarters, resulting
in less operational revenue during the first nine months of fiscal 2006.
Owing to the seasonal nature of vessel operations in the NE Caspian,
July through to October is typically the best performing period of the year. We
expect significantly increased earnings during the fourth quarter.
Geophysical Services
As we did not acquire a controlling interest in Kazmorgeophysica until
the beginning of the current fiscal year, we were unable to consolidate the
results of Kazmorgeophysica operations into our financial statements during the
2005 fiscal year. It is important to keep this in mind when comparing the
results of our geophysical operations from fiscal 2005 to fiscal 2006. During
the nine months ended June 30, 2006, we realized revenue from geophysical
services of $19,522 and costs of geophysical revenues of $8,972. By comparison,
during the nine months ended June 30 2005, we realized revenue from geophysical
services of $7,320 and costs of geophysical revenues of $2,833.
During the nine months ended June 30, 2006 we realized pretax operating
income of $5,314 or 120% increase compared to the nine months ended June 30,
2005.
Like our vessel operations, our ability to provide seismic data
acquisition services is directly impacted by weather conditions in the Caspian
Sea region. During the current fiscal year TatArka and Kazmorgeophysica have
also been expanding their service area to enable them to provide services in
areas of the Caspian Sea that do not freeze over in the winter. We anticipate
this will lengthen the work seasons for TatArka and Kazmorgeophysica.
Water Desalinization
Revenue from water desalinization increased 14% while costs increased
16% during the first nine months quarter of 2005 compared to the first quarter
of 2004. The increase in revenues is the result of increased demand for water
arising from increased activity in the port of Bautino. We anticipate revenue
from water sales will continue at a higher rate in 2006 as compared to 2005.
21
Corporate Administration
During the nine months ended June 30, 2006 net loss from corporate
administration was $405 compared to $424 during the same period of 2005. This
decrease in net loss is attributable to a reduction in travel and entertainment
expenses during the nine months ended June 30, 2006. Corporate administration
realized intersegment revenue of $0 and $120 during the nine months ended June
30, 2006 or 2005.
Consolidated Results
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $3,237, or
75%, for the nine months ended June 30, 2006, compared to the same period ended
June 30, 2005. The primary contributing factors to the increase in general and
administrative expense were the consolidation of Kazmorgeophysica, increased VAT
expense incurred in TatArka, which was partially offset by decreased marketing
expenses. We expect general and administrative expenses will increase in
upcoming quarters as a result of hiring additional officers and administrative
personnel.
Depreciation
Depreciation expense increased by $941 or 90% to $1,983 during the nine
months ended June 30, 2006 compared to the same period 2005. This increase in
depreciation is primarily attributable to the consolidation of Kazmorgeophysica
and the acquisition of seismic equipment by TatArka, and a new vessel acquired
by Caspian during the first quarter 2006 and involved into operating activity in
the third quarter. We expect depreciation expense will continue at higher rates
in the current fiscal year as compared to the 2005 fiscal year.
Interest Expense
Interest expense decreased from $711 to $251 in nine months ended June
30, 2006, compared to the first nine months ended June 30, 2005. The decrease in
interest expense is the result of the decreased debt load we carried during the
nine months ended June 30, 2006 compared to the nine months ended June 30, 2005.
We expect interest expense to remain fairly constant or decrease until such time
as we borrow additional funds for real estate development, which we anticipate
will occur after the end of our 2006 fiscal year.
Cash Flow
Typically, due to the seasonal nature of our operations, we realize
diminishing cash flow during the first fiscal quarter and limited cash flow
during our second fiscal quarter. Due to weather conditions in the north Caspian
Sea where we conduct our operations, exploration and production activities
22
typically terminate in November and do not begin again until late March. As a
result, we realize our greatest revenues from operations during our third and
fourth fiscal quarters, with decreasing revenues in the first fiscal quarter.
The following table provides an overview of our cash flow during the
nine months ended June 30, 2006 and 2005.
Period ended June 30,
2006 2005
----------- ---------
Net cash used in operating activities $(9,095) $ (4,985)
Net cash used in investing activities (923) (5,018)
Net cash provided by financing activities 10,340 10,460
Effect of exchange rate changes on cash 362 73
------- --------
Net Change in Cash $ 683 $ 530
======= ========
During the nine months ended June 30, 2006, net cash used in operating
activities was $9,095. This increase in net cash used in operating activities is
the result of several factors. During the current fiscal year we used cash from
operating activities to pay compensation increased due to hire of new officers,
tax liabilities and repay debts to suppliers.
During the nine months ended June 30, 2006, net cash used in investing
activities was $923, compared to $5,018 during the nine months ended June 30,
2005. During the current fiscal year, cash has primarily been used to acquire
equipment and marine base design. Proceeds of $1,868 were received from the sale
of Caspian Yelena to an unrelated third party.
Net cash provided by financing activities during the nine months ended
June 30, 2006 was $10,340. This consisted primarily of $7,922 raised through the
sale of our common stock and $5,229 from the issuance of debt, which was
partially offset by principal payments on notes payables.
Summary of Material Contractual Commitments
(Stated in thousands)
-----------------------------------------------------------------------------------------------------
Payment Period
--------------------------------------------------------
Contractual Commitments Less than After
Total 1 year 2-3 years 4-5 years 5 years
Long-Term Debt $ 1,936 $ 517 $1,419 $ - $ -
Operating Leases 435 435 - - -
Long-Term Debt - Related Party 517 517 - - -
23
Financing
During the nine months TatArka borrowed $5,080 and repaid $3,200 from a
local bank and Bauta borrowed $56 and repaid $57.
During the second quarter 2006 we commenced a private placement of our
equity securities, which was concluded in April 2006. Total cash received was
$8,000 less offering cost.
Off-Balance Sheet Financing Arrangements
As of June 30, 2006 we had no off-balance sheet financing arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting
standards generally accepted in the United States requires management to make
estimates and assumptions that affect both the recorded values of assets and
liabilities at the date of the financial statements and the revenues recognized
and expenses incurred during the reporting period. Our estimates and assumptions
affect its recognition of deferred expenses, bad debts, income taxes, the
carrying value of its long-lived assets and its provision for certain
contingencies. We evaluate the reasonableness of these estimates and assumptions
continually based on a combination of historical information and other
information that comes to its attention that may vary its outlook for the
future. Actual results may differ from these estimates under different
assumptions.
We suggest that our Summary of Significant Accounting Policies, as
described in Note 1 of Notes to Consolidated Financial Statements, be read in
conjunction with this Management's Discussion and Analysis of Financial
Condition and Results of Operations. We believe the critical accounting policies
that most impact our consolidated financial statements are described below.
Revenue Recognition -- Vessel revenues are derived from time charter
contracts of its vessels on a rate-per-day of service basis; therefore, vessel
revenues are recognized on a daily basis throughout the contract period. These
time charter contracts are generally on a term basis, ranging from three months
to three years. The base rate of hire for a contract is generally a fixed rate,
provided, however, that term contracts often include clauses to recover specific
additional costs, and mobilization and demobilization costs.
Geophysical service revenue is recognized when services are rendered
and collectibility is reasonably assured. Certain revenues are recognized on a
time and materials basis, or on a percentage of completion basis, depending on
the contract, as services are provided. Revenue from time and material service
contracts is recognized as the services are provided. Revenue from fixed price
contracts lasting longer than one year is recognized over the contract term
based on the percentage of the cost of services provided during the period
compared to the total estimated cost of services to be provided over the entire
contract. Losses on contracts are recognized during the period in which the loss
first becomes probable and reasonably estimated.
24
Product sales revenue is recorded upon delivery or shipment of bulk or
bottled water to the customer.
Receivables-- In the normal course of business, the company extends
credit to its customers on a short-term basis. Our principal customers are major
oil and natural gas exploration, development and production companies. Although
credit risks associated with our customers are considered minimal, the company
routinely reviews its accounts receivable balances and makes adequate provisions
for doubtful accounts.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
-- Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount that the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
At September 30, 2005, we reviewed our long-lived assets as disclosed above and
determined no impairment was necessary.
Income Taxes -- Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences in the balances of
existing assets and liabilities on our financial statements and their respective
tax bases and attributable to operating loss carry forwards. Deferred taxes are
computed at the enacted tax rates for the periods when such amounts are expected
to be realized or settled. Because of differences which result in calculation of
income under accounting principles generally accepted in the United States of
America, and income calculated under Kazakh income tax regulations it is
possible for operations to result in local taxable income while reflecting
operating losses in the accompanying consolidated financial statements.
Drydocking Costs -- Caspian's vessels must be periodically drydocked
and pass certain inspections to maintain their operating classification, as
mandated by certain maritime regulations. Costs incurred to drydock the vessels
for certification are deferred and amortized over the period to the next
certification drydocking, generally 54 to 60 months. Drydocking costs are
comprised of painting the vessel hull and sides, recoating cargo and fuel tanks,
and performing other engine and equipment maintenance activities to bring the
vessels into compliance with classification standards.
Effects of Inflation
Day-to-day operating costs are generally affected by inflation.
However, because the energy services industry requires specialized goods and
services, general economic inflationary trends may not affect our operating
costs. The major impact on operating costs is the level of offshore exploration,
development and production spending by energy exploration and production
companies. As spending increases, prices of goods and services used by the
energy industry and the energy services industry will increase. Future increases
in vessel day rates may shield us from the inflationary effects on operating
costs.
25
Forward Looking Information and Cautionary Statement
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we note that certain statements set forth in this
Quarterly Report on Form 10-QSB which provide other than historical information
and which are forward looking, involve risks and uncertainties that may impact
our actual results of operations. We face a number of risks and uncertainties,
many of which are beyond our control, including: fluctuations in oil and gas
prices; level of fleet additions by competitors; changes in capital spending by
customers in the energy industry for exploration, development and production;
unsettled political conditions, civil unrest and governmental actions; foreign
currency fluctuations; and environmental and labor laws. Readers should consider
all of these risk factors as well as other information contained in this report.
Readers should also consider that the operating season for our vessels is
dependent upon weather conditions in the north Caspian Sea. Drilling and
exploration activities in that region typically commence in late March or early
April and continue through late October or early November. Therefore, our
vessels are typically inactive from November to March and demand for water and
onshore accommodations also decreases significantly as exploration activities
during this time are limited.
Forward-looking statements are predictions and not guarantees of future
performance or events. The forward-looking statements are based on current
industry, financial and economic information, which we have assessed but which
by its nature is dynamic and subject to rapid and possibly abrupt changes. Our
actual results could differ materially from those stated or implied by such
forward-looking statements due to risks and uncertainties associated with our
business.
The information contained in this analysis should be read in
conjunction with the condensed consolidated financial statements contained
herein and related disclosures.
Item 3. Controls and Procedures
Our principal executive officers and our principal financial officer
(the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e). Such officers have concluded (based upon their evaluations of
these controls and procedures as of the end of the period covered by this
report) that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by it in this report is accumulated and
communicated to management, including the Certifying Officers as appropriate, to
allow timely decisions regarding required disclosure.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls over financial reporting or other
factors that could significantly affect such controls subsequent to the date of
their evaluation, and there were no significant deficiencies and material
weaknesses.
26
Management, including our Certifying Officers, does not expect that our
disclosure controls or its internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls is also based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and may not be detected.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities
No instruments defining the rights of the holders of any class of
registered securities were materially modified, limited or qualified during the
quarter ended June 30, 2006.
On February 8, 2006, we agreed to engage in a private placement of our
securities in exchange for $8,000,000 to fund our operations. This agreement was
made subject to us performing due diligence to determine whether it was in our
interest to engage in a larger public offering to raise more than $8,000,000. It
was agreed that we would offer Units consisting of two shares of restricted
Company common stock and a warrant to purchase an additional share of common
stock for $5.00 per share for a price of $8.00 per Unit.
Based on our due diligence investigation, on April 10, 2006, we
determined that we would not seek to engage in a larger private offering. On
April 10, 2006, we accepted the subscription agreements of three parties for an
aggregate of 1,000,000 Units and total proceeds of $8,000,000 and closed the
private offering. Firebird Global Master Fund, Ltd., purchased 625,000 Units,
Firebird Avrora Fund, Ltd., purchased 250,000 Units and Firebird Republics Fund,
Ltd., purchased 125,000 Units. Each of these Firebird funds was a shareholder of
the Company prior to this private placement. As of March 31, 2006, we had
collected $5,000,000 with a subscription receivable for $3,000,000.
Mr. James Passin, a Company director, is also a manager of FGS
Advisors, LLC. FGS Advisors LLC acts as investment adviser to the Firebird
Global Master Fund, Ltd. In his capacity as a manager of FGS Advisors, LLC, Mr.
Passin may be deemed to have shared control with respect to the securities owned
by Firebird Global Master Fund, Ltd. Firebird Avrora Advisors, LLC acts as
investment advisor to Firebird Avrora Fund, Ltd., and Firebird Management, LLC
27
acts as investment adviser to Firebird Republics Fund, Ltd. As investment
advisers to Firebird Avrora Fund, Ltd., Firebird Global Master Fund, Ltd. and
Firebird Republics Fund, Ltd. , each of Firebird Avrora Advisors, LLC, FGS
Advisors, LLC and Firebird Management, LLC have voting and investment control
over the securities held by their respective advised Fund. Firebird Avrora
Advisors, LLC, FGS Advisors, LLC and Firebird Management, LLC are investment
advisers under common control.
From the total proceeds of $8,000,000 offering expenses of $100,000
were deducted. Offering expenses include such item as legal and accounting
costs. None of these expenses were paid directly or indirectly to any officer,
director or greater than 10% shareholder of the Company.
The warrant contained in each Unit is immediately exercisable and has a
three year term. The warrants are callable by us at any time that the closing
sales price of our common stock, as traded on the most senior exchange or
quotation medium where our common shares are quoted, equals or exceeds $10.00
for a period of at least five consecutive trading days. Following a 30 day
written notice period to the warrant holder, we may redeem any or all of the
then outstanding warrants. The redemption price of the warrants under the call
provision is $0.001 per share.
Investors in this private placement were granted the right to request
that we file a registration statement on their behalf registering for resale the
shares they purchased in this private placement. The Registration Rights
Agreement, a copy of which was filed as an exhibit to the Current Report on Form
8-K filed by the Company on April 13, 2006, requires that at least 51% of the
shares purchased in this private placement request registration before we must
undertake efforts to register the shares for resale. The investors in this
private placement may not request registration for at least 90 days from the
closing of the private placement.
The securities were offered and sold without registration under the
Securities Act of 1933 in reliance upon the exemption from registration pursuant
to Regulation S of the rules and regulations promulgated by the Securities and
Exchange Commission under the Securities Act of 1933. All offers and sales were
made to non-U.S. persons in offshore transactions. No directed selling efforts
were made in the United State by the issuer or any person acting on their
behalf. The shares sold are subject to the offering restrictions set forth in
Rule 903(b)(3), including a one-year distribution compliance period.
Item 6. Exhibits
Exhibits. The following exhibits are included as part of this report:
Exhibit 31.1 Certification of Principal Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Principal Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Principal Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this to be signed on its behalf by the undersigned
thereunto duly authorized.
CASPIAN SERVICES, INC.
August 14, 2006 /s/ Laird Garrard
-----------------------
Laird Garrard,
Chief Executive Officer
August 14, 2006 /s/ Maksuda Sunnatova
-----------------------
Maksuda Sunnatova,
Chief Financial Officer
28