UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2014

[  ]
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 000-33215

CASPIAN SERVICES, INC.
(Exact name of registrant as specified in its charter)

Nevada
  
87-0617371
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)
     
2319 Foothill Drive, Suite 160
    
Salt Lake City, Utah
  
84109
(Address of principal executive offices)
  
(Zip Code)

(801) 746-3700
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes þ  Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o  Accelerated filer o
 Non-accelerated filer o (Do not check if a smaller reporting company)  Smaller reporting company þ
 

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

As of August 12, 2014, the registrant had 52,657,574 shares of common stock, par value $0.001, issued and outstanding.
 

 
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements
Page
     
 
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2014
   and September 30, 2013
3
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
  (Unaudited) for the three and nine months ended June 30, 2014 and 2013
4
     
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
  
 
   nine months ended June 30, 2014 and 2013
5
     
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
6
     
Item 2. Management’s Discussion and Analysis of Financial Condition
  
             and Results of Operations
24
     
Item 3. Qualitative and Quantitative Disclosures About Market Risk
38
     
Item 4. Controls and Procedures
39
   
PART II — OTHER INFORMATION
  
   
Item 1.  Legal Proceedings
39
   
Item 1A. Risk Factors
39
   
Item 3. Defaults Upon Senior Securities
39
   
Item 6. Exhibits
40
   
Signatures
40

2
 
 
 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
 

 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
      
CONDENSED CONSOLIDATED BALANCE SHEETS
      
(Dollars in thousands, except share and per share data)
      
 
June 30,
  
September 30,
 
2014
  
2013
 
(Unaudited)
    
ASSETS
      
Current Assets
      
Cash
 $         1,162
  
 $          3,973
Trade accounts receivable, net of allowance of $2,492 and $2,796, respectively
          10,408
  
           11,075
Trade accounts receivable from related parties, net of allowance of $436 and $3,499, respectively
                   4
  
             1,455
Other receivables, net of allowance of $247 and $291, respectively
               752
  
                705
Inventories
            1,213
  
             1,053
Property held for sale, net of allowance of $1,067 and $1,273, respectively
                 44
  
                203
Prepaid taxes
            1,153
  
             1,329
Advances paid, net of allowance of $59 and $39, respectively
               585
  
                829
Deferred tax assets
               583
  
                235
Prepaid expenses and other current assets
               386
  
                571
Total Current Assets
          16,290
  
           21,428
Vessels, equipment and property, net
          43,080
  
           50,741
Drydocking costs, net
               737
  
                519
Long-term deferred tax assets
1,267
  
1,849
Goodwill
               187
  
                224
Intangible assets, net
                 15
  
                  29
Long-term prepaid taxes
            3,282
  
             4,735
Investments
                 11
  
                  13
Long-term other receivables, net of current portion
               813
  
             1,005
Total Assets
 $       65,682
  
 $        80,543
       
LIABILITIES AND DEFICIT
      
Current Liabilities
      
Accounts payable
 $         1,952
  
 $          2,409
Accounts payable to related parties
                 84
  
                  -
Accrued expenses
            1,272
  
             1,244
Taxes payable
               539
  
                911
Deferred revenue
               958
  
                  10
Accelerated put option liability
          21,263
  
           19,649
Long-term debt - current portion
          67,693
  
           63,836
Total Current Liabilities
          93,761
  
           88,059
Long-term deferred revenue from related parties
                  -
  
             2,619
Total Liabilities
          93,761
  
           90,678
Deficit
      
Common stock, $0.001 par value per share; 500,000,000 shares authorized;
      
 52,657,574 shares issued and outstanding
                 53
  
                  53
Additional paid-in capital
          64,827
  
           64,827
Accumulated deficit
        (61,144)
  
         (49,894)
Accumulated other comprehensive loss
        (20,434)
  
         (15,619)
Deficit attributable to Caspian Services, Inc. Shareholders
        (16,698)
  
              (633)
Deficit attributable to noncontrolling interests
        (11,381)
  
           (9,502)
Total Deficit
        (28,079)
  
         (10,135)
Total Liabilities and Deficit
 $       65,682
  
 $        80,543
 
See accompanying notes to the condensed consolidated financial statements.
 
3
 
 
 

CASPIAN SERVICES, INC. AND SUBSIDIARIES
  
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  (Unaudited)
(Dollars in thousands, except per share data)
      
           
 
 For The Three Months
Ended June 30,
  
 For The Nine Months
Ended June 30,
 
 2014
 2013
  
 2014
 2013
           
Revenues
          
Vessel revenues
 $                  4,046
 $                     5,685
  
 $                      9,882
 $                   9,827
Geophysical service revenues
                      3,564
                          3,491
  
                        10,832
12,829
Marine base service revenues (which includes $265 and $931 from related parties for the three and nine months ended June 30, 2014, respectively and $125 and $440 from related parties for the three and nine months ended June 30, 2013, respectively)
                           564
                              265
  
                           1,780
816
   Total Revenues
          8,174
            9,441
  
         22,494
       23,472
           
Operating Expenses
          
Vessel operating costs
                       2,159
                         2,685
  
                            7,011
6,572
Cost of geophysical service revenues
                       2,017
                          2,197
  
                          6,088
6,382
Cost of marine base service
                            159
                                 89
  
                               513
521
Depreciation and amortization
                        1,018
                          1,236
  
                          3,295
3,808
Impairment loss
                            (90)
                                  -
  
(34)
                                -
General and administrative expense
                      2,207
                          1,870
  
                          6,257
7,984
   Total Costs and Operating Expenses
         7,470
           8,077
  
          23,130
       25,267
Income (Loss) from Operations
                704
               1,364
  
                 (636)
            (1,795)
           
Other Income (Expense)
          
Interest expense
                      (2,101)
                        (1,677)
  
                        (6,074)
(5,210)
Foreign currency transaction loss
                          (313)
                            (259)
  
                        (6,776)
(407)
Interest income
                               12
                                  12
  
                                 35
50
Other non-operating income, net
                              32
                              272
  
                                  51
1,259
   Net Other Expense
       (2,370)
          (1,652)
  
        (12,764)
        (4,308)
           
Loss from Continuing Operations Before Income Tax
           (1,666)
                (288)
  
           (13,400)
            (6,103)
Benefit from (provision for) income tax
                          (318)
                             (413)
  
                            (240)
313
   Net loss from continuing operations
        (1,984)
              (701)
  
        (13,640)
        (5,790)
Loss from discontinued operations, net of tax of $45 and $162 for the three and nine months ended June 30, 2013, respectively
                               -
                       (2,790)
  
                                   -
                     (3,359)
   Net loss
        (1,984)
          (3,491)
  
        (13,640)
        (9,149)
Net  loss attributable to noncontrolling interests
                           535
                              478
  
                          2,390
                           855
Net loss attributable to Caspian Services, Inc
 $        (1,449)
 $          (3,013)
  
 $         (11,250)
 $        (8,294)
           
Other Comprehensive Income (Loss)
        
Foreign currency translation adjustment
                          (221)
                            (494)
  
                         (4,814)
                         (335)
Comprehensive loss
           (1,670)
             (3,507)
  
           (16,064)
           (8,629)
Comprehensive income (loss) attributable to non-controlling interest
                              64
                             (217)
  
                                511
                          (164)
Comprehensive loss attributable to  Caspian Services, Inc
 $        (1,606)
 $         (3,724)
  
 $        (15,553)
 $        (8,793)
           
Basic and Diluted Loss per Share from continuing operations
 $          (0.04)
 $            (0.01)
  
 $            (0.26)
 $           (0.11)
Basic and Diluted Loss per Share from discontinued operations
                   -
               (0.05)
  
                     -
             (0.06)
Basic and Diluted Loss per Share
 $          (0.04)
 $            (0.06)
  
 $            (0.26)
 $           (0.17)
Weighted Average Shares Outstanding
  52,657,574
    52,657,574
  
    52,657,574
  52,657,574

See accompanying notes to the condensed consolidated financial statements.
 
4
 
 
 

CASPIAN SERVICES, INC AND SUBSIDIARIES
      
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
    
(Dollars in thousands, except share and per share data)
      
 
 For the Nine Months
 
 Ended June 30,
 
 2014
  
 2013
       
Cash flows from operating activities:
      
Net loss
 $            (13,640)
  
 $              (9,149)
Adjustments to reconcile net loss to net cash provided by operating activities:
    
   Depreciation and amortization
                  3,295
  
                  3,808
   Impairment loss
                      (34)
  
                        -
   Loss from discontinued operations
                        -
  
                  3,359
   Gain on sale of property and equipment
                        -
  
                 (1,070)
   Accrued interest on accelerated put option
                  1,614
  
                  1,496
   Foreign currency transaction loss
                  6,776
  
                     407
   Stock based compensation
                         4
  
                       25
   Changes in current assets and liabilities:
      
      Trade accounts receivable
                 (1,126)
  
                 (7,089)
      Trade accounts receivable from related parties
                  1,229
  
                    (326)
      Other receivables
                     789
  
                     100
      Inventories
                    (393)
  
                     772
      Property held for sale
                     126
  
                     480
      Prepaid taxes
                      (41)
  
                     778
      Advances paid
                     158
  
                       60
      Deferred tax assets
                      (42)
  
                      (20)
      Prepaid expenses and other current assets
                     110
  
                     160
      Long-term prepaid taxes
                     682
  
                     315
      Long-term other receivables, net of current portion
                       28
  
                     102
      Accounts payable
                    (213)
  
                     115
      Accounts payable to related parties
                 (2,123)
  
                      (81)
      Accrued expenses
                  8,618
  
                  3,722
      Taxes payable
                    (224)
  
                    (766)
      Deferred revenue
                     950
  
                       10
      Long-term deferred revenue from related parties
                        -
  
                    (136)
      Long-term deferred income tax liability
                      (63)
  
                    (290)
Net cash provided by (used in) operating activities
 $               6,480
  
 $              (3,218)
       
Cash flows from investing activities:
      
   Cash received from sale of vessels, equipment and property
                       70
  
                  2,888
   Payments to purchase vessels, equipment and property
                 (3,893)
  
                 (1,931)
Net cash provided by (used in) investing activities
 $              (3,823)
  
 $                  957
       
Cash flows from financing activities:
      
   Payments on long-term debt
                    (700)
  
                 (1,400)
Net cash used in financing activities
 $                 (700)
  
 $              (1,400)
Effect of exchange rate changes on cash
                 (4,768)
  
                    (422)
Net change in cash
                 (2,811)
  
                 (4,083)
Cash at beginning of period
                  3,973
  
                  4,601
Cash at end of period
 $               1,162
  
 $                  518
       
Supplemental disclosure of cash flow information:
      
   Cash paid for interest
 $                  700
  
 $               1,400
 
See accompanying notes to the condensed consolidated financial statements.
 
5
 
 
 

CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)


NOTE 1 — THE COMPANY AND BASIS OF PRESENTATION

Interim Financial Information – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, they are condensed and do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments 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 Caspian Services, Inc. (the “Company” or “CSI”) most recent annual financial statements included in its annual report on Form 10-K filed with the SEC on January 14, 2014. Operating results for the nine-month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending September 30, 2014.

Discontinued Operations – In August 2013 the Company discontinued the operations of KMG. Upon determining to discontinue KMG, all prior periods presented have been restated to separately account for the discontinued operations.

Principles of Consolidation –The accompanying condensed consolidated financial statements are presented in conformity with US GAAP and include operations and balances of Caspian Services, Inc. and its wholly-owned subsidiaries: Caspian Services Group Limited (“CSGL”), Caspian Services Group LLP (“Caspian LLP”), Caspian Services Group B.V. (“Caspian B.V.”), Caspian Services LLC (“Caspian LLC”), Caspian Geophysics, Ltd (“CGEO”), TatArka LLP (“TatArka”) and Caspian Real Estate, Ltd (“CRE”); and include majority owned subsidiary Balykshi LLP (“Balykshi”), collectively “Caspian” or the “Company.” Balykshi owns a 20% interest in a joint venture, Mangistau Oblast Boat Yard LLP (“MOBY”) and TatArka owns a 50% interest in a joint venture, Veritas Caspian LLP (“Veritas Caspian”).  Ownership of 20% to 50% noncontrolling interests are accounted for by the equity method.  Intercompany balances and transactions have been eliminated in consolidation.

Business Condition – The Company funded a portion of the construction of its marine base through a combination of debt and equity financing pursuant to which the European Bank for Reconstruction and Development (“EBRD”) provided $18,600 of debt financing and made an equity investment in the marine base in the amount of $10,000 in exchange for a 22% equity interest in Balykshi.

In connection with EBRD’s 22% equity interest in Balykshi, the Company entered into a Put Option Agreement granting EBRD the right to require the Company to repurchase the 22% equity interest based on Balykshi’s fair market value.  The put option is exercisable between June 2013 and June 2017.  This agreement also contains an acceleration feature that, should a triggering event occur, grants EBRD the right to require the Company to repurchase the $10,000 equity investment at a 20% annual rate of return at any time following the triggering event.

In accordance with US GAAP the put option is an unconditional obligation and is measured at its fair value based on an estimate of the amount of cash that would be required to settle the liability.  
 
6 
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
Under the terms of the EBRD Loan Agreement, as amended, Balykshi is required to repay the loan principal and accrued interest in eight equal semi-annual installments commencing November 20, 2011 and then occurring each May 20 and November 20 thereafter until fully repaid.  As of the date of this report, none of the required semi-annual repayment installments have been made.  The failure to pay the principal or interest on the EBRD loan when due may constitute an event of default under the EBRD Loan Agreement. The EBRD financing agreements have acceleration right features that, in the event of default, allow EBRD to declare the loans and accrued interest immediately due and payable.  As a result, the Company has included the EBRD loan and all accrued interest as current liabilities at June 30, 2014 and September 30, 2013. Additionally, an event of default may trigger the acceleration clause in the Put Option Agreement with EBRD which would allow EBRD to put its $10,000 investment in Balykshi back to the Company.  If EBRD were to accelerate its put right, the Company could be obligated to repay the initial investment plus a 20% annual rate of return. The balance of the accelerated put option liability was $21,263 and $19,649 as of June 30, 2014 and September 30, 2013, respectively. This balance includes the 20% rate of return on the $10,000 investment and is classified as a current liability.  EBRD also previously notified the Company that it believes the Company and Balykshi are in violation of certain other covenants of the EBRD financing agreements.  As of the date of this report on Form 10-Q, to the Company’s knowledge, EBRD has not sought to accelerate repayment of the loan or the put option.

The Company continues to engage in discussions with EBRD regarding a possible restructuring of its financial obligations to EBRD.

To help the Company meet its additional funding obligations to construct the marine base, in 2008 the Company entered into two facility agreements pursuant to which the Company received debt funding of $30,000.  In June and July 2011 Mr. Bakhytbek Baiseitov (the “Investor”) acquired the two facility agreements.  In connection with restructuring the facility agreements, each of which matured in 2011,in September 2011 the Company issued the Investor two secured promissory notes, a Secured Non-Negotiable Promissory Note in the principal amount of $10,800 (“Non-Negotiable Note”) and a Secured Convertible Consolidated Promissory Note in the principal amount of $24,446 (“Consolidated Note”).

Pursuant to the terms of the Non-Negotiable Note, the Investor may, at any time, demand and receive payment of the Note by the issuance of common stock of the Company. The price per share for principal and interest shall be $0.12 per share. The Investor has the right, at any time, to demand the issuance of shares in satisfaction of the Non-Negotiable Note.  If the issuance of common stock has not been demanded by the Investor or made at the election of the Company by the September 30, 2014 maturity date, the Company must repay the principal and interest in cash.

Pursuant to the terms of the Consolidated Note, interest accrues at 12% per annum and shall be paid semi-annually in arrears on each six month anniversary of the Issuance Date (September 30, 2011).  The Consolidated Note provides for a default rate of interest of 13% per annum upon the occurrence and during the continuation of an event of default, which shall be payable in cash upon demand.  The unpaid principal amount of the Consolidated Note, and any accrued but unpaid interest thereon, shall be due and payable on September 30, 2014.
 
The Investor has the right at any time following a five day written notice to convert all or any portion of the principal and any accrued but unpaid interest under the Consolidated Note into common stock at $0.10 per share.
 
7
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
As of the date of this report, none of the semi-annual interest payments have been made when due. The Company has, however, made partial interest payments to Investor totaling $2,300 in reduction of interest due.

The failure to pay interest on the Consolidated Note when due is an event of default under the Consolidated Note.  In the event of a default that remains uncured, the Investor may, at any time, demand immediate repayment of the Consolidated Note.  As a result, the Company has included the Consolidated Note and all accrued but unpaid interest as current liabilities at June 30, 2014 and September 30, 2013. As of the date of this report on Form 10-Q, to the Company’s knowledge, the Investor has not demanded immediate repayment of the Consolidated Note.

Should EBRD or the Investor determine to accelerate the Company’s repayment obligations to them, the Company currently has insufficient funds to repay its obligations to EBRD or the Investor, individually or collectively, and would be forced to seek other sources of funds to satisfy these obligations.  Given the Company’s current and near-term anticipated operating results, the difficult credit and equity markets and the Company’s current financial condition, the Company believes it would be very difficult to obtain new funding to satisfy these obligations. If the Company were unable to obtain funding to meet these obligations EBRD or the Investor could seek any legal remedies available to them to obtain repayment, including forcing the Company into bankruptcy, or in the case of the EBRD loan, which is collateralized by the assets, including the marine base, and bank accounts of Balykshi and CRE, foreclosure by EBRD on such assets and bank accounts.  The Company has also agreed to collateralize the Investor’s Notes with non-marine base related assets.  The ability of the Company to continue as a going concern is dependent upon, among other things, its ability to (i) successfully restructure its financial obligations to EBRD and the Investor on terms that will allow the Company to service the restructured obligations, (ii) generate sufficient revenue from operations to satisfy its financial obligations, and/or (iii) identify a financing source that will provide the Company the ability to satisfy its financial obligations. Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern.  The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Nature of Operations –The Company’s business consists of three major business segments:
 
Vessel Operations – Vessel operations consist of chartering a fleet of shallow draft offshore support vessels to customers performing oil and gas exploration activities in the Caspian Sea.

Geophysical Services – Geophysical services consist of providing seismic data acquisition services to oil and gas companies operating onshore in Kazakhstan.

Marine Base Services – Marine Base services consist of operating a marine base located at the Port of Bautino on the North Caspian Sea.

Basic and Diluted Loss Per Share – Basic loss per common share is calculated by dividing net loss attributable to Caspian Services by the weighted-average number of common shares outstanding. Diluted loss per common share is calculated by dividing net loss attributable to Caspian Services by the weighted-average number of common shares outstanding giving effect to potentially dilutive issuable common shares.
 
8
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
For the three and nine months ended June 30, 2014 the Company had 800,000 options outstanding, 147,939 non-vested restricted shares outstanding and 409,111,667 potential shares related to convertible debt that were not included in the computation of diluted loss per common share because they would be anti-dilutive.

For the three and nine months ended June 30, 2013 the Company had 800,000 options outstanding, 441,862 non-vested restricted shares outstanding and 375,708,333 potential shares related to convertible debt that were not included in the computation of diluted loss per common share because they would be anti-dilutive.

Fair Value of Financial Instruments – The carrying amounts reported in the accompanying condensed consolidated financial statements for other receivables, accounts receivables from related parties, accounts payable to related parties and accrued expenses approximate fair values because of the immediate nature or short-term maturities of these financial instruments. The carrying amount of long-term debts approximates fair value due to the stated interest rates approximating prevailing market rates.

Accelerated Put Option Liability – In connection with EBRD’s $10,000 equity investment to purchase a 22% equity interest in Balykshi, the Company entered into a Put Option Agreement granting EBRD the right to require the Company to repurchase the 22% equity interest. The put option is exercisable between June 2013 and June 2017. The put price is determined based on the fair market value of Balykshi as mutually agreed by the parties. If the parties are unable to agree upon a fair market valuation, the parties agree to hire a third party expert to determine the put price on the basis of the fair market value of Balykshi, as set forth in the Put Option Agreement.  In the event there is a change in control of the Company, EBRD has the right to require the repurchase of the equity interest at its fair market value.  The Put Option Agreement also contains an acceleration feature.  Should Balykshi: (i) default on $1,000 or more of debt; (ii) fail to meet the obligations of any of the agreements between Balykshi, the Company and EBRD; (iii) be found to have made false representations to EBRD; or (iv) be declared insolvent, EBRD has the right to accelerate the put option.  If the put option is accelerated, EBRD can require the Company to repurchase the $10,000 equity investment plus a 20% per annum rate of return, taking into account any dividend or other distribution received by EBRD, at any time following one of the events mentioned above. Due to the fact that certain events of default under the EBRD Loan Agreement may have occurred and that such could trigger EBRD’s accelerated put right, we have reflected an accelerated put option liability of $21,263, although, as of the date of this quarterly report on Form 10-Q, EBRD has not sought to accelerate the put option.

Revenue Recognition – Vessel revenues are usually derived from time charter contracts on a rate-per-day of service basis; therefore, vessel revenues are recognized on a daily basis throughout the contract period. These time charter contracts are generally on a term basis. The base rate of hire for a contract is generally a fixed rate; however, these contracts often include clauses to recover mobilization and demobilization costs and specific additional costs which are billed on a monthly basis.

Geophysical service revenue is recognized when services are rendered, accepted by the customer and collectability is reasonably assured. Direct costs are charged to each contract as incurred along with allocated indirect costs for the specific period of service. Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimated. Due to the nature of some of the geophysical services provided, certain customers have prepaid their contract services.  These prepayments have been deferred and are recognized as revenue as the services are provided.  At June 30, 2014 and September 30, 2013 the Company had $958 and $10, respectively, of deferred revenue related to these prepaid services.
 
9 
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
Marine base service revenue is recognized when services are rendered, accepted by the customer and collectability is reasonably assured.

Receivables – In the normal course of business the Company extends credit to its customers on a short-term basis.  The principal customers for the Company’s marine vessels are major oil and natural gas exploration, development and production companies and their contractors. Credit risks associated with these customers are considered minimal. Dealings with smaller, local companies pose the greatest risks. For new geophysical services customers the Company typically requires an advance payment and the Company retains the seismic data generated from these services until payment is made in full.  The Company routinely reviews accounts receivable balances and makes provisions for doubtful accounts as necessary.  Accounts are reviewed on a case-by-case basis and losses are recognized in the period the Company determines it is likely that receivables will not be fully collected.  The Company may also provide a general provision for accounts receivable based on existing economic conditions.

Impairment of Long-Lived Assets and Long-Lived Assets for Disposal – Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Income Taxes – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences in assets and liabilities and their respective tax bases and attributable to operating loss carry forwards. Differences generally result from the calculation of income under accounting principles generally accepted in the United States of America and the calculation of taxable income calculated under Kazakhstan income tax regulations.

The current regime of penalties and interest related to reported and discovered violations of Kazakhstan’s laws, decrees and related regulations can be severe.  Penalties include confiscation of the amounts in question for currency law violations, as well as fines of generally 100% of the unpaid taxes.  Interest is assessable at rates of generally 0.06% per day. As a result, penalties and interest can result in amounts that are multiples of any unreported taxes. No interest or penalties have been accrued as a result of any tax positions taken.  In the event interest or penalties are assessed, we will include these amounts related to unrecognized tax benefits in income tax expense.

A deferred tax liability is not recognized for the following types of temporary differences unless it becomes apparent that those temporary differences will reverse in the foreseeable future:

(a) An excess of the amount for financial reporting over the tax basis of an investment in a foreign subsidiary or a foreign corporate joint venture, that is essentially permanent in duration; or
 
10
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)

(b) Undistributed earnings of a domestic subsidiary or a domestic corporate joint venture that is essentially permanent in duration.

Drydocking Costs – Caspian’s vessels must be periodically drydocked and undergo certain inspections to maintain their operating classification, as mandated by certain maritime regulations.  Costs incurred to drydock the vessels for certification are capitalized and amortized over the period until the next drydocking, which is generally 24 months.  Drydocking costs comprise painting the vessels’ hulls and sides, recoating cargo and fuel tanks, and performing other engine and equipment maintenance activities to bring the vessels into compliance with classification standards.

Foreign Currency Transactions – Caspian Services, Inc., the parent company of the subsidiaries, makes its principal investing and financing transactions in United States Dollars (USD), which is also its functional currency. Transactions and balances denominated in other currencies have been translated into USD using historical exchange rates. Exchange gains and losses from holding foreign currencies and having liabilities payable in foreign currencies are included in the results of operations.

USD is also the functional currency of CSGL, CGEO and CRE.

The Kazakh Tenge (KZT) is the functional currency of Caspian LLP, TatArka and Balykshy, the Euro is the functional currency of Caspian B.V. and the Russian Ruble is the functional currency of Caspian LLC.  Their respective balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. Their respective statements of comprehensive income (loss) have been translated into USD using the average exchange rates prevailing during the periods of each statement.  The corresponding translation adjustments are part of accumulated other comprehensive income and are shown as part of shareholders’ equity.
 
The translation of KZT denominated assets and liabilities into USD for the purpose of these consolidated financial statements does not necessarily mean the Company could realize or settle, in USD, the reported values of these assets and liabilities in USD. Likewise it does not mean the Company could return or distribute the reported USD value of its Kazakh subsidiaries’ capital to its shareholders.

In February 2014 the Kazakh government devalued the KZT by 20%. As a result of the devaluation, during the three and nine month periods ended June 30, 2014, the Company recorded foreign exchange transaction losses of $313 and $6,776, respectively, as a result of the remeasurement of the EBRD loan which is denominated in U.S. Dollars.

Use of Estimates – The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Comprehensive Loss –   Total comprehensive loss consists of net loss and changes in accumulated other comprehensive loss.  Accumulated other comprehensive loss is presented in the consolidated statements of comprehensive income (loss) and consists of foreign currency translation adjustments.
 
11
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
Concentration of Revenue – During nine months ended June 30, 2014 76% of vessel revenue came from three clients: NC Production Operations Company B.V. – 29%, Saipem Kazakhstan Branch – 28%, Bumi Armada Caspian LLC – 19%. During nine months ended June 30, 2014 52% of marine base service revenue came from our related party MOBY.

Recent Accounting Pronouncements –

In July 2013 the FASB issued Accounting Standards Update (“ASU”) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.

In March 2013 the FASB issued Accounting Standards Update (“ASU”) No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign (a consensus of the FASB Emerging Issues Task Force). The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.
 
In February 2013 the FASB issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.
 
In January 2013 the FASB issued Accounting Standards Update (“ASU”) No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.

In April 2014 the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment. Reporting discontinued operations and disclosures of disposals of components of an entity. The Company does not believe that adoption of the standard will have a material impact on its results of operations or financial position upon adoption.

In May 2014 the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers.  The objective of this update is to provide a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance.  This update is effective in annual reporting periods beginning after December 15, 2016 and the interim periods within that year.  The Company is evaluating the impact of this update on the Company’s financial statements.
 
12
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)

 
In June 2014 FASB issued Accounting Standards Update (ASU) No. 2014-12 "Compensation - Stock Compensation (Topic 718) - Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period."  ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  ASU 2014-12 is effective for interim and annual periods beginning after December 15, 2015.  The amendments can be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all new or modified awards thereafter. Early adoption is permitted.  The adoption of this standard is not expected to have a material effect to the Company's operating results or financial condition.

NOTE 2 — ATASH MARINE BASE

During fiscal 2012 the Company contracted with a contractor to complete the dredging which was initially projected to cost around $3,000. However, the project was only partially completed at a cost of around $1,500 with further dredging works still required. Currently, Balykshi has insufficient funds to complete the dredging project. Failure to complete the dredging could subject Balykshi to certain penalties, including the cancelation of permits and termination of operational activities at the marine base until the dredging is completed. The failure by Balykshi or the Company to provide financing for, or to complete, the dredging works could constitute a default under the EBRD financing agreements.

In 2008 Balykshi entered into an agreement with the Investment Committee of the Republic of Kazakhstan and agreed to a schedule of work to be performed at the marine base. As of the date of this report, Balykshi has failed to complete approximately $3,000 of the agreed upon scheduled work, which could result in the cancellation of tax preferences granted to Balykshi by the Investment Committee.

NOTE 3 — NOTES PAYABLE

Notes payable consists of the following:
 
June 30,
  
September 30,
 
2014
  
2013
       
Secured non-negotiable promissory note payable to Investor; interest at 0.26%
due September 30, 2014
 $             10,877
  
 $              10,856
       
Secured convertible consolidated promissory note payable to Investor; interest at 12%
(default interest at 13%) due September 30, 2014
                31,847
  
                 29,593
 
      
EBRD loan and accrued interest at 7% due May 2015 (default interest at 9%);
secured by property and bank accounts
                24,969
  
                 23,387
       
Total Long-term Debt
                67,693
  
                 63,836
Less: Current Portion
              (67,693)
  
               (63,836)
Long-term Debt - Net of Current Portion
 $                      -
  
 $                        -
 
Notes payable consist of the following:
 
13 
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
EBRD Loan
 
EBRD’s financing agreements contain certain financial and other covenants, the violation of which could be deemed a default under those agreements. Pursuant to the terms of the financing agreements, following delivery of written notice to Balykshi or the Company of an event of default and the expiration of any applicable grace period, EBRD may declare all or any portion of its loan together with all accrued interest immediately due and payable or payable on demand. The EBRD financing agreements also provide that in the event any indebtedness of the Company in excess of $1,000 is declared or otherwise becomes due and payable prior to its specified maturity date, such may be deemed an event of default which would allow EBRD to declare its loan immediately due and payable or payable on demand. As the EBRD loan is secured, in the event Balykshi or the Company are unable to repay the loan, EBRD could have the right to foreclose on the assets and bank accounts of Balykshi and CRE, including the marine base.

Under the terms of the EBRD Loan Agreement, as amended, Balykshi is required to repay the loan principal and accrued interest in eight equal semi-annual installments commencing November 20, 2011 and then occurring each May 20 and November 20 thereafter until fully repaid.  As of the date of this report, none of the semi-annual repayment installments has been made by the Company,  The failure to pay the principal of, or interest on, the EBRD Loan when due constitutes an event of default under the EBRD Loan Agreement.  The EBRD Loan Agreement provides that if the Borrower fails to pay when due any amount payable by it under the Loan Agreement, the overdue amount shall bear interest at a rate that is 2% higher than the non-default rate of interest.

The Company is engaged in ongoing discussions with EBRD about a potential restructuring of the terms of the EBRD financing agreements. There is no guarantee the Company will be successful in restructuring the EBRD financing agreements.

Loan from Investor

In 2008 the Company entered into Facility agreements with Altima Central Asia (Master) Fund Ltd. (“Altima”) and Great Circle Energy Services LLC (“Great Circle”).  Pursuant to the Facility agreements, each party made an unsecured loan to the Company in the amount of $15,000.  The Altima loan matured and became due and payable in June 2011 while the Great Circle loan matured and became due and payable in December 2011.  The Altima and Great Circle loans (“Loans”) bore interest at 13% per annum. At June 30, 2011 these Loans and accrued interest totaled $42,264. During June and July 2011 an Investor acquired these Loans and on September 30, 2011 the Company and the Investor agreed to restructure the Loans.  Prior to the restructuring, the Company made payments to the Investor reducing the total debt balance to $37,246.  Within 30 days of closing, the Company agreed to make a $2,000 cash payment to the Investor which was credited as a reduction of principal due. This payment was made during fiscal 2012. In satisfaction of the remaining outstanding balance of the restructured loan obligations, the Company issued the Investor the Non-Negotiable Note in the principal amount of $10,800 and the Consolidated Note in the principal amount of $24,446.  The Company has agreed to collateralize the Investor’s Notes with non-marine base related assets.  
 
14
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
Non-Negotiable Promisssory Note
 
Pursuant to the terms of the Non-Negotiable Note, the Investor may, at any time, demand and receive payment of the Non-Negotiable Note by the issuance of common stock of the Company. The price per share for principal and interest shall be $0.12 per share. The Investor has the right, at any time, to demand the issuance of shares in satisfaction of the Non-Negotiable Note.  The Company has the right to pay the principal and interest under the Non-Negotiable Note by the issuance of Company common stock on the earlier of: (i) the date on which the Company and the Investor complete renegotiation of the terms of the financing between the Company and EBRD; or (ii) the date when the Company and the Investor terminate restructuring negotiations with EBRD. If the issuance of common stock has not been demanded by the Investor or made at the election of the Company by September 30, 2014 (the Maturity Date) the Company must repay the principal and interest in cash.

The Company is required to pay interest on the principal amount of the Non-Negotiable Note in common stock at the time of payment of the principal. Interest accrues at a rate per annum equal to 0.26%, until the Maturity Date.

The Company will issue the Investor 90 million shares of restricted common stock to settle the principal amount of the Non-Negotiable Note, excluding shares that will be issued to the Investor in satisfaction of accrued interest.

The Non-Negotiable Note was issued in connection with the Loan Restructuring Agreement. As the Loan Restructuring Agreement has not yet closed, the Non-Negotiable Note has been treated as a current liability in the accompanying financial statements.

Convertible Consolidated Promissory Note

Interest accrues on the Consolidated Note at 12% per annum and is required to be paid semi-annually in arrears on each six month anniversary of the Issuance Date (September 30, 2011).  The Consolidated Note provides for a default rate of interest of 13% per annum upon the occurrence and during the continuation of an event of default, as defined in the Consolidated Note, which shall be payable in cash upon demand.

The unpaid principal amount of the Consolidated Note, and any accrued but unpaid interest thereon, shall be due and payable on September 30, 2014 (the Maturity Date). The Company may elect to prepay principal in increments of $1,000 at the time of any scheduled interest payment, except in the case of full repayment of principal and interest which may be made at any time.

As of the date of this report, none of the semi-annual interest payments have been made on the date they were due.  During fiscal 2013 the Company paid $1,600 to the Investor, which was credited as a reduction of interest due under the Consolidated Note. An additional $700 was paid during the nine months ended June 30, 2014. The failure to pay the interest on the Consolidated Note is an event of default under the Consolidated Note.  In the event of a default that remains uncured, the Investor may, at any time, demand immediate repayment of the Consolidated Note.  As a result, the Company has included the Consolidated Note and all accrued interest as current liabilities at June 30, 2014 and September 30, 2013.

The Consolidated Note is superior in rank to all future unsecured indebtedness of the Company and its subsidiaries, except for the EBRD Indebtedness.
 
With the increase in the Company’s authorized common stock in May 2013, the Investor now has the right at any time following a five day written notice to convert all or any portion of the principal and any accrued but unpaid interest into common stock at $0.10 per share.
 
15
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
Registration Rights Agreement

In connection with restructuring the facility agreements, the Company and the Investor agreed to enter into a Registration Rights Agreement granting the Investor the right to require the Company to register all or any part of the shares held by the Investor, including but not limited to, any shares issued in satisfaction of the Notes.  As of the date of this report, no agreement has been finalized.

NOTE 4 — STOCK BASED COMPENSATION PLANS

A summary of the non-vested stock under the Company’s compensation plan at June 30, 2014 follows:
 
Non-Vested
Weighted Average Grant
 
Shares
Date Fair Value Per Share
     
Non-vested at September 30, 2013
147,939
$0.11
Stock granted
            -
       -
Stock vested
            -
       -
Non-vested at June 30, 2014
147,939
$0.11

The value of the non-vested stock under the Company’s compensation plan at June 30, 2014 is $4.  As of June 30, 2014 unrecognized stock-based compensation was $1 and will be recognized over the weighted average remaining term of 0.1 years.

NOTE 5 — COMMITMENTS AND CONTINGENCIES

Economic Environment – In recent years, Kazakhstan has undergone substantial political and economic change.  As an emerging market, Kazakhstan does not possess a well-developed business infrastructure, which generally exists in more mature free market economies.  As a result, operations carried out in Kazakhstan can involve significant risks, which are not typically associated with those in developed markets. Instability in the market reform process could subject the Company to unpredictable changes in the basic business infrastructure in which it currently operates. Uncertainties regarding the political, legal, tax or regulatory environment, including the potential for adverse changes in any of these factors could affect the Company’s ability to operate commercially. Management is unable to estimate what changes may occur or the resulting effect of such changes on the Company’s financial condition or future results of operations.

Legislation and regulations regarding taxation, foreign currency translation, and licensing of foreign currency loans in the Republic of Kazakhstan continue to evolve as the central government manages the transformation from a command to a market-oriented economy. Such legislation and regulations are not always clearly written and their interpretation is subject to the opinions of the local tax inspectors. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual.
 
16
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)

Guarantee of Debt – The Company has agreed to guarantee payment to EBRD, on demand, all monies and liabilities which have been advanced or which shall become due, owing or incurred by MOBY to or in favor of EBRD when such shall become due.  The Company’s guarantee obligation is limited, however, to the “Caspian Pro-rata Percentage.”  The Caspian Pro-rata Percentage is an amount equal to the Company’s percentage ownership of Balykshi multiplied by Balykshi’s percentage ownership of MOBY, expressed as a percentage.  Currently, the Company owns a 78% interest in Balykshi and Balykshi owns a 20% interest in MOBY.  Therefore, the Caspian Pro-rata Percentage is currently 15.6%, which, including interest, at June 30, 2014 reflected a total maximum potential obligation of $1,815.  There is currently no recorded liability for potential losses under this guarantee, nor is there any liability for the Company’s obligation to fund such guarantee.

Litigation – The Company’s subsidiary Balykshi is involved in litigation with Mangistau Electricity network company (“MREK”), which is a local electricity provider. MREK filed litigation against Balykshi in the Mangistau local court in February 2014 claiming that Balykshi has been improperly using its electric facilities.  MREK is seeking penalties in the amount of $310.  Based on the Company’s estimation of the probability of a negative outcome in the litigation, the Company has accrued $310.

NOTE 6 — RELATED PARTY TRANSACTIONS

MOBY – During October 2008 the Company entered into a lease agreement with MOBY for the lease of three hectares of space at the marine base to operate a vessel repair and drydock facility. Balykshi owns a 20% joint venture interest in MOBY. The lease agreement is for 20 years and calls for a fixed rent payment of $290 per year. In November 2009, according to the agreement term, MOBY made a partial advance payment of $3,347, which is being recognized over the 20 year lease term starting from May 2010. This prepayment has been recorded as long-term deferred revenue from related parties on the balance sheet.

During the second fiscal quarter 2014 this lease agreement was canceled. The Company off-set most of the balance of the advance received for land rental against the balance due by MOBY to Balykshi.

In July 2014 the Company signed an agreement with Topaz Engineering Limited (“Topaz”) (related party through the participation in MOBY) for the acquisition of 100% share in Kyran Holdings Limited (“Kyran”). Kyran owns a 50% share in MOBY; and after execution of this agreement the Company will own approximately 66% share in MOBY.  As disclosed in the Current Report on Form 8-K of the Company filed with the SEC on August 12, 2014, this agreement closed on August 7, 2014.

The lease and storage service revenue recognized from MOBY for the three and nine months ended June 30, 2014 was $265 and $931, respectively.

The lease revenue recognized from MOBY for the three and nine months ended June 30, 2013 was $125 and $440, respectively.

Accounts receivable from related parties as of June 30, 2014 and September 30, 2013 consisted of the following:
 
17
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
Related Party's Name
Description
June 30, 2014
  
September 30, 2013
         
Bolz LLP
Seismic services
 $                         -
  
 $                        3,174
MOBY
Marine base
                            -
  
                           1,330
Demeu Energy
Advance given for vehicles delivery
                         272
  
                              325
Caspian Geo Consulting
Advance given for equipment delivery
                         163
  
                                 -
Others
Other services
                             4
  
                              125
 
Allowance for doubtful accounts
                        (435)
  
                         (3,499)
TOTAL
  
 $                          4
  
 $                      1,455

Accounts payable to related parties as of June 30, 2014 and September 30, 2013 consisted of the following:
 
Related Party's Name
Description
June 30, 2014
  
September 30, 2013
         
MOBY
 Advance received for land rental
$                        69
  
$                              -
Others
 Others
                           15
     -
TOTAL
  
 $                       84
  
 $                             -

Long-term deferred revenue from related parties as of June 30, 2014 and September 30, 2013 consisted of the following:
 
Related Party's Name
Description
June 30, 2014
  
September 30, 2013
         
MOBY
 Advance received for land rental
 $                         -
  
 $                        2,619
TOTAL
  
 $                         -
  
 $                      2,619
 

NOTE 7 — FAIR VALUE MEASUREMENTS
 
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
 
Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
18
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. This is done primarily for the put option liability. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values.  Fair value is also used when evaluating impairment on certain assets, including goodwill, intangibles, and long-lived assets.

Recurring basis:

At June 30, 2014 the Company had one liability measured at fair value on a recurring basis. The put option liability is a Level 3 measurement, which is fair valued at the put option price plus accrued interest at a rate of 20% annually.

The fair value of the put option liability was $21,263 at June 30, 2014. As of September 30, 2013 the amount was valued at $19,649 which is the amount the Company would have had to pay if EBRD had exercised the accelerated put option. The $1,614 change during the nine months ended June 30, 2014 was for the 20% rate of return and it was charged to interest expense.

There were no changes in the valuation techniques during the current quarter.

Nonrecurring basis:
     
Fair Value Measurements at Reporting Date Using
Description
June 30, 2014
  
Level 1
  
Level 2
  
Level 3
Property held for sale
 $               44
  
 $         -
  
 $         -
  
 $       44
 
The value of the Property held for sale was derived based on estimated sales price of the property. The estimation of sales price is made based on the market prices of similar vessels.

For Level 3 assets, the Company’s finance department, which reports to the chief financial officer, determines the fair value measurement valuation policies and procedures.  At least annually, the finance department determines if the current valuation techniques used in the fair value measurements are still appropriate and evaluates and adjusts the unobservable inputs used in the fair value measurements based on current market conditions and third-party information.
 
     
Fair Value Measurements at Reporting Date Using
Description
September 30, 2013
Level 1
  
Level 2
  
Level 3
Property held for sale
 $             203
  
 $         -
  
 $         -
  
 $     203
 
19
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
NOTE 8 — SEGMENT INFORMATION

US GAAP establishes disclosures related to components of a company for which separate financial information is available and evaluated regularly by a company’s chief operating decision makers in deciding how to allocate resources and in assessing performance. They also require segment disclosures about products and services as well as geographic area.

The Company has operations in three segments of its business, namely: Vessel Operations, Geophysical Services and Marine Base Services. All of these operations are located in the Republic of Kazakhstan. Corporate administration is located in the United States of America and the Republic of Kazakhstan.

Further information regarding the operations and assets of these reportable business segments follows:
       
 
 For the Three Months
  
 For the Nine Months
 
 Ended June 30,
  
 Ended June 30,
 
2014
  
2013
  
2014
  
2013
Capital Expenditures
              
Vessel Operations
 $               359
  
 $         489
  
 $         816
  
 $        1,370
Geophysical Services
                  889
  
              21
  
         3,077
  
              568
Marine Base Services
   -  
              -
  
              -
  
                58
Total segments
               1,248
  
            510
  
         3,893
  
           1,996
Corporate assets
                    (1)
  
                -
  
              -
  
                 -
Less intersegment investments
                    -
  
              (3)
  
              -
  
               (65)
Total consolidated
 $            1,247
  
 $         507
  
 $      3,893
  
 $        1,931

20
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 

 
For the Three Months
  
 For the Nine Months
 
Ended June 30,
  
 Ended June 30,
 
2014
  
2013
  
2014
  
2013
Revenues
              
Vessel Operations
 $            4,495
  
 $      6,103
  
 $    11,218
  
 $      10,918
Geophysical Services
               3,564
  
         3,436
  
       10,832
  
         12,829
Marine Base Services
                  564
  
            262
  
         3,641
  
           3,422
Total segments
               8,623
  
         9,801
  
       25,691
  
         27,169
Corporate revenue
                      -
  
                -
  
                -
  
                   -
Less intersegment revenues
                (449)
  
          (360)
  
       (3,197)
  
          (3,697)
Total consolidated
 $            8,174
  
 $      9,441
  
 $    22,494
  
 $      23,472
               
Depreciation and Amortization
            
Vessel Operations
 $             (400)
  
 $       (540)
  
 $    (1,396)
  
 $       (1,650)
Geophysical Services
                (282)
  
          (326)
  
          (890)
  
          (1,057)
Marine Base Services
                (336)
  
          (370)
  
       (1,009)
  
          (1,100)
Total segments
             (1,018)
  
       (1,236)
  
       (3,295)
  
          (3,807)
Corporate depreciation and amortization
                      -
  
              -
  
              -
  
                 (1)
Total consolidated
 $          (1,018)
  
 $    (1,236)
  
 $    (3,295)
  
 $       (3,808)
               
Interest expense
              
Vessel Operations
 $                   -
  
 $           -
  
 $             -
  
 $              -
Geophysical Services
                      -
  
              37
  
              -
  
                 -
Marine Base Services
             (1,543)
  
       (1,269)
  
       (4,447)
  
          (3,850)
Total segments
             (1,543)
  
       (1,232)
  
       (4,447)
  
          (3,850)
Corporate interest expense
                (558)
  
          (445)
  
       (1,627)
  
          (1,360)
Total consolidated
 $          (2,101)
  
 $    (1,677)
  
 $    (6,074)
  
 $       (5,210)
               
Income/(Loss) Before Income Tax
            
Vessel Operations
 $               797
  
 $      1,306
  
 $       (409)
  
 $       (1,877)
Geophysical Services
                  900
  
            362
  
         2,633
  
           3,287
Marine Base Services
             (2,664)
  
       (1,731)
  
     (13,205)
  
          (5,881)
Total segments
                (967)
  
            (63)
  
     (10,981)
  
          (4,471)
Corporate loss
                (699)
  
          (225)
  
       (2,419)
  
          (1,632)
Total consolidated
 $          (1,666)
  
 $       (288)
  
 $  (13,400)
  
 $       (6,103)
 
 
21
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)
 
 
 
 
 For the Three Months
  
 For the Nine Months
 
 Ended June 30,
  
 Ended June 30,
 
2014
  
2013
  
2014
  
2013
Benefit from (Provision for) Income Tax
            
Vessel Operations
 $             (100)
  
 $       (285)
  
 $         499
  
 $        1,170
Geophysical Services
                (216)
  
          (128)
  
          (737)
  
             (857)
Marine Base Services
                      -
  
                -
  
                -
  
                   -
Total segments
                (316)
  
          (413)
  
          (238)
  
              313
Corporate provision for income tax
                    (2)
  
                -
  
              (2)
  
                   -
Total consolidated
 $             (318)
  
 $       (413)
  
 $       (240)
  
 $           313
               
Loss from discontinued operations
            
Vessel Operations
 $                   -
  
 $             -
  
 $             -
  
 $                -
Geophysical Services
                    -
  
          (499)
  
              -
  
          (1,068)
Marine Base Services
                      -
  
                -
  
                -
  
                   -
Total segments
                      -
  
          (499)
  
                -
  
          (1,068)
Corporate
                      -
  
       (2,291)
  
                -
  
          (2,291)
Total consolidated
 $                   -
  
 $    (2,790)
  
 $             -
  
 $       (3,359)
               
Loss/(Income) attributable to Noncontrolling Interests
        
Vessel Operations
 $                   -
  
 $             -
  
 $             -
  
 $                -
Geophysical Services
                      -
  
              -
  
              -
  
                 -
Marine Base Services
                  535
  
            478
  
         2,390
  
              855
Total segments
                  535
  
            478
  
         2,390
  
              855
Corporate noncontrolling interest
                      -
  
                -
  
                -
  
                   -
Total consolidated
 $               535
  
 $         478
  
 $      2,390
  
 $           855
               
Net (Loss)/Income attributable to Caspian Services Inc.
        
Vessel Operations
 $               697
  
 $      1,021
  
 $           90
  
 $          (707)
Geophysical Services
                  684
  
          (265)
  
         1,896
  
           1,362
Marine Base Services
             (2,129)
  
       (1,253)
  
     (10,815)
  
          (5,026)
Total segments
                (748)
  
          (497)
  
       (8,829)
  
          (4,371)
Corporate loss
                (701)
  
       (2,516)
  
       (2,421)
  
          (3,923)
Total consolidated
 $          (1,449)
  
 $    (3,013)
  
 $  (11,250)
  
 $       (8,294)
               
         
  June 30,
  
 September,
Segment Assets
        
2014
  
2013
Vessel Operations
        
 $    17,915
  
 $      24,031
Geophysical Services
        
       19,311
  
         18,005
Marine Base Services
        
       68,273
  
         78,186
Total segments
        
     105,499
  
       120,222
Corporate assets
        
            825
  
           6,946
Less intersegment investments
      
     (40,642)
  
        (46,625)
Total consolidated
        
 $    65,682
  
 $      80,543
 
22
 
 
 
CASPIAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (UNAUDITED)
(Dollars in thousands, except share and per share data)

 
NOTE 9 — SUBSEQUENT EVENTS

In July 2014 the Company signed an agreement with Topaz for the acquisition of 100% share in Kyran. Kyran owns a 50% share in MOBY; and after execution of this agreement the Company will own around 66% share in MOBY.  As disclosed in the Current Report on Form 8-K of the Company filed with the SEC on August 12, 2014, this agreement closed on August 7, 2014.  The estimated financial effect of this acquisition for the Company is an increase in debt of approximately $5,900, which is the current outstanding amount of the MOBY debt due to EBRD.  During the nine months ended June 30, 2014 we realized $931 in marine base services revenue from MOBY, approximately 52% of marine base services revenue during the period.  Going forward, marine base revenue from MOBY will be eliminated in consolidation which will have the effect of lowering marine base services revenue in future periods.
 
23
 
 
 

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

Unless otherwise indicated by the context, all dollar amounts stated in this Part I, Item 2, other than share and per share amounts, are presented in thousands and all references to dollar amounts ($) refers to U.S. dollars.

The following discussion is intended to assist you in understanding our results of operations and our present financial condition.  Our condensed consolidated financial statements and the accompanying notes included in this quarterly report on Form 10-Q should be read in conjunction with our annual report on Form 10-K for the year ended September 30, 2013 and our other filings with the Securities and Exchange Commission.

Forward-Looking Information and Cautionary Statements

This quarterly report contains forward-looking statements as that term is defined in Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  These statements relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “project”, “potential” or “continue” or the negative of these terms or other comparable terminology.  Such statements are based on currently available financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations.  Undue reliance should not be placed on such forward-looking statements as such statements speak only as of the date on which they are made.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Forward-looking statements are predictions and not guarantees of future performance or events.  Forward-looking statements are based on current industry, financial and economic information, which we have assessed but which by its nature, is dynamic and subject to rapid and possibly abrupt changes.  Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business.  We hereby qualify all our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to publicly update or revise these forward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act), whether as a result of new information, future events or otherwise.
 
24
 
 
 
Business Review

We do not anticipate demand for our services to grow through fiscal 2014.  In fact, we expect demand will decrease in this year and in the next two fiscal years as development of the second phase of the Kashagan oil field development project continues to be delayed. Moreover oil production from the first phase of Kashagan has been halted due to concerns over the integrity of the consortium’s pipeline.  It is anticipated that the entire pipeline may need to be replaced.  Current projections place commencement of the second phase some time in 2018-2019, but this could be delayed depending upon how replacement of the pipeline progresses.  We do not anticipate growth in demand for our services until the second phase of the Kashagan development project ramps up.

During the three and nine months ended June 30, 2014, we operated three business segments: Vessel Operations, Geophysical Services and Marine Base Services.
 
For the Three Months
  
For the Nine Months
 
Ended June 30,
  
Ended June 30,
 
2014
2013
% change
  
2014
2013
% change
               
VESSEL OPERATIONS
              
Operating Revenue
 $    4,495
 $   6,103
-26%
  
 $  11,218
 $ 10,918
3%
Pretax Operating Income/(Loss)
797
1,306
-39%
  
(409)
(1,877)
-78%
               
GEOPHYSICAL SERVICES
              
Operating Revenue
 $    3,564
 $   3,436
4%
  
 $  10,832
 $ 12,829
-16%
Pretax Operating Income/(Loss)
900
362
149%
  
2,633
3,287
-20%
               
MARINE BASE SERVICES
              
Operating Revenue
 $       564
 $      262
115%
  
 $    3,641
 $   3,422
6%
Pretax Operating Loss
(2,664)
(1,731)
54%
  
(13,205)
(5,881)
125%
               
CORPORATE ADMINISTRATION
            
Operating Revenue
 $         -
 $         -
n/a
  
 $         -
 $         -
n/a
Pretax Operating Loss
(699)
(225)
211%
  
(2,419)
(1,632)
48%
 
This table includes intercompany revenues, which are eliminated on a consolidation level. For details, please, refer to Note 8 to our condensed consolidated financial statements.

Summary of Operations

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

Total revenue during the three months ended June 30, 2014 was $8,174 compared to $9,441 during the three months ended June 30, 2013, a decrease of 13%.

Vessel revenues were down 29% due to lower utilization of our vessels in the third fiscal quarter 2014 caused by delay of Kashagan project.  Revenue from geophysical services of $3,564 during the third fiscal quarter 2014 were in line with the comparative prior year quarter result. Marine Base service revenues of $564 were 113% higher in the third fiscal quarter.  During the third fiscal quarter 2013 we realized a loss from discontinued operations of $2,790 for the discontinuation of KMG operations. No such losses were incurred during the third fiscal quarter 2014.  As a result of the foregoing, our net loss attributable to Caspian Services, Inc. decreased from $3,013 during the third fiscal quarter 2013 to $1,449 during the third fiscal quarter 2014.
 
25
 
 
 
Vessel Operations

Third fiscal quarter 2014 revenue from vessel operations of $4,046 was 29% or $1,639 lower than the third fiscal quarter 2013.  The delay in Kashagan project caused the decrease in demand for vessel charter services. We expect vessel revenues will continue to be on the same level or lower and we do not expect significant growth in demand for our vessels during fiscal 2014 in the Kazakhstan sector of the Caspian Sea.  Therefore, we continue to seek opportunities to utilize our vessel fleet outside of Kazakhstan, in the Turkmen and Russian sectors of the Caspian Sea.

During the three months ended June 30, 2014 vessel operating costs of $2,159 were 20% lower than during the three months ended June 30, 2013 due to decrease in a vessel utilization.

As a result of decreased activity our net income attributable to Caspian Services, Inc. from vessel operations in the third fiscal quarter 2014 decreased to $697 compared to net income of $1,021 in the third fiscal quarter of 2013.

Geophysical Services

Revenue from geophysical services of $3,564 during the third fiscal quarter 2014 was in line with the comparative prior year quarter result.

Cost of geophysical service revenues decreased by 8% to $2,017 during the third fiscal quarter 2014 as a result of improved margins on current projects.

            As a result of improved margins, net income attributable to Caspian Services, Inc. from geophysical operations of $684 was accrued during the third fiscal quarter 2014 compared to net loss attributable to Caspian Services, Inc. of $265 during the third fiscal quarter 2013.

The local market, from which much of our seismic work is generated, remains depressed as a result of the difficult credit market and we continue to struggle to obtain payment from overdue accounts from non-related parties.

We anticipate our operating result through the remainder of fiscal 2014 will be similar to fiscal 2013 for seismic work. This segment of our business is fairly dependent on work from local companies.  The credit required by local companies to finance seismic projects remains elusive.
 
26
 
 
 
Marine Base Services

Our marine base services revenues increased 113% to $564 during the third fiscal quarter 2014.  This increase is primarily attributable to a successful contract with a client that accommodated a significant number of vessels alongside our marine base.  The increased revenue, however, was insufficient to cover our fixed costs, including depreciation.  Interest expense of $1,543 was accrued to reflect our liability under the EBRD loan, the potential accelerated put option and the portion of interest on the loan from Investor that relates to the marine base. Additionally, during the third fiscal quarter 2014 we accrued $310 to reflect the potential obligation of Balykshi related to litigation with the local electricity network company.  During the third fiscal quarter 2014 we realized a marine base services loss attributable to Caspian Services, Inc. of $2,129 compared to a loss of $1,253 during the third fiscal quarter 2013.

Although we have been able to enter into agreements with some customers to use our base’s services we do not expect significant demand for the marine base until Kashagan field development and construction activity increases significantly, which is currently anticipated to start in 2018 or 2019.  Until activity in the Caspian Sea region increases, we do not expect the marine base to be able to service its current debt obligations or to operate profitably.

Corporate Administration

During the third fiscal quarter 2014 pretax operating loss from corporate administration was $699, which is $474 more than the loss for the third fiscal quarter 2013. This increase in loss is mostly due to the default interest rate of 13% being applied to Investor’s debt during the third fiscal quarter 2014.

Depreciation

Depreciation expense decreased by $218 or 18% to $1,018 during the third fiscal quarter 2014 compared to the third fiscal quarter 2013.  This decrease was caused by the fact that a number of our properties were fully depreciated prior to fiscal 2014. Additionally, we sold one of our vessels during the fiscal 2013.

General and Administrative Expenses

General and administrative expenses of $2,207 during the quarter ended June 30, 2014 were 18% or $337 higher compared to the quarter ended June 30, 2013. This increase is principally the result of an accrual of $310 to reflect the potential outcome of litigation brought against Balykshi by the local electricity network company.

Interest Expense

Interest expense of $2,101 for the third fiscal quarter 2014 was 25% higher than the interest expense for the third fiscal quarter 2013. This increase is attributable to applying the default interest rates to our long-term debt during the third fiscal quarter 2014.
 
27
 
 
 
Exchange Loss

During the third fiscal quarter 2014 and 2013 we realized foreign exchange transaction losses of $313 and $259, respectively.

 It is our policy to try and match Euro costs with Euro income and we were able to reduce some of the loss as Euro costs for vessel rental were also lower. It is not our business to speculate on currency movements and we have not historically engaged in currency hedging.

Other Non-operating Income, Net

During the quarter ended June 30, 2014 we realized net other non-operating income of $32 compared to net other non-operating income of $272 during the quarter ended June 30, 2013.

Net Other Expenses

Net other expenses increased 43% to $2,370 during the third fiscal quarter 2014.  The increase in net other expenses is mostly attributable to the increased interest expenses and decreased other non-operating interest during the quarter ended June 30, 2014.

Benefit from (Provision for) Income Tax

During the three months ended June 30, 2014 we recorded a provision for income tax in the amount of $318, which is in line with the provision of $413 during the three months ended June 30, 2013. The tax provision recognized during the third fiscal quarter 2013 and 2014 was caused by significant taxable income generated by Tatarka. In Kazakhstan each entity is taxed independently.

Net Loss Attributable to Caspian Services, Inc.

As a result of the aforementioned factors, during our third fiscal quarter 2014 we realized a net loss attributable to Caspian Services, Inc. of $1,449.  By comparison, during the third fiscal quarter 2013 we realized a net loss attributable to Caspian Services, Inc. of $3,013.

Comprehensive Loss Attributable to Caspian Services, Inc.

During the quarter ended June 30, 2014 our loss from foreign currency translation adjustment was $221 and comprehensive income attributable to non-controlling interest was $64.  As a result, comprehensive loss attributable to Caspian Services, Inc. was $1,606 during the quarter ended June 30, 2014.
 
28
 
 
 
During the quarter ended June 30, 2013 our loss from foreign currency translation adjustment was $494 and comprehensive loss attributable to non-controlling interest was $217.  As a result, comprehensive loss attributable to Caspian Services, Inc. was $3,724 during the quarter ended June 30, 2013.

Nine months ended June 30, 2014 compared to the nine months ended June 30, 2013

Total revenue during the nine months ended June 30, 2014 was $22,494 compared to $23,472 during the nine months ended June 30, 2013, a decrease of 4%.  Vessel revenues of $9,882 during the nine months ended June 30, 2014 were in line with the results for the nine months ended June 30, 2013.  Revenue from geophysical services decreased 16% from $12,829 during the nine months ended June 30, 2013 to $10,832 during the nine months ended June 30, 2014.  This is a result of an exceptionally good second and third fiscal quarter 2013, when we had three seismic projects with high operating margins.  During the nine months ended June 30, 2014 and 2013 we realized foreign exchange transaction losses of $6,776 and $407, respectively. The increase in loss was due to revaluation of our debt denominated in US Dollars following a 20% devaluation of the Kazakh Tenge in February 2014.  As a result of the foregoing, our net loss attributable to Caspian Services, Inc. increased from $8,294 during the nine months ended June 30, 2013 to $11,250 during the nine months ended June 30, 2014.

Vessel Operations

Vessel revenues of $9,882 during the nine months ended June 30, 2014 were in line with the results for the nine months ended June 30, 2013.  We expect vessel revenues will continue to be on the same level or lower and we do not expect significant growth in demand for our vessels during fiscal 2014 in the Kazakhstan sector of the Caspian Sea.  Therefore, we continue to seek opportunities to utilize our vessel fleet outside of Kazakhstan, in the Turkmen and Russian sectors of the Caspian Sea.

During the nine months ended June 30, 2014 vessel operating costs of $7,011 were 7% higher than during the nine months ended June 30, 2013. The increase in vessel operating costs is mainly due to cost of renting one additional vessel.

During the nine months ended June 30, 2013 $1,300 of the allowance for trade accounts receivable from one of the client was recognized.  No such expenses were recognized during the nine months ended June 30, 2014.

As a result of these factors, our net income from vessel operations during the nine months ended June 30, 2014 attributable to Caspian Services, Inc was $90 compared to net loss of $707 during the nine months ended June 30, 2013.
 
29
 
 
 
Geophysical Services

Revenue from geophysical services decreased 16% from $12,829 during the nine months ended June 30, 2013 to $10,832 during the nine months ended June 30, 2014.  This is a result of completing three successful projects with higher than average margins during the nine months ended June 30, 2013.  Cost of geophysical service revenues decreased by 5% to $6,088. The decrease in costs was less than the decrease in revenues because we realized lower margins on one contract due to the cost of renting additional seismic equipment for a project.

During the nine months ended June 30, 2014 our onshore seismic segment collected overdue payments from a related party (Bolz LLP) in the amount of $3,154.  In prior periods we created an allowance for this overdue trade account receivable from related parties.  As a result we reversed this allowance during the nine months ended June 30, 2014 for the amount of the repayment received.

During the nine months ended June 30, 2014 we paid a bonus of $1,487 to Mr. Vasilenko, our General Manager of Geophysical Services, in recognition of his efforts to collect this overdue balance from Bolz LLP.
 
As a result of collected overdue payments received in our onshore seismic business, net income attributable to Caspian Services, Inc. from geophysical operations of $1,896 was recognized during the nine months ended June 30, 2014 copared to net income attributable to Caspian Services, Inc. of $1,362 during the nine months ended June 30, 2013.

The local market, from which much of our seismic work is generated, remains depressed as a result of the difficult credit market and we continue to struggle to obtain payment from overdue accounts from non-related parties.

We anticipate that the results of the remainder of fiscal 2014 will be similar to fiscal 2013 for seismic work. This segment of our business is fairly dependant on local companies and the credit required by local companies to finance seismic projects remains elusive.

Marine Base Services

Our marine base services revenues increased 118% to $1,780 during the nine months ended June 30, 2014 mostly as a result of a successful contract with a client that accommodated 15 vessels alongside the marine base for the entire winter period. The increased revenue, however, was insufficient to cover our fixed costs, including depreciation. Additionally, interest expense of $4,447 was accrued to reflect our liability under the EBRD loan, the potential accelerated put option and the portion of interest on the loan from Investor that relates to the marine base.  During the nine months ended June 30, 2014 we realized a marine base services loss attributable to Caspian Services, Inc of $10,815 compared to a loss of $5,026 during the nine months ended June 30, 2013. The increase in loss was mostly due to $7,664 of foreign exchange loss resulting from a revaluation of our debt to EBRD denominated in US Dollars following a 20% devaluation of the Kazakh Tenge in February 2014.
 
30
 
 
 
Although we have been able to enter into agreements with some customers to use our base’s services we do not expect significant demand for the marine base until Kashagan field development and construction activity increases, which is currently anticipated to start in 2018 or 2019.  Until activity in the Caspian Sea region increases significantly, we do not expect the marine base to be able to service its current debt obligations or to operate profitably.

During the nine months ended June 30, 2014 Balykshi and MOBY agreed to cancel the MOBY land lease at the marine base.  We off-set most of the balance of the advance received for land rental against the balance due from MOBY to Balykshi.

Corporate Administration

During the nine months ended June 30, 2014 pretax loss from corporate administration was $2,419, which is 48% higher than the loss realized during the nine months ended June 30, 2013. This increase in loss is mostly due to the default interest rate of 13% applied to the Investor’s debt during the nine months ended June 30, 2014.

Depreciation

Depreciation expense decreased by $513 or 13% to $3,295 during the nine months ended June 30, 2014 compared to the nine months ended June 30, 2013.  This decrease resulted from the fact that a number of our properties were fully depreciated prior to fiscal 2014. Additionally, we sold one of our vessels during the fiscal 2013.

General and Administrative Expenses

General and administrative expenses decreased 22% to $6,257 during the nine months ended June 30, 2014. This decrease is mostly attributable the reversal of a $3,154 allowance related to trade accounts receivable from a related party (Bolz LLP).  This was partially off-set by $1,487 we paid to our General Manager of Geophysical Services in recognition of his efforts to collect the overdue trade account receivable due to TatArka.

Interest Expense

Interest expense of $6,074 for the nine months ended June 30, 2014 was 17% more than the interest expense for the nine months ended June 30, 2013. This increase is attributable to applying the default interest rates to our long-term debt during the nine months ended June 30, 2014.

Exchange Loss

During the nine months ended June 30, 2014 and 2013 we realized foreign exchange transaction losses of $6,776 and $407, respectively. This increase in loss is mostly due to a revaluation of our EBRD loan denominated in US Dollars following a 20% devaluation of the Kazakh Tenge in February 2014.
 
31
 
 
 
 It is our policy to try and match Euro costs with Euro income and we were able to reduce some of the loss as Euro costs for vessel rental were also lower. It is not our business to speculate on currency movements and we have not historically engaged in currency hedging.

Other Non-operating Income, Net

During the nine months ended June 30, 2014 we realized net other non-operating income of $51 compared to income of $1,259 during the nine months ended June 30, 2013.  We realized other non-operating income during fiscal 2013 from the sale of one vessel.  We had no similar transaction during the same fiscal period ended June 30, 2014.

Net Other Expenses

Net other expenses increased 196% to $12,764 during the nine months ended June 30, 2014.  The increase in net other expenses is mostly attributable to the increase in foreign currency transaction losses due to the 20% devaluation of the Kazakh Tenge and the sale of one vessel, resulting in other non-operating income, net during the 2013 period.

Benefit from (Provision for) Income Tax

During the nine months ended June 30, 2014 we created a provision for income tax in the amount of $240 compared to a benefit of $313 during the nine months ended June 30, 2013. This difference was caused by the fact that our wholly-owned subsidiary, CSG LLP, incurred twice as much taxable loss during nine months ended June 30, 2013 compared to the same nine-month period ended June 30, 2014. In Kazakhstan each entity is taxed independently.

Net Loss Attributable to Caspian Services, Inc.

As a result of the aforementioned factors, during the nine months ended June 30, 2014 we realized a net loss attributable to Caspian Services, Inc. of $11,250.  By comparison, during nine months ended June 30, 2013 we realized a net loss attributable to Caspian Services, Inc. of $8,294.

Comprehensive Loss Attributable to Caspian Services, Inc.

During the nine months ended June 30, 2014 our loss from foreign currency translation adjustment was $4,814 and comprehensive income attributable to non-controlling interest was $511.  As a result, comprehensive loss attributable to Caspian Services, Inc. was $15,553 during nine months ended June 30, 2014.

During the nine months ended June 30, 2013 our loss from foreign currency translation adjustment was $335 and comprehensive loss attributable to non-controlling interest was $164.  As a result, comprehensive loss attributable to Caspian Services, Inc. was $8,793 during the nine months ended June 30, 2013.
 
32
 
 
 
Liquidity and Capital Resources

At June 30, 2014 we had cash on hand of $1,162 compared to cash on hand of $3,973 at September 30, 2013.  At June 30, 2014 total current liabilities exceeded total current assets by $77,471. This was mainly attributable to the EBRD loan and put option and the Investor loans being classified as current liabilities.  As discussed in more detail under the heading “Off-Balance Sheet Financing Arrangements” below, we may also be required to guarantee certain repayment obligations of Balykshi in connection with a loan made by EBRD to MOBY.

In 2007 we entered into a series of debt and equity financing agreements with EBRD to provide funding for our marine base.  As of June 30, 2014 the outstanding loan balance and accrued interest of the EBRD loan was $24,969.  The EBRD loan matures in May 2015.  The financing agreements with EBRD contain financial and other covenants, the violation of which could be deemed a default under these agreements.  Pursuant to the terms of the financing agreements, following delivery of written notice to us of an event of default and the expiration of any applicable grace period, EBRD may declare all or any portion of its loan, together with all accrued but unpaid interest, immediately due and payable or payable on demand.  The EBRD financing agreements provide that in the event any indebtedness of the Company in excess of $1,000 is declared or otherwise becomes due and payable prior to its specified maturity date, such may be deemed an event of default which would also allow EBRD to declare its loan immediately due and payable or payable on demand.  The EBRD loan is collateralized by the assets, including the marine base and bank accounts of Balykshi and CRE.
 
In connection with the EBRD financing, EBRD also made a $10,000 equity investment to purchase a 22% equity interest in Balykshi.  To secure that funding we were required to grant EBRD a put option whereby EBRD can require the Company to repurchase the 22% equity interest.  The put is exercisable during the period from six to ten years after the signing of the Investment Agreement.  The put price is determined based on the fair market value of Balykshi as mutually agreed by the parties, except that in the event of a default, EBRD has the right to accelerate the put option at a fixed rate of return as discussed in more detail below.  In the event there is a change in control of the Company, EBRD may, but is not required to exercise its put right to require the Company to repurchase the equity interest at its fair market value.

The put option includes an acceleration right in the event: (i) any financial debt of Balykshi in excess of $1,000 is not paid when due, or a default of any nature occurs and such financial debt becomes prematurely due and payable or is placed on demand; (ii) any party to the financing agreements (other than EBRD) fails to meet its obligations under of any of the financing agreements between Balykshi, the Company and EBRD; (iii) any actions are taken or proceeding instituted that would result in the Company’s bankruptcy, insolvency, reorganization or similar action, or the Company’s consenting to any such action or proceeding;  (iv) any representation or warranty made or confirmed by the Company or Balykshi is found to be false or misleading when made or confirmed.  If the put option is accelerated, EBRD can require the Company to repurchase the $10,000 equity investment plus a 20% per annum rate of return.
 
33
 
 
 
In connection with the EBRD financing agreements, the Company is obligated to provide financial assistance to Balykshi to meet its obligations and working capital needs.  We previously agreed with local authorities to complete outstanding dredging work at the marine base.  During fiscal 2012 the Company contracted with a contractor to complete the dredging which was initially projected to cost around $3,000. However, the project was only partially completed at a cost of around $1,500 with further dredging works still required.  Currently, Balykshi has insufficient funds to complete the dredging project.  As the dredging has not been completed, Balykshi could be subject to certain penalties, including the cancelation of permits and termination of operational activities at the marine base until the dredging is completed.  The failure by Balykshi or the Company to provide financing for, or to complete, the dredging works could constitute a default under the EBRD financing agreements.

In 2008 Balykshi entered into an agreement with the Investment Committee of the Republic of Kazakhstan and agreed to a schedule of work to be performed at the marine base.  As of the date of this report, Balykshi has failed to complete approximately $3,000 of the agreed upon scheduled work, which could result in the cancellation of tax preferences granted to Balykshi by the Investment Committee.

As discussed above, under the terms of the EBRD Loan Agreement, as amended, the semi-annual repayment installments under the EBRD loan are due each year on November 20 and May 20.  As of the date of this report, none of the required installment payments has been made, which may constitute an event of default under the EBRD Loan Agreement and may constitute a default under the Put Option Agreement. The default interest rate of the EBRD Loan of 9% is applied to the payments due but not paid.

Should EBRD accelerate its loan or its put option, we would have insufficient funds to satisfy those obligations collectively or individually. If we are unable to satisfy those obligations, EBRD could seek any legal remedy available to it to obtain repayment, including forcing the Company into bankruptcy, or foreclosing on the loan collateral, which includes the marine base and other assets and bank accounts of Balykshi and CRE.

To help meet our additional funding obligations to construct the marine base, in 2008 we entered into two facility agreements pursuant to which we obtained debt funding of $30,000.  In June and July 2011 the Investor acquired the two facility agreements.  In September 2011 we issued the Investor two secured promissory notes, the Non-Negotiable Note in the principal amount of $10,800 and the Consolidated Note in the principal amount of $24,446 in connection with a proposed restructuring of the facility agreements.  We agreed to secure these Notes with non-marine base assets that have not been pledged to EBRD.

Pursuant to the terms of the Non-Negotiable Note, the Investor may, at any time, demand and receive payment of the Non-Negotiable Note by the issuance of our common stock.  The price per share for principal and interest is $0.12.  The Investor has the right, at any time, to demand the issuance of shares in satisfaction of the Non-Negotiable Note.  If the issuance of common stock has not been demanded by the Investor or made at our election by the September 30, 2014 maturity date, we must repay the principal and interest in cash.
 
34
 
 
 
Pursuant to the terms of the Consolidated Note, interest accrues at 12% per annum and shall be paid semi-annually in arrears on each six month anniversary of the Issuance Date (September 30, 2011).  The unpaid principal amount of the Consolidated Note and any accrued but unpaid interest thereon shall be due and payable on September 30, 2014. The Consolidated Note provides for a default rate of interest of 13% per annum upon the occurrence and during the continuation of an event of default, as defined in the Consolidated Note, which shall be payable in cash upon demand.
 
With the increase in our authorized common stock in May 2013, the Investor now has the right at any time following a five-day written notice to convert all or any portion of the principal and any accrued but unpaid interest into shares of our common stock at $0.10 per share.

As of the date of this report, none of the semi-annual interest payments under the Consolidated Note have been made to the Investor when due.  We have, however, made partial interest payments to Investor in the aggregate amount of $2,300 to reduce interest due on the Consolidated Note.  The failure to pay the full interest on the Consolidated Note when due may constitute an event of default under the Consolidated Note.  In the event of a default that remains uncured, the Investor may, at any time, demand immediate repayment of the Consolidated Note.  As a result, we have included the Consolidated Note and all accrued but unpaid interest as current liabilities at June 30, 2014 and September 30, 2013.  As of the date of this report, to our knowledge, the Investor has not made any demand for immediate repayment of the Consolidated Note.  As with EBRD, if Investor were to demand immediate repayment of the Consolidated Note, we would have insufficient funds to satisfy that obligation.  Were that to occur, we anticipate Investor would seek any legal remedy available to him to obtain repayment.

We are engaged in discussions with EBRD about a potential restructuring of our obligations to EBRD.  There is no guarantee we will be successful in negotiating, obtaining approval of or concluding definitive restructuring agreements with EBRD or the Investor on favorable terms, or at all.

While we have made significant efforts to increase our revenues and control our operating expenses, we continue to generate net losses.  As noted above, we do not expect revenues from operations to improve significantly until the second phase of the Kashagan development ramps up, which at this time is projected to occur in 2018 or 2019.  In order to diversify our operations, we have worked to enter the Turkmen and Russian markets.  Unless we are able to exploit other new markets outside of Kazakhstan for our services, there is no guarantee we will be able to continue to sustain net losses until the second phase of Kashagan development ramps up.
 
35
 
 
 
Our ability to continue as a going concern is dependent upon, among other things, our ability to (i) successfully restructure our financial obligations to EBRD and Investor, (ii) increase our revenues and improve our operating results to a level that will allow us to service our financial obligations, and/or (iii) attract other significant sources of funding.  Uncertainty as to the outcome of each of these events raises substantial doubt about our ability to continue as a going concern.

Cash Flows

We typically realize decreasing cash flows during our first fiscal quarter and limited cash flow during our second fiscal quarter as weather conditions in the north Caspian Sea dictate when oil and gas exploration and development work can be performed.  Usually, the work season commences in late March or early April and continues until the Caspian Sea ices over in November.  As a result, other than TatArka, which can continue to provide some onshore geophysical services between November and March and the receipt of winter standby rates on vessels, we generate very little revenue from November to March each year.

The following table provides an overview of our cash flow during the nine months ended June 30, 2014 and 2013.
 
 
Period ended June 30,
 
2014
  
2013
Net cash provided by (used in) operating activities
 $       6,480
  
          $      (3,218)
Net cash provided by (used in) investing activities
(3,823)
  
957
Net cash used in financing activities
(700)
  
   (1,400)
Effect of exchange rate changes on cash
(4,768)
  
(422)
Net Change in Cash
$        (2,811)
  
$    (4,083)

Net cash flow from operations for the nine months ended June 30, 2014 was positive, mostly due to an increase in accrued expenses of $8,618, which was partially off-set by a decrease in our accounts payable to related parties of $2,123.

Net cash used in investing activities for the nine months ended June 30, 2014 mostly represents the payment for vessel dry-docking of $800 and the purchase of geophysical equipment of $3,000.

Net cash used in financing activities during the nine months ended June 30, 2014 represents partial payment of interest due to Investor under the Notes.
 
36
 
 
 
 
Payment Period
Contractual Commitments
  
Less than
    
After
 
Total
1 Year
1-3 Years
3-5 Years
5 years
Loans from Investor
 $  42,724
 $42,724
 $        -
 $        -
 $        -
Loans from EBRD
     24,969
   24,969
           -
           -
           -
Accelerated put option liability
     21,263
   21,263
           -
           -
           -
Operating leases - vessels
       9,770
        853
      2,312
      2,161
     4,444
Operating leases - other
          522
        124
         286
         112
           -
       Total
 $  99,248
 $89,933
 $   2,598
 $   2,273
 $  4,444
 
Off-Balance Sheet Financing Arrangements

In January 2008 Balykshi, Kyran Holdings Limited and JSC “KazMorTransFlot” formed the MOBY joint venture, to operate a boat repair and drydocking services yard located at our marine base.  Balykshi owns a 20% interest in MOBY.  In August 2008 MOBY entered into a loan agreement with EBRD.  The MOBY loan agreement provided that EBRD would loan MOBY $10,300 (the “MOBY Loan”).

In June 2009 in connection with the MOBY Loan, EBRD required certain parties, including the Company, as the parent company of Balykshi, to execute a Deed of Guarantee and Indemnity (the “Guarantee”), which guarantees repayment of the MOBY Loan.  The MOBY Loan funded and we became liable for the obligations under the Guarantee as of September 2009.  The Guarantee constitutes a direct financial obligation of the Company.

Pursuant to and in accordance with the Guarantee, we have agreed to guarantee payment to EBRD, on demand, all monies and liabilities which have been advanced or which shall become due, owing or incurred by MOBY to or in favor of EBRD when such shall become due.  Our guarantee obligation is limited, however, to the “Caspian Pro-rata Percentage.”  The Caspian Pro-rata Percentage is an amount equal to our percentage ownership of Balykshi multiplied by Balykshi’s percentage ownership of MOBY, expressed as a percentage.  Currently, we own a 78% interest in Balykshi and Balykshi owns a 20% interest in MOBY.  Therefore, the Caspian Pro-rata Percentage is currently 15.6%, which, including interest, at June 30, 2014 reflected a total maximum potential obligation of $1,815.  There is currently no recorded liability for potential losses under this Guarantee, nor is there any liability recorded for the Company’s obligation to fund such Guarantee.

We also agreed, as a separate and independent obligation and liability, to indemnify EBRD on demand against all losses, costs and expenses suffered or incurred by EBRD should any of the financing agreements between EBRD and MOBY be or become unlawful, void, voidable or unenforceable, ineffective or otherwise not recoverable on the basis of the Guarantee, provided again our obligation is limited to the Caspian Pro-rata Percentage of such losses, costs and expenses.
 
37
 
 
 
As a guarantor, we agreed to advance to MOBY at any time on demand of EBRD any additional amount required by MOBY to enable it to comply with its obligations under the financing agreements and to carry out the project.  Our obligation in this context is limited to 20% of the total amount.

Pursuant to and in accordance with the Guarantee, EBRD is not obliged before taking steps to enforce any of its rights and remedies under the Guarantee to make any demand or seek to enforce any right against MOBY or any other person to obtain judgment in any court against MOBY or any other person or to file any claim in bankruptcy, liquidation or similar proceedings.

The Guarantee provides that each guarantor agrees to pay interest to EBRD on all unpaid sums demanded under the Guarantee at a rate of LIBOR plus 5.6%.  The Guarantee also provides that each guarantor shall, on demand and on a full indemnity basis, pay to EBRD, the amount of all costs and expenses, including legal and out-of-pocket expenses and any VAT on such costs and expenses which EBRD incurs in connection with:  a) the preparation, negotiation, execution and delivery of the Guarantee; b) any amendment, variation, supplement, waiver or consent under or in connection with the Guarantee; c) any discharge or release of the Guarantee; d) the preservation or exercise of any rights in connection with the Guarantee; and e) any stamping or registration of the Guarantee; provided that our obligation in this context is limited to the Caspian Pro-rata Percentage.

As of June 30, 2014 and September 30, 2013 MOBY was in violation of certain financial covenants under the MOBY Loan.  To our knowledge, as of the date of this report, EBRD has not sought to accelerate repayment of the MOBY Loan.

On July 29, 2013 we entered into an agreement to acquire Kazmortransflot’s (“KMTF”) 30% interest in MOBY for approximately $4. Closing of this agreement is subject to various closing conditions including restructuring our obligations with EBRD.

In July 2014 we signed an agreement with Topaz for the acquisition of 100% share in Kyran.  Kyran owns a 50% share in MOBY, and after execution of this agreement we will own approximately 66% share in MOBY. As disclosed in the Current Report on Form 8-K of the Company filed with the SEC on August 12, 2014, subsequent to the end of the fiscal quarter this agreement closed.  With the closing of this agreement, in future quarters the operations and balances of Kyran and MOBY will be consolidated with our financial statements and our obligations pursuant to the Guarantee will no longer treated as an off-balance sheet financing arrangement.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

As a smaller reporting company, as defined in Rule 12b-2 promulgated under the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
 
38
 
 
 
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this quarterly report on Form 10-Q our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business.  Excluding ordinary routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results of operations.

Item 1A.  Risk Factors

We believe there are no additions to the risk factors disclosed in our annual report on Form 10-K for the year ended September 30, 2013 filed on January 14, 2014.

Item 3.  Defaults Upon Senior Securities

See Note 1 – Business Condition to the condensed consolidated financial statements included in this quarterly report on Form 10-Q.
 
39
 
 
 
Item 6.  Exhibits

Exhibits.  The following exhibits are included as part of this report:
       
 
Exhibit No.
  
Description of Exhibit
       
 
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
  
Certification pursuant to 18 U.S.C. Section 1350 as
     
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
Exhibit 101
  
The following Caspian Services, Inc. financial information for the period ended June 30, 2014, formatted in XBRL (eXtensive Business Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Stockholders’ Equity, (iv) the Statements of Cash Flows, and (v) the Notes to the Financial Statements.
       
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
CASPIAN SERVICES, INC.
       
       
Date: August 19, 2014
By:
/s/ Alexey Kotov
  
     
Alexey Kotov
  
     
Chief Executive Officer
  


Date: August 19, 2014
By:
/s/ Indira Kaliyeva
  
     
Indira Kaliyeva
  
     
Chief Financial Officer
  

40





EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Alexey Kotov, certify that:

1.           I have reviewed this Quarterly Report on Form 10-Q of Caspian Services, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))  for the registrant and have:

 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:   August 19, 2014
By:
/s/ Alexey Kotov
    
     
Alexey Kotov
  
     
Chief Executive Officer
  
         






EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Indira Kaliyeva, certify that:

1.           I have reviewed this Quarterly Report on Form 10-Q of Caspian Services, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date:   August 19, 2014
By:
/s/ Indira Kaliyeva
  
     
Indira Kaliyeva
  
     
Chief Financial Officer
  
         





EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with this Quarterly Report on Form 10-Q of Caspian Services, Inc. (the “Company”) for the period ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Alexey Kotov, Chief Executive Officer and Indira Kaliyeva, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



Date:   August 19, 2014
By:
/s/ Alexey Kotov
  
     
Alexey Kotov
  
     
Chief Executive Officer
  
         



Date:   August 19, 2014
By:
/s/ Indira Kaliyeva
  
     
Indira Kaliyeva
  
     
Chief Financial Officer
  


Caspian Services (CE) (USOTC:CSSV)
Historical Stock Chart
From Oct 2024 to Nov 2024 Click Here for more Caspian Services (CE) Charts.
Caspian Services (CE) (USOTC:CSSV)
Historical Stock Chart
From Nov 2023 to Nov 2024 Click Here for more Caspian Services (CE) Charts.