**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 EndedSeptember 30,            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.    YesxNoo

 

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 Filerx |
|--------|--------------------------|--------------------|------------------------|

 

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

 

As            of November 5, 2007, the registrant had 124,750,239 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

September 30, 2007 and December 31, 2006                            (Restated)                                                                                                                                                    |  

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

Three Months and Nine Months Ended September 30, 2007                            and 2006, and for the Period from March 5, 2004 (Date of Inception)                            through September 30, 2007 (Restated) |  

6 |
|                                                                                                                            |                                                                                                                                                                                                                                                                                                                  |   |
|                                                                                                                            | Condensed Consolidated Statements of Cash Flows                            (Unaudited) for the Nine Months Ended September 30, 2007 and 2006, and                            for the Period from March 5, 2004 (Date of Inception) through September                            30, 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                                   | 30                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                            |                                                                                                                                                                                                                                                                                                                  |
| Item 4. Controls and Procedures                                                                                                 | 31                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                            |                                                                                                                                                                                                                                                                                                                  |
| PART II — OTHER INFORMATION                                                                                               |                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                                                                                                                                                  |
| Item 1A. Risk Factors                                                                                                           | 32                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                            |                                                                                                                                                                                                                                                                                                                  |
| Item 6. Exhibits                                                                                                                | 32                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                            |                                                                                                                                                                                                                                                                                                                  |
| Signatures                                                                                                                      | 33                                                                                                                                                                                                                                                                                                                    |

 

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 endedSeptember 30, 2007, which was filed with the Securities and            Exchange Commission (“SEC”) on November 14, 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            shares 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 decreases in            “*Net Loss*” of $185,517            during the three months ended September 30, 2007 and $0 during the three months ended            September 30, 2006, and increases in “*Net            Loss*” of $758,633 during the nine months ended            September 30, 2007 and $47,179 during the nine months ended September 30, 2006. The            revision did not result in changes to “*Basic Loss Per            Common Share*” during the three months ended September            30, 2007 or 2006 or during the nine months ended September 30, 2006, but did result in            a $0.01 per share increase in “*Basic Loss Per Common            Share*” during the nine months ended September 30,            2007.

 

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 September 30, 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)**

 

| **BEKEM METALS, INC. AND SUBSIDIARIES**                                                   |
|-------------------------------------------------------------------------------------------|
| **CONSOLIDATED BALANCE SHEETS**                                                           |
|                                                                                      |   |   |   |   |
|                                                                                      |   | **September 30,** |   | **December 31,** |
|                                                                                      |   | **2007** |   | **2006** |
|                                                                                      |   | **(Restated)** |   | **(Restated)** |
| **ASSETS**                                                                                |   |   |   |   |
|                                                                                      |   |   |   |   |
| **Current Assets**                                                                        |   |   |   |   |
| Cash                                                                                      |   | $ 2,378,425 |   | $ 8,583,680 |
| Trade accounts receivable                                                                 |   | 5,350 |   | 2,776 |
| VAT recoverable                                                                           |   | 209,709 |   | 186,915 |
| Inventories                                                                               |   | 352,124 |   | 185,063 |
| Prepaid expenses and other current assets                                                 |   | 352,580 |   | 139,293 |
| Deferred compensation                                                                     |   | 362,825 |   | 757,920 |
| **Total Current Assets**                                                                  |   | 3,661,013 |   | 9,855,647 |
|                                                                                      |   |   |   |   |
| Property, plant and mineral interests (net of                            accumulated      |   |   |   |   |
| depreciation of $230,967 and $144,030)                                                    |   | 14,833,026 |   | 13,870,563 |
| Non-current deferred compensation                                                         |   | 467,234 |   | 1,202,587 |
| Other assets                                                                              |   | 189,234 |   | 169,130 |
| **Total Assets**                                                                          |   | $ 19,150,507 |   | $ 25,097,927 |
|                                                                                      |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY                            (DEFICIT)**             |   |   |   |
|                                                                                      |   |   |   |   |
| **Current Liabilities**                                                                   |   |   |   |   |
| Accounts payable                                                                          |   | $ 366,854 |   | $ 530,665 |
| Accrued expenses                                                                          |   | 248,703 |   | 274,739 |
| Due to related party                                                                      |   | 13,347 |   | 9,644 |
| **Total Current Liabilities**                                                             |   | 628,904 |   | 815,048 |
|                                                                                      |   |   |   |   |
| Deferred tax liabilities                                                                  |   | - |   | 433,645 |
| Asset retirement obligation                                                               |   | 1,060,515 |   | 951,355 |
| **Total Liabilities**                                                                     |   | 1,689,419 |   | 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 124,750,239 and 125,172,011 shares issued and                            outstanding  |   | 124,750 |   | 125,172 |
| Additional paid-in capital                                                                |   | 28,203,239 |   | 29,025,272 |
| Accumulated deficit                                                                       |   | (10,812,413) |   | (6,222,349) |
| Accumulated other comprehensive loss                                                      |   | (54,488) |   | (30,216) |
| **Total Shareholders' Equity (Deficit)**                                                  |   | 17,461,088 |   | 22,897,879 |
|                                                                                      |   |   |   |   |
| **Total Liabilities and Shareholders' Equity                            (Deficit)**       |   | $ 19,150,507 |   | $ 25,097,927 |
|                                                                                      |   |   |   |   |

 

 

5

----

 

|   |   |   |   |   |
|--------|--------|--------|--------|--------|

                **BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

| **BEKEM METALS, INC. AND SUBSIDIARIES**                                      |
|------------------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF OPERATIONS**                                    |
|                                                                         |   |   |   |   |   |   |   |
|                                                                         |   |   |   |   |   |   |   |
|                                                                         |   |   |   |   |   |   | **For the Period from** |
|                                                                         |   |   |   |   |   |   | **March 5, 2004** |
|                                                                         | **For the Three Months Ended** |   | **For the Nine Months Ended** |   | **(Date of Inception)** |
|                                                                         | **September 30,** |   | **September 30,** |   | **through** |
|                                                                         | **2007** | **2006** |   | **2007** | **2006** |   | **September 30, 2007** |
|                                                                         | **(Restated)** | **(Restated)** |   | **(Restated)** | **(Restated)** |   | **(Restated)** |
|                                                                         |   |   |   |   |   |   |   |
| **Revenue**                                                                  | $ - | $ - |   | $ - | $ - |   | $ - |
|                                                                         |   |   |   |   |   |   |   |
| **Operating Expenses**                                                       |   |   |   |   |   |   |   |
| Cost of product sold                                                         | - | - |   | - | - |   | - |
| General and administrative expenses                                          | 871,463 | 1,287,652 |   | 3,564,696 | 2,209,740 |   | 7,819,068 |
| Research and development costs                                               | - | - |   | - | 391,307 |   | 792,168 |
| Exploratory costs                                                            | 489,230 | 336,211 |   | 2,282,713 | 581,462 |   | 4,450,456 |
| Accretion expense on asset retirement                            obligations | 20,189 | 18,758 |   | 60,558 | 54,901 |   | 194,055 |
| Grant compensation expense                                                   | 120,941 | - |   | 307,993 | - |   | 459,576 |
|                                                                         |   |   |   |   |   |   |   |
| **Total Operating Expenses**                                                 | 1,501,823 | 1,642,621 |   | 6,215,960 | 3,237,410 |   | 13,715,323 |
|                                                                         |   |   |   |   |   |   |   |
| **Loss From Operations**                                                     | (1,501,823) | (1,642,621) |   | (6,215,960) | (3,237,410) |   | (13,715,323) |
|                                                                         |   |   |   |   |   |   |   |
| **Other Income (Expense)**                                                   |   |   |   |   |   |   |   |
| Interest income                                                              | 89,902 | 17,563 |   | 316,529 | 27,935 |   | 401,866 |
| Interest expense                                                             | - | (1,109,062) |   | (1,018) | (1,474,274) |   | (1,677,441) |
| Translation adjustment                                                       | (77,526) | 90,045 |   | (216,913) | (30,269) |   | (211,295) |
| Exchange loss (gain)                                                         | 361,665 | (1,031,056) |   | 1,053,644 | (140,908) |   | 818,910 |
| Other income (expense)                                                       | 9,953 | 3,709 |   | 32,541 | (30,639) |   | 54,402 |
|                                                                         |   |   |   |   |   |   |   |
| **Net Other Expense**                                                        | 383,994 | (2,028,801) |   | 1,184,783 | (1,648,155) |   | (613,558) |
|                                                                         |   |   |   |   |   |   |   |
| **Net Loss Before Taxes**                                                    | (1,117,829) | (3,671,422) |   | (5,031,177) | (4,885,565) |   | (14,328,881) |
| Deferred tax benefit                                                         | - | - |   | 441,113 | - |   | 3,375,260 |
| Loss in minority interest                                                    | - | - |   | - | - |   | 141,208 |
| **Net Loss**                                                                 | $ (1,117,829) | $ (3,671,422) |   | $ (4,590,064) | $ (4,885,565) |   | $ (10,812,413) |
|                                                                         |   |   |   |   |   |   |   |
| **Basic Loss per Common Share**                                              | $ (0.01) | $ (0.03) |   | $ (0.04) | $ (0.05) |   |   |
| **Weighted-Average Shares used in**                                          |   |   |   |   |   |   |   |
| **Basic Loss per Common Share**                                              | 124,750,239 | 120,436,714 |   | 125,028,330 | 106,946,031 |   |   |
|                                                                         |   |   |   |   |   |   |   |

 

 

6

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

| **BEKEM METALS, INC. AND SUBSIDIARIES**                                              |   |
|--------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED STATEMENTS OF CASH FLOWS**                                            |   |
|                                                                                 |   |   |   |   | **For the Period from** |
|                                                                                 |   |   |   |   | **March 5, 2004** |
|                                                                                 |   | **For the Nine Months Ended** | **(Date of Inception)** |
|                                                                                 |   | **September 30,** | **through** |
|                                                                                 |   | **2007** |   | **2006** | **September 30, 2007** |
|                                                                                 |   | **(Restated)** |   | **(Restated)** | **(Restated)** |
| **Cash Flows from Operating Activities**                                             |   |   |   |   |   |
| Net loss                                                                             |   | $ (4,590,064) |   | $ (4,885,565) | $ (10,812,413) |
| Adjustments to reconcile net loss to                                                 |   |   |   |   |   |
| net cash provided by operating activities:                                           |   |   |   |   |   |
| Depreciation and amortization                                                        |   | 99,777 |   | 37,396 | 266,910 |
| Accretion expense on asset retirement                            obligations         |   | 60,558 |   | 54,901 | 210,124 |
| Interest expense from debt discount                                                  |   | - |   | - | 963,231 |
| Shares issued on option modification                                                 |   | - |   | - | 19,426 |
| Deferred tax benefit                                                                 |   | (441,113) |   | - | (3,375,260) |
| Foreign currency exchange gain and translation                            adjustment |   | (203,106) |   | 41,682 | (406,357) |
| Purchased exploration costs                                                          |   |   |   |   | 251,286 |
| Loss on disposal of property and equipment                                           |   | 150,604 |   | 40,191 | 209,532 |
| Stock grant compensation expense                                                     |   | 307,993 |   | - | 459,576 |
| Loss recognized on minority shareholders'                            interest        |   | - |   | - | (141,208) |
| Change in operating assets and liabilities:                                          |   |   |   |   |   |
| Trade accounts receivable                                                            |   | (2,949) |   | 7,370 | 6,019 |
| Inventories                                                                          |   | (155,160) |   | 22,710 | (76,776) |
| VAT recoverable                                                                      |   | (13,222) |   | - | (135,720) |
| Prepaid expenses and other current assets                                            |   | (225,887) |   | (709,570) | (144,908) |
| Accounts payable                                                                     |   | (174,605) |   | 298,512 | 47,362 |
| Accrued expenses                                                                     |   | (570,261) |   | 208,863 | (657,471) |
| **Net Cash From Operating Activities**                                               |   | (5,757,435) |   | (4,883,510) | (13,316,647) |
|                                                                                 |   |   |   |   |   |
| **Cash Flows from Investing Activities**                                             |   |   |   |   |   |
| Purchase of property and equipment                                                   |   | (516,434) |   | (2,079,419) | (3,134,871) |
| Purchase of intangible assets                                                        |   | (7,399) |   | (31,797) | (64,879) |
| Proceeds from disposal of property and                            equipment          |   | - |   | - | 22,941 |
| Restricted cash                                                                      |   | - |   | (100,000) | (100,000) |
| Notes receivable                                                                     |   | - |   | - | (56,983) |
| Cash acquired in acquisitions                                                        |   | - |   | 45,393 | (152,180) |
| Change in related party receivables /                            payables            |   | (4,619) |   | (2,240,525) | 45,856 |
| **Net Cash From Investing Activities**                                               |   | (528,452) |   | (4,406,348) | (3,440,116) |
|                                                                                 |   |   |   |   |   |
| **Cash Flows from Financing Activities**                                             |   |   |   |   |   |
| Proceeds from notes payable                                                          |   | - |   | 869,900 | 14,706,914 |
| Payments on notes payable                                                            |   | - |   | (11,260,644) | (22,745,753) |
| Proceeds from notes payable related parties                                          |   | - |   | 1,536,044 | 4,326,912 |
| Payments on notes payable - related parties                                          |   | - |   | - | (4,326,912) |
| Issuance of shares for cash                                                          |   | - |   | 26,401,842 | 26,728,842 |
| **Net Cash From Financing Activities**                                               |   | - |   | 17,547,142 | 18,690,003 |   |   |   |   |   |   |
| **Effect of Exchange Rate Changes on                            Cash**               |   | 80,632 |   | 149,573 | 445,185 |
|                                                                                 |   |   |   |   |   |
| **Net Increase in Cash**                                                             |   | (6,205,255) |   | 8,406,857 | 2,378,425 |
| **Cash at Beginning of Period**                                                      |   | 8,583,680 |   | 89,366 | - |
| **Cash at End of Period**                                                            |   | $ 2,378,425 |   | $ 8,496,223 | $ 2,378,425 |
|                                                                                 |   |   |   |   |   |

 

 

7

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 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 nine-month period ended September 30, 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 included in 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**

**SEPTEMBER 30, 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 ($4,590,064) and            ($4,885,565) for the nine months ended September 30, 2007 and 2006, respectively and            ($10,812,413) for the period from March 5, 2004 (date of inception) through September            30, 2007. Current assets exceeded current liabilities by $3,032,109 at September 30,            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

 

9

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

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.

 

***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.

 

**Corrected Prior Period Financials**

 

During the course of preparing the financial statements the Company            identified certain prior period misstatements whose impact was not material, either            individually or in aggregate, to the Company’s financial statements for the year            ended December 31, 2006. However, these misstatements were considered material to the            Company’s quarterly financial statements related to 2007. The correction of the            misstatements is in accordance with SAB 108. As a result, the Company corrected the            financial statements for the year ended December 31, 2006. The corrected balance sheet            as of December 31, 2006 is included in these financial statements. These misstatements            relate to recognizing an incorrect amount of deferred compensation. The effect of            correcting these misstatements resulted in an increase in deferred compensation            expense, an increase in accumulated deficit, and an increase in net loss of $48,740 for            the year ended December 31, 2006.

 

**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:

 

|                     | **September 30,** |   | **December 31,** |
|--------------------------|-------------------|--------|------------------|
|                     | **2007**          |   | **2006**         |
| Current accounts (USD)   | $ 169,121         |   | $ 479,947        |
| Current accounts (Tenge) | 43,877            |   | 38,379           |
| Bank deposit (USD)       | 143,626           |   | 8,065,354        |
| Bank deposit (Tenge)     | 2,021,801         |   | -                |
| **Total**                | **$ 2,378,425**   |   | **$ 8,583,680**  |

 

 

10

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

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:

 

|                             | **September 30,** |   | **December 31,** |
|----------------------------------|-------------------|--------|------------------|
|                             | **2007**          |   | **2006**         |
| Buildings                        | $ 2,364,257       |   | $ 2,156,326      |
| Machinery and equipment          | 3,846,276         |   | 3,474,858        |
| Other fixed assets               | 124,578           |   | 69,665           |
| Unproved mineral interests - net | 8,728,882         |   | 8,313,744        |
|                             | 15,063,993        |   | 14,014,593       |
| Accumulated depreciation         | (230,967)         |   | (144,030)        |
| **Net Property and Equipment**   | **$ 14,833,026**  |   | **$ 13,870,563** |

 

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

 

11

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

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 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.

 

12

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

***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.

 

***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, our 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.

 

13

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

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.

 

**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 and            nine months ended September 30, 2007 was corrected.

 

The            effects of the restatements are as follows:

 

| **Balance Sheet**                    |                       |                      |            |
|--------------------------------------|----------------------------|---------------------------|-----------------|
|                                 |                       |                      |            |
| **September 30, 2007**               | **As Previously Reported** | **Effect of Restatement** | **As Restated** |
|                                 |                       |                      |            |
| Inventories                          | 1,275,941                  | (923,817)                 | 352,124         |
| Accrued expenses                     | (303,335)                  | 54,632                    | (248,703)       |
| Accumulated deficit                  | 9,916,457                  | 895,956                   | 10,812,413      |
| Accumulated other comprehensive loss | 81,259                     | (26,771)                  | 54,488          |

 

 

14

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

 

| **Statements of Operations**                                                 |                       |                      |            |
|------------------------------------------------------------------------------|----------------------------|---------------------------|-----------------|
|                                                                         |                       |                      |            |
| **For the Three Months Ended September 30,                            2007** |                       |                      |            |
|                                                                         | **As Previously Reported** | **Effect of Restatement** | **As Restated** |
|                                                                         |                       |                      |            |
| Revenue                                                                      | 1,882                      | (1,882)                   | -               |
| Cost of product sold                                                         | (2,150)                    | 2,150                     | -               |
| Exploratory costs                                                            | (71,534)                   | (417,696)                 | (489,230)       |
| Depreciation expense                                                         | (27,472)                   | 27,472                    | -               |
| Other income (expense)                                                       | 31,673                     | (21,720)                  | 9,953           |
| Deferred tax expense                                                         | (597,193)                  | 597,193                   | -               |
| Net Loss                                                                     | (1,303,346)                | 185,517                   | (1,117,829)     |
|                                                                         |                       |                      |            |

 

 

| **Statements of Operations**                                                |                       |                      |            |
|-----------------------------------------------------------------------------|----------------------------|---------------------------|-----------------|
|                                                                        |                       |                      |            |
| **For the Nine Months Ended September 30,                            2007** |                       |                      |            |
|                                                                        | **As Previously Reported** | **Effect of Restatement** | **As Restated** |
|                                                                        |                       |                      |            |
| Revenue                                                                     | 38,537                     | (38,537)                  | -               |
| Cost of product sold                                                        | (36,950)                   | 36,950                    | -               |
| Exploratory costs                                                           | (1,467,338)                | (815,375)                 | (2,282,713)     |
| Depreciation expense                                                        | (94,253)                   | 94,253                    | -               |
| Other income (expense)                                                      | 19,264                     | 13,277                    | 32,541          |
| Deferred tax benefit                                                        | 490,314                    | (49,201)                  | 441,113         |
| Net Loss                                                                    | (3,831,431)                | (758,633)                 | (4,590,064)     |

 

| **Statements of Cash Flows**                                                |                       |                      |            |
|-----------------------------------------------------------------------------|----------------------------|---------------------------|-----------------|
|                                                                        |                       |                      |            |
| **For the Nine Months Ended September 30,                            2007** |                       |                      |            |
|                                                                        | **As Previously Reported** | **Effect of Restatement** | **As Restated** |
|                                                                        |                       |                      |            |
| **Cash Flows from Operating Activities**                                    |                       |                      |            |
| Net loss                                                                    | (3,831,431)                | (758,633)                 | (4,590,064)     |
| Adjustments to reconcile net loss to                                        |                       |                      |            |
| net cash provided by operating activities:                                  |                       |                      |            |
| Deferred tax benefit                                                        | (515,422)                  | 74,309                    | (441,113)       |
| Stock grant compensation expense                                            | 333,101                    | (25,108)                  | 307,993         |
| Change in operating assets and liabilities:                                 |                       |                      |            |
| Inventories                                                                 | (864,592)                  | 709,432                   | (155,160)       |

 

 

**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

 

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**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-Obinskoye section”) and the Novo-Shandashinskoe section. KKM also            holds a subsoil use contract to

 

16

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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            September 30, 2007 we have drilled a total of 15,625 meters (619 test            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.

 

17

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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 September 30, 2007, we had            spent approximately $24,222,000 of those funds. Approximately $12,200,000 was used to            repay loans, $2,500,000 was used to meet our minimum working program obligations,            approximately $2,200,000 was spent developing our hydrochlorination processing            technology and $7,300,000 was used for working capital. At September 30, 2007, we had            cash on hand of $2,378,425. 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 September 30, 2007 compared to the three months            ended September 30, 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 period ended            September 30, 2007, such incidental sales amounted to $1,882.

 

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

             

Our general and administrative expenses during the three months ended            September 30, 2007 decreased to $871,463 from $1,287,652 during the three months ended            September 30, 2006. During the 2006 quarter we extracted no ore. As a result, expenses            (salaries of workers and other related expenses) of approximately $400,000 were            allocated to general and administrative expenses. By comparison, during the 2007            quarter we extracted 62,065 tons of ore, which allowed us to reduce the amount of            workers’ salaries and other related expenses allocated to general and            administrative expense during the three months ended September 30, 2007.

             

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 third            quarter 2007 or during the third quarter 2006.

 

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

 

We pursued an aggressive exploratory drilling program during the first            half of 2007, which resulted in our nearly satisfying our full year drilling commitment            during the first six months of the year. As a result, during the three months ended            September 30, 2007 we completed drilling of 16 test holes (12 test holes in the South            section of the Gornostai deposit and four test holes in the North section of the            Gornostai deposit). By comparison, during the three months ended September 30, 2006, we            drilled 105 test holes in the South section of the Gornostai deposit. Despite the            reduced scope of drilling activities, the exploratory costs increased to $489,230            during the three months ended September 30, 2007 compared to exploratory costs of            $336,211 during the three months ended September 30, 2006. The increase mainly occurred            due to cost of extracted ore at the Kempirsai deposit. As discussed above, during the            three months ended September 30, 2007 we extracted 62,065 tons of ore which were            included into exploratory costs since the Company is being at the exploratory stage. No            ore was produced during the same period of 2006. 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            September 30, 2007, we earned revenue of $1,882. By comparison during the three month            period ended September 30, 2006 we realized no revenue. We will continue to engage in            exploration activities throughout the remainder of the current fiscal year. We do not            expect to realize significant revenue during the remainder of the current fiscal            year.

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

             

Accretion expense increased by $1,431 during the three months ended            September 30, 2007 compared to the same period of 2006. Until such time as we engage in            mining and production we believe accretion expense will continue at rates consistent            with those realized during the quarter ended September 30, 2007.

 

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Grant Compensation Expense

             

During the three months ended September 30, 2007 we recognized $120,941            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 September 30, 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 decreased from            $1,642,621 during the three months ended September 30, 2006 to $1,501,823 during three            months ended September 30, 2007. The principal reasons for the decrease are the            following:

             

|   | o | Decrease in general and administrative expense of                            $416,189 as we extracted ore during the three months ended September                            30, 2007 which led to a decrease in allocation of certain costs to                            general and administrative expenses. By comparison, no ore was                            extracted during the same period of 2006; |
|--------|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | Increase in exploratory costs of $153,019 mainly due to                            increase in cost of ore extracted during the period; |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | o | Increase in recognition of the stock grant compensation                            expenses of $120,941. By comparison, we had no comparable expense                            during the three months ended September 30, 2006. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Despite the reduction in total operating expenses realized during the            third quarter 2007 compared to 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 September 30, 2007, we realized interest            on deposits of $89,902. By comparison during the three months ended September 30, 2006            we earned $17,563 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. Certain deposits matured during the third quarter of 2007 which resulted in            the realization of higher rates of return as compared to the third quarter            2006.

             

Interest Expense

             

We realized no interest expense during the three months ended September            30, 2007. During the three months ended September 30, 2006 we realized interest expense            of $1,109,062. The interest expense realized during the third quarter 2006 resulted            from retiring notes payable prior to their due dates and the full recognition of the            debt discount of $885,970. Upon acquisition of KKM we assumed certain debts with            interest rates that were considered to be below market rates. These particular debts            with below market interest rates were discounted, for

             

20

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reporting purposes, to arrive at interest rates equivalent to market            rates. The total payout of these debts was not adjusted, just the allocation of            principal and interest payments. Upon the payoff of these debts, the interest expense,            or discount, was recognized in full. The recognition of the debt discount was a            one-time occurrence and we have not and do not expect to recognize a similar charge in            future years. The actual dollar amount of funds paid by us for interest during the            third quarter 2006 was $229,096.

             

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            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, the average exchange rate during the three months ended September 30, 2007 was            higher than the closing exchange rate, thus resulting in a negative translation            adjustment during the three months ended September 30, 2007.

             

Exchange Gain/Loss

             

During the quarter ended September 30, 2007 we realized an exchange gain            of $361,665 compared to an exchange loss of $1,031,056 during the quarter ended            September 30, 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.

             

Other Income (Expense)

             

During the three months ended September 30, 2007 we earned income from            other sales of $9,953 comprising mainly income from renting transport facilities to            third parties. For the same period of 2006 we earned income of $3,709 from similar            services. The services are provided on an irregular basis when assets are not used in            the Company’s primary activities.

 

21

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Net Loss

             

Because of reductions in operating expenses and our realizing net other            income of $383,994 compared to net other expense of $2,028,801 during the three months            ended September 30, 2007 we experienced a net loss of $1,117,829 or $.01 per share,            compared to a net loss of $3,671,422 or $.03 per share, during the three months ended            September 30, 2006. We anticipate we will continue to experience 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.

             

***Nine months ended September 30, 2007 compared to the nine months            ended September 30, 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.

             

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

             

Our general and administrative expenses during the nine months ended            September 30, 2007 increased to $3,564,696 from $2,209,740 during the nine months ended            September 30, 2006. This increase in general and administrative expenses during the            nine months ended September 30, 2007 is mainly attributable to a $700,000 increase in            salary expense and related taxes as a result of an increase in the number of personnel            we employ and salary increases for existing employees, as our subsidiary KKM hired a            number of personnel to carry out development and testing of the pilot plant and            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 needs 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. Also, during            second quarter we had a $270,000 increase in transportation and repair services related            to modernization works at KKM’s facilities. Another contributing factor to the            increase in general and administrative expenses was a $447,000 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 nine            months ended September 30, 2007. During the nine months ended September 30, 2006 we            spent $391,307 in research and development costs, primarily in connection with the            development of our pilot plant. Given our limited funds, we have decided to allocate            the funds budgeted for development and testing of our pilot plant to other uses. We do            not anticipate engaging in additional development and testing of our hydrochlorination            processing technology prior to receipt of the pre-feasibility study.

 

22

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

 

As a result of our aggressive exploratory drilling program for 2007,            during the nine months of 2007 we completed drilling of 619 test holes (611 test holes            in the South section and 8 test holes in the North section of the Gornostai deposit) to            an aggregate depth of 15,625 meters (14,965 meters in the South section and 660 meters            in the North section). We incurred $2,282,713 in exploratory costs through September            30, 2007. By comparison, during the nine months ended September 30, 2006, we drilled            169 test holes in the South section and no holes in the North section of the Gornostai            deposit and incurred exploratory costs of $581,462. Our exploratory drilling program            for our 2007 fiscal year calls for us to drill a total of 615 test holes to an            aggregate depth of approximately 15,700 meters.

The            increase also occurred due to cost of extracted ore at the Kempirsai deposit. During            the nine months ended September 30, 2007 we extracted 79,021 tons of ore while no ore            was extracted during the same period of 2006. The cost of extraction of ore was            included into exploratory costs since the Company is being at the exploratory stage.            Also, as discussed above, because our operations are considered as exploratory, the            exploratory costs are reflected net of revenues earned from sale of ore or brown coal.            During the nine months ended September 30, 2007 we have realized revenue of $38,537. By            comparison, during the nine months ended September 30, 2006 we realized no revenue            from. We do not anticipate realizing significant revenue during 2007.

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

             

Accretion expense increased by $5,657 during the nine months ended            September 30, 2007. We believe accretion expense will continue at rates consistent with            those realized during the nine months ended September 30, 2007 until such time as we            begin to engage in significant mining and production activities.

             

Grant Compensation Expense

             

During the nine months ended September 30, 2007 we incurred $307,993 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            nine months ended September 30, 2006 because, as noted above, the grants were not made            until the fourth quarter 2006.

|   | Total Operating Expenses and Loss from                            Operations |
|--------|------------------------------------------------------------------------------|

             

Despite an insignificant decrease in total operating expenses during the            three month period ended September 30, 2007 we realized a 92% increase in total            operating expenses during the nine months ended September 30, 2007 as a result of            higher general and administrative expense, grant compensation expense and exploration            costs, which expenses and costs were only partially offset by a reduction in research            and development costs during the nine months ended September 30, 2007. Our total            operating expenses and loss from operations increased by $2,978,550 during the nine            months ended September 30, 2007. We expect total operating expenses during the balance            of 2007 to remain significantly higher as compared to 2006 and we will continue to            generate losses until such time as we begin significant ore production.

 

23

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Interest Income

             

During the nine months ended September 30, 2007, we realized interest on            deposits of $316,529. By comparison during the nine months ended September 30, 2006 we            earned $27,935interest on deposits. As discussed above, 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. Certain deposits matured during the            third quarter of 2007 which resulted in the realization of higher rates of return as            compared to the third quarter 2006.

             

Interest Expense

             

During the nine months ended September 30, 2007 we incurred interest            expense of $1,018 compared to interest expense of $1,474,274 during the nine months            ended September 30, 2006. As discussed above, the interest expense realized during the            first three quarters of 2006 resulted from retiring notes payable prior to their due            dates and the full recognition of the debt discount of $885,970. Upon acquisition of            KKM we assumed certain debts with interest rates that were considered to be below            market rates. These particular debts with below market interest rates were discounted,            for reporting purposes, to arrive at interest rates equivalent to market rates. The            total payout of these debts was not adjusted, just the allocation of principal and            interest payments. Upon the payoff of these debts, the interest expense, or discount,            was recognized in full. The recognition of the debt discount was a one-time occurrence            and we have not and do not expect to recognize a similar charge in future years. The            actual dollar amount of funds paid by us for interest during the nine months ended            September 30, 2006 was $529,096.

             

Translation Adjustment

             

As indicated above, the translation adjustment in the consolidated            financial statements represents the translation differences from translation of the            Kaznickel’s financial statements.

             

As a result of the weakening of the U.S. dollar against the Kazakh            tenge, the average exchange rate during the nine months ended September 30, 2007 was            higher than the closing exchange rate, thus resulting in a negative translation            adjustment during the nine months ended September 30, 2007.

             

Exchange Loss and Gain

             

During the nine months ended September 30, 2007 we realize an exchange            gain of $1,053,644 compared to an exchange loss of $140,908 during the quarter ended            September 30, 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.

 

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Other Income (Expense)

             

During the nine months ended September 30, 2007 we earned income from            other sales of $32,541 comprising mainly income from renting transport facilities to            third parties. For the same period of 2006 we incurred losses of $30,639 from similar            services. The services are provided on an irregular basis when assets are not used in            the Company’s primary activities.

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

             

For the foregoing reasons, during the nine months ended September 30,            2007 we experienced a net loss of $4,590,064, or $.04 per share, compared to a net loss            of $4,885,565, or $.05 per share, during the nine months ended September 30, 2006. We            anticipate 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 September 30, 2007, we had $2,378,425 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            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 nine months ended September 30, 2007 and September 30, 2006,            cash was primarily used to fund operations and repay notes payable. See below for            additional discussion and analysis of cash flow.

 

| *For the Nine Months Ended September                            30,* | **2007**         | **2006**        |
|----------------------------------------------------------------------|------------------|-----------------|
|                                                                 |             |            |
| Net cash used in operating activities                                | $(5,757,435)     | $(4,883,510)    |
| Net cash used in investing activities                                | (528,452)        | (4,406,348)     |
| Net cash provided by financing activities                            | -                | 17,547,142      |
| Effect of exchange rate changes on cash                              | 80,632           | 149,573         |
| **NET (DECREASE) INCREASE IN CASH**                                  | **$(6,205,255)** | **$ 8,406,857** |

 

 

25

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During the nine months ended September 30, 2007 net cash used in            operating activities was $5,757,435 compared to net cash used in operating activities            of $4,883,510 during the nine months ended September 30, 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 nine months ended September 30, 2007 net cash used in            investing activities was $528,452. By comparison, during the nine months ended            September 30, 2006 we used net cash from investing activities of $4,406,348. The cash            used in investing activities was primarily used to purchase additional            equipment.

 

During the nine months ended September 30, 2007 no cash was generated in            financing activities compared to $17,547,142 net cash realized in financing activities            during the nine months ended September 30, 2006, as a result of the private placement            of our equity securities.

 

**Plan of Operations**

             

As of September 30, 2007 we had cash on hand of $2,378,425. As discussed            above, we have budgeted to spend all of these funds in exploration and development            activities during remaining three months of 2007. Following is a brief description of            how we anticipate allocating our cash on hand during the next three months.

 

***Drilling and Core Analysis***

 

We have allocated approximately $169,400 to the completion of our            drilling and exploration program for the remainder of the 2007 fiscal year. This            included exploration costs for geologist fees, geological data processors, core sample            takers, topographers etc. The drilling program is completed in July 2007 by drilling            15,625 meters, including 14,965 meters in South section and 660 meters in North            section. We have satisfied our 2007 minimum work program requirements for the Gornostai            deposit. We do not expect to engage in additional drilling activities during the            remainder of 2007. Currently, we are analyzing the results of our drilling and            exploration works in order to prepare and submit an exploration report to the MEMR for            finalizing the reserve estimates and obtaining permission for commercial production of            the nickel ore from the Gornostai deposit.

             

***Feasibility Study***

 

We anticipate spending approximately $315,000 for the preparation of            pre-feasibility studies for the construction of a processing plant at the Kempirsai            deposit. As of September 30, 2007 we had spent $102,000 for the study.

             

***Field Modernization***

             

We have allocated approximately $1,000,000 during 2007 for modernization            of vehicles and equipment at the Kempirsai deposit to allow us to increase our ore            extracting capabilities. As of September 30, 2007 we had spent approximately $563,000            to modernize vehicles and equipment at the Kempirsai deposit.

 

26

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***Administrative Expenses***

 

We plan to allocate approximately $1,500,000 for administrative expenses            during the next three months, which include expenses of maintaining offices in the            United States and Kazakhstan, for salaries and taxes.

 

***Professional Fees***

 

We expect to incur approximately $52,000 in expenses for services of our            financial auditors and securities attorneys during the next three months.

 

**Additional Activities**

 

We are currently considering alternatives to a hydrochlorination            processing plant to allow us to begin to generate cash flow from the Kempirsai deposit.            We are considering the economic viability of a pyrometallurgical or hydrometallurgical            processing plant to produce ferronickel at our Kempirsai deposit. As noted above, we            have allocated $315,000 in our 2007 budget for the preparation of pre-feasibility study            to help us determine the appropriate technology for use at the Kempirsai deposit. Once            that determination is made, we plan to undertake a feasibility study. Assuming the            results of those studies are positive, we would like to move to the design phase of a            commercial processing 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 September 30,                            2007: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

 

| Contractual Commitments                                                       |  

Total | Payments Due by Fiscal Year |
|-------------------------------------------------------------------------------|---------------|-----------------------------|
| Less than

one year                                                           | 2-3 years     | 4-5 years                   | After

5 years |
|                                                                          |          |                        |   |   |   |
| Due to the government of Republic of                            Kazakhstan(1) | $ 731,221     | $ -0-                       | $ 731,221 | $ -0- | $ -0- |
| Social projects(2)                                                            | 321,000       | -0-                         | 14,000 | 307,000 | -0- |
| Asset retirement obligation(3)                                                | 1,060,515     | -0-                         | -0- | -0- | 1,060,515 |
| Operating leases                                                              | 61,900        | 61,900                      | -0- | -0- | -0- |
|  

Total                                                                 | $ 2,174,636   | $61,900                     | $ 745,221 | $ 307,000 | $ 1,060,515 |

                

(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.

 

27

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(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.

 

In July 2007, we completed the minimum exploratory drilling requirements            for 2007 associated with the Gornostai deposit.

             

**Off-Balance Sheet Financing Arrangements**

 

|   | As of September 30, 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

 

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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. 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.

             

***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            September 30, 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 our 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 September 30, 2007 and reported that there was no            change in the Company’s internal control over financial reporting that occurred            during the quarter ended September 30, 2007 that materially affected, or was            reasonably likely to materially affect, the internal control over financial

 

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reporting. However, in connection with the restatements of the            Company’s consolidated financial statements for the fiscal periods ended            September 30, 2007 and 2006, as fully described in Note 5 of this Amendment,            management determined that the material weakness described above existed as of            September 30, 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            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 |

 

 

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**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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