UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2007

 

For the Transition Period From ________ to _________

 

Commission File Number 000-33215

 

CASPIAN SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

(801) 746-3700

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No x

 

As of August 10, 2007, the registrant had 50,492,061 shares of common stock, par value $0.001, issued and outstanding.

 

 

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CASPIAN SERVICES, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

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PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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See accompanying notes to the condensed consolidated financial statements.

 

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See accompanying notes to the condensed consolidated financial statements.

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

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 16, 2007. Operating results for the three and nine month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2007.

 

Corrected prior year financial statements — The Company identified certain prior year misstatements whose impact was not material, either individually or in aggregate, to the Company’s financial statements for the year ended September 30, 2006. The Company corrected the financial statements for the year ended September 30, 2006. The corrected balance sheet as of September 30, 2006 is included in these financial statements. The result was a decrease in net loss of $219 for the year ended September 30, 2006.

 

Foreign Currency Transactions — Caspian makes its principal investing and financing transactions in United States Dollars and the United States Dollar is therefore its functional currency. Transactions and balances denominated in other currencies have been translated into United States Dollars using historical exchange rates. Exchange gains and losses from holding foreign currencies and having liabilities payable in foreign currencies are included in the results of operations. The Kazakh Tenge is TatArka's, KMG's, Balykshi's and Bauta's functional currency. The effect of changes in exchange rates with respect to these subsidiaries are recognized as a separate component of accumulated other comprehensive income. The translation of Kazakh Tenge denominated assets and liabilities into United States Dollars for the purpose of these consolidated financial statements does not necessarily mean that the Company could realize or settle, in United States Dollars, the reported values of these assets and liabilities. Likewise it does not mean that the Company could return or distribute the reported United States Dollar value of its Kazakh subsidiaries capital to its shareholders.

 

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”), Caspian Services Group LLP (“Caspian LLP”), TatArka LLP (“TatArka”), Caspian Real Estate, Ltd (“CRE”), Caspian Geophysica, Ltd (“CGEO”), Balykshi LLP (“Balykshi”) and majority owned subsidiaries, CJSC Bauta, (“Bauta”) and Kazmorgeophysica CJSC (“KMG”), collectively (“Caspian” or the “Company”). KMG has a 50% non-controlling interest in Veritas Caspian LLP (“Veritas”) for which the investment is accounted by the equity method. Our initial investment in Veritas has been reduced to zero due to accumulated losses. Caspian had a non-controlling 50% interest in Bautino Development Company, LLC (“Bautino”) which was sold in March 2007. Our initial investments in Bautino have been reduced to zero due to accumulated losses. Intercompany balances and transactions have been eliminated in consolidation.

 

Nature of Operations — The Company provides seismic data acquisition 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; maintains a fleet of shallow draft vessels that it commissions to companies engaged in oil and gas development activities in the North Caspian Sea; provides other oilfield services such as desalinated water and is engaged in the development of a marine base located at the Port of Bautino.

 

Net Income Per Common Share - Basic and Diluted – Basic income per common share is calculated by dividing net income 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. The Company does not include any potentially issuable shares that are anti-dilutive.

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

At June 30, 2007, the Company had 1,000,000 warrants that have been excluded from the calculation of dilutive earnings per share as the exercise price of the warrants is in excess of the market value of the common stock. At June 30, 2006, the Company had 1,000,000 options outstanding that were not included in the computation of diluted net loss per common share as their effects would be anti-dilutive. The following data shows the amounts used in computing basic and diluted weighted-average number of shares outstanding at June 30, 2007 and 2006:

 

 

Stock-based Compensation Plans – Effective October 1, 2006, the Company adopted SFAS 123R, using the modified prospective method. SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). Prior to the adoption of SFAS 123R, the Company accounted for stock-based compensation plans under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). The Company adopted the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

 

For the three and nine months ended June 30, 2007, the Company recognized $8 and $24 of compensation expense related to stock options. For the three and nine months ended June 30, 2006, the Company recognized $9 and $14 of compensation expense related to stock options. At June 30, 2007 there was approximately $8 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of 0.25 years.

 

The Company granted no options during the nine months ended June 30, 2007. Information related to options outstanding at June 30, 2007 is as follows:

 

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

For options granted subsequent to the adoption date of SFAS 123R on October 1, 2006, the fair value of each stock option grant will be estimated on the date of grant using the Black-Scholes option pricing model.

 

Prior to October 1, 2006, the Company determined the value of stock-based compensation arrangements under the provisions of APB Opinion No. 25 “Accounting for Stock Issued to Employees” and made pro forma disclosures required under SFAS No. 123, “Accounting for Stock-Based Compensation.” Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed in FASB 123, the Company's net loss and net loss per share would have been adjusted to the pro forma amounts below for the three and nine months ended June 30, 2006.

 

 

Concentrations of Credit Risk — The Caspian Sea offshore operations are contracted primarily with Agip KCO and service providers to Agip KCO. Loss of these customers could have a material negative effect on the Company. Vessel charter services provided to these customers were under contract with varying terms and dates during 2006 and 2007. However, it is possible that a loss of business could occur in the short or long term. While Management expects to renew the contracts periodically, there is no assurance that these customers will renew, or will renew on terms favorable to the Company. The geophysical division has a more widespread portfolio of clients and does not have the same concentration of credit risk.

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade and other receivables. The Company manages its exposure to risk through ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts for potential losses and does not believe it is generally exposed to concentrations of credit risk that are likely to have a material adverse impact on the Company’s financial position or results of operations.

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

Reclassifications — Certain reclassifications have been made to the 2006 financial statements to conform to the current presentation. The reclassifications had no effect on net income.

 

NOTE 2 — DEVELOPMENT OF MARINE BASE

 

The Company continues with development plans for the marine base in Bautino Bay.  Construction is expected to commence in the fourth fiscal quarter 2007. The Company also expects the initial phase of the marine base facilities, including dredging, breakwater, wharf front and general site area to be completed and functional by May 2008 with final completion of the base occurring by May 2009.  Anticipated cost to construct the marine base is approximately $80,000.  The Company plans to achieve this funding through a combination of debt financing in the amount of $32,000, equity financing in the amount of $35,600 and $12,400 which has already been contributed by the Company for the land, initial feasibility studies and preliminary construction costs.

 

In December 2006, Balykshi LLP entered into a loan agreement with the European Bank for Reconstruction and Development (“EBRD”) in the amount of $24,000 and in June 2007 the first amendment to the loan agreement with EBRD was signed increasing the loan amount to $32,000. 

 

In June 2007 the Company also entered into an investment agreement with EBRD under which EBRD has agreed to make an equity investment in the marine base in the amount of $10,000 in exchange for a 22% equity interest in Balykshi LLP. 

 

The balance of $29,000 will be provided to Balykshi from the Company.  The Company raised these funds partially through a private placement of Units raising gross proceeds of $25,270 completed on July 31, 2007.

 

In February 2007 Balykshi entered into short-term loan agreement with Halyk Bank for $2,000. The loan bears interest at 12% and is due in August 2007. The purpose of the loan is to pay for marine base construction costs.

 

NOTE 3 – LONG-TERM DEBT

 

During the nine months ended June 30, 2007, TatArka borrowed an additional $915 from a local bank and repaid $1,650 on outstanding loans.  A non-collateralized note of $506 bearing interest at 14% per annum was repaid in January 2007. A non-collateralized note of $409 was issued bearing interest at 14% and repaid in July 2007.

 

In October 2006 TatArka borrowed $989 from a customer that was fully repaid in February 2007. The loan was non-interest bearing. The customer providing the financial assistance is not a related party to the Company.

 

In December 2006 Bauta repaid $26 of notes payable bearing interest at 18%. During the nine months ended June 30, 2007 Bauta borrowed an additional $26 at 18% interest per annum and repaid $4.

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

In February 2007 Balykshi borrowed $2,000 from a bank. The note is not collateralized and bears interest at 12%.

 

In April 2007 Kazmogeophysica borrowed $220 from a vendor that is to be repaid within 12 months no later than April 2008. The loan was non-interest bearing. The vendor providing the financial assistance is not a related party to the Company.

 

Long-term debt consists of the following:

 

 

NOTE 4 — STOCKHOLDERS’ EQUITY

 

At June 30, 2007 the Company had outstanding options to purchase 1,000,000 shares of common stock with an exercise price of $3.00, weighted average remaining term of 7.06 years and which have no intrinsic value. At June 30, 2007, 975,000 of these options were exercisable with weighted average remaining term of 7.18 years and have no intrinsic value. 100,000 of these options will expire in September 2009, 100,000 will expire in September 2010 and the balance will expire in August 2015.

 

At June 30, 2007 the Company had outstanding warrants to purchase 1,000,000 shares of common stock. The warrants have an exercise price of $5.00, expire in March 2009 and have no intrinsic value.

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

NOTE 5 — COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income (loss) for the nine months ended June 30, 2007 and 2006 was $3,332 and ($1,076), respectively. Accumulated other comprehensive income is included in stockholder’s equity and consists of the foreign currency translation adjustments.

 

NOTE 6 – OTHER INCOME

 

In January 2007, the Company entered into an agreement with the Chagala Group Limited, its joint venture partner in Bautino Development Company (“Bautino”) to sell its 50% interest in Bautino for $3,000. The sale of the hotel closed in March 2007.

 

The total gain from the sale was $3,000 as the initial investment of $96 was reduced to zero in previous years due to losses incurred by Bautino. The $3,000 gain is included in other income.

 

NOTE 7 — 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 of 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 remediated 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.

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

During the nine months ended June 30, 2007 and 2006, the Company paid entities which have owners in common $715 and $192, respectively, for corporate travel, car rental and visa support.

 

The Company paid an entity under common management, (KazakhstanCaspiShelf (“KCS”)), $3,074 and $0 during the nine months ended June 30, 2007 and 2006, respectively, for vessel rental. In this instance, the Company was acting as an intermediary between KCS and the KCS customer. The Company managed the contract, collected and forwarded revenues and was paid a commission by the KCS customer. The Company also recognized $1,942 and $491 for geological, seismic services and data processing revenues during the same period from the same entity.

 

The Company recognized $6,069 and $514 of vessel revenue during the nine months ended June 30, 2007 and 2006, respectively from Veritas Caspian, a 50% joint venture of KMG.

 

Accounts receivable from related parties consist of the following:

 

 

Accounts payable due to related parties consist of the following:

 

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

 

NOTE 9 – 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, geophysical services and infrastructure 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:

 

 

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

 

 

 

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CASPIAN SERVICES, INC., AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007

(Dollars in thousands except share and per share data)

 

 

NOTE 10 – SUBSEQUENT EVENTS

On July 31, 2007, the Company completed a private placement offering of 2,807,775 units priced at $9.00 per unit for gross proceeds of $25,270. Each unit consisted of three shares of the Company’s common stock and a redeemable warrant to purchase an additional share of common stock for three years at a price of $4.00. The warrants expire in July 2010. The proceeds were allocated to the warrants based upon their fair value of $5,981 and resulted in $4,970 being allocated to the warrants and $20,300 allocated to the shares of common stock. The fair value of the warrants, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 4.55%, expected dividend yield of 0%, expected volatility of 134.33% and an expected life of 3 years.

 

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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.

 

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our Consolidated Financial Statements and the accompanying notes included in this Form 10-Q contain additional information that should be referred to when reviewing this material and this document should be read in conjunction with our Form 10-KSB for the year ended September 30, 2006.

 

Statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, including those discussed below, which could cause actual results to differ from those expressed.

 

Forward Looking Statements

 

Certain statements contained herein including, but not limited to those relating to our negotiations for future charters and work contracts including future potential revenue, future expenses, changes in the composition of our vessel fleet, future growth of our vessel fleet, plans for development of the marine base, our ability to obtain future governmental approvals, expansion of our operations, future equipment acquisitions, our ability to generate additional work, future demand for oil and gas, future commodity price environment, forecasts of the quantity and recoverability of oil and gas reserves in the Kazakhstan sector of the Caspian Sea, managing our asset base, integration of new technology into operations, credit facilities, future capital expenditures and working capital, sufficiency of future working capital, borrowings and capital resources and liquidity, projected cash flows from operations, expectations of timing, satisfaction of contingencies, the impact of any change in accounting policies on our financial statements, future acquisitions, management’s assessment of internal control over financial reporting, financial results, opportunities, growth, business plans and strategy and other statements that are not historical facts contained in this report are forward-looking statements. When used in this document, words like “believe,” “expect,” “project,” “intend,” “estimate,” “budget,” “plan,” “forecast,” “predict,” “may,” “will,” “could,” “should,” or “anticipates” and similar expressions or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy that involve risk and uncertainties. Such statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements or the industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, market factors, market prices (including regional basis differentials) of natural gas and oil, results for future drilling and marketing activity, future production and costs, unsettled political conditions, civil unrest and governmental actions, foreign currency fluctuations, and environmental and labor laws and other factors detailed herein. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements are based on current expectations, and we assume no obligation to update this information. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Recent Developments

 

We continue with development plans for the marine base in Bautino Bay.  Construction is expected to commence in the fourth fiscal quarter 2007. The anticipated cost to construct the marine base is approximately $80,000. We plan to achieve this funding through a combination of debt financing in the amount of $32,000, equity financing in the amount of $35,600 and $12,400 that we have already contributed for the land, initial feasibility studies and preliminary construction costs. If additional funds are required they will be provided from cash flow from our operations.

 

In June 2007, our subsidiary Balykshi LLP entered into a first amendment to its loan agreement with the European Bank for Reconstruction and Development (“EBRD”) increasing the amount of the loan commitment by EBRD from $24,000 to $32,000. Also in June 2007 we entered into an investment agreement with EBRD, whereby EBRD agreed to acquire a 22% interest in Balykshi in exchange for a $10,000 equity investment in Balykshi. The funding of these agreements was contingent on our providing funding of approximately $29,810 to Balykshi.

 

On July 31, 2007, we completed a private placement of units of our securities that raised net proceeds to us of approximately $24,000. The purpose of the private placement was to raise money for the construction of the marine base. The completion of the private placement will allow us to meet our equity contribution requirement under the EBRD agreements. All of the conditions to commence the ground-breaking on the marine base have now been completed and ground-breaking on the marine base is expected to commence in fourth quarter 2007.

 

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We expect the initial phase of the marine base facilities, including dredging, breakwater, wharf front and general site area to be completed and functional by May 2008 with final completion of the base occurring by May 2009. 

 

Business Review

 

After the reduced activity of the winter season, where from November to April our vessels are usually not engaged in active operations, we experience significantly increased revenues in the third and fourth fiscal quarters, as the work season in the Caspian Sea reopens.

 

During the third fiscal quarter of 2007, we operated four business segments: Vessel Operations, Geophysical Services, Infrastructure 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.

 

(Stated in thousands)   

 

 

 

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  1 Pretax operating income (loss) represents income before taxes and minority interest

 

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Summary of Operations

 

Three months ended June 30, 2007 compared to the three months ended June 30, 2006

 

Total revenue during the three months ended June 30, 2007 was $15,108 compared to $10,234 during the three months ended June 30, 2006, an increase of 48%. Vessel revenue and operating margins improved because of growth in the fleet, increased charter rates and greater utilization. Geophysical services revenue improved because of several new short-term contracts we entered into at the beginning of 2007. Infrastructure revenue improved but, as a percentage of total revenues is less material to total revenue than vessel operations and geophysical services.

 

Total operating expenses increased by $2,645 or 24% to $13,699 in the three months ended June 30, 2007 compared to the same period ended June 30, 2006. This increase was due to two main factors: i) increased personnel and equipment costs associated with the expansion of the production capacity of our subsidiary TatArka; and ii) increased vessel repair and personnel costs resulting from the mobilization of two additional vessels into our fleet during the quarter the quarter ended June 30, 2007.

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During the third fiscal quarter 2007, income from operations was $1,409 compared to loss from operations during the third fiscal quarter of 2006 of $820. Net income during the three months ended June 30, 2007 rose to $520 compared to net loss of $1,593 during the same period of 2006. The significant improvement is primarily attributable to our having more vessels in operation at improved rates in 2007.

 

 

As discussed above, third fiscal quarter revenue from vessel operations of $6,843 increased 120% year-on-year.  This is explained by higher vessel utilization rates and more vessels being in active operations during the three months ended June 30, 2007 compared to the same quarter 2006. Also, revenue in the third quarter 2006 was lower because several vessels were on stand-by and started the season late. All of our vessels are contracted to the end of the current year, so we expect strong revenue.

 

During the three months ended June 30, 2007, vessel operating costs increased by $617, or 17%, compared to the three months ended June 30, 2006.  This was due to the fact that we brought in two additional vessels for a new contract with geophysical company RXT.   These vessels were provided to us under our existing agreement with Rederij Waterweg.  We pay a day rate to Rederij Waterweg for the vessels they own and that we operate.  Currently, six of the thirteen vessels in our fleet are owned by Rederij Waterweg.  While it costs us more to operate these vessels, we are willing to accept a reduced profit margin to gain access to Rederij

 

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Waterweg’s large fleet of shallow draft vessels.  This relationship makes it possible for us to meet demand without incurring the significant expense of purchasing additional vessels.   

 

The division realized a loss in the quarter due to the delayed commencement of vessel operations. These delays were caused by the client’s decision to start later or because the client experienced delays in receiving equipment from other suppliers. We also had some technical difficulties in the delivery of a new vessel. We were, however, able to mitigate the effect of some of these delays as the high demand in the area for vessels allowed us to contract a portion of these vessels onto other projects.  We have a minimum operational commitment under our contracts that will result in additional revenue at the end of the season.  All vessels are now under contract, which leaves us well positioned for a strong fourth quarter.

 

Geophysical Services

 

Revenue from geophysical services increased by $1,040 or 15% during the three months ended June 30, 2007 compared to the same three months period ended June 30, 2006. This improvement is due to several new short-term contracts obtained in 2007 at higher rates than we received during 2006.

 

Operating costs increased by $331 or 10% during the three months ended June 30, 2007 compared to the same period ended June 30, 2006. This is because we hired additional personnel and acquired additional equipment as we have increased the number of teams we have available for seismic operations.

 

With increased exploration activities in the Caspian Sea region in 2007, we expect revenues from geophysical services will be higher throughout the 2007 fiscal year as compared to the 2006 fiscal year.

 

 

Revenue from infrastructure, which was primarily attributable to sales of desalinized water, increased 34% during the three months ended June 30, 2007 compared to the same three month period ended June 30, 2006. Costs, as reported in this year’s results appear to have declined but this is the result of a different classification of accounts. During the three months ended June 30, 2007 costs related to infrastructure increased by 32% compared to the three months ended June 30, 2006. This was caused by higher volume and raw material costs. Improvement in revenue is the result of increased demand for water arising from more activity in the port of Bautino.

 

Much like our vessel operations, our water desalinization operations are seasonal. With the onset of the work season at the end of the second fiscal quarter, demand for our products, and correspondingly, revenue and costs of products sold increased in the third quarter. We expect further increases in demand for our products, revenue and costs of products sold during the fourth quarter of fiscal 2007. We do not, however, expect gross margin from water sales to improve significantly due to additional costs planned by Bauta to perform repairs and cleaning of the desalinization plant.

 

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Corporate Administration

 

During the quarter ended June 30, 2007 net loss from corporate administration was $235 compared to net loss $216 during the quarter ended June 30, 2006. The increase in net loss during the quarter ended June 30, 2007 is mainly attributable to increased travel and communication expenses.

 

Consolidated Results

 

 

General and administrative expense increased by $755, or 24%, for the quarter ended June 30, 2007, compared to the same period ended June 30, 2006. The increase in general and administrative expense is due to increased payroll and employee related costs as a result of the expansion of our work force to meet the anticipated expansion of our business operations. We believe we currently have sufficient staffing to meet our business needs and expect to add additional personnel only to the extent that we expand into new operations such as construction of the marine base.

 

 

Depreciation expense increased by $995 or 133% to $1,742 during the third fiscal quarter 2007 compared to the same quarter 2006. This increase in depreciation is primarily attributable to the purchase of additional seismic equipment by TatArka during 2006 and the new vessel, Caspian Raushan, acquired in September 2006. We plan additional investment in the production capacity of our vessel and seismic divisions in the current fiscal year, which should lead to higher depreciation expenses in upcoming fiscal quarters.

 

 

During the third fiscal quarter 2007 we realized an exchange loss of $35 compared to an exchange loss during the third fiscal quarter 2006 of $50. The change is due to fluctuations in the rate of the Kazakh Tenge to the US Dollar.

 

Income from Equity Method Investments

 

During the third fiscal quarter 2007 income from equity method investments was $0, compared to loss of $108 during the third fiscal quarter 2006. The loss realized in 2006 was primarily attributable to our interest in Ishymgeophysica, which was sold in June 2006.

 

Other

 

During the three months ended June 30, 2007 we incurred other expenses of $158 compared to other income during the three months ended June 30, 2006 of $125. That fluctuation is mainly attributable to more sales of inventory in 2006. We do not expect significant changes in upcoming quarters.

 

Provision for Income Tax

 

Provision for income taxes is discussed below in the analysis of the nine month periods ended June 30, 2007 and 2006.

 

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Nine months ended June 30, 2007 compared to the nine months ended June 30, 2006

 

Total revenue during the nine months ended June 30, 2007 was $40,021 compared to $27,547 during the nine months ended June 30, 2006, an increase of 45%. Revenue in each segment improved as compared to 2006, with geophysical services being noticeably stronger during the first fiscal quarter 2007.

 

Total operating expenses increased by $11,439 or 42% to $38,451 in the nine months ended June 30, 2007 compared to the same period ended June 30, 2006. The principal cause was the increased depreciation expenses due to additional equipment both in our geophysical and vessel divisions. Another factor that contributed to higher expenses was increased payroll costs, vessel repairs and the mobilization of two additional vessels to the Caspian Sea.

 

During the nine month period ended June 30, 2007, we realized income from operations of $1,570 compared to income from operations during the same period 2006 of $535. Net income during the nine months ended June 30, 2007 was $2,349 compared to a net loss during the same period 2006 of $3,124. The improvement is the result of the profit on the sale of our interest in Bautino for $3,000 and a general increase in the vessel operating rates. Excluding the sale of Bautino, which was a one-time occurrence, we would have realized a net loss of $651 during the nine months ended June 30, 2007.

 

 

Revenue from vessel operations for the nine months ended June 30, 2007 increased $7,347, or 102% year-on-year to $14,534. This was because more vessels were under charter, rates were higher and vessels were charged for a greater number of months.

 

During the nine months ended June 30, 2007, vessel operating costs were $10,737 compared to $8,033 during the nine months ended June 30, 2006. During the nine months ended June 30, 2007 vessel operating costs as a percentage of vessel revenues decreased to 74% from 112% during the nine months ended June 30, 2006. This decrease in operating costs as a percentage of revenues was largely the result of our successful negotiation of a 30% operational charter rate reduction with Rederij Waterweg which took effect in January 2007.

 

The increase in vessel operating costs is the result of several factors. First, vessel maintenance costs were higher because we had more vessels in drydock during the second and third quarters 2007. Second, a disproportionate percentage of our vessel operating costs are attributable to the vessels we operate under our agreement with Rederij Waterweg. These vessels operate at lower margins but do not tie up capital. Because of the growth of our fleet, and as a result of inflation, we also realized increases in operational costs and costs for general supplies, including consumables. As discussed above, while vessel operating costs were higher in the 2007 period, our gross margin from vessel operations still improved as a result of the reduction in the operational charter  rate we negotiated with Rederij Waterweg. We expect gross margin will similarly improve in the fourth quarter.

 

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During the nine months ended June 30, 2007 we experienced a significant increase in revenue from geophysical services, as revenue increased by $4,909 or 25% compared to the nine months of 2006. Geophysical revenues can be affected by large, high-value contracts as we experienced in the first fiscal quarter of the current fiscal year. The second quarter is traditionally slow but also took the impact of two contracts finishing at the same time, meaning both teams were inactive. KMG got off to a slow start in the third quarter because of weather conditions. Because of weather conditions and varying demand for services, geophysical services revenue will not always be smooth from quarter to quarter but the overall trend is one of growth.

 

As a result of increased demand for onshore seismic services in the region, and the addition of another crew and the purchase of additional equipment, TatArka performed more work during the nine months of 2007 than for the same period 2006.  TatArka’s revenue increased during the nine months 2007 compared to the nine months 2006 from $14,825 to $18,389.  The majority of this increase was due to the commencement of two large projects during our first quarter 2007 valued at $13,260. These contracts provided $6,500 dollars of revenue during our third fiscal quarter 2007.

 

With the anticipated increase in proprietary exploration activities in the Caspian Sea region in 2007 and the rights of Veritas Caspian to conduct non-proprietary surveys, we anticipate revenue from geophysical services will continue to increase throughout the remainder of our 2007 fiscal year.

 

TatArka was able to improve its gross margins during the nine months of fiscal 2007 by mobilizing a second crew and using its own employees and equipment to meet the increased demand for onshore seismic data acquisition services. By comparison, KMG did not have sufficient personnel and equipment to meet the increased demand for its services and was forced to hire subcontractors to fulfill some of its contracts. This resulted in an increase in geophysical costs of revenues in the nine months ended June 30, 2007 from $8,972 to $11,126. Despite this overall increase in geophysical costs during the nine months ended June 30, 2007, our gross margin of 54% during the nine months ended June 30, 2007 was the same compared to the nine months period of 2006.

 

With the anticipated exploration activities in the Caspian Sea region in 2007, we expect revenues from geophysical services will be higher throughout the 2007 fiscal year as compared to the 2006 fiscal year.

 

 

Revenue from water desalinization increased 26% while costs increased 40% during the nine months of 2007 compared to the same period of 2006. These increases in revenue and costs are the result of higher demand

 

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for water arising from increased activity in the port of Bautino. The decrease in gross margin from water sales is mainly attributable to increased cost of materials as we switched suppliers of plastic forms for water bottles to ensure timely delivery and increased utility costs due to higher tariffs in 2007.

 

With the anticipated increases in exploration and production activities in the region, we foresee increased revenue from water desalinization in 2007. However, we do not expect gross margin from water sales to improve significantly due to additional costs planned by Bauta to perform repairs and cleaning of the desalinization plant.

 

On January 16, 2007, we entered into an agreement with the Chagala Group Limited, our 50% joint venture partner in Bautino to sell our 50% interest in that for $3,000. The sale of the hotel closed in March 2007. The gain on the sale of our interest in Bautino is included in other income for the nine months at June 30, 2007. The sale price did not include repayment of a $1,100 construction loan made by the Company to Chagala Group Limited in 2003. This construction loan was fully repaid in May 2007.

 

 

During the nine months ended June 30, 2007 net loss from corporate administration was $475 compared to $405 during the same period of 2006. This increase in net loss is due to increased office rental cost, travel, communication costs and payroll expenses.

 

Consolidated Results

 

 

General and administrative expense increased by $3,443, or 46%, for the nine months ended June 30, 2007, compared to the same period ended June 30, 2006. A primary contributing factor to this increase in general and administrative expense is the overall growth of our business. This growth has required us to hire new personnel including key management. In July 2006 we also formed a new subsidiary, Caspian Services Group, LLP, and opened a branch office of that subsidiary in Aktau, Kazakhstan. This resulted in increases in office rent expenses, payroll and travel costs, all of which contributed to the increases in our general and administrative expenses. Our infrastructure is substantially complete and we anticipate it will only be increased as required by new operations. Therefore, we anticipate general and administrative expenses will remain more or less constant in upcoming quarters.

 

 

Depreciation expense increased by $2,948 or 149% to $4,931 during the nine months ended June 30, 2007 compared to the same period 2006. The large increase in depreciation was caused by two principal factors. First, and most significantly, we have made substantial investments in fixed assets. This was most notable in our

 

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geophysical division, where the addition of a second crew was matched by corresponding increases in equipment. Second, there was a reassessment of the realistic working life of assets acquired in our desalinization plant and this change was retroactively stated to the date of acquisition.

 

 

Interest expense decreased from $251 to $124 in nine months ended June 30, 2007, compared to the nine months ended June 30, 2006. The decrease in interest expense is the result of the decreased debt load we carried during the nine months ended June 30, 2007 compared to the nine months ended June 30, 2006. We expect interest expense will increase in future periods as we access funds under the loan agreement with EBRD for the construction of the marine base.

 

Income from Equity Method Investees

 

During the nine months ended June 30, 2007 we realized no income from equity method investees compared to $28 during the same period 2006. The income realized in 2006 was primarily attributable to our interest in Ishymgeophysica, which was sold in June 2006.

 

Other

 

During the nine months of fiscal 2007 we realized other income of $3,296 compared to $122 during the nine months of fiscal 2006. As discussed above this increase in other income is primarily attributable to the $3,000 gain we realized on the sale of our interest in Bautino. The residual balance of net income is mainly attributable to sale of materials by TatArka to KazakhstanCaspiShelf. The sale of our interest in Bautino was a one-time occurrence and we expect other income will return to more traditional levels in upcoming quarters.

 

Provision for Income Tax

 

During the nine months ended June 30, 2007 our provision for income tax increased by 5%. Our taxation charge of $3,119 during the nine months of fiscal 2007 appears high when compared to the profit of $4,955. The principle of group consolidation for tax purposes does not exist in Kazakhstan. This means that we pay tax on all profits realized by our subsidiaries, but we cannot offset the losses of other subsidiaries. These losses can only be carried forward in the same company. We estimate that this treatment has cost us approximately $1,300. There is also a smaller issue relating to non-deductible expenditures. We are examining how we may modify our corporate structure and/or procedures, with a view to reducing these charges.

 

 

 

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comparison during the nine months ended June 30, 2006, we realized a net loss of $3,124 or $0.08 per share. As discussed above, the reason for this significant change was the sale of our interest in Bautino, which resulted in the realization of a $3,000 gain. Excluding the gain from the sale of Bautino, our net loss and net loss per share during the nine months ended June 30, 2007 would have been $651 or $0.02 per share, respectively.

 

Cash Flow

 

We typically realize decreasing cash flows during our first fiscal quarter and limited cash flow during our second fiscal quarter as weather conditions in the north Caspian Sea region dictate when oil and gas exploration and development work can be undertaken. Usually, the work season commences in late March or early April and continues until the Caspian Sea ices over in November. As a result, other than TatArka, which can continue to provide some onshore geophysical services between November and March and the receipt of winter standby rates on vessels, we generate very little revenue from November to March each year. Cash flow from operating activities was lower during the third fiscal quarter 2006 than the same period 2007 because several vessels were on stand-by and started the 2006 work season late.

 

The following table provides an overview of our cash flow during the nine months ended June 30, 2007 and 2006.

 

 

 

 

In the first nine months of fiscal 2007 net cash provided by operating activities was $4,550, compared to net cash used in operating activities of $9,095 during the fiscal nine months 2006. During the nine months of fiscal 2007, cash flow from operating activities resulted from depreciation and amortization of equipment and drydocking costs of $4,931, a decrease in trade accounts receivable of $2,208, a decrease in accounts receivable from related parties of $1,905 and an increase in accounts payable and accrued expenses of $1,423. The changes in net cash provided by operating activities were only partially offset by a $3,445 decrease in deferred revenue, a $1,871 increase in prepaid expenses and other current assets, and $1,238 decrease in accounts payable to related parties.

 

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During the nine months ended June 30, 2007 we invested $8,973 in vessels and equipment. This included purchases of machinery and equipment for $3,737, vehicles and vessels for $2,655, other fixed assets for $345 and increased costs of Atash Marine base of $2,236. These purchases were only partially offset by proceeds from sale of property and equipment for $112.

 

Financing

 

Subsequent to the quarter ended June 30, 2007, on July 31, 2007 we completed the private placement of units raising gross proceeds of $25,269. Fees and out-of-pocket costs due to the placement agent were $1,139. We sold 2,807,775 units in the private placement at a price of $9.00 per unit. Each unit consisted of three shares of our restricted common stock and a warrant to purchase an additional share of our common stock for three years at a price of $4.00.

 

In June 2007 TatArka borrowed an additional $409 from a bank that bears interest at 14%, non-collateralized and is repayable in July 2007. During the nine months ended June 30, 2007 TatArka totally repaid $1,650 on its outstanding loans.

 

During the nine months ended June 30, 2007 Bauta borrowed an additional $26 from a bank with interest at 18% per annum and repaid $4 during the reporting period.

 

In February 2007 Balykshi took out a short-term loan for $2,000 from a bank with interest at 12% per annum.

 

In April 2007 Kazmorgeophysica entered into an agreement with one of its contractors, which is not a related party, to receive a short-term non-interest bearing loan for $220 that is repayable within 12 months, or no later than April 2008.

 

Summary of Material Contractual Commitments

 

 

Off-Balance Sheet Financing Arrangements

 

As of June 30, 2007 we had no off-balance sheet financing arrangements.

 

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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.

 

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

 

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asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. At June 30, 2007, 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 24 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.

 

Item 3. Qualitative and Quantitative Disclosures About Market Risk

 

 

Foreign Currency Risk

 

The functional currency for our subsidiary Caspian Services Group Limited is the U.S. dollar. The functional currency for all other subsidiaries is the Kazakh Tenge. To the extent that business transactions in

 

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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 US dollar strengthens in relation to the Kazakh Tenge, the US dollar-reported expenses will decrease. We do not engage in hedging transactions to protect us from such risk. We do, however, seek to minimize currency risk through our client contracts, which are denominated in several currencies, including Euros, U.S. Dollars and Kazakh Tenge.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met.

 

As of the end of the period covered by this Report we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2007.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceeding

 

Currently we are involved in two administrative appeals in Kazakhstan. Pending the outcome of those appeals, these matters could proceed to litigation in the Kazakhstan courts. The Customs Committee of the Ministry of Finance of the Republic of Kazakhstan has challenged the claims of a number of Agip KCO

 

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contractors, including the Company, to an exemption from customs VAT for certain goods provided to Agip KCO. The Tax Committee claims that we owe approximately $0.6 million in customs VAT on various Agip KCO contracts. We disagree with the Tax Committee’s interpretation of the tax provision and under advice from Agip KCO we lodged administrative appeals against these assessments. We are not yet aware of the results of these appeals, but if unsuccessful, the matter can further proceed to litigation. We have discussed this matter with Agip KCO, who has acknowledged to us in writing that under the terms of our contracts with Agip KCO it is obliged to pay the customs VAT if it is determined that it is owed. Therefore, we anticipate we will incur no liability if the customs VAT is imposed.

 

If customs VAT is owed, we could be subject to fines and penalties totaling up to as much as 100% of the tax obligation. Our understanding is that Agip KCO will also indemnify us against any fines and penalties but, until this point is specifically agreed to in writing, we have accrued $0.6 million toward any possible payment.

 

Item 1A. Risk Factors

 

In addition to the risk factors disclosed in Item 1 to Part I of our Annual Report on Form 10-KSB filed on January 16, 2007 please see the following additional risk factors.

 

Cost Overruns or Time Delays in Completing Construction of the Marine Base Could Negatively Impact our Results of Operations and our ability to Complete the Marine Base. While we will seek to include penalty provisions in our construction contracts designed to ensure construction of the marine base within our budget and projected timelines, we cannot completely protect ourselves against cost overruns and time delays in the construction process. If we experience cost overruns or time delays in the construction of our marine base our projected revenues, results of operations and overall financial condition could be negatively impacted as a result of higher than anticipated costs and/or delays in the realization of revenues from the marine base. If the cost overruns or time delays were significant, such could result in us being unable to complete construction of the marine base based on our current financing model. This could result in our having to seek additional funding, diverting funds from other projects to complete the marine base, or possibly in our being unable to complete the marine base, each of which could also negatively impact our results of operations and financial condition. Moreover, delays in completion of the marine base within the projected timelines could potential lead to other negative outcomes, such as the possible breach of the funding agreements we have negotiated with EBRD. Such delays could impact our results of operations and financial condition.

 

Marine Base Revenue and Expense Estimates may Differ Materially from Actual Results. Our determination to move forward with the construction of the marine base was based on our projections regarding marine base revenue and operating expenses. These projections were based on assumptions and expectations. While we have utilized our best efforts and the market information available to us in formulating these projections, we have not previously constructed or operated a marine base and some of our assumptions and expectations could be incorrect. Moreover, any number of factors we relied upon in preparing our estimates could change as the result of an unforeseen or unexpected change. Any of these things could result in actual results varying significantly from our projections. Depending upon how significantly our projections vary from actual results, our results of operations and financial condition could be adversely affected.

 

Other than the foregoing, there have been no material changes in the risk factors previously described in Item 1 to Part I of our Annual Report on Form 10-K filed on January 16, 2007.

 

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Item 6. Exhibits

 

 

 

 

SIGNATURES

 

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf, thereunto duly authorized.

 

CASPIAN SERVICES, INC.

 

 

 

 

 

 

 

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