**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q/A-1**

 

| x | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF                            THE SECURITIES EXCHANGE ACT OF 1934** |
|---|------------------------------------------------------------------------------------------------------------------------|

For the Quarterly Period EndedMarch 31,            2007

 

| o | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF                            THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-------------------------------------------------------------------------------------------------------------------------|

For the Transition Period From ________ to _________

 

Commission File Number**0-50218**

 

**BEKEM METALS, INC.**

(Exact name of registrant as specified in its charter)

                

| **Utah**                                                         |   | **87-0669131**      |
|------------------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                                  |   | (I.R.S. Employer    |
| incorporation or organization)                                   |   | Identification No.) |
|                                                             |   |                |
| **170 Tchaikovsky Street, 4th                            Floor** |   |                |
| **Almaty, Kazkahstan**                                           |   | **050000**          |
| (Address of principal executive offices)                         |   | (Zip Code)          |

 

**+7 (7272) 582-386**

(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 xNoo

 

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):

 

|   | Large accelerated Filero | Accelerated Filero | Non-accelerated Filer x |
|--------|--------------------------|--------------------|-------------------------|

 

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

 

As            of May 3, 2007, the registrant had 125,172,011 shares of common stock, par value            $0.001, issued and outstanding.

 

 

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**BEKEM METALS, INC.**

**(An Exploration Stage Company)**

**FORM 10-Q/A-1**

**TABLE OF CONTENTS**

 

EXPLANATORY NOTE

 

PART I            — FINANCIAL INFORMATION

 

| Item 1. Financial Statements                                                                                                    |                                                                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |   |
|                                                                                                                            | Condensed Consolidated Balance Sheets (Unaudited) as                            of

March 31, 2007 and December 31, 2006                            (Restated)                                                                                                                                |  

5 |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |   |
|                                                                                                                            | Condensed Consolidated Statements of Operations                            (Unaudited) for the

Three Months Ended March 31, 2007 and 2006, and for the                            Period from March 5, 2004 (Date of Inception) through March 31, 2007                            (Restated) |  

6 |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |   |
|                                                                                                                            | Condensed Consolidated Statements of Cash Flows                            (Unaudited) for the Three Months Ended March 31, 2007 and 2006, and for                            the Period from March 5, 2004 (Date of Inception) through March 31,                            2007 (Restated)  |  

7 |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |   |
|                                                                                                                            | Notes to Condensed Consolidated Financial Statements                            (Unaudited)                                                                                                                                                                                                   | 8 |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |
| Item 2. Management’s Discussion and Analysis of                            Financial Condition

and Results of Operations |  

17                                                                                                                                                                                                                                                                                    |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |
| Item 3. Qualitative and Quantitative Disclosures About                            Market Risk                                   | 27                                                                                                                                                                                                                                                                                            |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |
| Item 4. Controls and Procedures                                                                                                 | 28                                                                                                                                                                                                                                                                                            |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |
| PART II — OTHER INFORMATION                                                                                               |                                                                                                                                                                                                                                                                                          |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |
| Item 1A. Risk Factors                                                                                                           | 29                                                                                                                                                                                                                                                                                            |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |
| Item 6. Exhibits                                                                                                                | 29                                                                                                                                                                                                                                                                                            |
|                                                                                                                            |                                                                                                                                                                                                                                                                                          |
| Signatures                                                                                                                      | 30                                                                                                                                                                                                                                                                                            |

 

 

2

 

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**EXPLANATORY NOTE**

 

Bekem Metals, Inc. (hereinafter referred to as “us,”            “we,” the “Company” or “Bekem”) is filing this            Amendment No. 1 on Form 10-Q/A-1 (the “Amendment”) to its Quarterly Report            for the fiscal quarter ended March 31, 2007, which was filed with the Securities and            Exchange Commission (“SEC”) on May 09, 2007 (the “Original            Report”) in response to certain comments raised by the staff of the SEC. While            the staff commented on several issues, as discussed in more detail herein the primary            issue raised by the staff was whether the presentation of the Company as a            “production stage” enterprise was proper, or whether, it would be more            consistent with SEC Industry Guide 7, “*Description of            Property by Issuers Engaged or to Be Engaged in Significant Mining            Operations*” (“Industry Guide 7”) to present            the Company as an “exploration stage” enterprise.

 

The disclosure and the financial statements included in the Original            Report present us as a production stage enterprise. At the time we prepared and filed            the Original Report we believed we were a production stage enterprise for a number of            reasons including:

 

|   | **•** | the licenses we hold from the Ministry of Energy and                            Mineral Resources of the Republic of Kazakhstan (“MEMR”) to                            the Kempirsai and Mamyt deposits are production licenses that require                            us to extract certain quantities of nickel, cobalt and brown coal in                            order to retain those licenses; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the deposits have a history of commercial production                            during the 1980s and 1990s; and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------|

|   | **•** | we had engaged in some limited mineral extraction                            activities in accordance with the terms of our licenses. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------|

             

We also considered the fact that we had historical reserve reports            prepared during the Soviet era that both the State Resources Committee and the MEMR            recognized as indicative of commercially producible reserves of nickel and cobalt ores            and brown coal at the Kempirsai and Mamyt deposits.

             

Following discussion with the staff of the SEC and further research we            now agree that the determination of reserves and production stage activities made by            Kazakhstani governmental authorities is not binding upon or authoritative under            Industry Guide 7. We further agree with the staff’s position that until such time            as we have a reserve report prepared in accordance with the standards recognized by the            SEC, the Company should be presented as an exploration stage enterprise. The purpose of            this Amendment is to, among other things, revise the presentation of the Original            Report to present the Company as an exploration stage enterprise.

             

The consolidated financial statements and notes to the financial            statements included in Part I, Item 1 “*Financial            Statements*” of the Original Report are hereby revised            to present the Company as an exploration stage enterprise rather than a production            stage enterprise. As a result of this revision, a column for transactions from            “inception to date” has been added to the statements of operations and cash            flows, stripping costs have been expensed rather than capitalized, and revenues and            costs of products sold have been reclassified to offset certain direct mining expenses            which are included in exploratory costs, depreciation and amortization expenses were            also reclassified as exploratory costs. Also, the other income (expense) as originally            filed included disposals of inventory, which were reclassified as exploratory costs and            revenue from services were reclassified as other income.

 

3

 

----

 

As noted above, the “*Consolidated            Statements of Operations*” has also been revised to            correct the reporting of deferred compensation expense. In addition, the weighted            average number of share outstanding was corrected in the            “*Consolidated Statements of            Operations*.”

 

The notes to the financial statements have been revised to:

 

|   | **•** | provide clarification regarding the Company’s                            disclosure regarding impairments of long-lived assets and long-lived                            assets to be disposed of; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | discuss why the Company was able to acquire its interest                            in Kyzl Kain Mamyt LLC at a price significantly below the fair value of                            its long term assets; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | clarify the restrictions on use of bank                            deposits; |
|--------|------------|------------------------------------------------------------------------------|

|   | **•** | include Note 5 *“ Restatement of Financial                            Statements”;* and |
|--------|------------|-----------------------------------------------------------------------------------------------------|

|   | **•** | include Note 6                            “*Subsequent                            Events*” regarding litigation between                            the Company and the MEMR in connection with the purported unilateral                            cancelation of the Company’s contracts and licenses to the                            Kempirsai and Mamyt deposits. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The revision resulted in increases in            “*Net Loss*” of $135,122            during the three months ended March 31, 2007 and $0 during the three months ended March            31, 2006. The revision did not result in changes to            “*Basic Loss Per Common            Share*” during the three months ended March 31, 2007 or            2006.

 

Part I, Item 2 “*Management’s            Discussion and Analysis of Financial Condition and Results of            Operations*” of the Original Report is hereby revised to            clarify that as of March 31, 2007 the Company was in the exploration stage. The            disclosure in Part I, Item 2 has also been revised to address the changes in operating            results resulting from the restatement of the            “*Consolidated Statements of            Operations.*” The discussion of            “*Critical Accounting            Policies*” has been revised to provide enhanced            discussion and analysis of the Company’s critical accounting policies and            assumptions in accordance with SEC Releases No. 33-8350, 34-48960 and FR-72.

 

Part I, Item 4 “*Controls and            Procedures*” of the Original Report is hereby revised to            more specifically state the conclusions of the Company’s certifying officers with            respect to whether the Company’s disclosure controls and procedures were            effective during the period covered in this report and to address changes to our            disclosure controls and procedures.

 

In accordance with Rule 12b-15 under the Securities Exchange Act of            1934, this Amendment also includes currently dated certifications from the            Company’s Chief Executive Officer and Chief Financial Officer as required by            Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certification exhibits and            Part II, Item 6            “*Exhibits*” have been            revised accordingly.

 

This Amendment speaks only of the original filing date of the Original            Report and, except for those Items disclosed in this explanatory note, is unchanged            from the Original Report. This Amendment does not reflect events after the filing of            the Original Report or modify or update those disclosures affected by subsequent            events. Therefore, you should read this Amendment together with our other reports that            update and supersede the information contained in this Amendment.

             

4

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**PART            I – FINANCIAL INFORMATION**

**Item            1. Financial Statements**

 

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 

|                                                                                                              |   |   |   | **March 31,**  |       |   |   | **December 31,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------------|------------|--------|--------|------------------|--------|
|                                                                                          |   |   |   | **2007**       |       |   |   | **2006**         |   |
|                                                                                          |   |   |   | **(Restated)** |       |   |   | **(Restated)**   |   |
| **ASSETS**                                                                                    |   |   |   |           |       |   |   |             |   |   |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| **Current                            Assets**                                                 |   |   |   |           |       |   |   |             |   |   |   |
| Cash                                                                                          |   |   |   | $              | 6,398,169  |   |   |             | $      | 8,583,680 |   |
| Trade accounts                            receivable                                          |   |   |   |           | 6,280      |   |   |             |   | 2,776 |   |
| VAT recoverable                                                                               |   |   |   |           | 205,899    |   |   |             |   | 186,915 |   |
| Inventories                                                                                   |   |   |   |           | 204,839    |   |   |             |   | 185,063 |   |
| Prepaid expenses and other current                            assets                          |   |   |   |           | 332,916    |   |   |             |   | 139,293 |   |
| Deferred compensation                                                                         |   |   |   |           | 353,119    |   |   |             |   | 757,920 |   |
| **Total Current                            Assets**                                           |   |   |   |           | 7,501,222  |   |   |             |   | 9,855,647 |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| Property, plant and mineral interests (net of                            accumulated          |   |   |   |           |       |   |   |             |   |   |   |
| depreciation of $172,173 and $144,030)                                                                            |   |   |   |           | 14,419,407 |   |   |             |   | 13,870,563 |   |
| Non-current deferred                            compensation                                  |   |   |   |           | 1,417,909  |   |   |             |   | 1,202,587 |   |
| Other assets                                                                                  |   |   |   |           | 165,086    |   |   |             |   | 169,130 |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| **Total                            Assets**                                                   |   |   |   | $              | 23,503,624 |   |   |             | $      | 25,097,927 |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY                            (DEFICIT)**           |   |   |   |           |       |   |   |             |   |   |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| **Current                            Liabilities**                                            |   |   |   |           |       |   |   |             |   |   |   |
| Accounts payable                                                                              |   |   |   | $              | 615,752    |   |   |             | $      | 530,665 |   |
| Accrued expenses                                                                              |   |   |   |           | 316,252    |   |   |             |   | 274,739 |   |
| Due to related party                                                                          |   |   |   |           | 297        |   |   |             |   | 9,644 |   |
| **Total Current                            Liabilities**                                      |   |   |   |           | 932,301    |   |   |             |   | 815,048 |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| Deferred tax                            liabilities                                           |   |   |   |           | —    |   |   |             |   | 433,645 |   |
| Asset retirement                            obligation                                        |   |   |   |           | 995,704    |   |   |             |   | 951,355 |   |
| **Total                            Liabilities**                                              |   |   |   |           | 1,928,005  |   |   |             |   | 2,200,048 |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| **Commitments and                            Contingencies**                                  |   |   |   |           | —    |   |   |             |   | — |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| **Shareholders’ Equity                            (Deficit)**                           |   |   |   |           |       |   |   |             |   |   |   |
| Preferred stock; $0.001 par value, 20,000,000                            shares               |   |   |   |           |       |   |   |             |   |   |   |
| authorized, no shares                            outstanding                                  |   |   |   |           | —    |   |   |             |   | — |   |
| Common stock; $0.001 par value, 150,000,000 shares                            authorized,     |   |   |   |           |       |   |   |             |   |   |   |
| and 125,172,011 and 125,172,011 shares issued and                            outstanding      |   |   |   |           | 125,172    |   |   |             |   | 125,172 |   |
| Additional paid-in                            capital                                         |   |   |   |           | 29,025,272 |   |   |             |   | 29,025,272 |   |
| Accumulated deficit                                                                           |   |   |   |           | (7,518,326 | )      |   |             |   | (6,222,349 | ) |
| Accumulated other comprehensive                            loss                               |   |   |   |           | (56,499    | )      |   |             |   | (30,216 | ) |
| **Total Shareholders’ Equity                            (Deficit)**                     |   |   |   |           | 21,575,619 |   |   |             |   | 22,897,879 |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |
| **Total Liabilities and Shareholders’ Equity                            (Deficit)**     |   |   |   | $              | 23,503,624 |   |   |             | $      | 25,097,927 |   |
|                                                                                          |   |   |   |           |       |   |   |             |   |   |   |

 

The            accompanying notes are an integral part of these condensed consolidated financial            statements.

 

5

 

----

 

                **BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

|                                                                         |   |                           |   | **For the Period from** |
|------------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------|
|                                                                         |   |                           |   | **March 5, 2004**       |
|                                                                         |   | **For the Three Months Ended** |   | **(Date of Inception)** |
|                                                                         |   | **March 31,**                  |   | **through**             |
|                                                                         |   | **2007**                       |   | **2006**                |   | **March 31, 2007** |
|                                                                         |   | **(Restated)**                 |   |                    | **(Restated)** |   |   | **(Restated)** |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Revenue**                                                                  | $      | -                         |   | $                       | -  |   | $ | -  |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Operating Expenses**                                                       |   |                           |   |                    |   |   |   |   |
| General and administrative expenses                                          |   | 1,255,862                 |   |                    | 357,538  |   |   | 5,510,234  |
| Research and development costs                                               |   | -                         |   |                    | 293,009  |   |   | 792,168  |
| Exploratory costs                                                            |   | 860,862                   |   |                    | 43,855  |   |   | 3,028,605  |
| Accretion expense on asset retirement                            obligations |   | 19,911                    |   |                    | 17,544  |   |   | 153,408  |
| Grant compensation expense                                                   |   | 189,479                   |   |                    | -  |   |   | 341,062  |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Total Operating Expenses**                                                 |   | 2,326,114                 |   |                    | 711,946  |   |   | 9,825,477  |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Loss From Operations**                                                     |   | (2,326,114)                    |   |                    | (711,946) |   |   | (9,825,477) |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Other Income (Expense)**                                                   |   |                           |   |                    |   |   |   |   |
| Interest income                                                              |   | 189,631                   |   |                    | -  |   |   | 274,968  |
| Interest expense                                                             |   | (1,018)                        |   |                    | (64,898) |   |   | (1,677,441) |
| Translation adjustment                                                       |   | (83,724)                       |   |                    | (43,462) |   |   | (78,106) |
| Exchange gain                                                                |   | 480,132                   |   |                    | 240,055  |   |   | 245,398  |
| Other income (expense)                                                       |   | 4,003                     |   |                    | (35,947) |   |   | 25,864  |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Net Other Expense**                                                        |   | 589,024                   |   |                    | 95,748  |   |   | (1,209,317) |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Net Loss Before Minority Interest and                            Taxes**   |   | (1,737,090)                    |   |                    | (616,198) |   |   | (11,034,794) |
| Deferred tax benefit                                                         |   | 441,113                   |   |                    | -  |   |   | 3,375,260  |
| Loss attributed to minority interest                                         |   | -                         |   |                    | -  |   |   | 141,208  |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Net Loss**                                                                 | $      | (1,295,977)                    |   | $                       | (616,198) |   | $ | (7,518,326) |
|                                                                         |   |                           |   |                    |   |   |   |   |
|                                                                         |   |                           |   |                    |   |   |   |   |
| **Basic Loss per Common Share**                                              | $      | (0.01)                         |   | $                       | (0.01) |   |   |   |
| **Weighted-Average Shares used in**                                          |   |                           |   |                    |   |   |   |   |
| **Basic Loss per Common Share**                                              |   | 125,172,011               |   |                    | 100,088,888  |   |   |   |
|                                                                         |   |                           |   |                    |   |   |   |   |
|                                                                              |        |                                |        |                         |  |  |  |  |  |

 

The            accompanying notes are an integral part of these condensed, consolidated financial            statements.

 

6

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

|                                                                                |   |                                                                     |   |                                                                         |   | **For the Period from**                                                                  |
|-------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|
|                                                                                |   |                                                                     |   |                                                                         |   | **March 5, 2004**                                                                        |
|                                                                                |   | **For the Three Months Ended**                                           |   | **(Date of Inception)**                                                      |
|                                                                                |   | **March 31,**                                                            |   | **through**                                                                  |
|                                                                                |   | **2007**                                                                 |   | **2006**                                                                     |   | **March 31, 2007**                                                                       |
|                                                                                |   | **(Restated)**                                                           |   | **(Restated)**                                                               |   | **(Restated)**                                                                           |
| **Cash Flows from Operating Activities**                                            |   |                                                                     |   |                                                                         |   |                                                                                     |
| Net loss                                                                            |   | $          (1,295,977) |   | $           (616,198) |   | $         (7,518,326)                       |
| Adjustments to reconcile net loss to                                                |   |                                                                     |   |                                                                         |   |                                                                                     |
| net cash provided by operating activities:                                          |   |                                                                     |   |                                                                         |   |                                                                                     |
| Depreciation and amortization                                                       |   | 26,666                                                              |   | 18,158                                                                  |   | 193,799                                                                             |
| Accretion expense on asset retirement                            obligations        |   | 19,911                                                              |   | 17,544                                                                  |   | 169,477                                                                             |
| Shares issued on option modification                                                |   | -                                                                   |   | -                                                                       |   | 19,426                                                                              |
| Loss on disposal of property and equipment                                          |   | (2,673)                                                                  |   | -                                                                       |   | 56,255                                                                              |
| Interest expense from debt discount                                                 |   | -                                                                   |   | 46,734                                                                  |   | 963,231                                                                             |
| Deferred tax benefit                                                                |   | (441,113)                                                                |   | -                                                                       |   | (3,375,260)                                                                              |
| Foreign currency exchange gain and                            translation           |   |                                                                     |   |                                                                         |   |                                                                                     |
| adjustment                                                                          |   | 124,400                                                             |   | 289,765                                                                 |   | (78,851)                                                                                 |
| Purchased exploration costs                                                         |   | -                                                                   |   | -                                                                       |   | 251,286                                                                             |
| Stock grant compensation expense                                                    |   | 189,479                                                             |   | -                                                                       |   | 341,062                                                                             |
| Loss recognized on minority shareholders’                            interest |   | -                                                                   |   | -                                                                       |   | (141,208)                                                                                |
| Change in operating assets and liabilities:                                         |   |                                                                     |   |                                                                         |   |                                                                                     |
| Trade accounts receivable                                                           |   | (3,954)                                                                  |   | (1,390)                                                                      |   | 5,014                                                                               |
| Inventories                                                                         |   | (10,050)                                                                 |   | (29,427)                                                                     |   | 68,334                                                                              |
| VAT recoverable                                                                     |   | (14,100)                                                                 |   | -                                                                       |   | (136,598)                                                                                |
| Prepaid expenses and other current assets                                           |   | (153,946)                                                                |   | (40,379)                                                                     |   | (72,967)                                                                                 |
| Accounts payable                                                                    |   | 79,598                                                              |   | 11,994                                                                  |   | 301,565                                                                             |
| Accrued expenses                                                                    |   | (552,895)                                                                |   | -                                                                       |   | (640,105)                                                                                |
| **Net Cash From Operating Activities**                                              |   | (2,034,654)                                                              |   | (303,199)                                                                    |   | (9,593,866)                                                                              |
|                                                                                |   |                                                                     |   |                                                                         |   |                                                                                     |
| **Cash Flows from Investing Activities**                                            |   |                                                                     |   |                                                                         |   |                                                                                     |
| Purchase of property and equipment                                                  |   | (221,699)                                                                |   | (469,142)                                                                    |   | (2,840,136)                                                                              |
| Purchase of intangible assets                                                       |   | (5,808)                                                                  |   | -                                                                       |   | (63,288)                                                                                 |
| Proceeds from disposal of property and                            equipment         |   | -                                                                   |   | -                                                                       |   | 22,941                                                                              |
| Restricted cash                                                                     |   | -                                                                   |   | -                                                                       |   | (100,000)                                                                                |
| Notes receivable                                                                    |   | -                                                                   |   | -                                                                       |   | (56,983)                                                                                 |
| Cash acquired in acquisitions                                                       |   | -                                                                   |   | -                                                                       |   | (152,180)                                                                                |
| Change in related party receivables /                            payables           |   | (8,783)                                                                  |   | (12,340)                                                                     |   | 41,692                                                                              |
| **Net Cash From Investing Activities**                                              |   | (236,290)                                                                |   | (481,482)                                                                    |   | (3,147,954)                                                                              |
|                                                                                |   |                                                                     |   |                                                                         |   |                                                                                     |
| **Cash Flows from Financing Activities**                                            |   |                                                                     |   |                                                                         |   |                                                                                     |
| Proceeds from notes payable                                                         |   | -                                                                   |   | 1,084,914                                                               |   | 14,706,914                                                                          |
| Payments on notes payable                                                           |   | -                                                                   |   | (353,213)                                                                    |   | (22,745,753)                                                                             |
| Proceeds from notes payable related parties                                         |   | -                                                                   |   | 100,000                                                                 |   | 4,326,912                                                                           |
| Payments on notes payable - related parties                                         |   | -                                                                   |   | -                                                                       |   | (4,326,912)                                                                              |
| Issuance of shares for cash                                                         |   | -                                                                   |   | -                                                                       |   | 26,728,842                                                                          |
| **Net Cash From Financing Activities**                                              |   | -                                                                   |   | 831,701                                                                 |   | 18,690,003                                                                          |
|                                                                                |   |                                                                     |   |                                                                         |   |                                                                                     |
| **Effect of Exchange Rate Changes on                            Cash**              |   | 85,433                                                              |   | (1,995)                                                                      |   | 449,986                                                                             |
|                                                                                |   |                                                                     |   |                                                                         |   |                                                                                     |
| **Net Increase / (Decrease) in Cash**                                               |   | (2,185,511)                                                              |   | 45,025                                                                  |   | 6,398,169                                                                           |
| **Cash at Beginning of Period**                                                     |   | 8,583,680                                                           |   | 89,366                                                                  |   | -                                                                                   |
| **Cash at End of Period**                                                           |   | $       6,398,169                |   | $          134,391    |   | $            6,398,169  |
|                                                                                |   |                                                                     |   |                                                                         |   |                                                                                     |
|                                                                                     |        |                                                                          |        |                                                                              |        |                                                                                          |  |

 

The            accompanying notes are an integral part of these condensed, consolidated financial            statements.

 

7

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

| **NOTE 1 – BASIS OF PRESENTATION AND NATURE OF                            BUSINESS** |
|--------------------------------------------------------------------------------------------|

 

***Interim Financial Information***— The accompanying 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 most recent audited financial statements of Bekem Metals, Inc. included in its            annual report on Form 10-KSB filed for the year ended December 31, 2006. Operating            results for the three-month period ended March 31, 2007 are not necessarily indicative            of the results that may be expected for the year ending December 31, 2007.

 

**Basis of Presentation**

 

On            October 24, 2005, Bekem Metals, Inc. (hereinafter referred to as “us,”            “we,” the “Company”, “BMI” or “Bekem”)            entered into an Acquisition Agreement with Kazakh Metals, Inc., a British Virgin            Islands international business company (“KMI”), under which BMI acquired            100% of the outstanding common shares of KMI in exchange for the issuance of 61,200,000            common shares.

 

The            KMI shareholders received 61.1% of the BMI common stock outstanding after the            transaction and therefore KMI was considered the acquirer for financial reporting            purposes. Accordingly, the accompanying financial statements include financial            statements of KMI for all periods presented.

 

Brisa Equities Corporation, a British Virgin Islands holding company            (“Brisa”), together with other entities its owners control, is the            controlling shareholder of KMI and was also the controlling shareholder of BMI.            Accordingly, the transaction was considered to be between entities under common control            and did not result in a change in control of BMI. Following the transaction, entities            over which the controlling shareholder maintained voting and investment control held            51,600,000 BMI common shares, which represented 51.5% of the 100,088,888 outstanding            common shares.

 

The            acquisition of the portion of the net liabilities of BMI relating to the common shares            owned by the controlling shareholder was recorded at historical cost of $(161,998). The            acquisition of the common shares of BMI purchased from the minority shareholders of BMI            were recorded at $345,000, which was the estimated fair value of those shares on the            date of acquisition. KMI accounted for the purchase of BMI similar to a            pooling.

 

***Bekem Metals, Inc.***– The            consolidated financial statements include the accounts of Condesa and Kaznickel, since            the date of its acquisition by Condesa, and the accounts of BMI since its acquisition            by Condesa. Condesa was incorporated under the laws of the British Virgin Islands on            March 5, 2004. Condesa acquired BMI in a reverse acquisition, on January 28, 2005. On            July 24, 2006, Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel            a wholly-owned subsidiary of Bekem. On September 30, 2006 Bekem sold Condesa to a third            party for a nominal value. Condesa is includedin the            consolidated financial statements from the date of acquisition and to the date of            disposal.

 

8

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

 

***Kazakh Metals, Inc.***– The            consolidated financial statements also include the accounts of KMI and its wholly-owned            subsidiary, KKM, which it acquired on May 31, 2005 in a purchase business            combination.

 

***Name Change***– On February 9,            2005, the Board of Directors of EMPS Research Corporation approved, and the            stockholders holding a majority of the outstanding shares of the company approved and            ratified by written consent, a change in the Company’s name from EMPS Research            Corporation to Bekem Metals, Inc. On March 16, 2005, the Company filed an amendment to            its Articles of Incorporation to affect the change.

 

***Currency Translation***– The            consolidated financial statements are presented in U.S. dollars. The functional            currency of the Company’s subsidiaries operating in Kazakhstan is U.S. dollars            for Kaznickel and Kazakh tenge for KKM. Results of operations are translated into U.S.            dollars at the average exchange rates during the reporting period. Non-monetary assets            and liabilities of Kaznickel are translated into U.S. dollars, using historical            exchange rates and monetary assets and liabilities are translated into U.S. dollars            using exchange rates on the date of the financial statements. Translation differences            are included in results of operations. All balance sheet accounts of KKM are translated            at exchange rates on the date of the financial statements and translation differences            are included in stockholders’ equity as cumulative translation            adjustments.

 

**Nature of Business**

 

The            Company is engaged in the exploration of mineral resource properties. Kaznickel owns            the right to the Gornostayevskoye (“Gornostai”) nickel and cobalt deposit            located in the East Kazakhstan Oblast in northeast Kazakhstan. The subsoil use contract            and license is for exploration and production of cobalt and nickel ores and is valid            through February 26, 2026. KKM holds exploration and production subsoil use contracts            and licenses from the government of Kazakhstan to a 575,756 acre parcel, located            approximately 130 kilometers northeast of Aktobe, Kazakhstan. This deposit is referred            to as the Kempirsai deposit. The subsoil use contracts and licenses grant KKM the right            to explore and produce nickel and cobalt from deposits located within the territory            through October 12, 2011, which may be extended upon agreement between KKM and the            Ministry of Energy and Minerals Resources (“MEMR”) of the Republic of            Kazakhstan. KKM also holds a subsoil use contract and a license to explore and produce            Mamyt brown coal from a deposit located within 40 kilometers of its cobalt and nickel            deposit. This subsoil use contract and license expires on December 11, 2018 with            further possible extensions. However, because our deposits are without known reserves,            our operations are considered to be at the exploratory stage.

 

***Business Condition***– The            Company has no proven mineral reserves that conform to U.S. accounting. The Gornostai            and the Kempirsai deposits have not yet entered the development stage with respect to            its mineral interests and have no production. There has been only limited revenue from            the Kempirsai operations, and the Company has incurred net losses of ($1,295,977) and            ($616,198) for the three months ended March 31, 2007 and 2006, respectively and            ($7,518,326) for the period from March 5, 2004 (date of inception) through March 31,            2007. Current assets exceeded current liabilities by $6,568,921 at March 31, 2007.            Management expects that the Company will need significant additional capital to fund            construction of a processing plant in 2007-2008. The Company anticipates it will need            to raise additional capital through the sale of its equity securities or debt            securities. Certain shareholders of the Company have indicated a willingness to provide            the Company a line of credit. The Company has no formal agreement with said            shareholders to provide this line of credit and the shareholders are under no            obligation to enter into any agreement or make available any funds to the            Company.

 

9

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

***Kempirsai Exploration Stage***–            The Kempirsai, or KKM, operations are considered to be in the exploration stage until            the company has the feasibility study.

 

***Gornostai Exploration Stage***–            The Gornostai, or Kaznickel, operations are considered to be in the exploration stage.            Since its inception on March 5, 2004, the Company has devoted a substantial amount of            effort in raising capital, acquiring Kaznickel, and exploring the Gornostai deposit            under its exploration contract. This mineral property has not yet reached development            or production stage and accordingly, no revenues from production have been            recorded.

 

**NOTE 2 - CASH**

 

The            Company considers all demand deposits, money market accounts and marketable securities            purchased with an original maturity of three months or less to be cash and cash            equivalents. The fair value of cash and cash equivalents approximates their carrying            amounts due to their short-term maturity.

 

Cash            consists of the following:

 

|                     | **March 31,**                          |   | **December 31,** |
|--------------------------|----------------------------------------|--------|------------------|
|                     | **2007**                               |   | **2006**         |
| Current accounts (USD)   | $     635,477 |   | $ 479,947        |
| Current accounts (Tenge) | 95,716                                 |   | 38,379           |
| Bank deposit (USD)       | 1,132,992                              |   | 8,065,354        |
| Bank deposit (Tenge)     | 4,533,984                              |   | -                |
| **Total**                | **$**  **6,398,169**         |   | **$ 8,583,680**  |

 

Bank            deposit accounts are located in a Kazakhstani Bank (Center Credit Bank). Bank deposits            earn interest from 3% to 8% annually based on the length of time the funds are left on            deposit. Of the total bank deposits, $100,000 is restricted until December 20, 2007.            This amount is included in other non-current assets. The remaining balances of the bank            deposits are immediately available to the Company.

 

**NOTE            3 -PROPERTY, PLANT AND MINERAL INTERESTS**

 

Property, plant and mineral interests consist of the            following:

 

|                             | **March 31,**                                     |   | **December 31,** |
|----------------------------------|---------------------------------------------------|--------|------------------|
|                             | **2007**                                          |   | **2006**         |
| Buildings                        | $ 2,211,348                                  |   | $ 2,156,326      |
| Machinery and equipment          | 3,783,914                                    |   | 3,474,858        |
| Other fixed assets               | 70,434                                       |   | 69,665           |
| Unproved mineral interests - net | 8,525,884                                    |   | 8,313,744        |
|                             | 14,591,580                                   |   | 14,014,593       |
| Accumulated depreciation         | (172,173)                                         |   | (144,030)        |
| **Net Property and Equipment**   | **$                            14,419,407**  |   | **$ 13,870,563** |

 

 

10

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

 

Unproved mineral interests represent the acquisition costs of the            mineral interests upon the purchase business combinations with Kaznickel and with KKM.            The government of Kazakhstan retains the title to the property upon which the            Company’s mineral rights pertain; however, the Company’s mineral interests            are considered to be tangible assets.

 

***Gornostai Deposit***

 

Kaznickel acquired its interest in the Contract on Exploration and            Development of Gornostai Cobalt and Nickel Deposit (the “Contract”) issued            by the MEMR dated February 26, 2004. By virtue of the Contract, Kaznickel acquired the            right to exploit the mineral property including the right to explore, develop and            produce the nickel and cobalt mineral resources on the Deposit through February 26,            2026. The Company has the right to re-negotiate the contract at that time for an            additional 30 years. The government of Kazakhstan retains the title to the property;            however, the Company’s mineral interests are considered to be tangible assets.            The Company capitalized the acquisition costs of its mineral interest upon the purchase            business combination with Kaznickel. The allocated purchase price included a            capitalized amount of an acquired asset retirement obligation. While the property is            not in production, the asset retirement cost is depleted over the life of the contract            from the date of acquisition.

 

The            Contract provides the Company certain rights and also imposes certain obligations and            commitments. The rights include exploration through February 2008, and development and            production of minerals through February 26, 2026. The Company may transfer its right to            third parties in accordance with Kazakh laws and regulations and has a right to            renegotiate an extension of the Contract. Significant rights, obligations and            commitments of the Contract include monetary commitments for exploration of $1,576,480,            which have been fulfilled in 2007, and expenditures to support social projects            amounting to $300,000 during the production stage. In addition, the Company was            required to pay a fee of $2,000 upon award of the Contract, and a fee for the use of            Kazakh owned technical data of $735,400 of which $4,179 was paid on award of the            Contract and $731,221 will be due upon a finding of commercial deposits. Royalties of            0.5% of ores extracted and sold will be required. The Contract subjects the Company to            pay regular income tax of 30 percent and requires an excess profits tax of 15 to 60            percent if its net profits exceed 20 percent of gross profit. Obligations also include            the establishment and funding of a reclamation fund that includes the cost of removing            buildings and equipment used in the Deposit area. The Company is also required to            comply with Kazakh environmental laws and regulations.

 

***Kempirsai Deposit***

 

Bekem acquired two contracts to explore for and extract minerals in            connection with the purchase of KKM. One contract is for the exploration and extraction            of nickel and cobalt ore through October 12, 2011 from deposits located in an            approximately 575,756 acre site in the northwest area of the Republic of Kazakhstan            approximately 130 kilometers northeast of the city of Aktobe, Kazakhstan, near the town            of Badamsha, referred to as the “Kempirsai” deposit. The other contract is            for the exploration and extraction of Mamyt brown coal through December 11, 2018 at a            site located within 40 kilometers of the Kempirsai deposit. The contracts may be            extended upon agreement between KKM and the

 

11

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

Geology and Minerals Resources Committee of the Ministry of Energy and            Minerals Resources of the Republic of Kazakhstan. The Kempirsai contract requires the            Company to pay royalty payments equal to 2.21% of gross ore sales. The Mamyt brown coal            contract requires a royalty payment equal to nine tenths of one percent (0.9%) of gross            coal sales. Both contracts require the Company to pay an excess profits tax ranging            from 4 to 30 percent based upon the reaching of an internal rate of return (as defined            in the contracts) ranging from 22 to 30 percent. The allocated purchase price of the            mineral interest included a capitalized amount of an acquired asset retirement            obligation. The asset retirement cost is depleted over the life of the contract from            the date of acquisition. Obligations also include the establishment and funding of a            reclamation fund that includes the cost of removing buildings and equipment used. The            Company is also required to comply with Kazakh environmental laws and            regulations.

 

**NOTE            4 - COMMITMENTS AND CONTINGENCIES**

 

***Concentration of Risk Relating to Foreign Mining            Operations***– All of the Company’s properties            are located within the Republic of Kazakhstan in Central Asia. In addition to general            industry risks of nickel and cobalt price fluctuations, and potential lack of economic            viability of the claims, the Company has a concentration of risk related to its foreign            properties and interests which are subject to political uncertainty, changes in            government, unilateral renegotiation of licenses, claims or contracts, nationalization,            or other uncertainties. In addition, the validity of mining claims which constitute the            Company’s property holdings in Kazakhstan, may, in certain cases, be uncertain            and are subject to being contested.

 

***Kazakhstan Business Environment***– Kazakhstan, as an emerging market, has a legal and regulatory            infrastructure that is not as mature and stable as those usually existing in more            developed free market economies. As a result, operations carried out in Kazakhstan can            involve risks and uncertainties that are not typically associated with developed            markets. The instability associated with the ongoing transformation process to a market            economy can lead to changes in the business conditions in which the Company currently            operates. Changes in the political, legal, tax or regulatory environment could            adversely impact the Company’s operations.

 

***Tax Matters***– The local and            national tax environment in the Republic of Kazakhstan is subject to change and            inconsistent application, interpretation and enforcement. Non-compliance with            Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to            the imposition of fines, penalties and interest.

 

***Environmental Matters***–            Extensive national, regional and local environmental laws and regulations in Kazakhstan            affect the Company’s operations. These laws and regulations set various standards            regulating certain aspects of health and environmental quality provide for user fees,            penalties and other liabilities for the violation of these standards and establish, in            some circumstances, obligations to remediate current and former facilities and off-site            locations. The Company believes it is currently in compliance with all existing            Republic of Kazakhstan environmental laws and regulations. However, as new            environmental laws and legislation are enacted and the old laws are repealed,            interpretation, application and enforcement of the laws may become inconsistent.            Compliance in the future could require significant expenditures, which may adversely            affect the Company’s operations.

 

12

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

 

***Due to the Government of the Republic of Kazakhstan***– In connection with the Company’s acquisition of the            exploration contract covering the Gornostai deposit, the Company is required to repay            the Republic of Kazakhstan for historical costs incurred in undertaking geological and            geophysical studies and infrastructure improvements. The repayment terms of this            obligation will not be determined until the Company applies for and is granted a            contract by the Republic of Kazakhstan to engage in commercial production. That amount            is expected to be $731,221 and has not been recorded as a liability. Under the current            contract, once the Company determines the property contains commercially producible            reserves, and desires to commence commercial production, it must apply for such right            prior to the expiration of its exploration and development rights in February 2026. The            Company anticipates it will apply for a commercial production contract within the next            1-3 years. Of course, there is no guarantee when or if the Company will discover            commercially producible reserves within the Gornostai deposit. Should the Company            decide not to pursue a commercial production contract, then it can relinquish the            Gornostai deposit to the Republic of Kazakhstan in satisfaction of this            obligation.

 

The            Company is required, under its subsoil use contracts and licenses, to submit a proposed            annual work program to the MEMR for approval. Failure to meet the minimum work program            requirements could cause the Company to lose its subsoil use contracts and            licenses.

 

***Operating Leases***– Bekem            leases approximately 400 square feet of office space located at 324 South 400 West,            Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in            the United States. The Company pays annual rents of approximately $7,800 for this space            pursuant to a lease agreement that expires December 31, 2007 with an option to extend            the lease for an additional year.

 

The            Company also maintains a representative office in Almaty, Kazakhstan, where it leases            approximately 1,575 square feet of office space. The lease agreement expires on            December 31, 2007. In April 2007, the monthly lease payment increased from $5,250 to            $6,125. Under the terms of the lease agreement, the owner of the space could terminate            the lease at any time and require the Company to vacate the premises.

Kaznickel LLP rents an office (approximately 1,840 square feet) in            Semei, Kazakhstan, for approximately $4,000 per month. Semei is the closest city to the            Gornostai deposit. Kaznickel also rents approximately 4,450 square feet of warehouse            space in Semei for $4,000 per month. Kaznickel uses this space to store test ore. These            spaces are leased on a year-to-year basis. Also, Kaznickel LLP rented an office            (approximately 350 square feet) in Astana, Kazakhstan, for approximately $1,600 per            month. This lease agreement was terminated on August 1, 2007 and will not be renewed as            Kaznickel closed its Astana office effective August 1, 2007.

 

In            April 2007, KKM increased the size of its offices in Aktobe, Kazakhstan from 1,260            square feet to 1,900 square feet. As a result, KKM’s monthly lease payment            increased from $4,000 per month to $5,400 per month. This space is leased on a            year-to-year basis.

 

13

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

**NOTE            5 – RESTATEMENT OF FINANCIAL STATEMENTS**

 

Subsequent to the issuance of the December 31, 2006 and 2005 financial            statements, the Company realized that its financial statements needed to be restated to            correct the reporting of mining transactions to be consistent with SEC Industry Guide            7,*Description of Property by Issuers Engaged or to Be Engaged            in Significant Mining Operations*that defines a production            stage enterprise as one that has reserves that are proven or probable as evidenced by            an acceptable reserve report. The Company has not yet received its reserve report,            therefore, under Industry Guide 7 it is an exploration stage enterprise. The Company            had not considered itself a development or exploration stage company due to the history            of production of the sites under mining licenses during the 1980s and 1990s and using            the reports evidencing commercial ore bodies that were developed during the Soviet era            under different methods than those currently used to support the definition of            “reserves” under Industry Guide 7. The Company’s licenses granted by            the MEMR for the Kempirsai and Mamyt deposits are production licenses and require the            Company to extract certain quantities of nickel, cobalt and coal in order to retain the            licenses, which were previously reported as production activity. The Company expects to            obtain acceptable reserve reports early in 2008.

 

In            order to comply with the reporting under Industry Guide 7, a column for transactions            from “inception to date” has been added to the statements of operations and            cash flows, stripping costs have been expensed rather than capitalized, and revenues            and costs of products sold have been reclassified to offset certain direct mining            expenses which are included in exploratory costs, depreciation and amortization            expenses were also reclassified as exploratory costs. Also, the other income (expense)            as originally filed included disposals of inventory, which were reclassified as            exploratory costs and revenue from services were reclassified as other income. In            addition, the number of weighted-average shares outstanding for the three months ended            March 31, 2007 was corrected.

 

The            effects of the restatements are as follows:

 

| **Balance Sheet**                    |                       |                      |            |
|--------------------------------------|----------------------------|---------------------------|-----------------|
|                                 |                       |                      |            |
| **March 31, 2007**                   | **As Previously Reported** | **Effect of Restatement** | **As Restated** |
|                                 |                       |                      |            |
| Inventories                          | 396,794                    | (191,955)                 | 204,839         |
| Non-current deferred compensation    | 1,584,067                  | (166,158)                 | 1,417,909       |
| Deferred tax liabilities             | (29,460)                   | 29,460                    | -               |
| Accumulated deficit                  | 7,197,141                  | 321,185                   | 7,518,326       |
| Accumulated other comprehensive loss | 49,031                     | 7,468                     | 56,499          |
|                                 |                       |                      |            |

 

14

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2007 (UNAUDITED)**

 

| **Statements of Operations**                                             |                       |                      |            |
|--------------------------------------------------------------------------|----------------------------|---------------------------|-----------------|
|                                                                     |                       |                      |            |
| **For the Three Months Ended March 31,                            2007** |                       |                      |            |
|                                                                     | **As Previously Reported** | **Effect of Restatement** | **As Restated** |
|                                                                     |                       |                      |            |
| Exploratory costs                                                        | (834,196)                  | (26,666)                  | (860,862)       |
| Grant compensation expense                                               | (97,169)                   | (92,310)                  | (189,479)       |
| Depreciation expense                                                     | (26,666)                   | 26,666                    | -               |
| Interest income                                                          | -                          | 189,631                   | 189,631         |
| Other income (expense)                                                   | 193,634                    | (189,631)                 | 4,003           |
| Deferred tax benefit                                                     | 483,925                    | (42,812)                  | 441,113         |
| Net Loss                                                                 | (1,160,855)                | (135,122)                 | (1,295,977)     |

 

 

| **Statements of Cash Flows**                                             |                       |                      |            |
|--------------------------------------------------------------------------|----------------------------|---------------------------|-----------------|
|                                                                     |                       |                      |            |
| **For the Three Months Ended March 31,                            2007** |                       |                      |            |
|                                                                     | **As Previously Reported** | **Effect of Restatement** | **As Restated** |
|                                                                     |                       |                      |            |
| **Cash Flows from Operating Activities**                                 |                       |                      |            |
| Net loss                                                                 | (1,160,855)                | (135,122)                 | (1,295,977)     |
| Adjustments to reconcile net loss to                                     |                       |                      |            |
| net cash provided by operating activities:                               |                       |                      |            |
| Deferred tax benefit                                                     | (483,925)                  | 42,812                    | (441,113)       |
| Stock grant compensation expense                                         | 97,169                     | 92,310                    | 189,479         |

 

 

**NOTE            6 – SUBSEQUENT EVENT**

             

In            December 2007, the Republic of Kazakhstan Ministry of Energy and Mineral Resources            (“MEMR”) unilaterally terminated KKM’s contracts and licenses to            explore for nickel, cobalt, brown coal, and other minerals within the Kempirsai and the            Mamyt deposits on the basis that KKM had material failures in execution of the work            programs associated with the contacts and licenses but did not detail those failures.            In January 2008, KKM filed an action in the Court of Astana city against the MEMR            challenging the legality of the unilateral termination of the KKM contracts and            licenses by the MEMR for several reasons, including that the contracts and licenses had            been terminated on grounds not provided for in the subsoil use contracts and            legislation and there were no material failures in the execution of the work programs            associated with the contracts and licenses. In February 2008, the Court of Astana city            acknowledged that the unilateral termination of the contracts and licenses by the MEMR            was illegitimate. The Court canceled the order of the MEMR relating to the unilateral            termination of the licenses and reinstated the KKM contracts and licenses. The MEMR has            appealed the Court’s decision to the Republic of Kazakhstan Supreme            Court.

 

15

 

----

**Item            2. Management’s Discussion and Analysis of Financial Condition and Results of            Operations**

 

For a complete understanding, this Management’s Discussion and            Analysis should be read in conjunction with the*Financial            Statements*and*Notes to the            Financial Statements*contained in this Form 10-Q and our Form            10-KSB for the year ended December 31, 2006.

 

**Forward Looking Information and Cautionary Statement**

 

Certain statements contained herein including, but not limited to those            relating to our plan of operations, future potential revenue, future expenses, future            development of our mineral properties, the development and commercial viability of our            processing technology, our ability to obtain future governmental approvals, expansion            of our operations, our ability to generate cash flow, future demand for nickel, cobalt            and brown coal, future commodity prices, integration of new technologies into            operations, credit facilities, future capital expenditures and working capital,            sufficiency of future working capital, borrowings and capital resources and liquidity,            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            “*anticipate*” and similar            expressions or the negative thereof, or other variations thereon, or comparable            terminology, or discussions of strategy that involve risk and uncertainties are also            intended to identify forward-looking statements. Such statements involve known and            unknown risks, uncertainties, and other factors that may cause the actual results,            performance or achievements of the Company or 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 nickel, cobalt and            brown coal, results of future exploration and extraction activities, 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. We undertake no obligation to publicly            update or revise any forward-looking statement, whether as a result of new information,            future events or otherwise.

 

|   | **Overview** |
|--------|--------------|

 

We are engaged in the development and exploration of nickel, cobalt and            brown coal deposits in the Republic of Kazakhstan. We carry out our exploration            activities through our two wholly-owned subsidiaries, Kyzyl Kain Mamyt LLP            (“KKM”) and Kaznickel LLP (“Kaznickel”).

 

The primary assets of KKM are exclusive subsoil use licenses and            contracts to a 575,756 acre territory in northwestern Kazakhstan referred to herein as            the Kempirsai deposit. The contract grants KKM the right to explore, extract and            process nickel and cobalt ore from the Kempirsai deposit, which is comprised of the            Kara-Obinskoe and Stepninskoye sections (collectively referred to as the            “Kara-

 

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Obinskoye section”) and the Novo-Shandashinskoe section. KKM also            holds a subsoil use contract to explore and produce brown coal from the Mamyt coal            deposit, which is located within 40 kilometers of the Kempirsai deposit. Unless            otherwise indicated by the context of the disclosure, the Kara-Obinskoye section, the            Novo-Shandashinskoye section and the Mamyt deposit are collectively referred to herein            as the “Kempirsai deposit.”

             

The primary asset of Kaznickel is an exclusive subsoil use license and            contract that grants Kaznickel the exclusive right, through February 2008, unless            extended, to explore for nickel, cobalt and other minerals in a 12,232 acre area in            northeastern Kazakhstan known as the Gornostayevskoye (“Gornostai”)            deposit. The concession further provides that if we make a commercial discovery of            nickel, cobalt or other minerals within the concession territory, we can apply for and            receive the exclusive rights to commercially produce and sell nickel and cobalt ore            through February 2026.

             

The following table provides additional information regarding our            subsoil use contracts:

             

| **Territory****Name** | **Size of****Territory** |  

**Primary Minerals** | **License**

**Type**        | **License or****Contract                            #** | **License and**

**Subsoil Use Contract Term**                                                                                                                           |
|-----------------------|--------------------------|------------------------------|------------------------------|---------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |                     |                         |                         |                                                    |                                                                                                                                                                     |
| Kempirsai             | 575,756 acres            | Nickel and cobalt ore        | Production                   | MG #420

MG #426                                        | Expires Oct, 12, 2011 unless extended.                                                                                                                                   |
|                  |                     |                         |                         |                                                    |                                                                                                                                                                     |
| Mamyt                 | 116 acres                | Brown coal                   | Production                   | MG #9-D                                                 | Expires Dec, 11 2018 unless

extended.

                                                                                                                            |
| Gornostai             | 12,232 acres             | Nickel and cobalt ore        | Exploration

and

Production | 1349                                                    | Exploration period expires Feb. 26, 2008 unless                            extended. Production period expires Feb. 26, 2026 unless                            extended. |

             

As noted above, our subsoil use contract for the Kempirsai nickel and            cobalt deposit and Mamyt brown coal deposit grant us commercial production rights. The            Kempirsai deposit was discovered in 1938 and at its peak in the late 1980’s            produced almost five million tons of ore annually. Since the mid-1990’s, however,            mining activity at the deposit has been insignificant.

 

We are currently at the exploration stage on the Gornostai deposit. To            retain our subsoil use contract during exploration stage we are required to satisfy a            minimum work program that is approved by the Geology Committee of the MEMR. We are            currently in the third year of a three-year work program. Under this program, we are            required to engage in an exploratory drilling program designed to identify and evaluate            the mineral resources contained within the contract territory. In 2007, we are required            to drill test holes totaling at least 12,961 meters. For 2007, we planned to drill            approximately 615 test holes totaling approximately 15,700 meters during 2007. As of            March 31, 2007 we have drilled a total of 9,110 meters (355 holes).

             

The objective of our drilling program is to complete a detailed study of            the structural characteristics of what we believe to be the two largest ore bodies in            the Gornostai deposit, as well as certain other ore bodies where high grade nickel            deposits have been located. The drilling was conducted on a 50 x 50-100 meter grid,            which will make it possible to convert indicated and inferred resources to proved and            probable reserves as development of the property progresses.

 

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When we complete exploration of the Gornostai deposit, assuming we make            commercial discoveries, we will apply to the MEMR to move to commercial            production.

 

Should we fail to complete the minimum work program imposed by any of            our subsoil use contracts in a given year, the MEMR could review the work program,            request an update and amendment to the work program, impose fines and penalties upon us            or even revoke our subsoil use contracts and licenses.

 

We currently have no processing facilities at either the Kempirsai or            Gornostai deposits. We plan to construct processing facilities to process our ores at            our Kempirsai deposit. Historically, pyrometallurgy has been the most common processing            procedure utilized to process nickel and cobalt ores. Hydrometallurgical technology has            improved to the point that it is now an acceptable alternative to pyrometallurgy for            processing nickel and cobalt ores. Both technologies require large plants, costly            construction and expensive equipment often requiring capital infusions of hundreds of            millions of dollars.

             

We have retained the services of an independent engineering firm to            conduct a pre-feasibility study reviewing different technologies to determine the best            processing technology, optimal processing capacity, construction costs and timelines,            etc. to allow us to determine the type of processing facility we will construct at the            Kempirsai deposit. We expect the pre-feasibility study to be completed by the end of            2007.

 

**Results of Operations**

 

Since inception we have generated limited revenue. We have spent            millions of dollars to date and anticipate that we will spend significant additional            capital before we begin to realize significant revenue from operations.

             

In July 2006, we realized net proceeds of approximately $26,600,000            through a private placement of our equity securities. As of March 31, 2007, we had            spent approximately $20,300,000 of those funds. Approximately $12,200,000 was used to            repay loans, $1,900,000 was used to meet our minimum working program obligations,            approximately $2,200,000 was spent developing our hydrochlorination technology and            $4,000,000 was used as working capital. At March 31, 2007, we had cash on hand of            $6,398,169. We expect cash on hand will be sufficient to fund our activities through            the end of the current fiscal year. We also anticipate the need to seek additional            funding by the end of fiscal 2007 to continue our efforts to develop and exploit our            mineral resources. There is no assurance that we will be able to obtain additional            funding in the future on favorable terms, or at all. At this time, we have no            commitments from any parties to provide us additional funding.

 

***Three months ended March 31, 2007 compared to the three months            ended March 31, 2006***

|   | Revenue |
|--------|---------|

 

Because our deposits are without known reserves, we are considered to be            in the exploration stage. Any revenues earned during this stage from sale of ore or            brown coal are recorded against exploratory costs. During the three months ended March            31, 2006, such incidental sales amounted to $64,642. No such sales were made during the            three months ended March 31, 2007.

 

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|   | General and Administrative Expenses |
|--------|-------------------------------------|

             

Our general and administrative expenses during the three months ended            March 31, 2007 increased to $1,255,862 from $357,538 during the first quarter 2006.            This increase in general and administrative expenses in the first quarter 2007 is            mainly attributable to a $542,799 increase salary and related taxes as a result of an            increase in the number of personnel we employ and salary increases for existing            employees, as KKM hired a number of personnel to carry out development and testing of            the pilot plant, additional geologists, metallurgists and ecology supervisors. We also            hired additional in-house accounting, finance, legal and information technology            personnel. We do not expect to hire a significant number of additional employees until            such time as operations or funding so justify. Therefore, we do not expect to            experience significant increases in salaries and related taxes during the remainder of            the 2007 fiscal year. Another contributing factor to the increase in general and            administrative expenses was a $300,000 increase in professional fees, primarily            attributable to increased legal and accounting fees and costs associated with a            resource estimation prepared by a third party consulting firm. We believe this increase            in professional fees was more a matter of timing and the one-time cost of the resource            estimation than a trend and we expect professional fees to return to more traditional            levels in upcoming quarters.

             

Research and Development Costs

 

We engaged in no research and development in connection with the            development and testing of our hydrochlorination processing technology during the first            quarter 2007. During the first quarter 2006 we spent $293,009 in research and            development costs, primarily in connection with the development of our pilot plant.            During the 2007 fiscal year we have budgeted $200,000 for testing of our pilot            plant.

             

|   | Exploratory Costs |
|--------|-------------------|

 

As a result of our aggressive exploratory drilling program for 2007, we            incurred $860,862 in exploratory costs during the three months ended March 31, 2007            compared to $43,855 during the three months ended March 31, 2006. We budgeted            $1,765,000 for drilling and core sampling expenses during 2007. We have spent almost            half of that amount to complete approximately 60% of our planned drilling program for            the year. We expect that exploratory costs will continue to be significantly higher            during the balance of 2007 fiscal year and we continue to pursue our planned drilling            and core sampling program. Also, as discussed above, because our activities are            considered as exploratory, the exploratory costs are reflected net of revenues earned            from sale of ore or brown coal. During the three month period ended March 31, 2006, we            earned revenue of $64,642. By comparison during the three month period ended March 31,            2007, we realized no revenue.

|   | Accretion Expense |
|--------|-------------------|

             

Accretion expense increased by $2,367 during the three months ended            March 31, 2007 compared to the same period of 2006. Until we engage in mining and            production, we believe accretion expense will continue at rates consistent with those            realized during the quarter ended March 31, 2007.

             

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Grant Compensation Expense

             

During the three months ended March 31, 2007 we recognized $189,479 in            grant compensation expense for restricted stock grants issued to certain officers and            key employees during the fourth quarter 2006. We had no comparable expense during the            three months ended March 31, 2006 because the restricted stock grants were not made            until the fourth quarter of 2006.

             

Total Operating Expense and Loss from Operations

             

Our total operating expense and loss from operations increased from            $711,946 during the three months ended March 31, 2006 to $2,326,114 during three months            ended March 31, 2007. The principal reasons for the increase are the            following:

             

|   | o | Increase in general and administrative expense of                            $898,324 mainly attributable to the increase in salary and related                            taxes as a result of an increase in the number of personnel we employ                            and salary increases for existing employees as well as due to the                            increase in professional fees; |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | Increase in exploratory costs of $817,007 mainly due to                            increase scope of our drilling program; |
|--------|---|----------------------------------------------------------------------------------------------------------------------------|

|   | o | Increase in recognition of the stock grant compensation                            expenses of $189,479. By comparison, we had no comparable expense                            during the three months ended March 31, 2006. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We            expect total operating expenses during the remainder of 2007 to be higher as compared            to 2006.

             

Interest Income

 

During the three months ended March 31, 2007, we realized interest on            deposits of $189,631. By comparison, during the three months ended March 31, 2006, we            earned no interest on deposits. The deposit accounts in which our funds are held            provide for higher rates of return, varying from 3% to 8%, the longer the funds are            left on deposit, with determination of the interest rate and recognition of the            interest earned at the time the funds are withdrawn or upon the maturity date of the            deposit.

             

Interest Expense

             

We realized $1,018 of interest expense during the three months ended            March 31, 2007. During the three months ended March 31, 2006 we realized interest            expense of $64,898. The interest expense realized during the first quarter 2006 was            accrued mainly on notes payable received from related and third parties in the            past.

             

Translation Adjustment

             

The consolidated financial statements are presented in U.S. dollars. The            functional currency of our subsidiary Kaznickel is U.S. dollars. The functional            currency of our subsidiary KKM is Kazakh tenge. Results of operations are translated            into U.S. dollars at the average exchange rates during the reporting period. All            balance sheet accounts of KKM are translated at exchange rates on the date of            the

 

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financial statements and translation differences are included in            stockholders’ equity as cumulative translation adjustments. However, non-monetary            assets and liabilities of Kaznickel are translated into U.S. dollars, using historical            or average exchange rates and monetary assets and liabilities are translated into U.S.            dollars using exchange rates on the date of the financial statements where translation            differences are included in results of operations.

             

Therefore, the translation adjustment in the consolidated financial            statements represents the translation differences from translation of the            Kaznickel’s financial statements. As a result, the translation adjustment is            commonly, but not always, positive if the average exchange rates are lower than            exchange rates on the date of the financial statements and negative if the average            exchange rates are higher than exchange rates on the date of the financial            statements.

             

As a result of the weakening of the U.S. dollar against the Kazakh            tenge, a negative translation adjustment during the three months ended March 31, 2007            amounted to $83,724.

             

Exchange Gain/Loss

             

During the quarter ended March 31, 2007 we realized an exchange gain of            $480,132 compared to an exchange loss of $240,055 during the quarter ended March 31,            2006. As with translation adjustment, we recognize exchange gain or loss as a result of            having subsidiaries operating in foreign countries whose functional currency may or may            not be the U.S. dollar. This requires us to translate results of operations from a            foreign currency, in this case Kazakh tenge, to U.S. dollars at the average exchange            rate, where results of operations include exchange gains or losses on the U.S. dollar            monetary assets and liabilities.

|   | Net Loss |
|--------|----------|

             

For the foregoing reasons, during the three months ended March 31, 2007            we experienced a net loss of $1,295,977 compared to a net loss of $616,198 during the            three months ended March 31, 2006. We anticipate that we will continue to experience            increasing net losses until we are able to engage in significant nickel and cobalt ore            extraction, processing and sales. We do not expect to be engaged in significant ore            extraction and processing prior to the 2009 fiscal year.

 

**Liquidity and Capital Resources**

 

Our capital resources have consisted primarily of funds we have borrowed            from related and non-related parties and funds we raised through a private placement of            our equity securities in July 2006. These funds, however, represent only a portion of            the funds we will need to complete exploration and development and move to commercial            production. As of March 31, 2007, we have $6,398,169 of the approximately $26,600,000            in net proceeds we realized from the private placement. We have used the money raised            in the private offering to reduce debt, acquire equipment, continue exploration and            fund operations. We anticipate the need for substantial additional capital resources.            As discussed above, we are in negotiations with certain third parties for the sale of            our ore, depending on the success of those negotiations, we may be able to fund our            expenses through the sale of our ore. We have received indications from certain of our            primary shareholders that if we are unsuccessful in negotiating ore sales contracts,            they are willing to provide additional funds to us to continue

 

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exploration activities during 2008, most likely in the form of loans. We            currently, however, do not have definitive agreements with any parties to provide us            additional funding.

 

During the three months ended March 31, 2007 and March 31, 2006, cash            was primarily used to fund operations and repay notes payable. See below for additional            discussion and analysis of cash flow.

 

| *For the Three Months Ended March 31,*    | **2007**         | **2006**                          |
|-------------------------------------------|------------------|-----------------------------------|
|                                      |             |                              |
| Net cash used in operating activities     | $(2,034,654)     | $(303,199)                        |
| Net cash used in investing activities     | (236,290)        | (481,482)                         |
| Net cash provided by financing activities | —     | 831,701                      |
| Effect of exchange rate changes on cash   | 85,433      | (1,995)                           |
| **NET (DECREASE) INCREASE IN CASH**       | **$(2,185,511)** | **$**  **45,025**  |

 

During the three months ended March 31, 2007 net cash used in operating            activities was $2,034,654 compared to net cash used in operating activities of $303,199            during the three months ended March 31, 2006. This increase in net cash used in            operating activities is primarily attributable to increases in salary and related            taxes, exploratory costs and professional fees.

             

During the three months ended March 31, 2007 net cash used in investing            activities was $236,290. By comparison, during the three months ended March 31, 2006 we            used net cash in investing activities of $481,482. We used more cash in investing            activity in 2006 primarily resulting from the purchase of equipment for KKM’s            pilot plant.

             

During the three months ended March 31, 2007 no cash was generated in            financing activities compared to net cash provided by financing activities of $831,701            during the three months ended March 31, 2006. This decrease in net cash used in            financing activities is explained by availability of capital from our private            placement.

 

**Plan of Operations**

             

As of March 31, 2007, we had cash on hand of $6,398,169. As discussed            above, we have budgeted to spend all of these funds in operations and development            activities during the remaining nine months of 2007. Following is a brief description            of how we anticipate allocating our cash on hand during the next nine            months.

 

***Drilling and Core Analysis***

 

We will allocate approximately $900,000 to drilling and exploration.            This includes drilling of approximately 6,000 meters of the South section of the            Gornostai deposit. Estimated drilling costs include both direct and indirect drilling            costs, including geologist fees and costs for site supervisors, geological data            processors, core sample takers, topographers, site procurement specialists,            etc.

             

***Reserve Report***

 

During the second quarter Wardell Armstrong, a qualified independent            engineering firm, completed a resource estimation of our Kempirsai nickel and cobalt            deposit. The resource modeling was based on previous exploration and mining of the            deposit and was done as an independent audit of

 

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an            earlier reserves and resources study conducted during the Soviet period to Soviet            standards. Wardell Armstrong also completed a scoping study for the south section of            the Gornostai deposit. The scoping study is our first step to evaluating the results of            our drilling activities at the Gornostai property and will provide the foundation for a            preliminary development feasibility study for the Gornostai deposit. We anticipate the            cost of the resources estimation will be approximately $135,000.

 

The State Reserves Committee of the Republic of Kazakhstan recognizes            that we have proven and probable reserves at the Gornostai and Kempirsai deposits, as            per their standards for classification of reserves. Wardell Armstrong is in the process            of estimating these reserves per JORC code standards. We expect that the minable            reserves of the Kempirsai deposit will be estimated per JORC code standards in            September 2007 while the minable reserves of the Gornostai deposit will be estimated            after completion of the drilling program and during the preliminary stage of the            feasibility study preparation.

             

Please note that the State Reserves Committee standards for            classification of proven and probable reserves differs from the standard set forth by            the U.S. Securities and Exchange Commission. None of our resources at either the            Gornostai or Kempirsai deposits currently qualify for classification as            “proven” or “probable” reserves under the standards of the            Securities and Exchange Commission. Therefore, we have not made in this report, nor            will we in subsequent reports, make any claim to proven or probable reserves until such            time as our resources qualify for classification as proven or probable reserves in            accordance with the standards of the Securities and Exchange Commission.

             

***Hydrochlorination Processing Technology Testing***

             

During the next nine months we expect to spend approximately $200,000            for continued testing at our pilot plant of the mineral concentrating capability of our            proprietary hydrochlorination processing technology and to formulate required            procedures, protocols and operational guidelines.

             

***Feasibility Study***

 

We anticipate spending approximately $940,000 for the preparation of            pre-feasibility and feasibility studies for the construction of the pyrometallurgical            plant at the Kempirsai deposit. This amount could increase if we retain a western            consulting firm.

             

***Field Modernization***

             

We have allocated approximately $1,000,000 for modernization of vehicles            and equipment at the Kempirsai deposit to allow us to increase our ore extracting            capabilities.

             

***Administrative Expenses***

 

We plan to allocate approximately $2,600,000 for administrative expenses            during the next nine months, which include expenses of maintaining offices in the            United States and Kazakhstan, for salaries and taxes.

 

***Professional Fees***

             

We expect to incur approximately $170,000 in expenses for services of            our financial auditors and securities attorneys during the next nine months.

 

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**Additional Activities**

 

As discussed above, we are currently considering alternatives to a            hydrochlorination processing plant to allow us to begin to generate cash flow from the            Kempirsai deposit. We do not currently have sufficient cash on hand to fund these            activities, nor have we budgeted for these items in our 2007 budget. Therefore, to            undertake these activities we will need to obtain additional capital either through            equity or debt financing. We plan to seek this funding through private equity            investments or debt financing to be obtained from banks or shareholders. We currently            have no firm commitment from any party to provide us additional funding.

             

We are considering the economic viability of a pyrometallurgical            processing plant to produce ferronickel at our Kempirsai deposit. As noted above, we            have allocated $940,000 in our 2007 budget for the preparation of pre-feasibility and            feasibility studies. Assuming the results of those studies are positive, we would like            to move to the design phase of a commercial pyrometallurgical plant, including            obtaining detailed engineering and design for plant construction. This would include            flowsheet design and pilot testing. We estimate the cost to do this will be roughly            $2.5 million.

             

**Summary of Material Contractual Commitments**

 

|   | The following table lists our significant commitments as                            of March 31, 2007: |
|--------|--------------------------------------------------------------------------------------------------------|

 

|                                                                                                  |   |   |   | **Payments Due by Fiscal Year** |      |
|-------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------|-----------|
| **Contractual Commitments**                                                                           |   |   |   | **Total**                       |      |   |   | **Less than****one year** |   |   |   | **2-3 years** |   |   |   | **4-5 years** |   |   |   | **After****5 years** |   |
|                                                                                                  |   |   |   |                            |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Monetary commitments for exploration                                                                  |   |   |   | $                               | 686,450   |   |   |   | $ | 686,450 |   |   |   | $ | -0 | - |   |   | $ | -0 | - |   |   | $ | -0 | - |
| Due to the government of Republic of                            Kazakhstan(1)     |   |   |   |                            | 731,221   |   |   |   |   | -0 | - |   |   |   | 731,221 |   |   |   |   | -0 | - |   |   |   | -0 | - |
| Training                                                                                              |   |   |   |                            | 39,300    |   |   |   |   | 39,300 |   |   |   |   |   |   |   |   |   | -0 | - |   |   |   | -0 | - |
| Social                            projects(2)                                     |   |   |   |                            | 417,906   |   |   |   |   | -0 | - |   |   |   | -0 | - |   |   |   | 300,000 |   |   |   |   | 117,906 |   |
| Asset retirement                            obligation(3)                         |   |   |   |                            | 951,333   |   |   |   |   | -0 | - |   |   |   | -0 | - |   |   |   | -0 | - |   |   |   | 951,333 |   |
| Operating leases                                                                  |   |   |   |                            | 203,050   |   |   |   |   | 203,050 |   |   |   |   | -0 | - |   |   |   | -0 | - |   |   |   | -0 | - |
| Total                                                                             |   |   |   | $                               | 3,029,260 |   |   |   | $ | 928,800 |   |   |   | $ | 731,221 |   |   |   | $ | 300,000 |   |   |   | $ | 1,069,239 |   |

 

(1) In connection with our acquisition of the exploration            contract covering the Gornostai deposit, we are required to repay the Republic of            Kazakhstan for historical costs incurred by it in undertaking geological and            geophysical studies and infrastructure improvements. The repayment terms of this            obligation will not be determined until such time as we apply for and are granted a            contract to engage in commercial production by the Republic of Kazakhstan. Under our            current contract once we determine the property contains commercially producible            reserves, if we wish to commence commercial production, we must apply for such right            prior to the expiration of our exploration rights in February 2008, unless we extend            our exploration period. We anticipate that we will apply for a commercial production            contract within the next 1-3 years. Of course, there is no guarantee when or if we will            discover commercially producible reserves within the Gornostai deposit. Should we            decide not to pursue a commercial production contract, we can relinquish the Gornostai            deposit to the Republic of Kazakhstan in satisfaction of this obligation.

(2) Under the terms of our subsoil use contracts, we are            required to make funding for social projects relating to employees of KKM, including            improvements to living conditions, etc., in the amount of $117,906. We have already            satisfied approximately $97,000 of this obligation during 2007 by transferring an idle            building to the Badamsha village administration. We are also required to donate            $300,000 for the ongoing development of Astana and Kurchatov, which are cities in            Kazakhstan.

(3) Under the terms of our subsoil use contracts, we are            required to remove all operating equipment and remediate the property. This remediation            work can be done during the term of the subsoil use contract or upon completion of the            terms of the contract.

 

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As discussed above, to maintain our rights to the Gornostai, Kempirsai            and Mamyt deposits we must satisfy the minimum work program requirements of the MEMR.            Should we fail to complete the minimum work program in some year, the MEMR could review            the work program, request an update and amendment to the work program, impose fines and            penalties upon us or even revoke our subsoil use contracts and licenses.

             

**Off-Balance Sheet Financing Arrangements**

 

|   | As of March 31, 2007 we had no off-balance sheet                            financing arrangements. |
|--------|-----------------------------------------------------------------------------------------------------|

 

**Critical Accounting Policies**

             

We prepare our financial statements in conformity with accounting            principles generally accepted in the United States of America. As such, we are required            to make certain estimates, judgments and assumptions that we believe are reasonable            based upon the information available. These estimates and assumptions affect the            reported amounts of assets and liabilities at the date of the financial statements and            the reported amounts of expenses and revenues, to the extent we generated revenue            during the periods presented. Actual results could differ from these estimates. Our            significant accounting policies require us to make difficult, subjective or complex            judgments or estimates. We consider an accounting estimate to be critical if (1) the            accounting estimate requires us to make assumption about matters that were highly            uncertain at the time the accounting estimate was made and (2) changes in the estimates            that are reasonably likely to occur from period to period, or use different estimates            that we reasonably could have used in the current period, would have a material impact            on our financial condition or results of operations.

 

There are other items within our financial statements that require            estimation, but are not deemed critical as defined above. Changes in estimates used in            these and other items could have a material impact on our financial statements.            Management has discussed the development of these critical accounting estimates with            our board of directors and they have reviewed the foregoing disclosure.

             

***Use of Estimates***– In            connection with the preparation of our financial statements, we are required to make            estimates and assumptions that affect the reported amounts in the financial statements            and accompanying notes. One of the significant areas requiring the use of management            estimates and assumptions relates to environmental reclamation and closure obligations.            Under our licenses with the Republic of Kazakhstan, following completion of exploration            and mining activities we are required to reclaim our licensed territories. To prepare            our financial statements in accordance with accounting principles generally accepted in            the United States of America we are required to account for this obligation. The            determination of the amount of the mine retirement and environmental reclamation            obligation the Republic of Kazakhstan will impose upon us, however, has not yet been            determined. The determination of the mine retirement and environmental reclamation            obligation is based, in significant part, on the size of each deposit. Because we are            still exploring our Gornostai property and do not yet know the full extent of the            Gornostai deposit, the mine retirement and environmental reclamation obligation has not            yet been set by the Republic of Kazakhstan. While we base our estimate of this            obligation on historical experience and on various other assumptions that            are believed to be reasonable under the circumstances. Accordingly,            actual results may differ significantly from our estimate.

 

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***Income Taxes***– While we are a            Utah corporation, our primary operations are in the Republic of Kazakhstan. The            Republic of Kazakhstan was formed in 1991 following the break-up of the former Soviet            Union. At the time the Republic of Kazakhstan was formed, it adopted a new tax code.            The tax code and the application of tax laws in the Republic of Kazakhstan are still            developing and may not be uniformly applied in all instances.

 

**Item            3. Qualitative and Quantitative Disclosures about Market Risk**

 

Our primary market risks are fluctuations in commodity prices and            foreign currency exchange rates. We do not currently use derivative commodity            instruments or similar financial instruments to attempt to hedge commodity price risks            associated with future crude oil production.

 

**Commodity Price Risk**

 

Our revenues, profitability and future growth will depend substantially            on prevailing prices for nickel and cobalt. If and when we commence commercial            production, commodity prices will affect the amount of cash flow available for capital            expenditures and our ability to either borrow or raise additional capital. Price will            also affect our ability to produce, transport and market the nickel and cobalt we            produce.

 

Historically, nickel and cobalt prices have been subject to significant            volatility in response to changes in supply, market uncertainty and a variety of other            factors beyond our control. Nickel and cobalt are likely to continue to be volatile in            the future and this volatility makes it difficult to predict future price movements            with any certainty. Any declines in nickel and cobalt prices would reduce the revenues            we could earn when we begin commercial production, and could also reduce the amount of            nickel and cobalt that we can produce economically. As a result, this could have a            material adverse effect on our business, financial condition and results of            operations.

 

**Foreign Currency Risk**

 

Our functional currency is the U.S. dollar. Our Kazakhstani subsidiary            Kaznickel uses the U.S. dollar as its functional currency and KKM uses the Kazakh tenge            as its functional currencies. To the extent that business transactions in Kazakhstan            are denominated in the Kazakh Tenge we are exposed to transaction gains and losses that            could result from fluctuations in the U.S. Dollar—Kazakh Tenge exchange rate.            When the U.S. dollar strengthens in relation to the Kazakh Tenge, the U.S.            dollar-reported expenses will decrease. We do not engage in hedging transactions to            protect us from such risk.

             

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**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.

             

Subsequent to the filing of the Original Report, and in connection with            the comments of the staff of the SEC, we determined that we had erroneously presented            the Company as being in the “production stage” rather than the            “exploration stage.” As a result of this error, the Company is filing this            Amendment to restate its consolidated financial statements for the periods ended            March 31, 2007 and 2006. Our management and our board of directors determined on            February 5, 2008, with respect to the annual reports for the fiscal years ended            December 31, 2006 and 2005 and the fiscal quarters beginning January 1, 2006 through            September 30, 2007, that we had a material weakness in internal control over financial            reporting because the controls did not identify the error on a timely basis.

 

In connection with the restatement referred to above, the Company, under            the supervision and with the participation of management, including the Chief Executive            Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and            operation of the disclosure controls and procedures as of the end of the period covered            by this report, which included consideration of the required restatement. Based on the            foregoing, the Chief Executive Officer and Chief Financial Officer concluded that our            disclosure controls and procedures were not effective as of the end of the period            covered by this report and that we had a material weakness in its internal control over            financial reporting because the controls did not identify the error on a timely            basis.

 

In light of this conclusion, the Company performed additional analysis            and procedures to ensure its consolidated financial statements are prepared in            accordance with U.S. generally accepted accounting principles. Accordingly, management            believes that the financial statements included in this report fairly present in all            material respects the Company’s financial condition, results of operations and            cash flows for the periods presented.

 

*Changes in Internal Control Over Financial Reporting*

 

Management had previously concluded that our disclosure controls and            procedures were effective as of March 31, 2007 and reported that there was no change in            the Company’s internal control over financial reporting that occurred during the            quarter ended March 31, 2007 that materially affected, or was reasonably likely to            materially affect, the internal control over financial reporting. However, in            connection with the restatements of the Company’s consolidated financial            statements for the fiscal periods ended March 31, 2007 and 2006, as fully described in            Note 5 of this Amendment, management determined that the material weakness described            above existed as of March 31, 2007 and has, as a result, effected material changes to            the Company’s internal control over financial reporting subsequent to the period            covered by this report. Management has implemented new policies requiring our internal            accounting staff and management to receive ongoing training on accounting for mineral            properties in accordance with generally accepted accounting principles in the            United

 

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States            and Industry Guide 7. Management believes these additional policies will provide            additional and enhanced internal control over financial reporting and improve the            ability of management to identify any potential errors prior to and during the            Company’s consolidated financial statement close process and prevent recurrence            of future errors of this nature.

 

**PART            II -- OTHER INFORMATION**

 

**Item            1A. Risk Factors**

There have been no material changes to the risk factors as previously            disclosed in our Annual Report on Form 10-KSB for the year ended December 31,            2006.

 

**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 by the Principal Executive Officer                            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|                                       |         |   |                                                                                                                                  |
|  

                              | Exhibit 32.2 |   | Certification by the Principal Financial Officer                            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

 

**SIGNATURES**

 

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

 

**BEKEM METALS, INC.**

 

 

| Date: April 2, 2008 | /s/ Yermek Kudabayev                                                          |
|---------------------|-------------------------------------------------------------------------------|
|                | Yermek Kudabayev

Chief Executive Officer

                              |

 

 

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