d3319210k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ________ to
_________
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Commission
File Number: 000-49846
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
(Exact
Name of Registrant as specified in its charter)
Nevada
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87-0638750
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(State
or other jurisdiction of
Incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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445 Park
Avenue
New York,
NY 10022
(Address
of principal executive office)
Registrant’s
telephone number, including area code: (212) 307-3568
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par
value per share
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
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 x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
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o
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Accelerated
filer
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o
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Non-accelerated
filer
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o
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Smaller
reporting company
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x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No x
The
aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant, as of the last business day of the registrant's most recently
completed second fiscal quarter, was approximately $69,015,691. All executive
officers and directors of the registrant have been deemed, solely for the
purpose of the foregoing calculation, to be "affiliates" of the
registrant.
As of
March 11, 2009, there were 20,784,080 shares of the issuer's common stock,
$0.001 par value, issued and outstanding.
Documents
Incorporated by Reference
None
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
ANNUAL
REPORT ON FORM 10-K
FOR
THE YEAR ENDED DECEMBER 31, 2008
TABLE OF
CONTENTS
Part
I
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Page
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Item
1.
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Business
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1
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Item
1A
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Risk
Factors
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9
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Item
2.
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Properties
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17
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Item
3.
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Legal
Proceedings
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18
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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18
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Part
II
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Item
5.
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Market
for Common Equity, Related Stockholder Matters and Issuer
Purchases
of Equity Securities
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18
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Item
6.
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Selected
Financial Data
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19
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and
Results
of Operation
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20
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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26
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Item
8.
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Financial
Statements and Supplementary Data
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26
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosure
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26
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Item
9A (T).
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Controls
and Procedures
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27
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Item
9B.
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Other
Information
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28
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Part
III
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Item
10.
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Directors,
Executive Officers Corporate Governance
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28
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Item
11.
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Executive
Compensation
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30
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
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32
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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33
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Item
14.
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Principal
Accountant Fees and Services
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34
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Item
15.
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Exhibits
and Financial Statement Schedules
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35
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Information
Regarding Forward-Looking Statements
In
addition to historical information, this report contains predictions, estimates
and other forward-looking statements that relate to future events or our future
financial performance. These statements involve known and unknown risks,
uncertainties and other factors that may cause our 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
the forward-looking statements. These risks and other factors include those
listed under “Risk Factors” and elsewhere in this report, and some of which we
may not know. In some cases, you can identify forward-looking statements by
terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of
these terms or other comparable terminology.
Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially
different from any future results, performances or achievements expressed or
implied by the forward-looking statements. We discuss many of these risks in
this report in greater detail under the heading “Risk Factors.” Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our management’s beliefs
and assumptions only as of the date of this report. You should read this annual
report on Form 10-K and the documents that we have filed as exhibits to this
annual report completely and with the understanding that our actual future
results may be materially different from what we expect.
Except as
required by law, we assume no obligation to update these forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in these forward-looking statements, even if
new information becomes available in the future.
PART
I
Overview
We are
engaged in the exploration and production of crude oil in Northern China. We
have an arrangement with the Jilin Refinery of PetroChina Group to sell our
crude oil production for use in the China marketplace. As of December 31, 2008,
we operated 247 producing wells located in four oilfields in Northern China and
have plans for additional drilling projects.
In
particular, through two of our subsidiaries, Song Yuan City Yu Qiao Oil and Gas
Development Ltd. Corp. (“Yu Qiao”) and Longde Oil and Gas Development Co. Ltd.
(“LongDe”), we have entered into binding sales agreements with the PetroChina
Group, whereby we sell our crude oil production for use in the China
marketplace.
We
currently operate 4 oilfields located in Northern China, which
include:
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Acreage Gross
(developed and
undeveloped) at
12/31/2008
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|
Producing Oil Wells
at
12/31/2008
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Proved Reserves (Bbls)
at
12/31/2008
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Qian’an
112
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5,115
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219
|
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5,292,591
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Daan
34
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2,298
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7
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13,240
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Gudian
31
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1,779
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7
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95,729
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Hetingbao
301
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2,471
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14
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52,232
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The
following chart illustrates our company’s organizational structure.
Organizational
History
We were
incorporated in the State of Nevada on August 20, 1999 under the name Draco
Holding Corporation. On March 29, 2004, we executed an Agreement for Share
Exchange with Hong Xiang Petroleum Group Limited, a corporation organized and
existing under the laws of the British Virgin Islands (“Hong Xiang”), and the
individual shareholders owning 100% of the outstanding common shares of Hong
Xiang (the “Hong Xiang Shareholders”).
Pursuant
to the Agreement for Share Exchange, we issued 18,700,000 shares of our common
stock to the Hong Xiang Shareholders in exchange for all of the shares of
capital stock of Hong Xiang owned by the Hong Xiang Shareholders at closing, and
Hong Xiang became our wholly-owned subsidiary. On June 28, 2004, we changed our
name to China North East Petroleum Holdings Ltd.
During
2004, we acquired a 100% ownership in Song Yuan City Hong Xiang Petroleum
Technical Services Co., Ltd. (“Hong Xiang Technical”), and Hong Xiang Technical
in turn acquired a 100% interest in Song Yuan City Yu Qiao Qianan Hong Xiang Oil
and Gas Development Co., Ltd. (“Hong Xiang Oil Development”), which was engaged
in the exploration and production of crude oil in the Jilin region of the
PRC.
As a
result of the Yu Qiao acquisition discussed below, all operations, assets and
liabilities of the Company’s subsidiary Hong Xiang Oil Development were
transferred to Yu Qiao on March 19, 2007. Since Hong Xiang Oil Development and
Hong Xiang Technical were no longer necessary elements of the Company’s
corporate structure, and they were liquidated and dissolved.
PetroChina
Oil Leases
Pursuant
to a 20-year exclusive Cooperative Oil Lease (the “Oil Lease”), among PetroChina
Group, Yu Qiao and the Company, entered into in May 2002, the Company has the
right to explore, develop and produce oil at Qian’an 112 Oilfield. Pursuant to
the Oil Lease, (i) 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; and (ii) Yu Qiao
is entitled to 2% of the Company’s oil production as a management fee. The
payment of management fee was stopped following the acquisition of Yu Qiao by
the Company.
LongDe is
a party to a 20-year contract with PetroChina Group entered into in May 2003,
pursuant to which LongDe has the right to explore, develop and produce oil at
the Hetingbao 301 oilfield in the PRC. Pursuant to such between PetroChina and
LongDe, 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
contract.
As the
controlling shareholder of Yu Qiao, the Company has the rights to extract and
develop Qian’an 112 and other oil fields under contracts that Yu Qiao has
entered into with PetroChina. These oilfields include the Daan 34 oilfield and
Gudian 31 oilfield in Jilin Province.
Song
Yuan Technical Joint Venture
On July
26, 2006, the Company entered into a joint venture agreement with Wang Hong Jung
(“Mr. Wang”), the president and a stockholder of the Company and Ju Guizhi (“Ms.
Ju”), mother of Mr. Wang, to contribute to the increased registered capital of
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 a 90% equity interest in Song Yuan Technical, and Ms. Ju owns the remaining
10% equity interest in Song Yuan Technical.
Acquisition
of LongDe
In order
to comply with certain PRC laws relating to foreign entities’ ownership of oil
and gas company in the PRC, prior to March 17, 2008, Song Yuan Technical
directly owned a 70% equity interest in LongDe, while Sun Peng and Ai Chang
Shan, respectively, owned 10% and 20% of the equity interests in Long De in
trust for Song Yuan Technical. On March 17, 2008, Song Yuan Technical
additionally acquired an additional 20% equity interest in LongDe, of which it
acquired a 10% of the equity interest in LongDe from Sun Peng, and 10% of the
equity interest in LongDe from Ai Chang Shan. Accordingly, Song Yuan Technical
now owns directly 90% of the equity interests in LongDe, with Ai Chang Shan
holding the remaining 10% in trust for Song Yuan Technical. The acquisition of
LongDe was made pursuant to the laws of the PRC. As a 90% owner of Song Yuan
Technical, the Company effectively controls LongDe.
Acquisition
of Yu Qiao
On
January 26, 2007, the Company, through its 90% owned subsidiary Song Yuan
Technical, acquired beneficial ownership of all of the interests in Yu Qiao from
Ms. Ju. In consideration for such acquisition, the Company issued to Ms. Ju an
aggregate of 10 million shares of its common stock (the “Acquisition Shares”),
having a market value of approximately U.S.$3.1 million. However, on June 29,
2007, the Company, Mr. Wang and Ms. Ju entered into an agreement pursuant to
which, among other things, all of the Acquisition Shares were contributed to the
Company.
In order
to comply with certain PRC laws relating to foreign entities’ ownership of oil
and gas company in the PRC, the former owners of Yu Qiao, Wang Pingwu and Meng
Xiangyun, held 10%, and 20% of the equity interests, respectively, in Yu Qiao in
trust for the benefit of Song Yuan Technical. The laws of the PRC govern the
agreements by which the Company acquired Yu Qiao and by which the former owners
of Yu Qiao hold equity interests in trust. See “Regulations Affecting Our
Business” under “Risk Factors.” Subsequently, on March 17, 2008, Song Yuan
Technical acquired from Meng Xiangyun the 20% equity interest which he had held
in Yu Qiao. Accordingly, Song Yuan Technical currently directly holds a 90%
equity interest in Yu Qiao, while Wang Hongjun holds a 10% equity interest in Yu
Qiao in trust for the benefit of Song Yuan Technical. Thus the Company, through
Song Yuan Technical, currently effectively controls 90% of the equity interests
in Yu Qiao, while the remaining 10% equity interests in Yu Qiao is effectively
controlled by Ms. Ju.
Oil
and Gas Properties and Activities
As of
December 31, 2008, the Company had a total of 247 producing wells, including 219
producing wells at the Qian’an 112 oilfield, 14 producing wells at the Hetingbao
301 oilfield, 7 producing wells at the Daan 34 oilfield and 7 producing wells at
the Gudian 31 oilfield.
All of
the Company’s crude oil production is sold to the Jilin Refinery of PetroChina
Group. The approximate distance of each of the Company’s oil fields from the
Jilin Refinery is as follows: the Qian’an 112 oilfield is four kilometers away,
the Hetingbao 301 oilfield is three kilometers away, the Daan 34 oilfield is
fifteen kilometers away and the Gudian Oilfield 31 is thirty kilometers
away.
PetroChina
pays the Company a price per barrel equal to the monthly mean price calculated
from the Mean of Platts Singapore (“MOPS”) daily price for sour, heavy
Indonesian crude, as measured during the previous month. Platts is an
international commodity and trading company that collects and publishes pricing
data on a wide range of petroleum and non-petroleum commodity types. The price
paid to the Company is FOB at the local Jilin Province PetroChina oil storage
depot.
PetroChina
pays the Company monthly in arrears, on approximately the 15th day
after the end of each month. The amount paid to the Company in the
first two months of each calendar quarter is decreased by the amount of oil
surcharge tax the Company will owe to the PRC government at the end of that
calendar quarter. PetroChina holds those amounts back from the
Company until the end of each calendar quarter, and then pays those amounts to
the Company with the balance due for oil deliveries in the final month of the
quarter. For this reason, the Accounts Receivable balance at the end
of each quarter is larger than the prior month’s oil sales revenue, because it
includes the oil surcharge tax amounts the Company owes for the first two months
of the quarter.
Sales Volumes and
Prices
The
following table shows the Company’s annual sales volumes of crude oil for the
last two fiscal years.
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2008
|
|
2007
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|
China
|
|
(Bbls)
|
|
(Bbls)
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Crude
Oil
|
|
|
645,856
|
|
|
267,516
|
|
Proved
Reserves
As of
December 31, 2008, total proven reserves were 5,453,792 barrels of
crude oil. The Qian’an 112 Oilfield had proven reserve of 5,292,591 barrels. The
Hetingbao 301 Oilfield had proven reserve of 52,232 barrels. The Gudian 31
Oilfield had proven reserve of 95,729 barrels, and the Daan 34 Oilfield had
proven reserve of 13,240 barrels.
Proved
reserve estimates were made as of December 31, 2008 by Ralph E. Davis Associates
Inc., an independent worldwide petroleum consultant based in Houston TX. Ralph
E. Davis Associates Inc. conducted a study of each of the aforementioned
oilfields in accordance with generally accepted petroleum engineering and
evaluation principles in conformity with SEC definitions and
guidelines.
The
Company’s estimates of proved reserves, proved developed reserves and proved
undeveloped reserves at December 31, 2008 and 2007 are contained in the Supplemental Oil and Gas
Disclosures— Unaudited (Supplemental Information) in the CNEH
Consolidated Financial Statements (Consolidated Financial
Statements).
Also
contained in the Supplemental
Information in the Consolidated Financial Statements are the Company’s
estimates of future net cash flows and discounted future net cash flows from
proved reserves. See Operating
Results and Critical
Accounting Policies and Estimates for additional information on the
Company’s proved reserves.
The
following table shows the Company’s annual average sales prices and average
production costs. Production costs are costs incurred to operate and maintain
the Company’s wells and related equipment and include cost of labor, well
service and repair, location maintenance, power and fuel, transportation, cost
of product, property taxes, production and severance taxes and production
related general and administrative costs. Additional detail of production costs
is contained in the Supplemental Information.
Qian’an
112 Oilfield
|
|
2008
|
|
|
2007
|
|
Average
annual sales price per barrel
|
|
$ |
94.29 |
|
|
$ |
70.03 |
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Aggregate
annual sales
|
|
$ |
56,258,744 |
|
|
$ |
18,466,325 |
|
Average
annual production cost per barrel equivalent
|
|
$ |
5.24 |
|
|
$ |
10.50 |
|
Hetingbao
301 Oilfield
|
|
2008
|
|
|
2007
|
|
Average
annual sales price per barrel
|
|
$ |
94.29 |
|
|
$ |
70.03 |
|
Aggregate
annual sales
|
|
$ |
1,605,505 |
|
|
$ |
797,696 |
|
Average
annual production cost per barrel equivalent
|
|
$ |
30.33 |
|
|
$ |
16.05 |
|
Daan
34 Oilfield
|
|
2008
|
|
|
2007
|
|
Average
annual sales price per barrel
|
|
$ |
94.29 |
|
|
$ |
70.03 |
|
Aggregate
annual sales
|
|
$ |
158.114 |
|
|
$ |
177,231 |
|
Average
annual production cost per barrel equivalent
|
|
$ |
5.24 |
|
|
$ |
10.50 |
|
Gudian
31 Oilfield
|
|
|
|
|
|
|
Average
annual sales price per barrel
|
|
$ |
94.29 |
|
|
$ |
70.03 |
|
Aggregate
annual sales
|
|
$ |
549,887 |
|
|
$ |
40,817 |
|
Average
annual production cost per barrel equivalent
|
|
$ |
5.24 |
|
|
$ |
10.50 |
|
Drilling
Programs
During
2008, the Company drilled 86 new productive wells at the Qian’an 112 oilfield, 3
new productive wells at the Hetingbao 301oilfield, 0 new productive well at the
Daan 34 oilfield, and 1 new productive well at the Gudian 31
oilfield.
Drilling
Statistics
The
following table shows the results of the oil and gas wells drilled and tested as
of December 31, 2008:
|
|
Net
Exploratory
|
|
Net
Development
|
|
|
|
|
|
|
Dry
|
|
|
|
|
|
Dry
Holes
|
|
|
|
|
|
2008
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
247
|
|
|
0
|
|
|
247
|
|
|
247
|
|
2007
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
157
|
|
|
0
|
|
|
157
|
|
|
157
|
|
Properties and
Leases
The
following schedule shows the number of developed leases, undeveloped lease and
fee mineral acres in which the Company held interests at December 31,
2008:
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
Qian’an
112
|
|
|
4,644
|
|
|
3,715
|
|
|
605
|
|
|
484
|
|
Hetingbao
301
|
|
|
475
|
|
|
380
|
|
|
0
|
|
|
0
|
|
Daan
34
|
|
|
173
|
|
|
138
|
|
|
0
|
|
|
0
|
|
Gudian
31
|
|
|
130
|
|
|
104
|
|
|
194
|
|
|
156
|
|
(1)
|
Developed
Proved Acres means the acres assigned to each productive well. Total
proved producing wells as of December 31, 2008 were
247.
|
(2)
|
Undeveloped
Proved Acres means the acres assigned to each undeveloped location under
lease that contains proved oil
reserves.
|
Marketing
and Sales
Currently,
all of the Company’s crude oil production is sold to PetroChina’s Jilin
Refinery. We do not expect the Company to have any other customers during the
next twelve months. As restricted by contract with PetroChina, we may not sell
any crude oil to any other customer. PetroChina pays the Company a price per
barrel equal to the monthly mean price calculated from the Mean of Platts
Singapore (“MOPS”) daily price for sour, heavy Indonesian crude, as measured
during the previous month. Platts is an international commodity and
trading company that collects and publishes pricing data on a wide range of
petroleum and non-petroleum commodity types. The price paid to the Company is
FOB at the local Jilin Province PetroChina oil storage depot.
Employees
At March
1, 2009, we employed 257 people, of which 69 are in management and 188 are site
workers. This figure represents a reduction from the number of
employees reported last year. We have reduced the number of site
workers employed, even as we have increased our number of operating wells
substantially, through more efficient deployment of site
workers. This has resulted in a lower cost per field labor unit for
the Company. Substantially all of our employees are located in Northern China.
Many of them are highly educated, including senior engineers and specialists
with bachelors or masters degrees. None of our employees belong to a union nor
are any employed pursuant to any collective bargaining agreement or similar
agreement. We believe that relationships with our employees are
satisfactory.
Regulations
Restrictions on Foreign
Ownership in the Oil and Gas Industry
The
principal regulation governing foreign ownership of oil and gas companies in
China is the “Regulations on Mergers and Acquisitions of Domestic Enterprises by
the Foreign Investors” issued by Ministry of Commerce, Foreign Investment
Administration, Stock Exchange Committee (September 2006). Currently, qualified
foreign investors cannot own 100% of an oil and gas company in China. The
foreign investors’ equity holding ratios are subject to the approval of relevant
government authorities.
As we
understand that any foreign investment in China should be subject to the
approval of the Ministry of Commerce and approvals of other authorities (if
applicable).
As a
result of the rules and regulations described above, we conduct our businesses
in China through Yu Qiao and Wang Hongjun, who holds the equity interests of Yu
Qiao in trust for the Company and LongDe and Ai ChangShan, who holds the equity
interests of LongDe in trust for the Company. We have entered into contractual
arrangements with Wang Hongjun and Ai ChangShan pursuant to which we believe,
based on the advice of PRC legal counsel, that:
|
•
|
|
we
are able to exert effective control over Yu Qiao and
LongDe;
|
|
|
|
|
|
•
|
|
substantially
all of the economic benefits of Yu Qiao and LongDe will be transferred to
us; and
|
|
|
|
|
|
•
|
|
our
90% owned joint venture, Song Yuan Technical, has an exclusive option to
purchase all or part of the equity interests in Yu Qiao and LongDe to the
extent permitted by PRC law.
|
The
Company further believes, based on the advice of PRC legal counsel,
that:
|
•
|
|
the
ownership structure of Yu Qiao and LongDe are in compliance with existing
PRC laws and regulations;
|
|
|
|
|
|
•
|
|
the
contractual arrangements among Song Yuan Technical, Yu Qiao, Wang Hongjun,
LongDe and Ai ChangShan are valid, binding and enforceable, and will not
result in any violation of PRC laws or regulations currently in effect;
and
|
|
|
|
|
|
•
|
|
the
PRC business operations of Song Yuan Technical and Yu Qiao and LongDe as
described in this annual report, are in compliance with existing PRC laws
and regulations in all material
respects.
|
We have
been further advised, however, that there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws and
regulations. Accordingly, there can be no assurance that the PRC regulatory
authorities will not in the future take a view that is contrary to the above
opinion of our PRC legal counsel.
Environmental
Regulations
We are
subject to the environmental laws and regulations of the jurisdictions in which
we carry on our business. Existing or future laws and regulations could have a
significant impact on the exploration and development of natural resources by
us. However, to date, we have not been required to spend any material amounts
for environmental control facilities. The Chinese government strictly monitors
compliance with these laws but compliance therewith has not had any adverse
impact on our operations or our financial resources.
Special Oil
Fees
In June
2006, the PRC government imposed a new regulation on all oil and gas producers.
Under this new regulation, all oil and gas producers are subject to a mandatory
special oil fee. The fee is calculated based on the per barrel selling price of
crude oil received by the producer. If the selling price of crude oil received
by the producer exceeds $40 per barrel, the special oil fee is 20% of that
portion of the selling price that exceeds $40 per barrel. If the selling price
of the crude oil exceeds $60 per barrel, the special oil fee is 40% of the
portion of the selling price that exceeds $60 per barrel. As a result of this
new regulation, the Company paid additional special oil fees of $11,105,325 to
the PRC government during 2008. The Company will be required to continue to pay
these special oil fees to the PRC government if the selling price of crude oil
remains above $40 per barrel, and these special oil fees will increase to the
extent that crude oil prices rise.
Competition
By virtue
of our binding contractual agreements with PetroChina Group as described above,
we have no competitor with respect to the extraction and production of crude oil
from the oilfields where we operate.
Properties
China
North East Petroleum’s principal headquarters are located in Song Yuan City,
Jilin Province in the People’s Republic of China. The Company leases an
approximately 7,747 square foot facility for approximately $14,006 per year that
expires in June 30, 2015. These headquarters house all of our administrative and
clerical staff. The Company also leases an approximately 26,910 square foot
facility as its production base for $182 per year that expires in September 20,
2023. At the same time, we have operation offices in Harbin City, China and New
York City, United States.
The
Company’s crude oil exploration and production operations are conducted on
property which is located in the Jilin Oil Region.
The
Company also has an office located at the Qian’an 112 Oilfield. The Company owns
the buildings although the land is leased pursuant to the Oil Lease. Actual oil
exploration and production operations are controlled from this office and
housing is provided for up to 60 workers. The Company pays no rent for use of
this space. In addition the Company has no written agreement or formal
arrangement pertaining to the use of this space. No other businesses operate
from this office.
The
Company does not have an office located in the Hetingbao 301, Daan 34 or Gudian
31 Oilfields.
The
Company has no current plans to occupy any additional office space.
Legal
Proceedings
On August
17, 2007, the Company filed a complaint in the Third Judicial District Court in
and for Salt Lake County, State of Utah, naming Topworth Assets Limited
("Topworth") as the principal defendant. The Company asserted conversion, unjust
enrichment, breach of warranty, fraud, and for declaratory relief causes of
action. The actions arise out of the issuance of 3,715,000 shares of the
Company's stock to Topworth in or about early 2004. The Company was able to
recover from Topworth 2,715,000 of these shares shortly after their issuance,
and now contends it is entitled to recover the remaining 1,000,000 shares
because Topworth received all the stock by fraud. The Company sought and
obtained an injunction preventing Topworth's transfer of this disputed
stock.
In
response to the Company's complaint and the issuance of the injunction against
it, Topworth filed an answer to the complaint and a counterclaim against the
Company, Wei Guo Ping, and Wang Hong Jun on December 11, 2007. Topworth asserts
various legal theories that contend it performed consulting services to the
Company; was entitled to all of the disputed stock as compensation for services;
and was improperly required to return some of the disputed stock to the
Company.
On March
5, 2009, the Company and Topworth entered into a Settlement and Release
Agreement (the “Settlement”) whereby the Company and Topworth agreed to mutually
release each other from any and all claims they have against each other,
including any and all claims and counterclaims pending in the action brought by
the Company in the Third District Court, State of Utah, Civil Case Number
070911868 (the “Action”). Under the Settlement, the parties’ shall
dismiss the Company’s complaint and Topworth’s counterclaim. The
627,360 shares of common stock in the Company held in the name of Topworth (the
“Shares”) that were a subject of dispute in the Action shall be disposed of on
the following material terms: Topworth shall deliver all certificates
representing the Shares to a designated custodian; the custodian shall hold the
certificates until at least June 26, 2009; and, thereafter, the custodian shall
release 100,000 of the Shares to Topworth each month until November 30, 2009,
when Topworth will be entitled to receive all of the remaining
Shares. The custodian shall release the Shares without any
restriction on Topworth’s ability transfer or sell the Shares imposed by the
Company subject to restrictions under the Securities Act of 1933, as
amended. The Shares have been held in Topworth’s name and have been
included in the Company’s outstanding shares; as such the Shares will not have
an additional dilutive effect on the Company’s shareholders.
We know
of no other material, active or pending legal proceedings against our Company,
and, other than as disclosed above, we are not involved as a plaintiff in any
other material proceeding or pending litigation. There are no proceedings in
which any of our directors, officers or affiliates, or any registered or
beneficial shareholder, is an adverse party or has a material interest adverse
to our interest.
ITEM
1A. 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 PetroChina pays
the Company a price per barrel equal to the monthly mean price calculated
from the Mean of Platts Singapore (“MOPS”) daily price for sour, heavy
Indonesian crude, as measured during the previous month. Platts is an
international commodity and trading company that collects and publishes pricing
data on a wide range of petroleum and non-petroleum commodity types. The price
paid to the Company is FOB at the local Jilin Province PetroChina oil storage
depot.
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:
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The
price and availability of alternative
fuels;
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disruptions
in supply and changes in demand caused by weather
conditions;
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changes
in demand as a result of changes in
price;
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political
conditions in oil and gas producing
regions; and
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domestic
governmental regulations.
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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.
Although
the Company currently has no plans to raise additional capital, the Company may
need to raise additional capital to fully deploy wells onto its oilfields or to
make acquisitions. There can be no assurance that we will be able to raise
sufficient 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 our
existing oil fields 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:
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historical production from an area compared with production from similar
producing areas;
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assumed effects of regulation by governmental agencies;
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assumptions concerning future oil and natural gas prices, future operating
costs and capital
expenditures; and
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estimates of future severance and excise taxes, workover and remedial
costs.
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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:
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uncertainties
in assessing the value, strengths, weaknesses, contingent and other
liabilities and potential profitability of acquisition or other
transaction candidates;
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the
potential loss of key personnel of an acquired
business;
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the
ability to achieve identified operating and financial synergies
anticipated to result from an acquisition or other
transaction;
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problems
that could arise from the integration of the acquired
business;
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unanticipated
changes in business, industry or general economic conditions that affect
the assumptions underlying the acquisition or other transaction rationale;
and
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Unexpected
development costs that adversely affects our
profitability.
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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 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 is currently
provided through a trust arrangement with a PRC citizen designated by
PetroChina, a government owned entity; pursuant to which they agree to hold 10%
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 150,000,000 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.
A
majority of our directors and officers are located 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 overseas-based
directors or officers.
A
majority 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 overseas-based
directors or officers, or enforce within the United States or Canada any
judgments obtained against us or our overseas-based 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, 2009, 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-K, 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
2 PROPERTIES
China
North East Petroleum’s principal headquarters are located in Song Yuan City, in
the People’s Republic of China. The Company leases an approximately 7,747 square
foot facility for approximately $14,006 per year that expires in June 30, 2015.
These headquarters house all of our administrative and clerical staff. The
Company also leases an approximately 26,910 square foot facility as its
production base for $182 per year that expires in September 20, 2023. At the
same time, we have administrative offices in Harbin City, China and New York
City, United States.
The
Company’s crude oil exploration and production operations are conducted on
property which is located in the Jilin Oil Region.
The
Company also has an office located at the Qian’an 112 Oilfield. The Company owns
the buildings although the land is leased pursuant to the Oil Lease. Actual oil
exploration and production operations are controlled from this office and
housing is provided for up to 60 workers. The Company pays no rent for use of
this space. In addition the Company has no written agreement or formal
arrangement pertaining to the use of this space. No other businesses operate
from this office.
The
Company does not have an office located in the Hetingbao 301, Daan 34 or Gudian
31 Oilfields.
The
Company has no current plans to occupy any additional office space.
ITEM
3. LEGAL PROCEEDINGS
On August
17, 2007, the Company filed a complaint in the Third Judicial District Court in
and for Salt Lake County, State of Utah, naming Topworth Assets Limited
("Topworth") as the principal defendant. The Company asserted conversion,
unjust enrichment, breach of warranty, fraud, and for declaratory relief causes
of action. The actions arise out of the issuance of 3,715,000 shares of
the Company's stock to Topworth in or about early 2004. The Company was
able to recover from Topworth 2,715,000 of these shares shortly after their
issuance, and now contends it is entitled to recover the remaining 1,000,000
shares because Topworth received all the stock by fraud. The Company
sought and obtained an injunction preventing Topworth's transfer of this
disputed stock.
In
response to the Company's complaint and the issuance of the injunction against
it, Topworth filed an answer to the complaint and a counterclaim against the
Company, Wei Guo Ping, and Wang Hong Jun on December 11, 2007. Topworth
asserts various legal theories that contend it performed consulting services to
the Company; was entitled to all of the disputed stock as compensation for
services; and was improperly required to return some of the disputed stock to
the Company.
On March
5, 2009, the Company and Topworth entered into a Settlement and Release
Agreement (the “Settlement”) whereby the Company and Topworth agreed to mutually
release each other from any and all claims they have against each other,
including any and all claims and counterclaims pending in the action brought by
the Company in the Third District Court, State of Utah, Civil Case Number
070911868 (the “Action”). Under the Settlement, the parties’ shall
dismiss the Company’s complaint and Topworth’s counterclaim. The
627,360 shares of common stock in the Company held in the name of Topworth (the
“Shares”) that were a subject of dispute in the Action shall be disposed of on
the following material terms: Topworth shall deliver all certificates
representing the Shares to a designated custodian; the custodian shall hold the
certificates until at least June 26, 2009; and, thereafter, the custodian shall
release 100,000 of the Shares to Topworth each month until November 30, 2009,
when Topworth will be entitled to receive all of the remaining
Shares. The custodian shall release the Shares without any
restriction on Topworth’s ability transfer or sell the Shares imposed by the
Company subject to restrictions under the Securities Act of 1933, as
amended. The Shares have been held in Topworth’s name and have been
included in the Company’s outstanding shares; as such the Shares will not have
an additional dilutive effect on the Company’s shareholders.
We know
of no other material, active or pending legal proceedings against our company,
and, other than as disclosed above, we are not involved as a plaintiff in any
other material proceeding or pending litigation. There are no proceedings in
which any of our directors, officers or affiliates, or any registered or
beneficial shareholder, is an adverse party or has a material interest adverse
to our interest.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.
PART
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
CNEH
common stock is quoted on the Over-the-Counter Electronic Bulletin Board under
the symbol “CNEH.OB”. Presented below is the high and low bid information of
CNEH’s common stock for the periods indicated. The source of the following
information is OTC Bulletin Board. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
|
|
CNEH
COMMON
STOCK
|
|
|
|
HIGH
|
|
|
LOW
|
|
FISCAL
YEAR ENDING DECEMBER 31, 2008:
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
2.52
|
|
|
$ |
1.64
|
|
Second
Quarter
|
|
$ |
5.37
|
|
|
$ |
2.27
|
|
Third
Quarter
|
|
$ |
5.58
|
|
|
$ |
2.27
|
|
Fourth
Quarter
|
|
$ |
2.50
|
|
|
$ |
1.57
|
|
|
|
|
|
|
|
|
|
|
FISCAL
YEAR ENDING DECEMBER 31, 2007:
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
0.39
|
|
|
$ |
0.31
|
|
Second
Quarter
|
|
$ |
0.50
|
|
|
$ |
0.30
|
|
Third
Quarter
|
|
$ |
4.24
|
|
|
$ |
0.37
|
|
Fourth
Quarter
|
|
$ |
4.12
|
|
|
$ |
2.0
|
|
Holders
As of
March 11, 2009, CNEH had approximately 91 holders of record.
Equity
Compensation Plan Information
The
following table sets forth certain information as of March 11, 2009 about our
equity compensation plans under which our equity securities are authorized for
issuance.
Equity
Compensation Plan Information Table
|
(a)
Number
of securities to
be
issued upon exercise of
outstanding
options,
warrants
and rights
|
(b)
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
|
(c)
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
|
Equity
compensation plans approved by security holders
|
1,720,000
|
$2.18
|
780,000
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
Total
|
1,720,000
|
|
780,000
|
Dividend
Policy
We have
not declared any dividends since incorporation and do not anticipate that we
will do so in the foreseeable future. Although there are no restrictions that
limit the ability to pay dividends on our common shares, our intention is to
retain future earnings for use in our operations and the expansion of our
business.
ITEM
6. SELECTED FINANCIAL DATA.
Not
required for smaller reporting companies.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks, uncertainties and assumptions.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historic or current facts. They use words such as “anticipate,”
“estimate,” “project,” “intend,” “plan,” “believe” and other words and terms of
similar meaning in connection with any discussion of future operating or
financial performance. In particular, these include statements relating
to:
|
•
|
Our
expectation of continued growth in the demand for our
oil;
|
|
|
|
|
•
|
Our
expectation that we will continue to have adequate liquidity from cash
flows from operations;
|
|
|
|
|
•
|
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.
|
Overview
We are
engaged in the exploration and production of crude oil in Northern China. We
have an arrangement with the Jilin Refinery of PetroChina Group to sell our
crude oil production for use in the China marketplace. We currently operate 247
producing wells located in four oilfields in Northern China and have plans for
additional drilling projects.
In
particular, through two of our subsidiaries, Song Yuan City Yu Qiao Oil and Gas
Development Co. Ltd. (“Yu Qiao”) and Chang Ling Longde Oil and Gas Development
Co. Ltd. (“LongDe”), we have entered into binding sales agreements with the
PetroChina Group, whereby we sell our crude oil production for use in the China
marketplace.
We
currently operate 4 oilfields located in Northern China, which
include:
Field
|
|
Acreage (Gross developed
and undeveloped)
|
|
Producing Oil Wells
|
|
Proved Reserves (Bbls)
|
|
Qian’an
112
|
|
|
5,249
|
|
|
219
|
|
|
5,292,591
|
|
Daan
34
|
|
|
173
|
|
|
7
|
|
|
13,240
|
|
Gudian
31
|
|
|
324
|
|
|
7
|
|
|
95,729
|
|
Hetingbao
301
|
|
|
475
|
|
|
14
|
|
|
52,232
|
|
The
following chart illustrates our company’s organizational structure.
CONSOLIDATED
RESULTS OF OPERATIONS
The
Company is paid by PetroChina base on the crude oil price in the international
commodity market. Prices in 2008 averaged RMB 4,845 per ton or approximately
$94.29 per barrel, which represents an increase of 23% over
2007.
Our cost
of net revenues consists of cost of labor, well service and repair, location
maintenance, power and fuel, transportation, cost of product, property taxes,
production and severance taxes and production related general and administrative
costs.
General
and administrative expenses consist primarily of salaries and related expenses
for executive, finance, accounting, information technology, facilities and human
resources personnel, recruiting expenses, professional fees and costs associated
with expanding our information systems.
Comparing
Fiscal Years Ended December 31, 2008 and 2007:
The
following table presents certain consolidated statement of operations
information. Financial information is presented for the 12-month period ending
as of December 31, 2008 and December 31, 2007
|
|
2008
|
|
|
2007
|
|
Revenues,
net
|
|
$ |
58,572,250
|
|
|
$ |
19,482,069
|
|
Cost
and Expenses
|
|
$ |
23,973,808
|
|
|
$ |
10,236,486
|
|
Income
from Operations
|
|
$ |
34,598,442
|
|
|
$ |
9,245,583
|
|
Revenues. Revenues
for 2008 increased to $58,572,250 from $19,482,069 in 2007 as a result of the
increase in oil production and higher oil prices. During the whole year, the
Company drilled 90 new oil wells in the four oilfields which are owned by the
Company. The total number of producing wells increased from 157 in 2007 to 247
in 2008, a total increase of 57%. Total oil production for 2008 was 645,856
barrels, or approximately a 141% increase, as compared to 267,516 barrels in the
same period in 2007 due to the increase in producing wells and the
implementation of water flooding in the Qian’an 112 oil field. Oil prices in
2008 averaged RMB 4,845 per ton or approximately $94.29 per barrel, which
represents an increase of 23% over 2007 levels of RMB 3,937 per ton or
approximately $ 70.03 per barrel.
Oilfield
|
|
2008 wells
|
|
2007 wells
|
|
2008 Production
|
|
2007 Production
|
|
Qian’an112
|
|
|
219
|
|
|
133
|
|
|
621,820
|
|
|
253,116
|
|
Hetingbao
301
|
|
|
14
|
|
|
11
|
|
|
16,626
|
|
|
11,318
|
|
Gudian31
|
|
|
7
|
|
|
6
|
|
|
5,821
|
|
|
502
|
|
Daan
34
|
|
|
7
|
|
|
7
|
|
|
1,588
|
|
|
2,580
|
|
Total
|
|
|
247
|
|
|
157
|
|
|
645,856
|
|
|
267,516
|
|
Company
|
|
2008 wells
|
|
2007 wells
|
|
2008 Production
|
|
2007 Production
|
|
Yu
Qiao
|
|
|
233
|
|
|
146
|
|
|
629,230
|
|
|
256,198
|
|
LongDe
|
|
|
14
|
|
|
11
|
|
|
16,626
|
|
|
11,318
|
|
Cost of sales.
Cost of sales increased by 136% from $8,941,976 for the year ended December 31,
2007 to $21,137,240 for the year ended December 31, 2008. The increase in cost
of sales resulted primarily from the increased number of producing wells and
higher production levels in 2008. During 2008, our total number of producing
wells increased from 157 in 2007 to 247 in 2008, a total increase of 57%. Higher
production also lead to an increase of the Special Oil Surcharge. The company
paid a special oil surcharge of $11,105,325 to the PRC government in 2008, while
$2,857,376 was paid to the PRC government for the same period in 2007. In
addition, depreciation of oil and gas properties was increased by 73% to
$6,172,422 in 2008, compared to $3,562,265 in the same period in
2007 by the result of an increase in the number of producing
wells.
Operating Expenses.
Operating expenses increased by 119% from $1,294,510 for the year ended December
31, 2007 to $2,836,568 for the year ended December 31, 2008. The increase in
operating expenses resulted primarily from higher selling and administrative
expenses, higher depreciation due to increased fixed assets and an increase in
consultant fees related to financing activities. During 2008, the Company paid
approximately $396,330 for consulting service in connection with financing
activities and other consulting services related to obligations of the Company
as a U.S. publicly traded company, as compared with $108,500 in
2007.
General and administrative
expenses. General and administrative expenses increased by 123% to
$1,959,602 for the year ended 2008 compared to $880,161 for the year ended 2007.
This increase was mainly due to expenses associated with increased stock
compensation of $708,228 to management and consultants in 2008.
Net Income. The
Company’s net income increased by 282% to $19,582,038 for the year ended
December 31, 2008, compared to $5,132,581 for the year ended December 31, 2007.
The increase in net income was primarily due to the increase in revenues as a
result in increased production, higher crude oil prices and increased proven
reserves which result in lower per-unit depreciation of oil and gas
properties.
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2008, the Company had cash and cash equivalents of $13,239,213,
other current assets of $5,322,441 and current liabilities of $16,995,154. For
the year ended December 31, 2008, our primary source of liquidity was
$36,203,786 in net cash provided by operations and proceeds from the issuance of
a secured debenture in the aggregate principal amount of
$15,000,000.
As of
December 31, 2008, the Company’s current liabilities were $16,995,154,
consisting of $10,985,894 in accounts payable primarily comprised of costs
related to the drilling of an additional 90 wells in 2008, $3,710,870 in income
and other taxes payable, and $1,489,126 for the current portion of secured
debenture due to the lender net of discount.
Net cash
provided by operating activities was $36,203,786 for the year ended December 31,
2008 compared to $9,503,642 for the year 2007. The increase is primarily related
to an increase in sales and net income in 2008.
Net cash
used in investing activities was $31,875,938 for the year ended December 31,
2008 compared to $12,334,036 for the year 2007. This is primarily a result of
the purchase of oil and gas properties and fixed assets.
Net cash
provided by financing activities was $10,079,101 for the year ended December 31,
2008 compared to $4,362,473 for the same period in 2007. This increase is
primarily a result of the successful completion of our 8% secured debenture
financing in February 2008.
While we
expect cash provided by operations may decrease due to the dramatic drop of
global oil prices, however as the newly drilled additional oil wells come into
production may offset the impact of lower oil price, and still creates positive
cash inflow. Global oil prices have declined from historic high levels
experienced in 2008, and we anticipate that oil prices will remain below those
levels for the balance of 2009. In spite of the lower anticipated oil
prices in the current year, we expect that cash flow from operations will be
sufficient to allow us to meet all of our obligations and to continue to drill
new oil wells.
Capital
Commitment
As of
December 31, 2008, the Company had capital commitments of $783,000 with a
contractor for the completion of drilling of 7 oil wells under
construction.
Inflation
Inflation
did not have a material impact on our business in 2008 other than the increase
in oil price received as discussed above.
Material
Subsequent Events
Amendment
to 8% Secured Debenture and Warrants
On March
5, 2009, the Company and Lotusbox Investments Limited (the “Investor”) entered
into Amendment No. 1 to 8% Secured Debenture (the “Amendment”) which
amended the 8% Secured Debenture (the “Debenture”) issued to the Investor on
February 28, 2008 for the principal amount of $15,000,000. Pursuant
to the Amendment, the Investor agreed to extend the Company’s requirement to
effect a listing of its common stock on either the NYSE Alternext US LLC
(formerly known as the American Stock Exchange) or NASDAQ until August 30, 2010,
and the Company agreed to issue warrants to purchase up to (1) 250,000 shares of
common stock at a per share exercise price of $2.00 and (2) 250,000 shares of
common stock at a per share exercise price of $2.35 (together, the
“Warrants”). Also pursuant to the Amendment, the parties have agreed
to amend the principal repayment schedule of the Debenture as
follows:
Repayment Date
|
Repayment Amount
|
August
28, 2008
|
$750,000
|
March
28, 2009
|
$1,250,000
|
June
28, 2009
|
$1,250,000
|
September
28, 2009
|
$1,250,000
|
December
28, 2009
|
$1,250,000
|
March
28, 2010
|
$1,875,000
|
August
28, 2010
|
$2,500,000
|
February
28, 2011
|
$2,500,000
|
August
28, 2011
|
$1,500,000
|
February
28, 2012
|
$875,000
|
Total
Principal Payment
|
$15,000,000
|
The
Company is obligated to file a registration statement registering the resale of
share of the Company’s common stock issuable upon exercise of the Warrants on or
before the March 5, 2010 (the “Filing Date”). On the 180th day
following the Filing Date and each sixth month anniversary thereafter until the
registration statement is declared effective, the Company must execute and
deliver to the Investor new warrants to purchase up to a total of 62,500 on the
same terms as the Warrants.
Settlement
and Release Agreement
On March
5, 2009, the Company and Topworth Asset Limited (“Topworth”) entered into a
Settlement and Release Agreement (the “Settlement”) whereby the Company and
Topworth agreed to mutually release each other from any and all claims they have
against each other, including any and all claims and counterclaims pending in
the action brought by the Company in the Third District Court, State of Utah,
Civil Case Number 070911868 (the “Action”). Under the Settlement, the
parties’ shall dismiss the Company’s complaint and Topworth’s
counterclaim. The 627,360 shares of common stock in the Company held
in the name of Topworth (the “Shares”) that were a subject of dispute in the
Action shall be disposed of on the following material terms: Topworth
shall deliver all certificates representing the Shares to a designated
custodian; the custodian shall hold the certificates until at least June 26,
2009; and, thereafter, the custodian shall release 100,000 of the Shares to
Topworth each month until November 30, 2009, when Topworth will be entitled to
receive all of the remaining Shares. The custodian shall release the
Shares without any restriction on Topworth’s ability transfer or sell the Shares
imposed by the Company subject to restrictions under the Securities Act of 1933,
as amended. The Shares have been held in Topworth’s name and have
been included in the Company’s outstanding shares; as such the Shares will not
have an additional dilutive effect on the Company’s shareholders.
CRITICAL
ACCOUNTING POLICIES
Proved Reserves. Proved oil
and gas reserves, as defined by SEC Regulation S-X Rule 4-10(a) (2i), (2ii),
(2iii), (3) and (4), are the estimated quantities of crude oil that geological
and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
The
Company’s estimates of proved reserves are made using available geological and
reservoir data as well as production performance data. These estimates, made by
the Company’s engineers, are reviewed annually and revised, either upward or
downward, as warranted by additional data. Revisions are necessary due to
changes in, among other things, reservoir performance, prices, economic
conditions and governmental restrictions. Decreases in prices, for example, may
cause a reduction in some proved reserves due to reaching economic limits
sooner.
Properties and Equipment. The
Company uses the full cost method of accounting for exploration and development
activities as defined by the SEC. Under this method of accounting, the costs of
unsuccessful, as well as successful, exploration and development activities are
capitalized as properties and equipment. This includes any internal costs that
are directly related to exploration and development activities but does not
include any costs related to production, general corporate overhead or similar
activities. Gain or loss on the sale or other disposition of oil and gas
properties is not recognized, unless the gain or loss would significantly alter
the relationship between capitalized costs and proved reserves of oil and
natural gas attributable to a country. The application of the full cost method
of accounting for oil and gas properties generally results in higher capitalized
costs and higher DD&A rates compared to the successful efforts method of
accounting for oil and gas properties.
OFF-BALANCE
SHEET ARRANGEMENTS
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our
investors.
RECENT
ACCOUNTING PRONOUNCEMENTS
On
December 31, 2008, the SEC published the revised rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions are
updates to definitions in existing oil and gas rules to make them consistent
with the petroleum resources management system, which is a widely accepted
standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include the ability to include
nontraditional resources in reserves, the use of new technology for determining
reserves, permitting disclosure of probable and possible reserves, and changes
to the pricing used in determining reserves. To determine reserves companies
must use a 12-month average price. The Company is required to comply with the
amended disclosure requirement for registration statements filed after January
1, 2010, and for annual reports for fiscal years ending on or after December 15,
2009. Early adoption is not permitted. The Company is currently assessing the
impact that the adoption will have on the Company’s disclosures, operating
results, financial position and cash flows.
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. SFAS 141R also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business
combination. This statement is effective beginning January 1,
2009. The Company does not expect the adoption of this statement to
have a material impact on its financial position and results of
operations.
In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” This
statement improves the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards that
require; the ownership interests in subsidiaries held by parties other than the
parent and the amount of consolidated net income attributable to the parent and
to the noncontrolling interest be clearly identified and presented on the face
of the consolidated statement of income, changes in a parent’s ownership
interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently, when a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value, entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 affects those
entities that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is
prohibited. The adoption of this statement did not have a material
impact on the Company's financial position and results of
operations.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” This statement is intended to improve transparency in
financial reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. SFAS 161 applies to
all derivative instruments within the scope of SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” (SFAS 133) as well as related
hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. Entities with
instruments subject to SFAS 161 must provide more robust qualitative disclosures
and expanded quantitative disclosures. SFAS 161 is effective
prospectively for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
permitted. The adoption of this statement did not have a material
impact on the Company’s financial position and results of
operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that presented in conformity
with generally accepted accounting principles in the United States of
America. SFA 162 will be effective 60 days following the SEC’s
approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The
adoption of this statement did not have a material impact on the Company’s
financial position and results of operations.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of this Statement is limited to financial guarantee insurance and
reinsurance contracts, as described in the Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this
Statement does not apply to financial guarantee contracts issued by enterprises
excluded from the scope of Statement 60 or to some insurance contracts that seem
similar to financial guarantee insurance contracts issued by insurance
enterprises (such as mortgage guaranty insurance or credit insurance on trade
receivables). This Statement also does not apply to financial
guarantee contracts that are derivative instruments included within the scope of
SFAS No. 133, “Accounting for Derivative instruments and Hedging
Activities.” SFAS 163 is effective prospectively for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years; disclosure requirements in paragraphs
30(g) and 31 are effective for the first period (including interim periods)
beginning after May 23, 2008. The adoption of this statement did not have a
material impact on the Company’s financial position and results of
operations.
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active”, to clarify
guidance on determining the fair value of a financial asset under SFAS 157 in a
market that is not active. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been
issued. The adoption of this statement effective September 30, 2008
did not have a material impact on the Company’s financial position and results
of operations.
ITEM
7A. QUANTITIAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
required for smaller reporting issuers.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
Consolidated Financial Statements of the Company and its subsidiaries including
the notes thereto, together with the report of Jimmy C.H. Cheung & Co. is
presented beginning on page F-1 of this report.
ITEM
9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this Annual Report, being December 31, 2008, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation ("Evaluation") was performed by our Chief Executive
Officer and our Chief Financial Officer in consultation with our accounting
personnel.
Based
upon the Evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that as of the end of the period covered by this Annual Report,
our disclosure controls and procedures were effective.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed 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. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions,
effectiveness of internal control over financial reporting may vary over
time.
A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the company’s ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company’s annual or interim
financial statements that is more than inconsequential will not be prevented or
detected. An internal control material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
Management
of the Company conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting based on the framework and criteria
established in Internal Control-Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on the
Company’s evaluation under the COSO framework, management concluded that
its internal control over financial reporting was effective as of December 31,
2008.
This
Annual Report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this Annual Report.
Changes
In Internal Control Over Financial Reporting.
There has
been no change in our internal control over financial reporting that occurred
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
None
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
DIRECTORS
AND EXECUTIVE OFFICERS
Management
and Board of Directors
The
following table sets forth the names, ages and positions of our directors and
executive officers:
|
|
|
|
|
Wang
Hong Jun
|
|
37
|
|
President
and Chairman of the Board
|
Yu
Li Guo
|
|
36
|
|
Director
|
Robert
C. Bruce
|
|
46
|
|
Director
|
Edward
M. Rule
|
|
61
|
|
Director
|
Li
Jing Fu
|
|
59
|
|
Director
|
Zhang
Yang
|
|
27
|
|
Chief
Financial Officer
|
Jiang
Chao
|
|
29
|
|
Secretary
|
Each
Director will hold office until the next annual meeting of stockholders and
until his successor has been elected and qualified.
Background
of Executive Officers and Directors
WANG HONG
JUN has served as Chairman and President of the Company since May 2004,
following completion of the share exchange transaction with Hong Xiang. Mr. Wang
has over 15 years experience in the business management and oil industry
experience. Before he joined the company, Mr. Wang worked for Jilin Oil Field
and Drilling Company as an Executive with the responsibility of overseeing
operations and coordinating various projects.
YU LI GUO
has served as Director of the Company since June 2005. In 2003, Mr. Yu was
elected a director of Harbin Hong Xiang Petroleum Services Limited, a
wholly-owned subsidiary of Hong Xiang Petroleum Group Limited. From 2000 to
2003, Mr. Yu was employed by Jilin Yong Ji Telecommunication Company as General
Manager. Prior, Mr. Yu was employed by the Department of Industrial &
Commercial Bank of China as Vice Manager of Human Resources from 1997 to 2000.
Mr. Yu received a bachelor’s degree in International Finance from Jilin
Financial College.
ROBERT C.
BRUCE has served as Director of the Company since May 2008. Mr. Bruce is
President of Oakmont Advisory Group, LLC, a financial management consulting firm
located in Portland, Maine. Prior to founding Oakmont Advisory Group, from 1999
through 2004 he served as Chief Operating Officer, Treasurer and Director for
Enterix Inc., a privately-held, venture-funded medical device and laboratory
services company that was purchased by Quest Diagnostics. He also previously
served as Chief Financial Officer for Advantage Business Services (1997 to
1998), a privately-held national payroll processing and tax filing business that
was subsequently acquired by PayChex. Mr. Bruce is a member of the Board of
Directors of Immucell Corp., a NASDAQ listed manufacturer of animal health
products. Mr. Bruce received his MBA from the Yale School of Management, and a
Bachelor of Arts degree in East Asian Studies from Princeton University. Mr.
Bruce speaks and reads Mandarin Chinese.
EDWARD M.
RULE has served as Director of the Company since May 2008. Mr. Rule is Chairman
of TDR Capital International Limited, a Hong Kong based financial services
house. Most of his career has been spent in China, initially as a diplomat and
subsequently as an investment banker with the Standard Chartered Group and
private equity professional with the $800 million Asian Infrastructure Fund. He
is a graduate in Chinese language of the University of Melbourne and the
Australian National University. He speaks Mandarin Chinese and Cantonese. He has
been director of several listed companies in Hong Kong and
Australia.
LI JING
FU has served as Director of the Company since May 2008. Mr. Li is the Chairman
and top representative of Joint Management Committee of Qian Guo County Longhai
Petroleum & Natural Gas Co., Ltd. and was appointed to that position by
Petro China’s Jilin branch in 2005. Mr. Li has been in the petroleum industry
since 1970. In his extensive career he has served as Vice Monitor for Jiang Han
Oil Field’s comprehensive logging team, Secretary of Command Department of
Petroleum Hui Zhan in Jilin Province, Vice President of Jilin Oilfield
Exploration and Development Research Institute. From 1995 to 2002, Mr. Li was
appointed by PetroChina’s Jilin branch to serve as General Manger of management
and production operation of oil exploitation of Jilin Jiyuan Petroleum &
Natural Gas Development Co. Ltd. From 2002 to 2005, Mr. Li, served as Project
Manager of Song Yua City Qian Yuan Oil & Gas Development Co., Ltd. also by
appointment by PetroChina’s Jilin branch. Mr. Li received his bachelor’s degree
from Chang Chun Geology Institute in Jilin, China.
ZHANG
YANG has served as Chief Financial Officer of the Company since January 2006.
Prior to CNEH, Mr. Zhang served as Controller of Harbin Gloria Inn from 2004 to
2005. Mr. Zhang received a Business degree in 2001, from London College of
International Business Study and a degree in Accounting from London South Bank
University. Mr. Zhang is a candidate member under the Association of Chartered
Certified Accountants (ACCA).
JIANG
CHAO has served as Secretary of the Company since January 2006. Prior to joining
CNEH, from 2004 to 2005, Mr. Jiang served as a Financial Manager at Songzai
International Holding Group, Inc., a Nevada corporation engaged in the coal
mining business. Mr. Jiang holds a Master’s degree in International Business
Management from University of Surrey (UK) and received Business degree from
University of Bradford (UK) and Heilongjiang University (China).
Yu Li
Guo, a Director and employee of the Company is the brother-in-law of Wang Hong
Jun, Chairman and President of the Company. Other than this
relationship, there are no family relationships, or other arrangements or
understandings between or among any of the directors, executive officers or
other person pursuant to which such person was selected to serve as a director
or officer.
Corporate Governance Matters
Code of Ethics. A
Code of Business Conduct and Ethics is a written standard designed to deter
wrongdoing and to promote (a) honest and ethical conduct, (b) full, fair,
accurate, timely and understandable disclosure in regulatory filings and public
statements, (c) compliance with applicable laws, rules and regulations, (d) the
prompt reporting violation of the code and (e) accountability for adherence to
the Code. We are not currently subject to any law, rule or regulation requiring
that we adopt a Code of Ethics, however, we have adopted a code of ethics that
applies to our principal executive officer, chief financial officer, principal
accounting officer or controller, or persons performing similar functions. Such
code of ethics will be provided to any person without charge, upon written
request, a copy of such code of ethics by sending such request to us at our
principal office.
Audit Committee. In
June 2008, Messrs. Bruce, Rule and Li were appointed to serve on the audit
committee of the Board of Directors. Mr. Bruce serves as Chair of the
audit committee.
Board of Directors
Independence. Our Board of Directors consists of five members. Three of
the members of the board of directors are “independent” as defined under the
rules of the NASDAQ Stock Market.
Audit Committee Financial
Expert. Our Board of Directors has determined that Mr. Bruce qualifies as
an “audit committee financial expert” and that all three members of the Audit
Committee are “independent,” in each case as defined in Item 407(d)(5) of
Regulation S-K of the Securities Exchange Act of 1934, as amended. We believe
that the members of our Board of Directors are collectively capable of analyzing
and evaluating our financial statements and understanding internal controls and
procedures for financial reporting.
Nominating Committee.
In August 2008, Messrs. Rule, Wang and Li were appointed to serve on the
nominating committee of the Board of Directors. Mr. Li serves as
Chair of the Nominating Committee
Compensation
Committee. In June 2008, Messrs. Rule, Wang and Li were appointed to
serve on the compensation committee of the Board of Directors. Mr.
Rule serves as Chair of the compensation committee.
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT OF 1934
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
initial statements of beneficial ownership, reports of changes in ownership and
annual reports concerning their ownership of our common stock and other equity
securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and
greater than 10% shareholders are required by the Securities and Exchange
Commission regulations to furnish our company with copies of all Section 16(a)
reports they file.
To the
best of our knowledge, other than Lotusbox Investments Limited all executive
officers, directors and greater than 10% shareholders filed the required reports
in a timely manner.
ITEM
11. EXECUTIVE COMPENSATION.
The table
below sets forth information concerning compensation paid to the chief executive
officer and chief financial officer. None of the Company’s other executive
officers currently serving as such had annual compensation exceeded $100,000
(U.S.) in the last fiscal year.
Summary
Compensation Table (1)
Name
and Principal Position
|
|
|
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
|
Wang
Hong Jun, President and Chairman of the Board
|
2008
|
5,922
|
-
|
-
|
154,972
|
-
|
-
|
-
|
160,894
|
2007
|
5,922
|
-
|
-
|
-
|
-
|
-
|
-
|
5,922
|
2006
|
3,002
|
-
|
-
|
-
|
-
|
-
|
-
|
3,002
|
Zhang
Yanng, Chief Financial Officer
|
2008
|
6,580
|
-
|
103,125
|
-
|
-
|
-
|
-
|
109,705
|
2007
|
6,580
|
-
|
-
|
-
|
-
|
-
|
-
|
6,580
|
2006
|
3,075
|
-
|
-
|
-
|
-
|
-
|
-
|
3,075
|
(1) All
compensation is paid in RMB. The amounts in the foregoing table have been
converted to U.S. dollars at the conversion rate of one U.S. dollar to RMB
6.96225 for year 2008, one U.S. dollar to RMB 7.2946 for year 2007 and one U.S.
dollar to RMB 7.8041 for year 2006.
No
deferred compensation or long-term incentive plan awards were issued or granted
to the Company’s officers and directors as at the fiscal year end, December 31,
2008.
Director
Compensation
The
following Director Compensation Table summarizes the compensation of our
directors for services rendered to the Company during the year ended December
31, 2008.
DIRECTOR
COMPENSATION TABLE(1)
|
Fees
Earned
or
Paid in
Cash
($)
|
|
|
Non-Equity
Incentive
Plan Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
($)
|
|
Wang
Hong Jun
|
0
|
-
|
20,288
|
-
|
-
|
-
|
20,288
|
Robert
Bruce
|
23,500
|
-
|
29,176
|
-
|
-
|
-
|
52,676
|
Edward
Rule
|
22,000
|
-
|
29,176
|
-
|
-
|
-
|
51,676
|
Li
Jing Fu
|
14,000
|
-
|
29,176
|
-
|
-
|
-
|
43,176
|
Yu
Liguo
|
0
|
-
|
20,288
|
-
|
-
|
53,903
|
74,191
|
Wei
Guo Ping(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1) All
compensation is paid in U.S. dollar.
(2) Wei
Guo Ping’s term as our director expired at our annual meeting of the
stockholders held on September 2, 2008 and was not nominated for
reelection.
For 2008,
the non-employee directors will each receive annual cash compensation of $20,000
paid on a quarterly basis. Each director will also receive $1,000 for each
meeting attended in person or by telephone, except for directors who reside
outside of Jilin or Heilongjiang provinces will receive $5,000 for each meeting
attended in person held at the Company’s principal office. The
Chairman of the audit committee will receive an additional annual cash
compensation of $5,000, paid on a quarterly basis.
In
addition to cash compensation, each director will receive an option to purchase
up to 20,000 shares of the Company common stock, with 25% of the options vesting
upon grant and 25% vesting every three months thereafter.
Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements
There are
no employment contracts, compensatory plans or arrangements, including payments
to be received from the Company, with respect to any director or executive
officer of the Company which would in any way result in payments to any such
person because of his resignation, retirement or other termination of employment
with the Company, any change in control of the Company, or a change in the
person’s responsibilities following a change in control of the
Company.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
following tables set forth information as of March 11, 2009 regarding the
beneficial ownership of stock by (a) each stockholder who is known by the
Company to own beneficially in excess of 5% of the Company’s outstanding stock;
(b) each director; (c) the Company’s chief executive officer; and (d) the
executive officers and directors as a group. Except as otherwise indicated, all
persons listed below have (i) sole voting power and investment power with
respect to their shares of common stock (the only class of outstanding stock),
except to the extent that authority is shared by spouses under applicable law,
and (ii) record and beneficial ownership with respect to their shares of stock.
The percentage of beneficial ownership is based upon 20,784,080 shares of common
stock outstanding, as of March 11, 2009.
Security
Ownership Of Certain Beneficial Owners, Directors And Executive Officers
In
Common
Stock
NAME AND ADDRESS OF
BENEFICIAL OWNER(1)
|
|
AMOUNT OF
BENEFICIAL OWNERSHIP(2)
|
|
PERCENT OF CLASS
OF STOCK
OUTSTANDING (%)
|
Officers
and Directors
|
|
Common
Stock
|
|
|
Wang
Hong Jun(3)
|
|
|
6,867,000
|
|
|
33
|
Zhang
Yang
|
|
|
100,000
|
|
|
*
|
Robert
Bruce(4)
|
|
|
29,000
|
|
|
*
|
Edward
Rule(5)
|
|
|
20,000
|
|
|
*
|
Li
Jing Fu(5)
|
|
|
20,000
|
|
|
*
|
Yu
Li Guo(6)
|
|
|
60,000
|
|
|
*
|
Jiang
Chao
|
|
|
20,000
|
|
|
*
|
|
|
|
|
|
|
|
All
Officers and Directors
as a Group
(7 persons)
|
|
|
7,116,000
|
|
|
33.8
|
|
|
|
|
|
|
|
5%
Beneficial Owners
|
|
|
|
|
|
|
Lotusbox
Investments Limited(7)
137,
telok Ayer Street
#04-04/05
Singapore
068602
|
|
|
5,300,000
|
|
|
21.3
|
_______________
* Less
than one percent
(1) Unless
otherwise indicated, the address of the stockholders is 445 Park Avenue, New
York, NY 10022.
(2)
Security ownership information for beneficial owners is taken from statements
filed with the Securities and Exchange Commission pursuant to information made
known by the Company. There are no shares issuable to any beneficial owner,
director or executive officer pursuant to stock options that are/or will become
exercisable within 60 days of March 11, 2009.
(3)
Includes 6,732,000 shares of common stock, 130,000 shares of common stock
issuable upon exercise of options that are exercisable, and 5,000 shares of
common stock issuable upon exercise of stock options which are exercisable
within 60 days of March 11, 2009.
(4)
Includes 20,000 shares of common stock issuable upon exercise of option that are
exercisable and 4,000 share of common stock and 5,000 shares of common stock
held in his wife’s name.
(5)
Includes 20,000 shares of common stock issuable upon exercise of options that
are exercisable.
(6)
Includes 55,000 shares of common stock issuable upon exercise of options that
are exercisable and 5,000 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days of March 11, 2009.
(7)
Includes 1,200,000 shares of common stock and 4,100,000 shares of common stock
issuable upon exercise of warrants that are exercisable. Harmony Investment Fund
Limited, through its directors Suresh Withana and John Robert Nicholls, has
shared voting and dispositive rights over the securities held by Lotusbox
Investments Limited.
Securities
Authorized for Issuance under Equity Compensation Plan
Please
refer to information disclosed in Part II, Item 5 of this report.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
CERTAIN
RELATIONSHIP AND RELATED TRANSACTIONS
During
the last two fiscal years, we have not entered into any material transactions or
series of transactions that would be considered material in which any officer,
director or beneficial owner of 5% or more of any class of our capital stock, or
any immediate family member of any of the preceding persons, had a direct or
indirect material interest. There are no transactions presently proposed, except
as follows:
a)
|
As
of December 31, 2008 and 2007, the Company owed a related party $51,672
and $3,118,085 respectively which is repayable in December 2009. Imputed
interest expense is computed at 5% and 7% per annum on the amount due for
the years ended December 31, 2008 and 2007
respectively.
|
b)
|
As
of December 31, 2008 and 2007, the Company owed a related party $14,590
and $13,672 respectively which is repayable on demand. Imputed interest
expense is computed at 5% and 7% per annum on the amount due for the years
ended December 31, 2008 and 2007
respectively.
|
c)
|
As
of December 31, 2007, the Company owed a related party $14,364 which is
repayable on demand. Imputed interest expense is computed at 7% per annum
on the amount due.
|
d)
|
As
of December 31, 2008 and 2007, the Company owed a stockholder $738 and
$123,105 respectively which is repayable on demand. Imputed interest
expense is computed at 5% and 7% per annum on the amount due for the years
ended December 31, 2008 and 2007
respectively.
|
e)
|
Total
imputed interest expenses recorded as additional paid-in capital amounted
to $50,587 and $200,165 for the years ended December 31, 2008 and 2007
respectively.
|
f)
|
The
Company paid a stockholder $13,789 and $12,603 for leased office spaces
for the years ended December 31, 2008 and 2007
respectively.
|
Indemnification
Agreements
None.
Director
Independence
Our Board
of Directors consists of five members. The Company has adopted the
independence standards promulgated by NASDAQ. Based on these standards, the
Board has determined that all of the members of the Board of Directors, except
for Messrs. Wang and Yu, are “independent” as defined under the listing
standards for NASDAQ. The three independent directors are Robert Bruce, Edward
Rule and Li Jing Fu.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Jimmy
C.H. Cheung & Co., Certified Public Accountants, is our independent auditors
engaged to examine our financial statements for the fiscal years ended December
31, 2008 and December 31, 2007. The following table shows the fees that we paid
or accrued for the audit and other services provided by Jimmy C.H. Cheung &
Co. for the fiscal years ended December 31, 2008 and December 31,
2007.
|
|
Years
Ended December 31
|
|
|
|
2008
|
|
2007
|
|
Audit
Fees
|
|
|
65,800
|
|
|
100,000
|
|
Audit-Related
Fees
|
|
|
3,200
|
|
|
-
|
|
Tax
Fees
|
|
|
-
|
|
|
-
|
|
Other
Fees
|
|
|
-
|
|
|
-
|
|
Audit
Fees
This
category includes the audit of our annual financial statements, review of
financial statements included in our annual and quarterly reports and services
that are normally provided by the independent auditors in connection with
engagements for those fiscal years. This category also includes advice on audit
and accounting matters that arose during, or as a result of, the audit or the
review of interim financial statements.
Audit-Related
Fees
This
category consists of assurance and related services by the independent auditors
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported above under “Audit Fees”. The services
for the fees disclosed under this category include services relating to our
registration statement and consultation regarding our correspondence with the
SEC.
Tax
Fees
This
category consists of professional services rendered for tax compliance and tax
advice.
All
Other Fees
This
category consists of fees for other miscellaneous items.
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
No.
|
Description
|
2.1
|
Distribution
Agreement between Draco Holding Corporation and Jump’n Jax, dated April
30, 2004, is incorporated herein by reference from Registrant’s Current
Report on Form 8-K filed with the SEC on May 14, 2004.
|
2.2
|
Agreement
for Share Exchange dated as of March 29, 2004, by and among Draco Holding
Corp., Hong Xiang Petroleum International Holdings, Ltd., and the
shareholders of Hong Xiang is incorporated herein by reference from
Registrant’s Current Report on Form 8-K filed with the SEC on March 30,
2004.
|
3.1
|
Articles
of Incorporation are incorporated herein by reference from Registrant’s
Annual Report on Form 10-KSB filed with the SEC on March 28,
2001.
|
3.2
|
By-laws
are incorporated herein by reference from Registrant’s Annual Report on
Form 10-KSB filed with the SEC on March 28, 2001.
|
3.3
|
Certificate
of Amendments to Articles of Incorporation is incorporated herein by
reference from Registrant’s Information Statement on Form 14C filed with
the SEC on May 26, 2004.
|
3.4
|
Certificate
of Amendments to Articles of Incorporation filed with the Secretary of
State of Nevada on September 12, 2005*
|
3.5
|
Amended
and Restated By-laws are incorporated herein by reference from
Registrant’s Current Report on Form 8-K filed with the SEC on September
30, 2008.
|
4.1
|
2006
Stock Option/Stock Issuance Plan is incorporated herein by reference from
Registrant’s Registration Statement on Form S-8 filed with the SEC on
February 27, 2006.
|
4.2
|
8%
Secured Debenture issued to Lotusbox Investments Limited is incorporated
herein by reference from Registrant’s Current Report on Form 8-K filed
with the SEC on March 3, 2008.
|
4.3
|
Form
of Series A and C Common Stock Warrant is incorporated herein by reference
from Registrant’s Current Report on Form 8-K filed with the SEC on March
3, 2008.
|
4.4
|
Form
of Series B Common Stock Warrant is incorporated herein by reference from
Registrant’s Current Report on Form 8-K filed with the SEC on March 3,
2008.
|
4.5
|
Form
of Common Stock Purchase Warrant is incorporated herein by reference from
Registrant’s Current Report on Form 8-K filed with the SEC on March 6,
2008.
|
4.6
|
Amendment
No. 1 to 8% Secured Debenture issued to Lotusbox Investments Limited is
incorporated herein by reference from Registrant’s Current Report on Form
8-K filed with the SEC on March 6, 2008.
|
10.1
|
Loan
Contract between Song Yuan City Yu Qiao Qian’an Hong Xiang Oil and Gas
Development Limited Company and Song Yuan City Wu Lan Da Jie Cheng Shi Xin
Yong She is incorporated herein by reference from Registrant’s Quarterly
Report on Form 10-QSB filed with the SEC on November 23, 2005. (Translated
from the original Mandarin)
|
10.2
|
Loan
Contract between Song Yuan City Yu Qiao Qian’an Hong Xiang Oil and Gas
Development Limited Company and Song Yuan City Wu Lan Da Jie Cheng Shi Xin
Yong She is incorporated herein by reference from Registrant’s Quarterly
Report on Form 10-QSB filed with the SEC on November 23, 2005. (Translated
from the original Mandarin)
|
10.3
|
Warranty
Deed between Lien holder: Song Yuan City Wu Lan Da Jie Cheng Shi Xin Yong
She and Mortgager: Wang Hongjun, Sun Jishuang is incorporated herein by
reference from Registrant’s Quarterly Report on Form 10-QSB filed with the
SEC on November 23, 2005. (Translated from the original
Mandarin)
|
10.4
|
Guarantee
Contract between Creditor: Song Yuan City Wu Lan Da Jie Cheng Shi Xin Yong
She and Assurer: Songyuan City Hongxiang Petroleum Technical Services Co.,
Ltd is incorporated herein by reference from Registrant’s Quarterly Report
on Form 10-QSB filed with the SEC on November 23, 2005. (Translated from
the original Mandarin)
|
10.5
|
Qian-112
Oilfield Cooperative Development Contract among PetroChina Oil and Gas
Company Limited, Jilin Oil Field Branch Company; Song Yuan City Yu Qiao
Oil and Gas Development Company Limited, dated as of May 28, 2003 is
incorporated by reference from Registrant’s annual report on Form 10-KSB
filed with the SEC on April 17, 2006.
|
Exhibit
No.
|
Description
|
10.6
|
Joint
Venture Agreement among the Registrant, Ms. Ju GuiZhi and Mr. Wang
Hongjun, to form a joint venture limited liability company in China, to be
named Song Yuan North East Petroleum Technical Service Co., Ltd is
incorporated herein by reference from Registrant’s Current Report on Form
8-K filed with the SEC on July 28, 2006.
|
10.7
|
Equity
Transfer Agreement by and among LongDe Oil & Gas Development Co. Ltd
and Song Yuan North East Petroleum Technical Service Co., Ltd. dated June
1, 2005 is incorporated by reference from Registrant’s Current Report on
Form 8-K filed with the SEC on December 28, 2006.
|
10.8
|
Hetingbao
301 Oilfield Cooperative Development Contract among PetroChina Oil and Gas
Company Limited and Chang Ling LongDe Oil and Gas Development Company
Limited dated as of May 28, 2003.
|
10.9
|
Agreement
for the Purchase and Sale of Stock among Song Yuan North East Petroleum
Technical Service Co., Ltd., China North East Petroleum Holdings, Limited,
Ju Guizhi, Ping Wu Wang, Meng Xiangyun, dated January 26, 2007 is
incorporated by reference from Registrant’s Current Report on Form 8-K
filed with the SEC on January 29, 2007.
|
10.10
|
Trust
Agreement between Bing Wu Wang and Song Yuan North East Petroleum
Technical Service Co., Ltd. is incorporated by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on January 29,
2007.
|
10.11
|
Trust
Agreement between Meng Xiangyun and Song Yuan North East Petroleum
Technical Service Co., Ltd. is incorporated by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on January 29,
2007.
|
10.12
|
Cooperative
Development Contract among PetroChina Oil and Gas Company Limited, Jilin
Oil Field Branch Company and Song Yuan City Yu Qiao Oil and Gas
Development Company Limited dated as May 28, 2003 to develop Qian 112
Oilfield, Da 34 Oilfield and Gu 31 Oilfield is incorporated by reference
from Registrant’s Current Report on Form 10-K filed with the SEC on April
16, 2007.
|
10.13
|
Capital
Contribution Agreement, dated as of June 29, 2007, by and among the
Company, Mr. Hong Jun Wang and Ms. Guizhi Ju is incorporated by
reference from Registrant’s Current Report on Form 8-K filed with the SEC
on July 7, 2007.
|
10.14
|
Securities
Purchase Agreement dated February 28, 2008 between the Company and
Lotusbox Investments Limited is incorporated herein by reference from
Registrant’s Current Report on Form 8-K filed with the SEC on March 3,
2008.
|
10.15
|
Security
Agreement dated February 28, 2008 between the Company and Lotusbox
Investments Limited is incorporated herein by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on March 3,
2008.
|
10.16
|
Agreement
of Pledge dated February 28, 2008 between the Company and Lotusbox
Investments Limited is incorporated herein by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on March 3,
2008.
|
10.17
|
Registration
Rights Agreement dated February 28, 2008 between the Company and Lotusbox
Investments Limited is incorporated herein by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on March 3,
2008.
|
10.18
|
Option
Agreement dated February 28, 2008 between the Company and Lotusbox
Investments Limited is incorporated herein by reference from Registrant’s
Current Report on Form 8-K filed with the SEC on March 3,
2008.
|
14.1
|
Code
of Ethics of China North East Petroleum Holdings, Ltd. is incorporated
herein by reference from Registrant’s Annual Report on Form 10-KSB filed
with the SEC on May 18, 2005.
|
21.1
|
List
of Subsidiaries is incorporated herein by reference from Registrant’s
Annual Report on Form 10-K filed with the SEC on March 31,
2008.
|
23.1
|
Consent
of Independent Petroleum Consultants Ralph E. Davis & Associates,
Inc.*
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer*
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer*
|
32.1
|
Certification
by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
32.2
|
Certification
by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
|
* Filed
herewith
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, China North East Petroleum Holdings, Limited has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date:
March 30, 2009
|
|
|
|
|
|
|
|
|
|
CHINA NORTH EAST PETROLEUM HOLDINGS, LIMITED
|
|
|
|
|
|
|
By:
|
/s/ Hong
Jun Wang |
|
|
Wang
Hong Jun |
|
|
Chairman
of the Board and President |
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Name
|
|
Title
|
|
Date
|
/s/
Wang Hong Jun
|
|
Chairman
of the Board and President
|
|
March
30, 2009
|
Wang
Hong Jun
|
|
(Principal
Executive Officer)
|
|
|
/s/
Robert Bruce
|
|
Director
|
|
March
30, 2009
|
Robert
Bruce
|
|
|
|
|
|
|
|
|
|
/s/
Edward Rule
|
|
Director
|
|
March
30, 2009
|
Edward
Rule
|
|
|
|
|
|
|
|
|
|
/s/
Li Jing Fu
|
|
Director
|
|
March
30, 2009
|
Li
Jing Fu
|
|
|
|
|
|
|
|
|
|
/s/
Yu Li Guo
|
|
Director
|
|
March
30, 2009
|
Yu
Li Guo
|
|
|
|
|
|
|
|
|
|
/s/
Zhang Yang
|
|
Chief
Financial Officer, Treasurer
|
|
March
30, 2009
|
Zhang
Yang
|
|
(Principal
Accounting and Financial Officer)
|
|
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 2008 AND 2007
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONTENTS
Pages
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-2
|
|
Consolidated
Statements of Operations and Comprehensive Income for the years ended
December 31, 2008 and 2007
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2008
and 2007
|
F-4
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007
|
F-5
|
|
Notes
to the Consolidated Financial Statements as of December 31, 2008 and
2007
|
F-6
– F-23
|
|
![](d3319210k1.jpg) |
Jimmy
C.H. Cheung & Co
Certified
Public Accountants
(A
member of Kreston International)
|
Registered
with the Public Company
Accounting
Oversight Board
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of:
China
North East Petroleum Holdings Limited
We have
audited the accompanying consolidated balance sheets of China North East
Petroleum Holdings Limited and subsidiaries as of December 31, 2008 and 2007 and
the related consolidated statements of operations and comprehensive income,
stockholders’ equity and cash flows for the years ended December 31, 2008 and
2007. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits of the
financial statements provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China North East Petroleum Holdings
Limited and subsidiaries as of December 31, 2008 and 2007, and the results of
its operations and its cash flows for the years ended December 31, 2008 and
2007, in conformity with accounting principles generally accepted in the United
States of America.
JIMMY
C.H. CHEUNG & CO
Certified
Public Accountants
Hong
Kong
Date: February
23, 2009
1607
Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong
Tel: (852)
25295500 Fax: (852) 21277660
Website: http://www.jchcheungco.hk
|
|
![](d3319210k1.gif) |
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
13,239,213 |
|
|
$ |
74,638 |
|
Accounts
receivable, net of allowance
|
|
|
4,230,080 |
|
|
|
4,852,633 |
|
Prepaid
expenses and other current assets
|
|
|
781,121 |
|
|
|
398,046 |
|
Value
added tax recoverable
|
|
|
311,240 |
|
|
|
651,905 |
|
Total
Current Assets
|
|
|
18,561,654 |
|
|
|
5,977,222 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Oil
and gas properties, net
|
|
|
70,193,852 |
|
|
|
40,345,008 |
|
Fixed
assets, net
|
|
|
1,684,377 |
|
|
|
885,474 |
|
Oil
and gas properties under construction
|
|
|
714,629 |
|
|
|
2,550,058 |
|
Total
Property and Equipment
|
|
|
72,592,858 |
|
|
|
43,780,540 |
|
|
|
|
|
|
|
|
|
|
LAND
USE RIGHTS, NET
|
|
|
36,198 |
|
|
|
45,076 |
|
|
|
|
|
|
|
|
|
|
DEFERRED
FINANCING COSTS, NET
|
|
|
939,098 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
92,129,808 |
|
|
$ |
49,802,838 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
10,985,894 |
|
|
$ |
6,580,930 |
|
Current
portion of secured debenture, net of discount
|
|
|
1,489,126 |
|
|
|
- |
|
Other
payables and accrued liabilities
|
|
|
742,264 |
|
|
|
1,020,980 |
|
Due
to related parties
|
|
|
66,262 |
|
|
|
28,036 |
|
Note
payable
|
|
|
- |
|
|
|
273,444 |
|
Income
tax and other taxes payable
|
|
|
3,710,870 |
|
|
|
2,687,449 |
|
Due
to a stockholder
|
|
|
738 |
|
|
|
123,105 |
|
Total
Current Liabilities
|
|
|
16,995,154 |
|
|
|
10,713,944 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
13,944,903 |
|
|
|
15,467,661 |
|
Secured
debenture, net of discount
|
|
|
6,594,700 |
|
|
|
- |
|
Deferred
tax payable
|
|
|
762,405 |
|
|
|
543,100 |
|
Due
to a related party
|
|
|
- |
|
|
|
3,118,085 |
|
Total
Long-term Liabilities
|
|
|
21,302,008 |
|
|
|
19,128,846 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
38,297,162 |
|
|
|
29,842,790 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
MINORITY
INTERESTS
|
|
|
4,513,650 |
|
|
|
1,124,964 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock ($0.001 par value, 150,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
20,784,080
shares issued and outstanding as of
|
|
|
|
|
|
|
|
|
December
31, 2008; 19,224,080 shares issued and
|
|
|
|
|
|
|
|
|
outstanding
as of December 31, 2007)
|
|
|
20,784 |
|
|
|
19,224 |
|
Additional
paid-in capital
|
|
|
21,384,816 |
|
|
|
11,361,579 |
|
Deferred
stock compensation
|
|
|
(1,248,750 |
) |
|
|
(27,125 |
) |
Retained
earnings
|
|
|
|
|
|
|
|
|
Unappropriated
|
|
|
24,326,209 |
|
|
|
5,200,907 |
|
Appropriated
|
|
|
1,372,999 |
|
|
|
916,263 |
|
Accumulated
other comprehensive income
|
|
|
3,462,938 |
|
|
|
1,364,236 |
|
Total
Stockholders' Equity
|
|
|
49,318,996 |
|
|
|
18,835,084 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
92,129,808 |
|
|
$ |
49,802,838 |
|
The
accompanying notes are an integral part of these financial
statements
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE
INCOME
FOR THE YEARS ENDED DECEMBER
31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$ |
58,572,250 |
|
|
$ |
19,482,069 |
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
|
|
|
|
|
|
Production
costs
|
|
|
3,847,775 |
|
|
|
2,872,990 |
|
Depreciation
of oil and gas properties
|
|
|
6,172,422 |
|
|
|
3,562,265 |
|
Amortization
of land use rights
|
|
|
11,718 |
|
|
|
10,711 |
|
Government
oil surcharge
|
|
|
11,105,325 |
|
|
|
2,857,376 |
|
Recovery
of deposit from a supplier previously written off
|
|
|
- |
|
|
|
(361,366 |
) |
Total
Cost of Sales
|
|
|
21,137,240 |
|
|
|
8,941,976 |
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
37,435,010 |
|
|
|
10,540,093 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
1,959,602 |
|
|
|
880,161 |
|
Professional
fees
|
|
|
251,202 |
|
|
|
186,214 |
|
Consulting
fees
|
|
|
396,330 |
|
|
|
108,500 |
|
Depreciation
of fixed assets
|
|
|
229,434 |
|
|
|
187,766 |
|
Gain
on disposal of fixed assets
|
|
|
- |
|
|
|
(68,131 |
) |
Total
Operating Expenses
|
|
|
2,836,568 |
|
|
|
1,294,510 |
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
34,598,442 |
|
|
|
9,245,583 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
(112,517 |
) |
|
|
(13,144 |
) |
Interest
expense
|
|
|
(1,011,367 |
) |
|
|
(81,434 |
) |
Amortization
of deferred financing costs
|
|
|
(247,131 |
) |
|
|
- |
|
Amortization
of discount on debenture
|
|
|
(1,622,678 |
) |
|
|
- |
|
Imputed
interest expense
|
|
|
(50,587 |
) |
|
|
(200,165 |
) |
Interest
income
|
|
|
38,829 |
|
|
|
1,760 |
|
Total
Other Expense, net
|
|
|
(3,005,451 |
) |
|
|
(292,983 |
) |
|
|
|
|
|
|
|
|
|
NET
INCOME BEFORE TAXES AND MINORITY INTERESTS
|
|
|
31,592,991 |
|
|
|
8,952,600 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(9,101,267 |
) |
|
|
(3,097,649 |
) |
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
(2,909,686 |
) |
|
|
(722,370 |
) |
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
19,582,038 |
|
|
|
5,132,581 |
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
2,098,702 |
|
|
|
1,091,940 |
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
21,680,740 |
|
|
$ |
6,224,521 |
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
-
basic
|
|
$ |
0.99 |
|
|
$ |
0.21 |
|
-
diluted
|
|
$ |
0.98 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the year
|
|
|
|
|
|
|
|
|
-
basic
|
|
|
19,805,340 |
|
|
|
24,128,190 |
|
-
diluted
|
|
|
19,924,929 |
|
|
|
24,128,190 |
|
The
accompanying notes are an integral part of these financial
statements
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER
31, 2008 AND 2007
|
|
Common
stock
|
|
|
Additional
|
|
|
Deferred
|
|
|
Unappropriated
|
|
|
Appropriated
|
|
|
Accumulated
other
|
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
paid-in
|
|
|
stock
|
|
|
retained
|
|
|
retained
|
|
|
comprehensive
|
|
|
|
|
|
|
shares
|
|
|
Amount
|
|
|
capital
|
|
|
compensation
|
|
|
earnings
|
|
|
earnings
|
|
|
income
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
|
29,224,080 |
|
|
$ |
29,224 |
|
|
$ |
3,953,601 |
|
|
$ |
(135,625 |
) |
|
$ |
696,955 |
|
|
$ |
287,634 |
|
|
$ |
272,296 |
|
|
$ |
5,104,085 |
|
Components
of comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,132,581 |
|
|
|
- |
|
|
|
- |
|
|
|
5,132,581 |
|
Foreign
currency translation gain
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,091,940 |
|
|
|
1,091,940 |
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,224,521 |
|
Amortization
of deferred stock compensation related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stocks issued for services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
108,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
108,500 |
|
Contribution
from a stockholder by waive of repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
advance from the stockholder
|
|
|
- |
|
|
|
- |
|
|
|
1,746,128 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,746,128 |
|
Contribution
from a related party by waive of repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
advance from the related party
|
|
|
- |
|
|
|
- |
|
|
|
5,451,685 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,451,685 |
|
Contribution
from a related party by cancellation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock previously issued to the related party
|
|
|
(10,000,000 |
) |
|
|
(10,000 |
) |
|
|
10,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Imputed
interest expenses on advances from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
stockholder and related parties
|
|
|
- |
|
|
|
- |
|
|
|
200,165 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
200,165 |
|
Transfer
from retained earnings to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statutory
and staff welfare reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(628,629 |
) |
|
|
628,629 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
19,224,080 |
|
|
|
19,224 |
|
|
|
11,361,579 |
|
|
|
(27,125 |
) |
|
|
5,200,907 |
|
|
|
916,263 |
|
|
|
1,364,236 |
|
|
|
18,835,084 |
|
Components
of comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,582,038 |
|
|
|
- |
|
|
|
- |
|
|
|
19,582,038 |
|
Foreign
currency translation gain
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,098,702 |
|
|
|
2,098,702 |
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,680,740 |
|
Issuance
of common stock for services
|
|
|
360,000 |
|
|
|
360 |
|
|
|
1,619,640 |
|
|
|
(1,620,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization
of deferred stock compensation related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stocks issued for services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
398,375 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
398,375 |
|
Exercise
of warrants for cash
|
|
|
1,200,000 |
|
|
|
1,200 |
|
|
|
10,800 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,000 |
|
Value
of beneficial conversion feature of secured debenture
|
|
|
- |
|
|
|
- |
|
|
|
7,788,852 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,788,852 |
|
Warrants
issued for services
|
|
|
- |
|
|
|
- |
|
|
|
216,380 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
216,380 |
|
Stock
compensation expenses on options issued
|
|
|
- |
|
|
|
- |
|
|
|
336,978 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
336,978 |
|
Imputed
interest expenses on advances from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
stockholder and related parties
|
|
|
- |
|
|
|
- |
|
|
|
50,587 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
50,587 |
|
Transfer
from retained earnings to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
statutory
and staff welfare reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(456,736 |
) |
|
|
456,736 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
20,784,080 |
|
|
$ |
20,784 |
|
|
$ |
21,384,816 |
|
|
$ |
(1,248,750 |
) |
|
$ |
24,326,209 |
|
|
$ |
1,372,999 |
|
|
$ |
3,462,938 |
|
|
$ |
49,318,996 |
|
The
accompanying notes are an integral part of these financial
statements
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER
31, 2008 AND 2007
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
19,582,038 |
|
|
$ |
5,132,581 |
|
Adjusted
to reconcile net income to cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of oil and gas properties
|
|
|
6,172,422 |
|
|
|
3,562,265 |
|
Depreciation
of fixed assets
|
|
|
229,434 |
|
|
|
187,766 |
|
Amortization
of land use rights
|
|
|
11,718 |
|
|
|
10,711 |
|
Amortization
of deferred financing costs
|
|
|
247,131 |
|
|
|
- |
|
Amortization
of discount on debenture
|
|
|
1,622,678 |
|
|
|
- |
|
Amortization
of stock option compensation
|
|
|
336,978 |
|
|
|
- |
|
Warrants
issued for services
|
|
|
216,380 |
|
|
|
- |
|
Minority
interests
|
|
|
2,909,686 |
|
|
|
722,370 |
|
Stocks
issued for services
|
|
|
27,125 |
|
|
|
108,500 |
|
Stock-based
compensation for service
|
|
|
371,250 |
|
|
|
- |
|
Imputed
interest expense
|
|
|
50,587 |
|
|
|
200,165 |
|
Gain
on disposal of fixed assets
|
|
|
- |
|
|
|
(68,131 |
) |
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
622,553 |
|
|
|
(4,101,949 |
) |
Prepaid
expenses and other current assets
|
|
|
(383,075 |
) |
|
|
527,312 |
|
Due
from related parties
|
|
|
- |
|
|
|
64,031 |
|
Value
added tax recoverable
|
|
|
340,665 |
|
|
|
(204,302 |
) |
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
2,882,206 |
|
|
|
811,727 |
|
Other
payables and accrued liabilities
|
|
|
(278,716 |
) |
|
|
(372,289 |
) |
Income
tax and other taxes payable
|
|
|
1,023,421 |
|
|
|
2,582,537 |
|
Deferred
tax payable
|
|
|
219,305 |
|
|
|
340,348 |
|
Net
cash provided by operating activities
|
|
|
36,203,786 |
|
|
|
9,503,642 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of oil and gas properties
|
|
|
(29,206,040 |
) |
|
|
(9,699,958 |
) |
Purchase
of fixed assets
|
|
|
(957,449 |
) |
|
|
(352,219 |
) |
Additions
to oil and gas properties under construction
|
|
|
(1,712,449 |
) |
|
|
(2,448,587 |
) |
Proceeds
from the disposal of fixed assets
|
|
|
- |
|
|
|
166,728 |
|
Net
cash used in investing activities
|
|
|
(31,875,938 |
) |
|
|
(12,334,036 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Contribution
to increased registered capital of a subsidiary
|
|
|
|
|
|
|
|
|
by
minority interests
|
|
|
479,000 |
|
|
|
- |
|
Payment
of deferred financing costs
|
|
|
(1,186,229 |
) |
|
|
- |
|
Repayment
of note payable
|
|
|
(273,444 |
) |
|
|
(110,743 |
) |
Proceeds
from issuance of secured debenture
|
|
|
15,000,000 |
|
|
|
- |
|
Repayment
of secured debenture
|
|
|
(750,000 |
) |
|
|
- |
|
Decrease
in other loans payable
|
|
|
- |
|
|
|
(25,612 |
) |
Proceeds
from exercise of stock warrants
|
|
|
12,000 |
|
|
|
- |
|
(Decrease)
increase in amount due to a stockholder
|
|
|
(122,367 |
) |
|
|
212,298 |
|
(Decrease)
increase in amounts due to related parties
|
|
|
(3,079,859 |
) |
|
|
4,286,530 |
|
Net
cash provided by financing activities
|
|
|
10,079,101 |
|
|
|
4,362,473 |
|
EFFECT
OF EXCHANGE RATE ON CASH
|
|
|
(1,242,374 |
) |
|
|
(1,471,187 |
) |
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
13,164,575 |
|
|
|
60,892 |
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
74,638 |
|
|
|
13,746 |
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
|
$ |
13,239,213 |
|
|
$ |
74,638 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
Income
tax expenses
|
|
$ |
7,824,394 |
|
|
$ |
1,681,005 |
|
Interest
expenses
|
|
$ |
1,011,367 |
|
|
$ |
81,434 |
|
The
accompanying notes are an integral part of these financial
statements
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
|
(A) Organization
China
North East Petroleum Holdings Limited (“North East Petroleum”) 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. In December 2002, Hong Xiang Oil
Development entered into an oil lease agreement with Song Yuan City Yu Qiao Oil
and Gas Development Limited Corporation (“Yu Qiao”) to develop the proven
reserves in the Qian’an Oil Field Zone 112 (Qian’an 112) in Jilin Oil Region for
20 years.
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”) at a consideration of
$120,773 in cash. LongDe is engaged in the exploration and production of crude
oil in the Jilin Oil Region of the PRC.
On
January 26, 2007, Song Yuan Technical acquired 100% of the equity interest of Yu
Qiao for 10,000,000 shares of the Company’s common stock having a fair value of
$3,100,000. 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.
After the
acquisition of Yu Qiao, the oil lease agreement between Yu Qiao and Hong Xiang
Oil Development was rescinded and Hong Xiang Technical and Hong Xiang Oil
Development were dissolved in March 2007.
North
East Petroleum, Hong Xiang Petroleum Group, Song Yuan Technical, LongDe and Yu
Qiao are hereinafter referred to as (“the Company”).
(B)
|
Principles
of consolidation
|
The
accompanying consolidated financial statements include the 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.
All significant
inter-company accounts and transactions have been eliminated in
consolidation.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ORGANIZATION (CONTINUED)
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent 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. The most significant
assumptions are for estimated reserves of oil and gas. Oil and gas reserve
estimates are developed from information provided by the Company to Ralph E.
Davis Associates, Inc. of Houston, Texas for the years ended December 31, 2008
and 2007, respectively. In 2008, management’s estimate of its proved reserves
was revised upward from 2,468,824 to about 5,453,794 barrels of oil. The
estimates were made using performance methods that utilize extrapolations of
various historical data including, but not limited to oil, gas and water
production. For the undeveloped reserves, estimates were made using analogy to
wells within each respective field and reservoir. While reserves are not
reflected on the Company’s Consolidated Balance Sheets, the revision in estimate
has affected the depreciation expense associated with its oil and gas properties
which is calculated on the basis of proved reserves. The change was accounted
for as a revision in an estimate, and the effect was to increase the net income
by approximately $8,260,000.
(D)
|
Cash
and cash equivalents
|
For
purpose of the statements of cash flows, cash and cash equivalents include cash
on hand and demand deposits with a bank with a maturity of less than three
months.
The
Company sells crude oil solely to PetroChina a PRC Government owned enterprise.
The Company considers its accounts receivable from PetroChina to be fully
recoverable.
(F)
|
Oil
and gas properties
|
The
Company follows the full cost method of accounting for oil and gas properties.
Accordingly, all costs associated with the acquisition of development
rights and the development of oil reserves, including direct related overhead
costs, are capitalized.
Depreciation,
depletion and amortization of capitalized costs, excluding unproved properties,
are based on the unit-of-production methods based on proved reserves.
Investments in unproved properties and major development projects are not
amortized until proved reserves associated with the projects can be determined
or until impairment occurs. If the results of an assessment indicate that
the properties are impaired, the amount of the impairment is added to the
capitalized costs to be amortized.
In
addition, the capitalized costs are subject to a “ceiling test”, which basically
limits such costs to the aggregate of the “estimated present value”, discounted
at a 10-percent interest rate of future net revenues from proved reserves, based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.
Sales of
portion of development rights and other proved and unproved properties are
accounted for as adjustments to capitalized costs with no gain or loss
recognized, unless such adjustments would significantly alter the relationship
between capitalized costs and proved reserves of oil and gas, in which case the
gain or loss is recognized as income.
Abandonment
of oil and gas properties other than the development rights are accounted for as
adjustments to capitalized costs with no loss recognized.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(CONTINUED)
|
Fixed
assets are stated at cost, less accumulated
depreciation. Expenditures for additions, major renewals and
betterments are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred.
Depreciation
is provided on a straight-line basis, less estimated residual values over the
assets’ estimated useful lives. The estimated useful lives are as
follows:
Buildings
|
20
Years
|
Furniture,
fixtures and equipment
|
5
Years
|
Motor
vehicles
|
5
Years
|
Land use
rights are stated at cost, less accumulated amortization and are amortized over
6 years from the date of acquisition (See note 6).
The
Company accounts for long-lived assets under the Statements of Financial
Accounting Standards (“SFAS”) Nos. 142 and 144 “Accounting for Goodwill and
Other Intangible Assets” and “Accounting for Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 142 and 144”). In accordance with SFAS
No. 142 and 144, long-lived assets held and used by the Company are reviewed for
impairment annually in the fourth quarter or more frequently if events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of evaluating the recoverability of long-lived
assets, when undiscounted future cash flows will not be sufficient to recover an
asset’s carrying amount, the asset is written down to its fair value. The
long-lived assets of the Company, which are subject to evaluation, consist
primarily of oil and gas properties and fixed assets. For the years ended
December 31, 2008 and 2007, the Company has not recognized any allowances for
impairment to its long-lived assets.
(I)
|
Fair
value of financial instruments
|
SFAS No.
107, "Disclosure About Fair Value of Financial Instruments," requires certain
disclosures regarding the fair value of financial instruments. Fair value of
financial instruments is made at a specific point in time, based on relevant
information about financial markets and specific financial instruments. As these
estimates are subjective in nature, involving uncertainties and matters of
significant judgment, they cannot be determined with precision. Changes in
assumptions can significantly affect estimated fair values.
The
carrying value of cash and cash equivalents, accounts receivable (trade and
others), accounts payable (trade and related party) and accrued
liabilities approximate their fair values because of the short-term nature
of these instruments. Based on the borrowing rates currently available to the
Company for loans and similar terms and average maturities, the fair value of
long-term debts also approximates its carrying value. The management of the
Company is of the opinion that the Company is not exposed to significant
interest or credit risks arising from these financial instruments.
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, 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.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(CONTINUED)
|
The
Company accounts for income taxes under the SFAS No. 109, “Accounting for Income
Taxes” (“SFAS 109”). Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that included the enactment date.
On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a
more-likely-than-not threshold for financial statements recognition and
measurement of a tax position taken (or expected to be taken) in a tax return.
This Interpretation also provides guidance on derecognition of income tax assets
and liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for interest and penalties associated with tax positions,
accounting for income taxes in interim periods and income tax disclosures. The
adoption of FIN 48 has not resulted in any material impact on the Company’s
financial position or results.
(L)
|
Foreign
currency translation
|
Except
for North East Petroleum and Hong Xiang Petroleum Group, which maintain their
accounting records in their functional currency in United States dollars
(“US$”), all other subsidiaries of the Company maintain their accounting records
in their functional currency in Renminbi (“RMB”). Foreign currency transactions
during the year are translated to the functional currency at the approximate
rates of exchange on the dates of transactions. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated at the approximate rates of exchange at that
date. Non-monetary assets and liabilities are translated at the rates
of exchange prevailing at the time the assets or liabilities were
acquired. Exchange gains or losses are recorded in the statements of
operations.
The
financial statements of the subsidiaries whose functional currencies are RMB are
translated into US$ using the closing rate method. The balance sheet
items are translated into US$ using the exchange rates at the respective balance
sheet dates. The capital and various reserves are translated at
historical exchange rates prevailing at the time of the transactions while
income and expenses items are translated at the average exchange rate for the
year. All exchange differences are recorded within
equity.
The
exchange rates used to translate amounts in RMB into US$ for the purposes of
preparing the financial statements were as follows:
|
December 31, 2008
|
December 31, 2007
|
Balance
sheet items, except for common
|
|
|
stock,
additional paid-in capital and
|
|
|
retained
earnings, as of year end
|
US$1=RMB6.8542
|
US$1=RMB7.3141
|
|
|
|
Amounts
included in the statements of
|
|
|
operations
and cash flows for the year
|
US$1=RMB6.96225
|
US$1=RMB7.6172
|
The
translation difference recorded for the years ended December 31, 2008 and 2007
were gains of $2,098,702 and $1,091,940 respectively.
No
presentation is made that RMB amounts have been, or would be, converted into US$
at the above rates. Although the Chinese government regulations now allow
convertibility of RMB for current account transactions, significant restrictions
still remain. Hence, such translations should not be construed
as representation that the RMB could be converted into US$ at that rate or
any other rate.
The value
of RMB against US$ and other currencies may fluctuate and is affected by, among
other things, changes in China’s political and economic conditions, any
significant revaluation of RMB may materially affect the Company’s financial
condition in terms of US$ reporting.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(CONTINUED)
|
The
foreign currency translation gain or loss resulting from the translation of the
financial statements expressed in RMB to US$ is reported as other comprehensive
income in the statements of operations and stockholders’ equity. Other
comprehensive income for the years ended December 31, 2008 and 2007 was $2,098,702 and $1,091,940
respectively.
(N)
|
Stock-based
compensation
|
The
Company adopts the provisions of SFAS No. 123(R), “Share-Based Payments”, which
establishes the accounting for employee stock-based awards. Under the provisions
of SFAS No. 123(R), stock-based compensation is measured at the grant date,
based on the calculated fair value of the award, and is recognized as an expense
over the requisite employee service period (generally the vesting period of the
grant). The Company determines the fair value of each stock award to be equal to
the quoted market price for the Company’s common stock on the date of the award.
Unearned compensation represents shares issued to executives and employees that
will be vested over a certain service period. These shares will be amortized
over the vesting period in accordance with FASB 123 (R). The average vesting
period for the shares issued to date has been 1.76 years, based on the terms of
the employment agreements under which the stock was awarded. The expense related
to the vesting of unearned compensation was $336,978 and $0 for years ended
December 31, 2008 and 2007 respectively.
The
Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”. The fair value of the option issued is used to
measure the transaction, as this is more reliable than the fair value of the
services received. Fair value is measured as the value of the Company’s common
stock on the date that the commitment for performance by the counterparty has
been reached or the counterparty’s performance is complete. The fair value of
the equity instrument is charged directly to compensation expense and additional
paid-in capital.
Earnings
per share in accordance with the provisions of SFAS No. 128, "Earnings Per
Share." SFAS No. 128 requires presentation of basic and diluted earnings per
share in conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into common
stock using the treasury method.
The
Company operates in only one segment. Thereafter segment disclosure is not
presented.
The PRC
has adopted extensive environmental laws and regulations that affect the
operations of the oil and gas industry. The outcome of environmental liabilities
under proposed or future environmental legislation cannot be reasonably
estimated at present, and could be material. Under existing legislation,
however, the management believes that there are no probable liabilities that
will have a material adverse effect on the financial position of the Company.
Hence no reserves have been set up for environmental costs.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ORGANIZATION (CONTINUED)
(R)
|
Asset
retirement obligations
|
The
Company adopts the provisions of SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement generally applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 requires the Company to recognize the fair
value of asset retirement obligations in the financial statements by
capitalizing that cost as a part of the cost of the related asset. With regard
to the Company, asset retirement obligations primarily relate to the abandonment
of oil producing facilities. The Company did not incur and does not anticipate
incurring any material dismantlement, restoration and abandonment costs given
the nature of its crude oil producing activities and the current PRC regulations
surrounding such activities.
(S)
|
Recent
accounting pronouncements
|
On
December 31, 2008, the SEC published the revised rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions are
updates to definitions in existing oil and gas rules to make them consistent
with the petroleum resources management system, which is a widely accepted
standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include the ability to include
nontraditional resources in reserves, the use of new technology for determining
reserves, permitting disclosure of probable and possible reserves, and changes
to the pricing used in determining reserves. To determine reserves companies
must use a 12-month average price. The Company is required to comply with the
amended disclosure requirement for registration statements filed after January
1, 2010, and for annual reports for fiscal years ending on or after December 15,
2009. Early adoption is not permitted. The Company is currently assessing the
impact that the adoption will have on the Company’s disclosures, operating
results, financial position and cash flows.
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. SFAS 141R also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business
combination. This statement is effective beginning January 1,
2009. The Company does not expect the adoption of this statement to
have a material impact on its financial position and results of
operations.
In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” This
statement improves the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards that
require; the ownership interests in subsidiaries held by parties other than the
parent and the amount of consolidated net income attributable to the parent and
to the noncontrolling interest be clearly identified and presented on the face
of the consolidated statement of income, changes in a parent’s ownership
interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently, when a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value, entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 affects those
entities that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is
prohibited. The adoption of this statement did not have a material
impact on the Company's financial position and results of
operations.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ORGANIZATION (CONTINUED)
(S)
|
Recent
accounting pronouncements
(Continued)
|
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” This statement is intended to improve transparency in
financial reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. SFAS 161 applies to
all derivative instruments within the scope of SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” (SFAS 133) as well as related
hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. Entities with
instruments subject to SFAS 161 must provide more robust qualitative disclosures
and expanded quantitative disclosures. SFAS 161 is effective
prospectively for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
permitted. The adoption of this statement did not have a material
impact on the Company’s financial position and results of
operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that presented in conformity
with generally accepted accounting principles in the United States of
America. SFA 162 will be effective 60 days following the SEC’s
approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The
adoption of this statement did not have a material impact on the Company’s
financial position and results of operations.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of this Statement is limited to financial guarantee insurance and
reinsurance contracts, as described in the Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this
Statement does not apply to financial guarantee contracts issued by enterprises
excluded from the scope of Statement 60 or to some insurance contracts that seem
similar to financial guarantee insurance contracts issued by insurance
enterprises (such as mortgage guaranty insurance or credit insurance on trade
receivables). This Statement also does not apply to financial
guarantee contracts that are derivative instruments included within the scope of
SFAS No. 133, “Accounting for Derivative instruments and Hedging
Activities.” SFAS 163 is effective prospectively for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years; disclosure requirements in paragraphs
30(g) and 31 are effective for the first period (including interim periods)
beginning after May 23, 2008. The adoption of this statement did not have a
material impact on the Company’s financial position and results of
operations.
In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active”, to clarify
guidance on determining the fair value of a financial asset under SFAS 157 in a
market that is not active. FSP FAS 157-3 was effective upon issuance,
including prior periods for which financial statements had not been
issued. The adoption of this statement effective September 30, 2008
did not have a material impact on the Company’s financial position and results
of operations.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
Accounts
receivable at December 31, 2008 and 2007 consisted of the
following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accounts
receivable from PetroChina
|
|
$ |
4,230,080 |
|
|
$ |
4,852,633 |
|
Less:
allowance for doubtful accounts
|
|
|
- |
|
|
|
- |
|
Accounts
receivable, net of allowance
|
|
$ |
4,230,080 |
|
|
$ |
4,852,633 |
|
As of
December 31, 2008 and 2007, the Company considered all accounts receivable
collectable and has not recorded a provision for doubtful accounts.
3. PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets at December 31, 2008 and 2007 consist of the
following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
$ |
690,838 |
|
|
$ |
150,973 |
|
Deposits
paid to suppliers
|
|
|
50,330 |
|
|
|
183,562 |
|
Other
receivables
|
|
|
39,953 |
|
|
|
63,511 |
|
|
|
$ |
781,121 |
|
|
$ |
398,046 |
|
4. OIL AND GAS
PROPERTIES
The
following is a summary of oil and gas properties at December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Oil
and gas properties, proven reserves
|
|
$ |
84,200,160
|
|
|
$ |
47,594,281
|
|
Intangible
mining rights
|
|
|
13,445
|
|
|
|
13,445
|
|
Less:
accumulated depreciation
|
|
|
(14,019,753
|
) |
|
|
(7,262,718
|
) |
Oil
and gas properties, net
|
|
$ |
70,193,852
|
|
|
$ |
40,345,008
|
|
Depreciation
expense for the years ended December 31, 2008 and 2007 was $6,172,422 and
$3,562,265 respectively.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
5. FIXED
ASSETS
The
following is a summary of fixed assets at December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Buildings
|
|
$ |
1,075,061 |
|
|
$ |
308,067 |
|
Furniture,
fixtures and equipment
|
|
|
224,180 |
|
|
|
197,171 |
|
Motor
vehicles
|
|
|
1,064,636 |
|
|
|
798,613 |
|
|
|
|
2,363,877 |
|
|
|
1,303,851 |
|
Less:
accumulated depreciation
|
|
|
(679,500 |
) |
|
|
(418,377 |
) |
Fixed
assets, net
|
|
$ |
1,684,377 |
|
|
$ |
885,474 |
|
Depreciation
expense for the years ended December 31, 2008 and 2007 was $229,434 and $187,766
respectively.
6.
LAND USE
RIGHTS
The
following is a summary of land use rights at December 31:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Land
use rights
|
|
$ |
71,418 |
|
|
$ |
66,927 |
|
Less:
accumulated amortization
|
|
|
(35,220 |
) |
|
|
(21,851 |
) |
Land
use rights, net
|
|
$ |
36,198 |
|
|
$ |
45,076 |
|
The term
of the land use rights are 30 years from the date of grant and expire in
2023. The land use rights are amortized by the Company over 6 years
from the date of acquisition of the rights in 2005. The amortization policy of
these rights is to conform with the tax benefit scheme enjoyed by the Company to
enterprises in the Northeast Region of the PRC. The amortization expense for the
years ended December 31, 2008 and 2007 was $11,718 and $10,711
respectively.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
7.
SECURED DEBENTURE
The following is a summary of secured
debenture at December 31:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
8%
Secured Debenture, net of unamortized discount of
|
|
|
|
|
|
|
$6,166,174
as of December 31, 2008 at 8% interest
|
|
|
|
|
|
|
per
annum, secured by 66% of the Company's equity interest
|
|
|
|
|
|
|
in
Song Yuan Technical and certain properties of the Company
|
|
|
|
|
|
|
and
6,732,000 shares of common stock of the Company
|
|
|
|
|
|
|
owned
by a stockholder, due on February 27, 2012
|
|
$ |
8,083,826
|
|
|
$ |
-
|
|
|
|
|
8,083,826
|
|
|
|
-
|
|
Less:
current maturities
|
|
|
(1,489,126
|
) |
|
|
-
|
|
Long-term
portion
|
|
$ |
6,594,700
|
|
|
$ |
-
|
|
On
February 28, 2008, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with Lotusbox Investments Limited (the
"Investor"). Pursuant to the Purchase Agreement, the
Company issued to the Investor an 8% Secured Debenture due 2012 (the
"Debenture") in the aggregate principal amount of $15,000,000, and issued to the
Investor five-year warrants exercisable for up to (i) 1,200,000 shares of the
Company's common stock at an initial exercise price equal to $0.01 per share
("Class A Warrants"), (ii) 1,500,000 shares of the Company's common stock at an
initial exercise price equal to $3.20 per share ("Class B Warrants") and (iii)
2,100,000 shares of the Company's common stock at an initial exercise price
equal to $3.45 (“Class C Warrants”), with all warrant exercise prices being
subject to certain adjustments. The Class B Warrants are subject to
certain call rights by the Company. The Company also granted the Investor an
option to purchase up to 24% of the registered capital of Song Yuan Technical at
a fair market value which option shall vest immediately on the date following
the occurrence of an event of default.
The
Company accounts for warrants as liability instruments in accordance with
paragraph 8 of EITF 00-19, Accounting for Derivative Financial Instruments
Indexed to, and potentially settled in, a Company’s Own Stock. The beneficial
conversion feature associated with the secured debenture is measured at its
intrinsic value after allocation between the warrant and the debenture and
before transaction costs in accordance with EITF 00-27, Application of Issue
98-5 to Certain Convertible Instruments. Debt proceeds are first allocated to
the warrant (as it is mark-to-market, fair-value liability instrument) and the
remaining proceeds are allocated to the debt. The debenture will be accreted to
liquidation value over two years, using the effective interest rate
method.
The
Company has recorded a cost of $7,788,852 for the beneficial conversion feature
granted to the Investor. The beneficial conversion feature is reflected as a
discount on the debenture and is being amortized as an interest expense over the
term of the debenture.
Interest
expense and discount amortized on the debenture in 2008 were $991,592 and
$1,622,678 respectively.
8.
OTHER PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities at December 31, 2008 and 2007 consist of the
following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Other
payables
|
|
$
|
494,553 |
|
|
$
|
662,941 |
|
Accrued
professional fees
|
|
|
117,335 |
|
|
|
154,869 |
|
Other
accrued liabilities
|
|
|
130,376 |
|
|
|
203,170 |
|
|
|
$
|
742,264 |
|
|
$
|
1,020,980 |
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
9. NOTE
PAYABLE
Note
payable at December 31, 2008 and 2007 consist of the following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Note
payable to a bank, interest rate of 11.16%
|
|
|
|
|
|
|
per
annum, secured by a property owned
|
|
|
|
|
|
|
by
a stockholder, due July 2008
|
|
$ |
-
|
|
|
$ |
273,444
|
|
|
|
|
-
|
|
|
|
273,444
|
|
Less:
current maturities
|
|
|
-
|
|
|
|
273,444
|
|
Long-term
portion
|
|
$ |
-
|
|
|
$ |
-
|
|
Interest
expense paid for the years ended December 31, 2008 and 2007 was $11,548 and
$81,434 respectively.
10. NET INCOME PER
SHARE
The
following is a reconciliation of the numerators and denominators used in
computing basic and diluted net income per share (in thousands, except per share
amounts):
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
Net
income used in computing basis net income per share
|
|
$ |
19,582
|
|
|
$ |
5,133 |
|
Net
income used in computing diluted net income per share
|
|
$ |
19,582
|
|
|
$ |
5,133 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares
used in computation of basic net income per share
|
|
|
|
|
|
|
|
|
(weighted
average common stock outstanding)
|
|
|
19,805
|
|
|
|
24,128 |
|
Dilutive
potential common stock:
|
|
|
|
|
|
|
|
|
Options
and warrants
|
|
|
120
|
|
|
|
- |
|
Shares
used in computation of diluted net income per share
|
|
|
19,925
|
|
|
|
24,128 |
|
Basic
net income per share
|
|
$ |
0.99
|
|
|
$ |
0.21 |
|
Diluted
net income per share
|
|
$ |
0.98
|
|
|
$ |
0.21 |
|
In 2008,
options to purchase 410,000 shares of common stock and warrants to purchase
3,960,000 shares of common stock with exercise prices greater than the average
fair market value of the Company’s stock of $2.92 were not included in the
calculation because the effect is anti-dilutive.
11. COMMITMENTS
AND CONTINGENCIES
(A) Employee
benefits
The full
time employees of LongDe and Yu Qiao are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and pension benefits
through a Chinese government mandated multi-employer defined contribution plan.
The Company is required to accrue for those benefits based on certain
percentages of the employees’ salaries and make contributions to the plans out
of the amounts accrued for medical and pension benefits. The total provision and
contributions made for such employee benefits for the years ended December 31,
2008 and 2007 was $15,093 and $92,835 respectively. The Chinese government is
responsible for the medical benefits and the pension liability to be paid to
these employees.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
11.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
The
Company leases office spaces from a stockholder, land and office spaces from
third parties under four operating leases which expire on September 20, 2023,
June 30, 2015, January 20, 2011 and September 14, 2009 at annual rental of $182,
$14,006, $18,966 and $37,200 respectively.
As of
December 31, 2008, the Company has outstanding commitments with respect to the
above operating leases, which are due as follows:
2009
|
|
$ |
57,924
|
|
2010
|
|
|
33,154
|
|
2011
|
|
|
15,769
|
|
2012
|
|
|
14,188
|
|
Thereafter
|
|
|
36,972
|
|
|
|
$ |
158,006
|
|
As of
December 31, 2008, the Company had capital commitments totaling $783,000 with a
contractor to complete the drilling of 7 oil wells under
construction.
12.
STOCK-BASED COMPENSATION
During
2008, the Company granted to its employees, stock options qualified under the
Company’s 2006 Stock Option/Stock Issuance Plan to purchase Common Stock.
As of December 31, 2008, stock options granted under the Company’s
2006 Stock Option/Stock Issuance Plan to purchase 410,000 shares of
its Common Stock (the “Options”) at an exercise price from $4.05 to $4.50
per share were outstanding. 25% of the 100,000 stock options shall vest upon
grant and 25% shall vest every three months thereafter, these stock options
granted shall expire one year after the grant date. 50% of the 310,000 stock
options shall vest upon grant and 50% shall vest on the first anniversary of the
grant date.
The fair
value of stock options granted was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Expected
|
Expected
|
Dividend
|
Risk Free
|
Grant Date
|
Life
|
Volatility
|
Yield
|
Interest Rate
|
Fair Value
|
1
to 2 years
|
131
to 173%
|
0%
|
2.15%
to 2.66%
|
$4.05
to $4.50
|
-
|
Dividend
Yield: The expected dividend yield is zero. The Company has not
paid a dividend and does not anticipate paying dividends in the
foreseeable future.
|
-
|
Risk
Free Rate: Risk-free interest rate of 2.15% to 2.66% was
used. The risk-free interest rate was based on U.S. Treasury
yields with a remaining term that corresponded to the expected term of the
option calculated on the granted
date.
|
-
|
Expected
Life: Because the Company has no historical share option exercise
experience to estimate future exercise patterns, the expected life was
determined using the simplified method as these awards meet the definition
of "plain-vanilla" options under the rules prescribed by Staff Accounting
Bulletin No. 107.
|
Stock
compensation expense is recognized based on awards expected to
vest. There was no estimated forfeiture as the Company has a short
history of issuing options. SFAS No. 123R requires forfeiture to be
estimated at the time of grant and revised in subsequent periods, if necessary,
if actual forfeitures differ from those estimates.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
12.
STOCK-BASED COMPENSATION (CONTINUED)
In 2008
410,000 stock options with a fair value of approximately $1,150,031 were issued
to staff, of which the Company recognized $336,978 as staff compensation
expenses included in selling, general and administrative expenses.
As of
December 31, 2008, the total compensation cost related to stock options not yet
recognized was $813,053 and these will be recognized over the next 2
years.
The
following is a summary of the stock options activity:
|
Number
of
Options
Outstanding
|
|
Weighted-
Average
Exercise
Price
|
Balance,
December 31, 2007
|
-
|
|
-
|
Granted
|
410,000
|
|
$4.43
|
Forfeited
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
Balance,
December 31, 2008
|
410,000
|
|
$4.43
|
The
following is a summary of the status of options outstanding at December 31,
2008:
Outstanding
Options
|
|
Exercisable
Options
|
Exercise
Price
|
|
Number
|
|
Average
Remaining
Contractual
Life
|
|
Average
Exercise
Price
|
|
Number
|
|
Weighted
Average
Exercise
Price
|
$4.05
|
|
60,000
|
|
0.40
year
|
|
$4.05
|
|
45,000
|
|
$4.05
|
$4.50
|
|
310,000
|
|
1.55
year
|
|
$4.50
|
|
155,000
|
|
$4.50
|
$4.50
|
|
40,000
|
|
0.55
year
|
|
$4.50
|
|
20,000
|
|
$4.50
|
13. STOCKHOLDERS’
EQUITY
Pursuant
to a Consulting Agreement (“the Agreement”), on January 1, 2008 the Company
issued to a consultant for Investor Relations Services a warrant to purchase
50,000 shares of the common stock of the Company at an exercise price of $2.65
per share. The Company’s stock was trading at $2.36 at the time of issuance of
the warrants. The warrant shall be exercisable for a term of one year from the
effective date of the Agreement. The warrant has been determined to have a
market value of $54,112 using the Black-Scholes option pricing model with market
value per common stock of $1.08, an exercise period of 1 year and a volatility
of 130%. The Company recognized $54,112 as consulting expenses in 2008. This
warrant expired on December 31, 2008.
On
February 28, 2008, the Company issued to a consultant five-year warrants
exercisable for up to (i) 120,000 shares of the Company's common stock at an
initial exercise price equal to $0.01 per share ("Class A Warrants"), (ii)
150,000 shares of the Company's common stock at an initial exercise price equal
to $3.20 per share ("Class B Warrants") and (iii) 210,000 shares of the
Company's common stock at an initial exercise price equal to $3.45 (“Class C
Warrants”), with all warrant exercise prices being subject to certain
adjustments. The Class B Warrants are subject to certain call rights.
The Company’s stock was trading at $2.14 at the time of issuance of warrants.
The warrants have been determined to have a total market value of $778,885 using
the Black-Scholes option pricing model with market value per common stock of
$2.13, $1.47 and $1.44 for Class A Warrants, Class B Warrants and Class C
Warrants respectively, an exercise period of 2 years and a volatility of 158%.
The Company recognized $162,268 as consulting expenses in 2008.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
13. STOCKHOLDERS’
EQUITY (CONTINUED)
On July
18, 2008, the Company issued 360,000 shares of common stock to two
executive officers and three engineers as bonuses for a period of two years. The
stock was valued at the closing price on the date of grant of $4.50 per share,
yielding an aggregate value of $1,620,000. The Company recognized expense of
$371,250 in 2008 and recorded deferred stock compensation of $1,248,750 as of
December 31, 2008 for these services.
On August
26, 2008, the Company issued Class A Warrants to the Investor to purchase up to
1,200,000 shares of common stock at an exercise price of $0.01 per
share.
(C) Appropriated
retained earnings
The
Company’s PRC subsidiaries are required to make appropriations to reserve funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on the after-tax net income determined in
accordance with the laws and regulations of the PRC. Prior to January
1, 2006 the appropriation to the statutory surplus reserve should be at least
10% of the after tax net income determined in accordance with the laws and
regulations of the PRC until the reserve is equal to 50% of the entities’
registered capital. Appropriations to the statutory public welfare
fund are at 5% to 10% of the after tax net income determined by the Board of
Directors. Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 percent of net income after tax
per annum, such contributions not to exceed 50 percent of the respective
companies’ registered capital.
The
statutory reserve funds are restricted for use to set off against prior period
losses, expansion of production and operation or for the increase in the
registered capital of the Company. The statutory public welfare fund is
restricted for use in capital expenditures for the collective welfare of
employees. These reserves are not transferable to the Company in the form of
cash dividends, loans or advances. These reserves are therefore not available
for distribution except in liquidation.
During
2008 and 2007, the Company appropriated $456,736 and $628,629 respectively to
the reserves funds based on its net income in accordance with the laws and
regulations of the PRC.
14. RELATED
PARTY TRANSACTIONS
a)
|
As
of December 31, 2008 and 2007, the Company owed a related party $51,672
and $3,118,085 respectively which is repayable in December 2009. Imputed
interest expense is computed at 5% and 7% per annum on the amount due for
the years ended December 31, 2008 and 2007
respectively.
|
b)
|
As
of December 31, 2008 and 2007, the Company owed a related party $14,590
and $13,672 respectively which is repayable on demand. Imputed interest
expense is computed at 5% and 7% per annum on the amount due for the years
ended December 31, 2008 and 2007
respectively.
|
c)
|
As
of December 31, 2007, the Company owed a related party $14,364 which is
repayable on demand. Imputed interest expense is computed at 7% per annum
on the amount due.
|
d)
|
As
of December 31, 2008 and 2007, the Company owed a stockholder $738 and
$123,105 respectively which is repayable on demand. Imputed interest
expense is computed at 5% and 7% per annum on the amount due for the years
ended December 31, 2008 and 2007
respectively.
|
e)
|
Total
imputed interest expenses recorded as additional paid-in capital amounted
to $50,587 and $200,165 for the years ended December 31, 2008 and 2007
respectively.
|
f)
|
The
Company paid a stockholder $13,789 and $12,603 for leased office spaces
for the years ended December 31, 2008 and 2007
respectively.
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
15. INCOME
TAX
It is
management's intention to reinvest all the income attributable to the Company
earned by its operations outside of the US. Accordingly, no US corporate income
taxes are provided for in these financial statements.
The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is
domiciled.
North
East Petroleum was incorporated in the United States and has incurred net
operating losses as for income tax purposes for 2008 and 2007.
North
East Petroleum has net operating losses carry forwards for income tax purposes
amounting to approximately $6,448,000 as of December 31, 2008. These
tax losses which may be available to reduce future years’ taxable income will
expire, if not utilized, commencing in 2024. Management believes that the
realization of the benefits from these tax losses appears uncertain due to the
Company’s operating history and continuing losses. Accordingly, a full deferred
tax asset valuation allowance has been provided and no deferred tax asset
benefit has been recorded. The valuation allowances at December 31, 2008 and
December 31, 2007 were $2,192,473 and $660,286 respectively. The net change in
the valuation allowance was an increase of $1,532,187.
Hong
Xiang Petroleum Group was incorporated in the British Virgin Islands (the "BVI")
and income earned is not subject to income tax.
Song Yuan
Technical, Yu Qiao and LongDe were incorporated in the PRC and are subject to
PRC income tax which is computed according to the relevant laws and regulations
in the PRC. The applicable tax rate has been 25% and 33% for the years ended
December 31, 2008 and 2007 respectively and no tax benefit is expected from the
tax credits in the future.
The
income tax expense for 2008 and 2007 are summarized as follows:
|
|
Year
ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
8,921,242 |
|
|
$ |
2,784,009 |
|
Deferred
|
|
|
180,025 |
|
|
|
313,640 |
|
|
|
$ |
9,101,267 |
|
|
$ |
3,097,649 |
|
The
reconciliation of income taxes computed at the statutory income tax rates to
total income taxes for the years ended December 31, 2008 and 2007 is as
follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Federal
tax rate on net income
|
|
$ |
10,741,617 |
|
|
$ |
3,043,402 |
|
Valuation
allowance
|
|
|
|
|
|
|
|
|
North
East Petroleum
|
|
|
1,532,187 |
|
|
|
106,471 |
|
Hong
Xiang Petroleum Group
|
|
|
- |
|
|
|
6,128 |
|
Song
Yuan Technical
|
|
|
103,922 |
|
|
|
35,500 |
|
Foreign
tax differential
|
|
|
(3,276,459 |
)
|
|
|
(93,852 |
)
|
Actual
tax expense
|
|
$ |
9,101,267 |
|
|
$ |
3,097,649 |
|
Deferred
income tax liabilities for 2008 and 2007 reflect the effect of temporary
differences between amounts of assets, liabilities, and equity for financial
reporting purposes and the bases of such assets, liabilities, and equity as
measured by tax laws.
Deferred
income tax liabilities mainly result from temporary differences for revenues
earned but not yet taxable under the PRC tax regulations. All the deferred tax
liabilities are classified as long-term liabilities as the Company will not be
demanded for payment within the next twelve months.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
16. CONCENTRATIONS AND
RISKS
During
2008, 98% and 2% of the Company's assets were located in the PRC and the United
States respectively, and during 2007, 100% of the Company’s assets were located
in the PRC.
During
2008 and 2007, 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.
17. SUPPLEMENTAL OIL AND GAS DISCLOSURES
(UNAUDITED)
The
accompanying table presents information concerning the Company’s crude oil
producing activities as required by SFAS No. 69, Disclosures about Oil and Gas
Producing Activities.
A.
|
Capitalized
costs relating to oil and gas producing activities are as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Proved
crude oil properties
|
|
$ |
84,200,160
|
|
|
$ |
47,594,281
|
|
Intangible
mining right
|
|
|
13,445
|
|
|
|
13,445
|
|
Accumulated
depreciation, depletion and amortization
|
|
|
(14,019,753
|
) |
|
|
(7,262,718
|
) |
Net
capitalized costs
|
|
$ |
70,193,852
|
|
|
$ |
40,345,008
|
|
B.
|
Cost
incurred in oil and gas property acquisitions, exploration and development
activities are as follows:
|
|
|
2008
|
|
|
2007
|
|
Property
acquisition costs (net of costs of properties sold)
|
|
|
|
|
|
|
Proved
reserves
|
|
$ |
19,001,720
|
|
|
$ |
12,518,210
|
|
|
|
|
|
|
|
|
|
|
Property
development costs
|
|
$ |
65,198,440
|
|
|
$ |
35,076,071
|
|
C.
|
The
results of operations for oil and gas producing activities are as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
58,572,250 |
|
|
$ |
19,482,069 |
|
Production
costs
|
|
|
(3,847,775 |
) |
|
|
(2,872,990 |
) |
Depreciation,
depletion and amortization
|
|
|
(6,413,574 |
) |
|
|
(3,760,742 |
) |
Government
oil surcharge
|
|
|
(11,105,325 |
) |
|
|
(2,857,376 |
) |
General
and administrative expenses
|
|
|
(1,959,602 |
) |
|
|
(880,161 |
) |
Income
tax expense
|
|
|
(9,101,267 |
) |
|
|
(3,097,649 |
) |
Results
of operations from oil and gas producing activities
|
|
|
|
|
|
|
|
|
(excluding
corporate overhead and financing costs)
|
|
$ |
26,144,707 |
|
|
$ |
6,013,151 |
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
17. SUPPLEMENTAL OIL AND GAS DISCLOSURES
(UNAUDITED) (CONTINUED)
D.
|
Estimated
quantities of proved oil and gas
reserves
|
The
following schedule estimates proved crude oil reserves attributable to the
Company. Proved reserves are estimated quantities of oil which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those which are expected to be
recovered through existing wells with existing equipment and operating methods.
Reserves are stated in barrels of oil (Bbls). Geological and engineering
estimates of proved oil and natural gas reserves at one point in time are highly
interpretive, inherently imprecise and subject to ongoing revisions that may be
substantial in amount. Although every reasonable effort is made to ensure that
the reserve estimates reported represent the most accurate assessments possible,
these estimates are by their nature generally less precise than other estimates
presented in connection with financial statement disclosures.
|
|
Bbls
|
|
Proved
oil reserves
|
|
|
|
Balance
at January 1, 2007
|
|
|
2,242,194 |
|
Discoveries
and extensions
|
|
|
- |
|
Revisions
of previous estimates
|
|
|
494,146 |
|
Production
|
|
|
(267,516 |
) |
Balance
at December 31, 2007
|
|
|
2,468,824 |
|
Discoveries
and extensions
|
|
|
- |
|
Revisions
of previous estimates
|
|
|
3,630,826 |
|
Production
|
|
|
(645,856 |
) |
Balance
at December 31, 2008
|
|
|
5,453,794 |
|
Proved
developed producing
|
|
|
|
|
reserves
at December 31, 2008
|
|
|
3,211,333 |
|
Proved
developed producing
|
|
|
|
|
reserves
at December 31, 2007
|
|
|
1,369,401 |
|
The
following schedule presents the standardized measure of estimated discounted
future net cash flows from the Company’s proved developed reserves for the years
ended December 31, 2008 and 2007. Estimated future cash flows were based on
independent reserves evaluation from Ralph E. Davis Associates, Inc. for the
years ended December 31, 2008 and 2007. Because the standardized measure of
future net cash flows was prepared using the prevailing economic conditions
existing at December 31, 2008 and 2007, it should be emphasized that such
conditions continually change. Accordingly, such information should not serve as
a basis in making any judgment on the potential value of the Company’s
recoverable reserves or in estimating future results of operations.
Estimated
future net cash flows represent an estimate of future net revenues from the
production of proved reserves using current sales prices, along with estimates
of the operating costs, production taxes and future development and abandonment
costs (less salvage value) necessary to produce such reserves. The average
prices per barrel used at December 31, 2008 and 2007 for 4 oilfields were $44.82
and $95.95 respectively. No deduction has been made for depreciation, depletion
or any indirect costs such as general corporate overhead or interest
expense.
Operating
costs and production taxes are estimated based on current costs with respect to
producing gas properties. Future development costs are based on the best
estimate of such costs assuming current economic and operating
conditions.
Income
tax expense is computed based on applying the appropriate statutory tax rate to
the excess of future cash inflows less future production and development costs
over the current tax basis of the properties involved, less applicable carry
forwards, for both regular and alternative minimum tax.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND
2007
17. SUPPLEMENTAL OIL AND GAS DISCLOSURES
(UNAUDITED) (CONTINUED)
D.
|
Estimated
quantities of proved oil and gas reserves
(Continued)
|
The
future net revenue information assumes no escalation of costs or prices, except
for gas sales made under terms of contracts which include fixed and determinable
escalation. Future costs and prices could significantly vary from current
amounts and, accordingly, revisions in the future could be
significant.
Standardized
measures of discounted future net cash flows relating to proved oil and gas
reserves at December 31, 2008 and 2007 is as follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Future
cash inflows
|
|
$ |
244,438,994 |
|
|
$ |
235,187,861 |
|
Future
production costs and taxes
|
|
|
(138,362,100 |
) |
|
|
(68,891,575 |
) |
Future
development costs
|
|
|
(9,015,252 |
) |
|
|
(28,713,919 |
) |
Future
income tax expense
|
|
|
(7,867,952 |
) |
|
|
(33,801,457 |
) |
|
|
|
|
|
|
|
|
|
Future
net cash flows
|
|
|
89,193,690 |
|
|
|
103,780,910 |
|
Discount
at 10% for timing of cash flows
|
|
|
(53,347,261 |
) |
|
|
(64,469,078 |
) |
Standardized
measure of discounted future net cash
|
|
|
|
|
|
|
|
|
related
to proved reserves
|
|
$ |
35,846,429 |
|
|
$ |
39,311,832 |
|
Of the
Company’s total proved reserves as of December 31, 2008 and 2007, 59% and 55%
respectively were classified as proved developed producing. All of the Company’s
reserves are located in the PRC.
The
following table sets forth the changes in the standardized measure of discounted
future net cash flows from proved reserves for December 31, 2008 and
2007.
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
39,311,832 |
|
|
$ |
36,339,206 |
|
Purchase
of minerals in place
|
|
|
32,893,880 |
|
|
|
12,148,545 |
|
Sales
and transfers of oil and gas produced, net
|
|
|
|
|
|
|
|
|
of
production costs
|
|
|
(45,670,538 |
) |
|
|
(13,522,379 |
) |
Changes
in prices and production costs
|
|
|
(364,474,506 |
) |
|
|
23,455,903 |
|
Revision
of quantity estimates
|
|
|
349,925,776 |
|
|
|
36,712,367 |
|
Changes
in estimated future development
|
|
|
|
|
|
|
|
|
and
acquisition costs
|
|
|
(13,195,213 |
) |
|
|
(32,275,264 |
) |
Net
changes in income taxes
|
|
|
25,933,381 |
|
|
|
(8,670,317 |
) |
Accretion
of discount
|
|
|
11,121,817 |
|
|
|
(14,876,229 |
) |
Standardized
measure, end of year
|
|
$ |
35,846,429 |
|
|
$ |
39,311,832 |
|
F-23