UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
Amendment
No. 1
x |
QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the quarterly period ended June 30, 2007 |
|
|
o |
TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the transition period from
to |
Commission
file number 0-49846
CHINA
NORTH EAST
PETROLEUM HOLDINGS LIMITED
(Exact
name of small business issuer as specified in its charter)
Nevada
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|
87-0638750
|
(State
of other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer identification No.)
|
20337
Rimview Place, Walnut, California 91789
(Address
of principal executive offices)
(909)
468-2840
(Issuer's
telephone number)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes o
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
Number
of
shares of common stock outstanding as of August 9, 2007: 19,224,080
Transitional
Small Business Disclosure Format: Yes o No
x
EXPLANATORY
STATEMENT
This
Amendment No. 1 to Form 10-QSB, which amends the Company’s Form 10-QSB for the
period ended June 30, 2007, filed with the Securities and Exchange Commission
(the “SEC”) on August 14, 2007, is being filed to do the following:
(i)
|
Revise
the Condensed Consolidated Balance Sheet to reduce current
liabilities by
$14,606,257 to $10,611,656 and correspondingly increase long-term
liabilities by $14,606,257 to $15,547,259 as a result of
the renegotiation
of payment terms with our primary drilling contractor which
extended the
payment period from 12 months to 24
months.
|
(ii)
|
Revise
the Condensed Consolidated Statement of Operations and Comprehensive
Income for the six months ended June 30, 2007, to reflect
“gain on
disposal of fixed assets” as a reduction in “Operating Expenses” and not
as “Other Income.”
|
(iii)
|
Added
notes 6, 7, 8 and 15 to the notes to the Condensed Consolidated
Financial
Statements to include more detailed disclosure of our oil
and gas
properties, oil and gas properties under construction, accounts
payable
and restatement of financial
statements.
|
(iv)
|
Revise
note 15 to the Condensed Consolidated Financial Statements
to reflect the
retroactive effect of the acquisition of Yu Qiao as a reorganization
of
entities under common control.
|
(v)
|
Include the information required by items
307 and 308(c)
of Regulation S-B. |
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Page
No.
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PART
I
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Item
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1
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Financial
Statements - Unaudited
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6
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Condensed
Consolidated Balance Sheet – June 30, 2007
(Unaudited)
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6
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Condensed
Consolidated Statements of Operations and Comprehensive Income
- three
months and six months ended June 30, 2007 and 2006 (Unaudited)
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7
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Condensed
Consolidated Statements of Cash Flows – six months ended June 30, 2007
and 2006 (Unaudited)
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8
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Notes
to Condensed Consolidated Financial Statements as of June 30, 2007
(Unaudited)
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9
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Item
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2
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Management’s
Discussion and Analysis of Financial Condition And Results
of
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Operations
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15
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Item
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3
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.
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Controls
and Procedures
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24
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PART
II
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Item
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1
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.
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Legal
Proceedings
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25
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Item
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2
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.
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Changes
in Securities
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25
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Item
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3
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.
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Defaults
Upon Senior Securities
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25
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Item
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4
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.
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Submission
of Matters to a Vote of Security Holders
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25
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Item
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5
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Other
Information
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25
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Item
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6
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Exhibits
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25
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SIGNATURES
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26
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SPECIAL
NOTE REGARDING FORWARD—LOOKING STATEMENTS
On
one or
more occasions, we may make forward-looking statements in this Quarterly Report
on Form 10-QSB regarding our assumptions, projections, expectations, targets,
intentions or beliefs about future events. Words or phrases such as
“anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,”
“intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,”
“will continue” or similar expressions identify forward-looking statements.
These forward-looking statements are only our predictions and involve numerous
assumptions, risks and uncertainties, including, but not limited to those listed
below and those business risks and factors described elsewhere in this report
and our other Securities and Exchange Commission filings.
Forward-looking
statements involve risks and uncertainties which could cause actual results
or
outcomes to differ materially from those expressed. We caution that while we
make such statements in good faith and believe such statements are based on
reasonable assumptions, including without limitation, management’s examination
of historical operating trends, data contained in records and other data
available from third parties, we cannot assure you that our projections will
be
achieved. Factors that may cause such differences include but are not limited
to:
|
·
|
Our
expectation of continued growth in the demand for our
oil;
|
|
·
|
Our
expectation that we will have adequate liquidity from cash flows
from
operations;
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|
·
|
A
variety of market, operational, geologic, permitting, labor and weather
related factors; and
|
|
·
|
The
other risks and uncertainties which are described below under “RISK
FACTORS”, including, but not
limited to, the following:
|
|
·
|
Unanticipated
conditions may cause profitability to
fluctuate.
|
|
·
|
Decreases
in purchases of oil by our customer will adversely affect our
revenues.
|
We
have
attempted to identify, in context, certain of the factors that we believe may
cause actual future experience and results to differ materially from our current
expectation regarding the relevant matter or subject area. In addition to the
items specifically discussed above, our business and results of operations
are
subject to the uncertainties described under the caption “Risk Factors” which is
a part of the disclosure included in Item 2 of this Report entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
From
time to time, oral or written
forward-looking statements are also included in our reports on Forms 10-KSB,
10-QSB and 8-K, Proxy Statements on Schedule 14A, press releases, analyst and
investor conference calls, and other communications released to the public.
Although we believe that at the time made, the expectations reflected in all
of
these forward looking statements are and will be reasonable, any or all of
the
forward-looking statements in this quarterly report on Form 10-QSB, our reports
on Forms 10-KSB and 8-K, our Proxy Statements on Schedule 14A and any other
public statements that are made by us may prove to be incorrect. This may occur
as a result of inaccurate assumptions or as a consequence of known or unknown
risks and uncertainties. Many factors discussed in this Quarterly Report on
Form
10-QSB, certain of which are beyond our control, will be important in
determining our future performance. Consequently, actual results may differ
materially from those that might be anticipated from forward-looking statements.
In light of these and other uncertainties, you should not regard the inclusion
of a forward-looking statement in this Quarterly Report on Form 10-QSB or other
public communications that we might make as a representation by us that our
plans and objectives will be achieved, and you should not place undue reliance
on such forward-looking statements.
We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent annual and periodic reports filed with the SEC on
Forms 10-KSB, 10-QSB and 8-K and Proxy Statements on Schedule 14A.
Unless
the context requires otherwise, references to “we,” “us,” “our,” the “Company”
and “CNEH” refer specifically to China North East Petroleum Holdings Limited and
its subsidiaries.
Item
1 – Financial Statements (Unaudited)
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED AND
SUBSIDIARIES
|
|
Condensed
Consolidated Balance Sheet
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|
At
June 30, 2007 (Unaudited)
|
|
ASSETS
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CURRENT
ASSETS
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|
|
|
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|
|
|
|
Cash
and cash equivalents
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|
$ |
325,417
|
|
Accounts
receivable, net
|
|
|
1,835,796
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|
Prepaid
expenses and other current assets
|
|
|
971,063
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Due
from related parties
|
|
|
355,930
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Value
added tax recoverable
|
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|
213,102
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|
Total
Current Assets
|
|
|
3,701,308
|
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PROPERTY
AND EQUIPMENT
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Oil
and gas properties, net
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|
27,250,739
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Fixed
assets, net
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|
844,667
|
|
Oil
and gas properties under construction
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9,161,596
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Total
Property and Equipment
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|
37,257,002
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|
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INTANGIBLE
ASSETS, NET
|
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|
48,589
|
|
|
|
|
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|
TOTAL
ASSETS
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|
$ |
41,006,899
|
|
|
|
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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CURRENT
LIABILITIES
|
|
|
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Accounts
payable
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|
$ |
7,373,363
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Other
payables and accrued liabilities
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|
1,483,411
|
|
Notes
payable
|
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|
786,906
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Income
tax and other tax payable
|
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|
954,861
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|
Due
to a related party
|
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|
13,115
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Total
Current Liabilities
|
|
|
10,611,656
|
|
LONG-TERM
LIABILITIES
|
|
|
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|
Accounts payable
|
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|
14,606,257 |
|
Deferred
tax payable
|
|
|
678,700
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|
Note
payable
|
|
|
262,302
|
|
Total
Long-term Liabilities
|
|
|
15,547,259
|
|
|
|
|
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TOTAL
LIABILITIES
|
|
|
26,158,915
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
MINORITY
INTERESTS
|
|
|
603,471
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
Common
stock, $0.001 par value, 150,000,000 shares authorized,
|
|
|
|
|
19,224,080
shares issued and outstanding
|
|
|
19,224
|
|
Additional
paid-in capital
|
|
|
11,294,089
|
|
Deferred
stock compensation
|
|
|
(81,375 |
) |
Retained
earnings
|
|
|
|
|
Unappropriated
|
|
|
2,237,885
|
|
Appropriated
|
|
|
287,634
|
|
Accumulated
other comprehensive income
|
|
|
487,056
|
|
Total
Stockholders' Equity
|
|
|
14,244,513
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
41,006,899
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
|
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Income
|
|
For
the three months and six months ended June 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30
|
|
|
Six
months ended June 30
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
NET
SALES
|
|
$ |
4,097,554
|
|
|
$ |
1,276,634
|
|
|
$ |
5,977,501
|
|
|
$ |
2,383,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production costs
|
|
|
627,808
|
|
|
|
239,677
|
|
|
|
964,598
|
|
|
|
500,196
|
|
Depreciation of oil and gas properties
|
|
|
850,602
|
|
|
|
163,689
|
|
|
|
1,239,829
|
|
|
|
510,673
|
|
Amortization of intangible assets
|
|
|
2,653
|
|
|
|
1,150
|
|
|
|
5,277
|
|
|
|
3,691
|
|
Government oil surcharge
|
|
|
495,456
|
|
|
|
145,909
|
|
|
|
652,587
|
|
|
|
145,909
|
|
Total
Cost of Sales
|
|
|
1,976,519
|
|
|
|
550,425
|
|
|
|
2,862,291
|
|
|
|
1,160,469
|
|
GROSS
PROFIT
|
|
|
2,121,035
|
|
|
|
726,209
|
|
|
|
3,115,210
|
|
|
|
1,223,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
279,141
|
|
|
|
274,185
|
|
|
|
499,406
|
|
|
|
467,849
|
|
Professional fees
|
|
|
4,000
|
|
|
|
3,000
|
|
|
|
20,000
|
|
|
|
33,773
|
|
Consulting fees
|
|
|
27,125
|
|
|
|
27,125
|
|
|
|
54,250
|
|
|
|
27,125
|
|
Depreciation of fixed assets
|
|
|
38,957
|
|
|
|
22,856
|
|
|
|
74,984
|
|
|
|
44,554
|
|
Gain on disposal of fixed assests
|
|
|
(14,757 |
) |
|
|
- |
|
|
|
(14,757 |
) |
|
|
- |
|
Total
Operating Expenses
|
|
|
334,466
|
|
|
|
327,166
|
|
|
|
633,883
|
|
|
|
573,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
1,786,569
|
|
|
|
399,043
|
|
|
|
2,481,327
|
|
|
|
649,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
|
3,522
|
|
|
|
-
|
|
|
|
18,284
|
|
Interest
expense
|
|
|
(12,513 |
) |
|
|
(12,345 |
) |
|
|
(23,104 |
) |
|
|
(25,664 |
) |
Imputed
interest expense
|
|
|
(829 |
) |
|
|
(96,180 |
) |
|
|
(132,675 |
) |
|
|
(136,728 |
) |
Interest
income
|
|
|
242
|
|
|
|
226
|
|
|
|
490
|
|
|
|
325
|
|
Recovery
of deposit from a supplier previously
written off
|
|
|
356,094
|
|
|
|
-
|
|
|
|
356,094
|
|
|
|
-
|
|
Total
Other Income
(Expense),
net
|
|
|
342,994
|
|
|
|
(104,777 |
) |
|
|
200,805
|
|
|
|
(143,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME BEFORE TAXES AND MINORITY INTERESTS
|
|
|
2,129,563
|
|
|
|
294,266
|
|
|
|
2,682,132
|
|
|
|
505,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(718,918 |
) |
|
|
(148,347 |
) |
|
|
(940,325 |
) |
|
|
(276,603 |
) |
Minority
interests
|
|
|
(157,078 |
) |
|
|
2,324
|
|
|
|
(200,877 |
) |
|
|
7,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,253,567
|
|
|
|
148,243
|
|
|
|
1,540,930
|
|
|
|
236,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
127,509
|
|
|
|
2
|
|
|
|
214,760
|
|
|
|
(8,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
1,381,076
|
|
|
$ |
148,245
|
|
|
$ |
1,755,690
|
|
|
$ |
228,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share-basic and diluted
|
|
$ |
0.04
|
|
|
$ |
0.01
|
|
|
$ |
0.05
|
|
|
$ |
0.01
|
|
Weighted
average number of shares
outstanding
during the period -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted
|
|
|
29,004,300
|
|
|
|
29,208,695
|
|
|
|
29,113,583
|
|
|
|
28,779,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
|
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED AND
SUBSIDIARIES
|
Condensed
Consolidated Statements of Cash Flows
|
For
the six months ended June 30, 2007 and 2006
(Unaudited)
|
|
|
2007
|
|
|
Restated
2006
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$ |
1,540,930
|
|
|
$ |
236,816
|
|
Adjusted
to reconcile net income to cash provided
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
Depreciation
of oil and gas properties
|
|
|
1,239,829
|
|
|
|
510,673
|
|
Depreciation
of fixed assets
|
|
|
74,984
|
|
|
|
44,554
|
|
Amortization
of intangible assets
|
|
|
5,277
|
|
|
|
3,691
|
|
Minority
interests
|
|
|
200,877
|
|
|
|
(7,460 |
) |
Stocks
issued for services
|
|
|
54,250
|
|
|
|
54,898
|
|
Imputed
interest expenses
|
|
|
132,675
|
|
|
|
136,728
|
|
Gain
on disposal of fixed assets
|
|
|
(14,757 |
) |
|
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,085,112 |
) |
|
|
(194,045 |
) |
Prepaid
expenses and other current assets
|
|
|
(45,705 |
) |
|
|
(237,692 |
) |
Due
from related parties
|
|
|
(291,899 |
) |
|
|
83,528
|
|
Value
added tax recoverable
|
|
|
234,501
|
|
|
|
32,097
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
Accounts
payable
|
|
|
742,756
|
|
|
|
(161,145 |
) |
Other
payables and accrued liabilities
|
|
|
88,642
|
|
|
|
176,225
|
|
Income
tax and other tax payable
|
|
|
849,949
|
|
|
|
286,147
|
|
Deferred
tax payable
|
|
|
475,948
|
|
|
|
2,072
|
|
Net
cash provided by operating activities
|
|
|
4,203,145
|
|
|
|
967,087
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase
of oil and gas properties
|
|
|
(5,098,317 |
) |
|
|
(880,622 |
) |
Purchase
of fixed assets
|
|
|
(157,094 |
) |
|
|
(30,404 |
) |
Additions
to oil and gas properties under construction
|
|
|
(205,620 |
) |
|
|
(241,501 |
) |
Proceeds
on disposal of fixed assets
|
|
|
23,286
|
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(5,437,745 |
) |
|
|
(1,152,527 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds
from the issuances of notes payable
|
|
|
786,906
|
|
|
|
-
|
|
Repayment
of note payable
|
|
|
(121,885 |
) |
|
|
-
|
|
Decrease
in other loans payable
|
|
|
(25,612 |
) |
|
|
(18,371 |
) |
Increase
in amount due to a stockholder
|
|
|
90,693
|
|
|
|
20,405
|
|
Increase
(decrease) in amounts due to related parties
|
|
|
1,153,524
|
|
|
|
(65,451 |
) |
Net
cash provided by (used in) financing activities
|
|
|
1,883,626
|
|
|
|
(63,417 |
) |
EFFECT
OF EXCHANGE RATE ON CASH
|
|
|
(337,355 |
) |
|
|
(210,505 |
) |
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
311,671
|
|
|
|
(459,362 |
) |
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
13,746
|
|
|
|
633,307
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
325,417
|
|
|
$ |
173,945
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Income
tax expense
|
|
$ |
147,328
|
|
|
$ |
28,634
|
|
Interest
expenses
|
|
$ |
23,104
|
|
|
$ |
25,664
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF JUNE 30,
2007
(UNAUDITED)
NOTE
1 BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to
the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In
the
opinion of management, the unaudited condensed consolidated financial statements
contain all adjustments consisting only of normal recurring accruals considered
necessary to present fairly the Company's financial position at June 30, 2007,
the results of operations for the three and six months ended June 30, 2007
and 2006 and cash flows for the six months ended June 30, 2007 and 2006.
The results for the six months ended June 30, 2007 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2007.
These
financial statements should be read in conjunction with the Company's annual
report on Form 10-KSB as filed with the Securities and Exchange
Commission.
NOTE
2 ORGANIZATION
China
North East Petroleum Holdings Limited (“North East Petroleum”) is a US listed
company which was incorporated in Nevada on August 20, 1999 under the name
of
Draco Holding Corporation (“Draco”).
Hong
Xiang Petroleum Group Limited ("Hong Xiang
Petroleum Group") was incorporated in the British
Virgin Islands (“BVI”) on August 28, 2003 as an investment holding
company.
On
December 5, 2003, Song Yuan City Hong Xiang Petroleum
Technical Services Co., Ltd. (“Hong Xiang Technical”) was incorporated in the
People’s Republic of China (“PRC”) which provided technical advisory services to
oil and gas exploration companies in the PRC.
During
2004, Hong Xiang Petroleum Group acquired a 100% ownership of Hong Xiang
Technical.
During
2004, Hong Xiang Technical acquired a 100% interest in Song Yuan City Yu
Qiao
Qianan Hong Xiang Oil and Gas Development Co., Ltd. (“Hong Xiang Oil
Development”) which is engaged in the exploration and production of crude oil in
the Jilin Oil Region, of the PRC.
During
2004, Draco executed a Plan of Exchange to acquire 100% of Hong Xiang Petroleum
Group.
On
July
26, 2006, the Company entered into a Joint Venture Agreement (the “JV
Agreement”) with a principal stockholder and a related party, hereafter referred
to as the “Related Parties,” to acquire oil and gas properties for the
exploration of crude oil in the PRC. Pursuant to the JV Agreement,
the Company and the Related Parties are obligated to contribute $1 million
and
$121,000, respectively, to the registered capital of Song Yuan North East
Petroleum Technical Service Co., Ltd. (“Song Yuan Technical”), and
the Company and the Related Parties will each share 90% and 10% respectively
of
the equity and profit interests of Song Yuan Technical.
On
June
1, 2005, Song Yuan Technical acquired from third parties 100% equity interest
of
LongDe Oil & Gas Development Co. Ltd. (“LongDe”) which is engaged in the
exploration and production of crude oil in the Jilin Oil Region, of the
PRC.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF JUNE 30,
2007
(UNAUDITED)
NOTE
2 ORGANIZATION (CONTINUED)
On
January 26, 2007, Song Yuan Technical entered into an agreement with the
stockholders of Song Yuan City Yu Qiao Oil and Gas Development Limited
Corporation (“Yu Qiao”) to acquire 100% of the equity interest of Yu Qiao. In
consideration for the acquisition, the Company will issue to the stockholders
of
Yu Qiao an aggregate of 10,000,000 shares of the Company’s common stock having a
fair value of $3,100,000 based on the preceding 30-day average of the high
bid
and the low ask price for the Company’s common stock as quoted on the
Over-the-Counter Bulletin Board as of the date of the closing of the
transaction. Before this transaction, Yu Qiao was owned 70% by a related party
and 30% by third parties held on behalf of the related party.
Yu
Qiao
was incorporated in Song Yuan City, Jinlin Province, PRC on
May 24, 2002 as a limited liability company. Yu Qiao is engaged in the
extraction and production of crude oil in Jilin Province, PRC and operates
3 oilfields with a total exploration area of 39.2 square kilometers. Pursuant
to
a 20-year exclusive Cooperative Exploration Contract (the “Oil Lease”) which was
entered into on May 28, 2002 with PetroChina Group, a corporation organized
and existing under the laws of PRC (“PetroChina”), the Company has the right to
explore, develop and extract oil at Qian’an 112, Da 34 and Gu 31 area. Pursuant
to the Oil Lease, PetroChina is entitled to 20% of the Company’s oil production
for the first ten years of the Oil Lease term and 40% of the Company’s oil
production for the remaining ten years of the Oil Lease term. On May 28,
2002, the Company also executed an Agreement of leasing 20.7 square kilometers
of Qian’an 112 area to Hong Xiang Oil Development and the Company is entitled to
2% of total sales revenue as consideration.
The
acquisition of Yu Qiao was accounted for as a reorganization of entities under
common control. Accordingly, the operations of Yu Qiao for the three and six
months ended June 30, 2007 and 2006 were included in the unaudited condensed
consolidated financial statements as if the transactions had occurred
retroactively.
In
March
2007, the Company approved the dissolution of its wholly owned subsidiaries,
Hong Xiang Technical and Hong Xiang Oil Development.
NOTE
3 PRINCIPLES OF CONSOLIDATION
The
accompanying unaudited condensed consolidated financial statements for 2007
include the unaudited financial statements of North East Petroleum and its
wholly owned subsidiary, Hong Xiang Petroleum Group and 90% equity interest
owned subsidiaries, Song Yuan Technical, LongDe and Yu Qiao (collectively,
“the
Company”). The minority interests represent the minority shareholders’ 10% share
of the results of Song Yuan Technical, LongDe and Yu Qiao.
The
accompanying unaudited condensed consolidated financial statements for 2006
include the unaudited financial statements of North East Petroleum and its
wholly owned subsidiaries, Hong Xiang Petroleum Group, Hong Xiang Petroleum
Technical and Hong Xiang Oil Development Co., Ltd. and 90% equity interest
owned
subsidiaries, Song Yuan Technical, LongDe and Yu Qiao. The minority interests
represent the minority shareholders’ 10% share of the results of Song Yuan
Technical, LongDe and Yu Qiao.
All
significant inter-company accounts and transactions have been eliminated in
consolidation.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF JUNE 30,
2007
(UNAUDITED)
NOTE
4 REVENUE RECOGNITION
The
Company recognizes revenue upon the delivery of its share of crude oil extracted
to its sole customer, PetroChina at which time title is passed; there are no
uncertainties regarding customer acceptance; persuasive evidence of an
arrangement exists; the sales price is fixed and determinable; and
collectability is deemed probable.
Pursuant
to the Oil Lease entered into on May 28, 2002 with PetroChina Group, the Company
is entitled to 80% of the Company’s oil production for the first ten years to
2012 and 60% of the Company’s oil production for the remaining ten years to
2022.
NOTE
5 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets at June 30, 2007 consist of the
following:
|
|
(Unaudited)
|
|
|
|
|
|
Prepaid
expenses
|
|
$ |
327,141
|
|
Deposits
paid to suppliers
|
|
|
600,498
|
|
Other
receivables
|
|
|
43,424
|
|
|
|
$ |
971,063
|
|
NOTE
6 OIL AND GAS PROPERTIES
The
following is a summary of oil and gas properties at June 30,
2007:
|
|
(Unaudited)
|
|
|
|
Beginning
balance at January
1
|
|
$ |
10,359,232
|
|
Additions
to capitalized
exploratory well costs
|
|
|
5,098,317
|
|
Additions
to capitalized
exploratory well costs on acquisition of Yu Qiao
|
|
|
15,813,486
|
|
Foreign
currency translation
difference
|
|
|
631,250
|
|
|
|
|
31,902,285
|
|
Intangible
mining
rights
|
|
|
13,445
|
|
Less:
Accumulated
depreciation
|
|
|
(4,664,991 |
) |
Ending
balance at June
30
|
|
$ |
27,250,739
|
|
Depreciation
expense for the period ended June 30, 2007 was 1,239,829.
As
of
June 30, 2007, the Company had no costs incurred in unproven oil and gas
properties.
NOTE
7 OIL AND GAS PROPERTIES UNDER
CONSTRUCTION
The
following is a summary of oil and gas properties under construction at June
30,
2007:
|
|
(Unaudited)
|
|
|
|
Beginning
balance at January
1
|
|
|
$5,682,384
|
|
Additions
on acquisition of Yu
Qiao
|
|
|
3,273,592
|
|
Additions
for the
period
|
|
|
205,620
|
|
Ending
balance at June
30
|
|
|
$9,161,596
|
|
|
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF JUNE 30,
2007
(UNAUDITED)
NOTE
8 ACCOUNTS PAYABLE
The
following is a summary of accounts payable at June 30, 2007:
|
|
(Unaudited)
|
|
|
|
Beginning
balance at January
1
|
|
$ |
7,442,423
|
|
Additions
on acquisition of Yu
Qiao
|
|
|
13,794,441
|
|
Additions
for the
period
|
|
|
742,756
|
|
Ending
balance at June
30
|
|
|
21,979,620
|
|
Less:
current
maturities
|
|
|
7,373,363
|
|
Long-term
portion
|
|
$ |
14,606,257
|
|
NOTE 9
RELATED PARTY TRANSACTIONS
|
a)
|
As
of June 30, 2007, three related parties owed the Company $228,079,
$72,133
and $55,718 respectively. The amounts are interest-free and are repayable
on demand.
|
|
b)
|
Pursuant
to an agreement entered into by a stockholder, a related party and
the
Company on June 29, 2007, the stockholder and the related party
unconditionally and irrevocably contributed all of the advances owed
by
the Company as of March 31, 2007 amounting to $1,746,128 and $5,451,685
respectively to the Company. These contributions were recorded as
additional paid-in capital by the
Company.
|
|
c)
|
As
of June 30, 2007, the Company owed a related party of $13,115 for
short-term advances. Imputed interest is computed at 7% per annum
on the
amount due.
|
|
d)
|
Total
imputed interest expenses recorded as additional paid-in capital
amounted
to $132,675 and $136,728 for the six months ended June 30, 2007 and
2006
respectively.
|
|
e)
|
The
Company paid a stockholder $6,210 for leased office spaces for the
six
months ended June 30, 2007.
|
|
f)
|
On
January 26, 2007, Song Yuan Technical entered into an agreement with
a
related party and third parties who are the stockholders of Yu Qiao
to
acquire 100% of the equity interest of Yu Qiao. In consideration
for the
acquisition, the Company will issue to the related party an aggregate
of
10,000,000 shares of the Company’s common stock (“the Acquisition Shares”)
having a fair value of $3,100,000.
On June 29, 2007, the Company
and the related party entered into an agreement pursuant to which
the
related party unconditionally and irrevocably contributed the Acquisition
Shares to the Company. The contribution of the Acquisition Shares
was
recorded as additional paid-in capital by the
Company.
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF JUNE 30,
2007
(UNAUDITED)
NOTE 10 NOTES
PAYABLE
Notes
payable consist of the following:
|
|
(Unaudited)
|
|
|
|
|
|
Note
payable to a bank, interest rate of 11.16%
|
|
|
|
per
annum, secured by a property owned
|
|
|
|
by
a stockholder, due July 2006 and
|
|
|
|
extended
to July 2008
|
|
$ |
262,302
|
|
|
|
|
|
|
Note
payable to a bank, interest rate of 10.44%
|
|
|
|
|
per
annum, secured by the Company's properties
|
|
|
|
|
due
October 2007
|
|
|
393,453
|
|
|
|
|
|
|
Note
payable to a bank, interest rate of 10.44%
|
|
|
|
|
per
annum, secured by the Company's properties
|
|
|
|
|
due
November 2007
|
|
|
393,453
|
|
|
|
|
1,049,208
|
|
Less:
current maturities
|
|
|
786,906
|
|
Long-term
portion
|
|
$ |
262,302
|
|
Interest
expense for the six months ended June 30, 2007 was $23,104.
NOTE 11 COMMITMENTS
AND CONTINGENCIES
(A) Lease
commitment
The
Company leases office spaces from a stockholder and land spaces from a
third
party under two operating leases which expire on June 30, 2015 and September
20,
2023 respectively at an annual rental of $12,590 and $164
respectively.
As
of
June 30, 2007, the Company had outstanding commitments with respect to
the above
operating leases, which are due as follows:
2007
|
|
$ |
6,377
|
|
2008
|
|
|
12,754
|
|
2009
|
|
|
12,754
|
|
2010
|
|
|
12,754
|
|
Thereafter
|
|
|
58,746
|
|
|
|
$ |
103,385
|
|
(B) Capital
commitment
According
to the amended Articles of Association of Song Yuan Technical, the Company
has
to fulfill registered capital contribution of $1 million. As of June 30,
2007,
the Company has fulfilled $490,000 of the registered capital requirement
and has
outstanding capital contributions of $510,000.
NOTE 12 STOCKHOLDERS’
EQUITY
Stock
issued for acquisition a
subsidiary
On
January 26, 2007, Song Yuan Technical entered into an agreement with a related
party and third parties who are the stockholders of Yu Qiao to acquire 100%
of
the equity interest of Yu Qiao. In consideration for the acquisition, the
Company will issue to the related party an aggregate of 10,000,000 shares of
the
Company’s common stock (“the Acquisition Shares”) having a fair value of
$3,100,000.
On
June
29, 2007, the Company and the related party entered into an agreement pursuant
to which the related party unconditionally and irrevocably contributed the
Acquisition Shares to the Company. The contribution of the Acquisition Shares
was recorded as additional paid-in capital by the Company.
NOTE
13 CONCENTRATIONS AND RISKS
During
2007, 100% of the Company's assets were located in the PRC and 100% of
the
Company's revenues were derived from one customer located in the PRC. The
Oil
Lease requires the Company to sell crude oil to PetroChina
only.
NOTE
14 RECLASSIFICATIONS
Certain
reclassifications have been made in the condensed consolidated financial
statements for the six months ended June 30, 2006 to conform to the current
period's presentation.
NOTE
15 RESTATEMENT OF FINANCIAL STATEMENTS
The
Company has restated the unaudited condensed consolidated financial statements
for the three and six months ended June 30, 2006 to reflect the retroactive
effects on acquisition of Yu Qiao as a reorganization of entities under common
control.
|
|
June
30,
|
|
|
|
|
|
|
2006
|
|
|
June
30,
|
|
|
|
(As
Previously
|
|
|
2006
|
|
Statement
of Operations and
Comprehensive Income
|
|
Reported)
|
|
|
(As
Restated)
|
|
|
Net
sales
|
|
$ |
931,783
|
|
|
$ |
2,383,512
|
|
Cost
of
sales
|
|
|
(173,032 |
) |
|
|
(1,160,469 |
) |
Gross
profit
|
|
|
758,751
|
|
|
|
1,223,043
|
|
Operating
expenses
|
|
|
(120,326 |
) |
|
|
(573,301 |
) |
Income
from
operations
|
|
|
638,425
|
|
|
|
649,742
|
|
Other
income
(expenses)
|
|
|
(104,514 |
) |
|
|
(143,783 |
) |
Net
income before taxes and
minority interests
|
|
|
533,911
|
|
|
|
505,959
|
|
Income
tax
expenses
|
|
|
(210,271 |
) |
|
|
(276,603 |
) |
Minority
interests
|
|
|
-
|
|
|
|
7,460
|
|
Net
income
|
|
|
323,640
|
|
|
|
236,816
|
|
Other
comprehensive
loss
|
|
|
(28,271 |
) |
|
|
(8,588 |
) |
Comprehensive
income
|
|
|
295,369
|
|
|
|
228,228
|
|
Net
income per share-basic and
diluted
|
|
$ |
0.02
|
|
|
$ |
0.01
|
|
Weighted
average number of shares
outstanding
|
|
|
|
|
|
|
|
|
during
the period-basic and
diluted
|
|
|
18,779,881
|
|
|
|
28,779,881
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
2006
|
|
|
June
30,
|
|
|
|
(As
Previously
|
|
|
2006
|
|
Balance
sheet
|
|
Reported)
|
|
|
(As
Restated)
|
|
|
Current
assets
|
|
$ |
1,535,458
|
|
|
$ |
2,730,027
|
|
Property
and
equipment
|
|
|
5,266,862
|
|
|
|
14,608,070
|
|
Total
assets
|
|
|
6,802,320
|
|
|
|
17,338,097
|
|
|
Liabilities
|
|
|
5,197,463
|
|
|
|
13,685,885
|
|
|
Minority
interests
|
|
|
-
|
|
|
|
320,927
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
19,224
|
|
|
|
29,224
|
|
Additional
paid-in
capital
|
|
|
1,796,256
|
|
|
|
3,276,512
|
|
Deferred
stock
compensation
|
|
|
-
|
|
|
|
(189,875 |
) |
Retained
(deficits)
earnings
|
|
|
(98,453 |
) |
|
|
269,010
|
|
Accumulated
other comprehensive
loss
|
|
|
(112,170 |
) |
|
|
(53,586 |
) |
|
|
|
1,604,857
|
|
|
|
3,331,285
|
|
Total
liabilities and
stockholders' equity
|
|
$ |
6,802,320
|
|
|
$ |
17,338,097
|
|
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS.
We
are
engaged in the extraction and production of crude oil in Jilin Province,
PRC,
through Song Yuan City Yu Qiao Qianan Hong Xiang Oil and Gas Development
Co.,
Ltd. (“Hong Xiang Oil Development”) , a wholly-owned subsidiary of the Company’s
100% owned subsidiary Hong Xiang Technical Services Co., Ltd. (“Hong Xiang
Technical”) organized and existing under the laws of PRC. The oil field is
called Jilin Qian’an Oil Field Zone 112 (“Qian’an 112”), located approximately 9
kilometers southwest of Qian’an City with a total exploration area of 20.7
square kilometers. Pursuant to a 20-year exclusive Cooperative Exploration
Contract (the “Contract”) among PetroChina Group, a corporation organized and
existing under the laws of the People’s Republic of China (“PetroChina”), Song
Yuan City Yu Qiao Oil and Gas Exploration Limited Corp., a corporation organized
and existing under the laws of the People’s Republic of China (“Yu Qiao”) and
the Company, we have the right to explore, develop (including well logging,
drill-stem testing and core sampling) and pump oil at Qian’an 112. Pursuant to
the Contract, PetroChina is entitled to 20% of our output in the first ten
years
and 40% of our output thereafter until the end of the Exploration Contract.
The
Company sells all of its current oil production to PetroChina.
On
July
26, 2006, the Company entered into a joint venture agreement with a stockholder
of the Company and a related party to contribute to the increased registered
capital of a limited liability company under the Laws of the PRC, named
Song
Yuan North East Petroleum Technical Service Co., Ltd. (“Song Yuan Technical”).
The purpose of Song Yuan Technical is to acquire oil and gas properties
and to
engage in the exploration of crude oil in the PRC. The Company owns 90% of
the equity interest in Song Yuan Technical, the related party owns the
remaining 10% equity interest in Song Yuan Technical.
Song
Yuan
Technical owns 100% of the equity interest of LongDe Oil & Gas
Development Co. Ltd. (“LongDe”). LongDe was incorporated in May 2003 under the
laws of the PRC and is a party to a 20 year exploration contract with
PetroChina, pursuant to which LongDe has the right to explore, develop and
pump
oil at Hetingbao Oilfield 301, located within
Song Yuan city in Jilin Province, 20 kilometers away from Ningjiang District
(“Hetingbao 301”). Pursuant to the Exploration Contract, PetroChina is
entitled to 20% of LongDe’s output in the first ten years and 40% of LongDe’s
output thereafter until the end of the Exploration Contract.
On
January 26, 2007, Song Yuan Technical, completed the acquisition of 100%
of the
equity interests of Yu Qiao. Yu
Qiao
was incorporated on May 24, 2002 as a limited liability company under the
laws
of the PRC and is a party to a 20 year exploration contract with PetroChina,
pursuant to which Yu Qiao has the right to explore, develop and pump oil
at
Qian’an 112 oilfield, Da 34 oilfield and Gu 31 oilfield in Jilin, province,
covering a total of 3,207 acres and consists of approximately 46 oil wells.
In consideration for this acquisition, the Company, as the 90% owner
of
Song Yuan Technical, will issue to the former shareholder of Yu Qiao, who
is
also a related party of the Company, an aggregate of ten million
(10,000,000) shares of the Company’s unregistered common stock. Such shares have
a market value of approximately US$3.1 million based on the preceding 30-day
average of the high bid and the low ask price for the Company's common
stock as quoted on the Over-the-Counter Bulletin Board as of the Closing.
As a
result of this acquisition, the Company owns 90% of the equity interests of
Yu Qiao, through its 90% owned joint venture, Song Yuan Technical.
As
a
result of the Yu Qiao acquisition, the Oil Lease between Hong Xiang Oil
Development and Yu Qiao became unnecessary, as the Company became, effectively,
both the lessor and lessee under the lease agreement pertaining to the Qian’an
112 oil fields. In particular, the management fee paid by Hong Xiang Oil
Development to Yu Qiao became redundant as both entities are controlled by
the
Company. In addition, all operations, assets and liabilities of Hong Xiang
Oil
Development will be transferred to Yu Qiao. As such, on March 19, 2007, the
Company dissolved Hong Xiang Oil Development and Hong Xiang Technical as
both
subsidiaries have no assets other than the lease agreement, and are no longer
necessary elements of its corporate structure. The Company did not incur
any
material costs in connection with the dissolution of Hong Xiang
Technical and Hong Xiang Oil Development.
The
Company is paid the FOB price on the first day of each month established by
the
Singapore crude oil spot market.
Results
of Operations
Three
Months Ended June 30, 2007 Compared To Three Months Ended June 30,
2006
Revenues.
Revenues for the quarter ended June 30, 2007 were $4,097,554 compared
to $1,276,634 for the quarter ended June 30, 2006, an increase of
$2,820,920, or 221%. This increase was due to an increase in crude
oil production. Our output of crude oil for the three months
ended June 30, 2007 was 8,364.8 tons compared to 2,583.2 tons for the same
quarter in 2006. The
increase
in production was mainly because of the new wells being brought into
production.
Cost
of
sales. Cost
of sales increased by 259% from $550,425 for the three months ended June
30,
2006 to $1,976,519 for the three ended June 30, 2007. The
increase in cost of sales resulted primarily from the increase in
production. For the
three
months ended June 30, 2007, the Company paid government oil surcharge of
$495,456 to the PRC government as a result of the
regulation introduced by the PRC government in June 2006. Under this
regulation, a surcharge of 20% is imposed on the portion of the selling price
of
crude oil which exceeds $40 per barrel and a surcharge of 40% is imposed
on the
portion of the selling price of crude oil which exceeds $60 per
barrel.
Operating
Expenses. Operating expenses increased by 2% from $327,166 for the three
months ended June 30, 2006 to $334,466 for the three months ended June 30,
2007. The slight increase primarily as a result of increase in
depreciation of fixed assets.
Net
Income. Net income increased by 746% from $148,243 for the three
months ended June 30, 2006 to $1,253,567 for the three months ended June 30,
2007, primarily as a result of a 221% increase in sales as described
above.
Six
Months Ended June 30, 2007 Compared To Six Months Ended June 30,
2006
Revenues.
Revenues for the six months ended June 30, 2007 were $5,977,501 compared
to $2,383,512 for the same period 2006, an increase of $3,593,989, or 151%.
This increase was due to an increase in crude
oil production. Our output of crude oil for the six months ended
June 30, 2007 was 12,732 tons compared to 5,086.4 tons for the same period
in
2006. The
increase
in production was mainly because of the new wells being taken into
production.
Cost
of
sales. Cost
of sales increased by 147% from $1,160,469 for the six months ended June
30,
2006 to $2,862,291 for the six months ended June 30, 2007. The
increase in cost of sales resulted primarily from the increase in
production. And also an additional
payment of government oil surcharge did not occurred in the first
quarter
of 2006. For the
six months
ended June 30, 2007, the Company paid government oil surcharge of
$652,587 to the PRC government as a result of the
regulation introduced by the PRC government in June 2006. Under this
regulation, a surcharge of 20% is imposed on the portion of the selling price
of
crude oil which exceeds $40 per barrel and a surcharge of 40% is imposed
on the
portion of the selling price of crude oil which exceeds $60 per
barrel.
Operating
Expenses. Operating expenses increased by 11% from $573,301 for
the six months ended June 30, 2006 to $633,883 for the same period
2007. The slight increase primarily as a result of increase in
depreciation of fixed assets.
Net
Income. Net income increased by 551% from $236,816 for the six
months ended June 30, 2006 to $1,540,930 for the same period 2007, primarily
as
a result of a 151% increase in sales as described above.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
June 30, 2007, the Company had cash and cash equivalents of $325,417, other
current assets of $3,375,891 and current liabilities of approximately $10.6
million. For the six months ended June 30, 2007, our primary source
of liquidity was approximately $4.2 million in net cash provided by operations
and approximately $1.2 million in loans made to the Company by related
parties.
As
of
June 30, 2007, the Company’s current liabilities were approximately $10.6
million consisting of approximately $7.4 million in accounts payable Primarily
Comprised of costs related to the drilling of an additional 49 wells in the
first two quarters of 2007. In July 2007, the Company was able to
negotiate new payment terms with its primary drilling company, which extends
the
payment term for each well from over 12 to over 24 months beginning upon
completion of the well. In addition, on June 29, 2007, the Company
negotiated an agreement with Mr. Hong Jun Wang, the Company’s Chief Executive
Officer and Ms. Guizhi Ju, Mr. Wang’s mother pursuant to which Mr. Wang and Ms.
Ju contributed an aggregate of approximately $7.2 million owed by the Company
to
Mr. Wang and Ms. Ju to the capital of the Company, reducing the Company’s
current liabilities by approximately $1.7 million and its long-term liabilities
by approximately $5.5 million.
As
a
result, at June 30, 2007, the Company’s current liabilities were reduced by
$14.6 million, with a working capital deficit by approximately $2.9
million to $6.9 million.
Net
cash
provided by operating activities was $4,203,145 for the six months ended
June
30, 2007 compared to $967,087 for the same period in 2006, primarily as
a result
of an increase in oil production as a result of the addition of 15 producing
wells during the period ended June 30, 2007.
Net
cash
used in investing activities was $5,437,745 for the six months ended June
30,
2007 compared to $1,152,527 for the same period in 2006. This increase is due
to the addition of oil and gas
properties of $5,098,317 during the six months ended June 30, 2007.
Net
cash
provided by financing activities was $1,883,626 for the six months ended
June
30, 2007 as a result of advances made to the Company by related
parties.
While
we
expect cash provided by operations to continue to increase as additional
oil
wells come into production, we also expect to continue to require a significant
amount of cash to continue to develop existing oil and
gas
properties and to acquire additional oil and gas properties. Each
well costs approximately $320,000 to bring into production and the Company’s
business plan contemplates the development of an additional 40 wells over
the
next 12 months from the completion of each well. The
Company’s agreement with its primary drilling company requires the company to
make a down payment of 30% of the total drilling cost of each well prior
to the
commencement of drilling of each well with the balance due in 24 installments
beginning in the month in which the well is brought into production. As
a
result, the Company will require an additional $3.8 million in upfront
costs
over the next 12 months and an additional $8.96 million over the following
24
months.
The
Company intends to pay for this development with cash from operations as
well as
by raising funds through the sale of equity or debt. The full and timely
development and implementation of its business plan and growth strategy
will
require significant additional resources, and the Company may not be able
to
obtain the funding necessary to implement its growth strategy on acceptable
terms or at all. An inability to obtain such funding could slow down
or prevent the Company from further development of its oil
resources. The Company intends to explore a number of options to
secure sources of capital, including the issuance of debt, and equity,
including
preferred equity securities or other equity securities. The Company
has not yet identified the sources for the additional financing it requires
and
the Company does not have commitments from any third parties to provide
this
financing. The Company might not succeed, therefore, in raising
additional equity capital or in negotiating and obtaining additional and
acceptable financing when it needs it or at all. The Company’s
ability to obtain additional capital will also depend on market conditions,
national and global economies and other factors beyond its
control. We cannot assure you that the Company will be able to
implement or capitalize on various financing alternatives or otherwise
obtain
required capital, the need for which is substantial given its operating
loss
history and its business and development plan. The terms of any
future debt or equity funding that the Company may obtain in the future
may be
unfavorable to the Company and to its stockholders.
Capital
Commitments.
Pursuant
to the Joint Venture Agreement, the Company is obligated to contribute $1
million as registered capital of Song Yuan Technical. On October 8,
2006, the Company made a capital contribution of $490,000 to Song Yuan Technical
and received 90% of Song Yuan Technical’s membership and profit
interests. The Company remains obligated to contribute an additional
$510,000 in capital to Song Yuan Technical. The Company will
contribute the remaining $510,000 during the third quarter of 2007.
RISK
FACTORS
Our
business is subject to certain risks, and we want you to review these risks
while you are evaluating our business and our historical results. Please keep
in
mind that any of the following risks discussed below and elsewhere in this
Annual Report could materially and adversely affect us, our operating results,
our financial condition and our projections and beliefs as to our future
performance. As such, our results could differ materially from those projected
in our forward-looking statements. Additional risks and uncertainties not
currently known to us or those we currently deem to be immaterial may also
materially and adversely affect our business.
RISKS
RELATED TO OUR BUSINESS
Oil
prices fluctuate significantly, and lower prices for an extended period of
time
are likely to have a material adverse impact on our
business.
Our
revenues, profitability and future growth depend substantially on prevailing
prices for crude oil. We sell to one customer, PetroChina, and we are paid
a
price per barrel equal to the Singapore crude oil spot market price on the
first
day of every month. These prices also affect the amount of cash flow
available for capital expenditures and our ability to borrow and raise
additional capital. The lower prices may reduce the amount of crude oil that
we
can economically produce.
Among the factors that can cause fluctuations are:
|
•
|
the
price and availability of alternative
fuels;
|
|
•
|
disruptions
in supply and changes in demand caused by weather
conditions;
|
|
•
|
changes
in demand as a result of changes in
price;
|
|
•
|
political
conditions in oil and gas producing
regions; and
|
|
•
|
domestic
governmental regulations.
|
Our
future success depends on our ability to find, develop and acquire oil and
gas
reserves.
To
maintain production levels, we must locate and develop or acquire new crude
oil
reserves to replace those depleted by production. Without successful exploration
or acquisition activities, our reserves, production and revenues will decline
rapidly. We may be unable to find and develop or acquire additional reserves
at
an acceptable cost. In addition, substantial capital is required to replace
and
grow reserves. If lower crude oil price or operating constraints or production
difficulties result in our cash flow from operations being less than expected,
we may be unable to expend the capital necessary to locate and develop or
acquire new crude oil reserves.
We
may need to raise substantial additional capital, which may result in
substantial dilution to existing stockholders.
In
order
to fully develop and exploit the Company’s oil reserves and to execute on our
business plan, the Company may need substantial additional capital. The Company
is currently considering possible sources of this additional capital,
including raising capital through the issuance of debt or equity securities.
There can be no assurance that we will be able to raise sufficient additional
capital at all or on terms favorable to our stockholders or us. If we issue
equity securities in order to raise additional capital in the amounts currently
contemplated, the stockholders will experience immediate and substantial
dilution in their ownership percentage of the combined company. In addition,
to
raise the capital we need, we may need to issue additional shares at a discount
to the current market price. If the terms of such financing are unfavorable
to
us or our stockholders, the stockholders may experience substantial dilution
in
the net tangible book value of their stock. In addition, any new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise funds on acceptable terms,
we may not be able to fully develop or exploit our existing oil reserves, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements all of which could have a material adverse effect
on
us.
Environmental
and regulatory factors
The
oil
drilling industry in China to date has not been subject to the type and scope
of
regulation seen in Europe and the United States. However, the possibility exists
that new legislation or regulations may be adopted or that the enforcement
of
existing laws could become more stringent, either of which may have a
significant impact on our mining operations or our customers’ ability to use oil
and may require us or our customers to significantly change operations or to
incur substantial costs. We believe that our operations in China are in
compliance with China’s applicable legal and regulatory requirements. However,
there can be no assurance that China’s central or local governments will not
impose new, stricter regulations or interpretations of existing regulations
that
would require additional expenditures.
Reserve
degradation and depletion
Our
profitability depends substantially on our ability to exploit our oil reserves
at competitive costs. Replacement reserves may not be available when required
or, if available, may not be capable of being drilled at costs comparable to
those characteristics of the depleting oil field. We may in the future acquire
oil reserves from third parties. We may not be able to accurately assess the
geological characteristics of any reserves that we acquire, which may adversely
affect our profitability and financial condition. Exhaustion of reserves at
Qian’an 112, Hetingbao 301 and at oil fields that we may acquire in the future
can also have an adverse effect on operating results that is disproportionate
to
the percentage of overall production represented by such mines.
Reserves
– title; leasehold interests
Our proved reserves are estimates. Any material inaccuracies in our reserve
estimates or assumptions underlying our reserve estimates could cause the
quantities and net present value of our reserves to be overstated or
understated.
There
are numerous uncertainties inherent in estimating
quantities of proved reserves, including many factors beyond our control that
could cause the quantities and net present value of our reserves to be
overstated. The reserve information included or incorporated by reference in
this report represents estimates prepared by our internal engineers and examined
by independent petroleum consultants. Estimation of reserves is not an exact
science. Estimates of economically recoverable oil and natural gas reserves
and
of future net cash flows necessarily depend upon a number of variable factors
and assumptions, any of which may cause these estimates to vary considerably
from actual results, such as:
|
•
|
historical
production from an area compared with production from similar producing
areas;
|
|
|
|
|
•
|
assumed
effects of regulation by governmental agencies;
|
|
|
|
|
•
|
assumptions
concerning future oil and natural gas prices, future operating costs
and
capitalexpenditures;
and
|
|
|
|
|
•
|
estimates
of future severance and excise taxes, workover and remedial
costs.
|
Estimates of reserves based on risk of recovery and estimates of expected future
net cash flows prepared or audited by different engineers, or by the same
engineers at different times, may vary substantially. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and the variance may be material. The net present values referred
to
in this report should not be construed as the current market value of the
estimated oil reserves attributable to our properties. In accordance with SEC
requirements, the estimated discounted net cash flows from proved reserves
are
generally based on prices and costs as of the date of the estimate, whereas
actual future prices and costs may be materially higher or lower.
Acquisitions
We
are
seeking to expand our operations and oil reserves in the regions in which we
operate through acquisitions of businesses and assets, including leases of
oil
reserves. Acquisition transactions involve inherent risks, such as:
|
•
|
uncertainties
in assessing the value, strengths, weaknesses, contingent and other
liabilities and potential profitability of acquisition or other
transaction candidates;
|
|
|
|
|
•
|
the
potential loss of key personnel of an acquired
business;
|
|
|
|
|
•
|
the
ability to achieve identified operating and financial synergies
anticipated to result from an acquisition or other
transaction;
|
|
|
|
|
•
|
problems
that could arise from the integration of the acquired
business;
|
|
|
|
|
•
|
unanticipated
changes in business, industry or general economic conditions that
affect
the assumptions underlying the acquisition or other transaction rationale;
and
|
|
|
|
|
•
|
unexpected
development costs, that adversely affect our
profitability.
|
Any
one
or more of these factors could cause us not to realize the benefits anticipated
to result from the acquisition of businesses or assets.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Our
operations are primarily located in China and may be adversely affected by
changes in the policies of the Chinese government.
The
political environment in the PRC may adversely affect the Company’s business
operations. The PRC has operated as a socialist state since 1949 and is
controlled by the Communist Party of China. In recent years, however, the
government has introduced reforms aimed at creating a “socialist market economy”
and policies have been implemented to allow business enterprises greater
autonomy in their operations. Changes in the political leadership of the PRC
may
have a significant effect on laws and policies related to the current economic
reforms program, other policies affecting business and the general political,
economic and social environment in the PRC, including the introduction of
measures to control inflation, changes in the rate or method of taxation, the
imposition of additional restrictions on currency conversion and remittances
abroad, and foreign investment. These effects could substantially impair the
Company’s business, profits or prospects in China. Moreover, economic reforms
and growth in the PRC have been more successful in certain provinces than in
others, and the continuation or increases of such disparities could affect
the
political or social stability of the PRC.
The
PRC’s economic, political and social conditions, as well as governmental
policies, could affect the financial markets in China and our liquidity and
access to capital and our ability to operate our business.
The
PRC
economy differs from the economies of most developed countries in many respects,
including the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth over the past, growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us. The PRC economy has
been
transitioning from a planned economy to a more market-oriented economy. Although
the PRC government has implemented measures since the late 1970s emphasizing
the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of improved corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. The PRC government also exercises significant
control over China’s economic growth through the allocation of resources,
controlling payment of foreign currency- denominated obligations, setting
monetary policy and providing preferential treatment to particular industries
or
companies. Since late 2003, the PRC government implemented a number of measures,
such as raising bank reserves against deposit rates to place additional
limitations on the ability of commercial banks to make loans and raise interest
rates, in order to slow down specific segments of China’s economy which it
believed to be overheating. These actions, as well as future actions and
policies of the PRC government, could materially affect our liquidity and access
to capital and our ability to operate our business.
The
Chinese government exerts substantial influence over the manner in which the
Company must conduct its business activities.
The
PRC
only recently has permitted greater provincial and local economic autonomy
and
private economic activities. The government of the PRC has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Accordingly, government
actions in the future, including any decision not to continue to support recent
economic reforms and to return to a more centrally planned economy or regional
or local variations in the implementation of economic policies, could have
a
significant effect on economic conditions in the PRC or particular regions
thereof, and could require the Company to divest the interests it then holds
in
Chinese properties or joint ventures. Any such developments could have a
material adverse effect on the business, operations, financial condition and
prospects of the Company.
Future
inflation in China may inhibit economic activity and adversely affect the
Company’s operations.
In
recent
years, the Chinese economy has experienced periods of rapid expansion and within
which some years with high rates of inflation and deflation, which have led
to
the adoption by the PRC government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth
and
contain inflation. While inflation has moderated since 1995, high inflation
may
in the future cause the PRC government to impose controls on credit and/or
prices, or to take other action, which could inhibit economic activity in China,
and thereby adversely affect the Company’s business operations and prospects in
the PRC.
We
may be restricted from freely converting the Renminbi to other currencies in
a
timely manner.
The
Renminbi is not a freely convertible currency at present. The Company receives
all of its revenue in Renminbi, which may need to be converted to other
currencies, primarily U.S. dollars, and remitted outside of the PRC. Effective
July 1, 1996, foreign currency “current account” transactions by foreign
investment enterprises, including Sino-foreign joint ventures, are no longer
subject to the approval of State Administration of Foreign Exchange (“SAFE,”
formerly, “State Administration of Exchange Control”), but need only a
ministerial review, according to the Administration of the Settlement, Sale
and
Payment of Foreign Exchange Provisions promulgated in 1996 (the “FX
regulations”). “Current account” items include international commercial
transactions, which occur on a regular basis, such as those relating to trade
and provision of services. Distributions to joint venture parties also are
considered a “current account transaction.” Other non-current account items,
known as “capital account” items, remain subject to SAFE approval. Under current
regulations, the Company can obtain foreign currency in exchange for Renminbi
from swap centers authorized by the government. The Company does not anticipate
problems in obtaining foreign currency to satisfy its requirements; however,
there is no assurance that foreign currency shortages or changes in currency
exchange laws and regulations by the Chinese government will not restrict the
Company from freely converting Renminbi in a timely manner. If such shortages
or
change in laws and regulations occur, the Company may accept Renminbi, which
can
be held or re-invested in other projects.
We
may suffer from exchange rate risks that could result in foreign currency
exchange loss.
Because
our business transactions are denominated in RMB and our funding and result
of
operations will be denominated in USD, fluctuations in exchange rates between
USD and RMB will affect our balance sheet and financial results. Since
July 2005, RMB is no longer solely pegged with USD but is pegged against a
basket of currencies as a whole in order to keep a more stable exchange rate
for
international trading. With the very strong economic growth in China in the
last
few years, RMB is facing a very high pressure to appreciate against USD. Such
pressure would result more fluctuations in exchange rates and in turn our
business would be suffered from higher exchange rate risk.
There
are
very limited hedging tools available in China to hedge our exposure in exchange
rate fluctuations. They are also ineffective in the sense that these hedges
cannot be freely preformed in the PRC financial market, and more important,
the
frequent changes in PRC exchange control regulations would limit our hedging
ability for RMB.
We
may be unable to enforce our rights due to policies regarding the regulation
of
foreign investments in China.
The
PRC’s
legal system is a civil law system based on written statutes in which decided
legal cases have little value as precedents, unlike the common law system
prevalent in the United States. The PRC does not have a well-developed,
consolidated body of laws governing foreign investment enterprises. As a result,
the administration of laws and regulations by government agencies may be subject
to considerable discretion and variation, and may be subject to influence by
external forces unrelated to the legal merits of a particular matter. China’s
regulations and policies with respect to foreign investments are evolving.
Definitive regulations and policies with respect to such matters as the
permissible percentage of foreign investment and permissible rates of equity
returns have not yet been published. Statements regarding these evolving
policies have been conflicting and any such policies, as administered, are
likely to be subject to broad interpretation and discretion and to be modified,
perhaps on a case-by-case basis. The uncertainties regarding such regulations
and policies present risks that the Company will not be able to achieve its
business objectives. There can be no assurance that the Company will be able
to
enforce any legal rights it may have under its contracts or
otherwise.
Because
our assets are located overseas, stockholders may not receive distributions
that
they would otherwise be entitled to if we were declared bankrupt or
insolvent.
Our
assets are, for the most part, located in the PRC. Because the Company’s assets
are located overseas, the assets of the Company may be outside of the
jurisdiction of U.S. courts to administer if the Company was the subject of
an
insolvency or bankruptcy proceeding. As a result, if the Company was declared
bankrupt or insolvent, the Company’s stockholders may not receive the
distributions on liquidation that they are otherwise entitled to under U.S.
bankruptcy law.
Our
acquisitions of LongDe and Yu Qiao (after our fiscal year) were structured
to
attempt to fully comply with PRC rules and regulations. However, such
arrangements may be adjudicated by relevant PRC government agencies as not
being
in compliance with PRC governmental regulations on foreign investment in oil
and
gas industries and such structures may limit our control with respect to such
entities.
PRC
rules
and regulations do not allow foreign investors to directly own 100% of a
domestic oil and gas business. As such, we are ineligible to own directly 100%
a
domestic oil and gas business in China. We acquired Hong Xiang Oil Development
through Hong Xiang Technical, our 100% owned subsidiary. We acquired a majority
interest of LongDe and Yu Qiao through Song Yuan Technical, our 90% owned joint
venture incorporated in the PRC. Our acquisition of Yu Qiao subsequent to our
fiscal year is currently provided through a trust arrangement with two PRC
citizens designated by PetroChina, a government owned entity; pursuant to which
they agree to hold 30% securities of Yu Qiao for the benefit of Song Yuan
Technical in compliance with the applicable law of the PRC. However, pursuant
to
the trust agreement, they agree, among other things, to (i) vote the securities
as directed by Song Yuan technical, (ii) deliver all payments, distributions
and
other economic benefits received with respect to the securities to Song Yuan
Technical, (iii) not transfer or encumber the securities without the consent
of
Song Yuan Technical and (iv) to transfer the securities to Song Yuan Technical
as soon as permissible under the laws of the PRC.
Although
we have been advised by our PRC counsel that our arrangements with our
affiliated Chinese entities are valid under current PRC laws and regulations,
we
cannot assure you that we will not be required to restructure our organization
structure and operations in China to comply with changing and new PRC laws
and
regulations. Restructuring of our operations may result in disruption of our
business, diversion of management attention and the incurrence of substantial
costs.
Recent
PRC regulations relating to offshore investment activities by PRC residents
may
increase our administrative burden and restrict our overseas and cross-border
investment activities. If our shareholders who are PRC residents fail to make
any required applications and filings under such regulations, we may be unable
to distribute profits and may become subject to liability under PRC
laws.
The
PRC
National Development and Reform Commission, or NDRC, and SAFE recently
promulgated regulations that require PRC residents and PRC corporate entities
to
register with and obtain approvals from relevant PRC government authorities
in
connection with their direct or indirect offshore investment activities. These
regulations apply to our shareholders who are PRC residents and may apply to
any
offshore acquisitions that we make in the future.
Under
the
SAFE regulations, PRC residents who make, or have previously made, direct or
indirect investments in offshore companies will be required to register those
investments. In addition, any PRC resident who is a direct or indirect
shareholder of an offshore company is required to file with the local branch
of
SAFE, with respect to that offshore company, any material change involving
capital variation, such as an increase or decrease in capital, transfer or
swap
of shares, merger, division, long-term equity or debt investment or creation
of
any security interest over the assets located in China. If any PRC shareholder
fails to make the required SAFE registration, the PRC subsidiaries of that
offshore parent company may be prohibited from distributing their profits and
the proceeds from any reduction in capital, share transfer or liquidation,
to
their offshore parent company, and the offshore parent company may also be
prohibited from injecting additional capital into their PRC subsidiaries.
Moreover, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC laws for evasion of
applicable foreign exchange restrictions.
We
cannot
assure you that all of our shareholders who are PRC residents will comply with
our request to make or obtain any registrations or approvals required under
these regulations or other related legislation. Furthermore, as the regulations
are relatively new, the PRC government has yet to publish implementing rules,
and much uncertainty remains concerning the reconciliation of the new
regulations with other approval requirements. It is unclear how these
regulations, and any future legislation concerning offshore or cross-border
transactions, will be interpreted, amended and implemented by the relevant
government authorities. The failure or inability of our PRC resident
shareholders to comply with these regulations may subject us to fines and legal
sanctions, restrict our overseas or cross-border investment activities, limit
our ability to inject additional capital into our PRC subsidiaries, and the
ability of our PRC subsidiaries to make distributions or pay dividends, or
materially and adversely affect our ownership structure. If any of the foregoing
events occur, our acquisition strategy, business operations and ability to
distribute profits to you could be materially and adversely
affected.
PRC
regulation of loans and direct investment by offshore holding companies to
PRC
entities may delay or prevent us from raising finance to make loans or
additional capital contributions to our PRC operating subsidiaries and
affiliates.
As
an
offshore holding company of our PRC operating subsidiaries and affiliates,
we
may make loans to our PRC subsidiaries and consolidated PRC affiliated entities,
or we may make additional capital contributions to our PRC subsidiaries. Any
loans to our PRC subsidiaries or consolidated PRC affiliated entities are
subject to PRC regulations and approvals.
We
may
also determine to finance Song Yuan Technical, by means of capital
contributions. These capital contributions to Song Yuan Technical must be
approved by the PRC Ministry of Commerce or its local counterpart. We cannot
assure you that we can obtain these government registrations or approvals on
a
timely basis, if at all, with respect to future loans or capital contributions
by us to our operating subsidiaries. If we fail to receive such registrations
or
approvals, our ability to capitalize our PRC operations would be negatively
affected which would adversely and materially affect our liquidity and our
ability to expand our business.
RISKS
RELATED TO CORPORATE AND STOCK MATTERS
Our
authorized preferred stock exposes stockholders to certain
risks.
Our
Articles of Incorporation authorizes the issuance of up to 50,000,000 shares
of
preferred stock, par value $.001 per share. To date, no shares of preferred
stock have been issued. The authorized preferred stock constitutes what is
commonly referred to as “blank check” preferred stock. This type of preferred
stock allows the
Board
of Directors to divide the preferred stock into series, to designate each
series, to fix and determine separately for each series any one or more relative
rights and preferences and to issue shares of any series without further
stockholder approval. Preferred stock authorized in series allows our Board
of
Directors to hinder or discourage an attempt to gain control of us by a merger,
tender offer at a control premium price, proxy contest or otherwise.
Consequently, the preferred stock could entrench our management. In addition,
the market price of our common stock could be materially and adversely affected
by the existence of the preferred stock.
The
market for the Company’s common stock is illiquid.
The
Company’s common stock is traded on the Over-the-Counter Bulletin Board. It is
thinly traded compared to larger more widely known companies in its industry.
Thinly traded common stock can be more volatile than stock trading in an active
public market. The Company cannot predict the extent to which an active public
market for its common stock will develop or be sustained.
Our
stock is a penny stock. Trading of our stock may be restricted by the SEC’s
penny stock regulations which may limit a stockholder’s ability to buy and sell
our stock.
Our
stock
is a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny
stock” to be any equity security that has a market price (as defined) less than
$5.00 per share or an exercise price of less than $5.00 per share, subject
to
certain exceptions. Our securities are covered by the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell to
persons other than established customers and “accredited investors”. The term
“accredited investor” refers generally to institutions with assets in excess of
$5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse. The penny
stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC which provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information,
must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock
is
a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules discourage investor interest in and limit
the
marketability of our common stock.
NASD
sales practice requirements may also limit a stockholder’s ability to buy and
sell our stock.
In
addition to the “penny stock” rules described above, the NASD has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable
for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these rules, the
NASD
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. The NASD requirements make
it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock and have
an
adverse effect on the market for our shares.
Stockholders
should have no expectation of any dividends.
The
holders of our common stock are entitled to receive dividends when, as and
if
declared by the board of directors out of funds legally available therefore.
To
date, we have not declared nor paid any cash dividends. The board of directors
does not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in our business
operations.
All
of our directors and officers are outside the United States, with the result
that it may be difficult for investors to enforce within the United States
any
judgments obtained against us or any of our directors or
officers.
All
of
our directors and officers are nationals and/or residents of countries other
than the United States, and all or a substantial portion of such persons’ assets
are located outside the United States. As a result, it may be difficult for
investors to effect service of process on our directors or officers, or enforce
within the United States or Canada any judgments obtained against us or our
officers or directors, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof.
Consequently, you may be effectively prevented from pursuing remedies under
U.S.
federal securities laws against them. In addition, investors may not be able
to
commence an action in a Canadian court predicated upon the civil liability
provisions of the securities laws of the United States.
If
we or our independent registered public accountants cannot attest our adequacy
in the internal control measures over our financial reporting, as required
by
Section 404 of the U.S. Sarbanes-Oxley Act, for the fiscal
year ending December 31, 2007, we may be adversely
affected.
As
a
public company, we are subject to report our internal control structure and
procedures for financial reporting in our annual reports on Form 10-KSB, as
a
requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the
U.S. Securities and Exchange Commission (the “SEC”). The report must contain an
assessment by management about the effectiveness of our internal controls over
financial reporting. Moreover, the independent registered public accountants
of
our company must attest to and report on management’s assessment of the same.
Even if our management attests to our internal control measure to be effective,
our independent registered public accountants may not satisfy with our internal
control structure and procedures. We cannot assure possible outcomes about
the
conclusion of the report and it could result in an adverse impact on us in
the
financial marketplace due to the loss of investor confidence in the reliability
of our financial statements, which could negatively impact to our stock market
price.
Item
3. Controls And Procedures
Evaluation
of Disclosure Controls and Procedures
As
of the
end of the period covered by this report, being June 30, 2007, the
Company
conducted an evaluation, under the supervision and with the participation
of its
Chief Executive Officer and President and Chief Financial Officer,
of the
effectiveness of the Company's disclosure controls and procedures (as
defined in
Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of
1934, as
amended (the "Exchange Act"). Based upon that evaluation, the Chief
Executive
Officer and President and Chief Financial Officer concluded that as
of June 30,
2007 our disclosure controls and procedures were effective in timely
alerting
them to material information relating to the Company required to be
included in
our Exchange Act filings. The two Executive Officers responsible for
the
financial reporting and disclosure are in direct control of the books
and
records of the Company and are involved first-hand in the decision
making
process for material transactions.
There
were no changes in internal controls over financial reporting that
occurred
during the quarter ended June 30, 2007, that have materially affected,
or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS
None.
ITEM
2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
.
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES
None.
.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. .
ITEM
5.
OTHER INFORMATION
None. .
ITEM
6.
EXHIBITS
The
following exhibits are filed herewith:
31.1
|
Certifications
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act
of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
31.2
|
Certifications
pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange
Act
of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
32.1
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley
Act of 2002. |
|
32.2
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley
Act of 2002. |
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
CHINA
NORTH EAST PETROLEUM
HOLDINGS LTD. |
|
(Registrant) |
|
|
|
|
|
|
By:
|
/s/ Zhang
Yang |
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
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