s1119210q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009 |
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to |
Commission
file number 000-49846
CHINA
NORTH EAST PETROLEUM
HOLDINGS
LIMITED
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
|
87-0638750
|
|
|
(State
of other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer identification No.)
|
|
445 Park
Avenue, New York, New York 10022
(Address
of principal executive offices)
(212)
307-3568
(Registrant's
telephone number, including area code)
Indicated
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerate filer, an accelerate
filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
|
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
x
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Number of
shares of common stock outstanding as of November 12, 2009:
25,852,181
INDEX
|
|
|
Page
No.
|
PART
I FINANCIAL INFORMATION
|
|
Item 1.
|
Financial
Statements
|
2 |
|
|
|
|
Condensed
Consolidated Balance Sheets – September 30, 2009 (Unaudited) and December
31, 2008 (Audited)
|
2 |
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income
-
three
and nine months ended September 30, 2009 and 2008 (Unaudited)
|
3 |
|
|
|
|
Condensed
Consolidated Statements of Cash Flows – nine months ended September
30, 2009 and 2008 (Unaudited)
|
4 |
|
|
|
|
Notes
to Condensed Consolidated Financial Statements as of September 30, 2009
(Unaudited)
|
5 |
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition And Results
of Operations
|
22 |
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
34 |
|
|
|
Item
4T.
|
Controls
and Procedures
|
34 |
|
|
PART
II OTHER INFORMATION
|
|
|
|
Item 1.
|
Legal
Proceedings
|
35 |
|
|
|
Item
1A.
|
Risk
Factors
|
35 |
|
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
35 |
|
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
35 |
|
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
35 |
|
|
|
Item 5.
|
Other
Information
|
35 |
|
|
|
Item 6.
|
Exhibits
|
35 |
|
|
|
SIGNATURES
|
36 |
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
On one or
more occasions, we may make forward-looking statements in this Quarterly Report
on Form 10-Q regarding our assumptions, projections, expectations, targets,
intentions or beliefs about future events. Words or phrases such as
“anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,”
“intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,”
“will continue” or similar expressions identify forward-looking statements.
These forward-looking statements are only our predictions and involve numerous
assumptions, risks and uncertainties, including, but not limited to, those
listed below and those business risks and factors described elsewhere in this
report and our other Securities and Exchange Commission filings.
Forward-looking
statements involve risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed. We caution that while we
make such statements in good faith and believe such statements are based on
reasonable assumptions, including without limitation, management’s examination
of historical operating trends, data contained in records and other data
available from third parties, we cannot assure you that our projections will be
achieved. Factors that may cause such differences include but are not limited
to:
|
●
|
Our
expectation of continued growth in the demand for our
oil;
|
|
●
|
Our
expectation that we will have adequate liquidity from cash flows from
operations;
|
|
●
|
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;
and
|
|
♦
|
Decreases
in purchases of oil by our customer will adversely affect our
revenues.
|
We have
attempted to identify, in context, certain of the factors that we believe may
cause actual future experience and results to differ materially from our current
expectation regarding the relevant matter or subject area. In addition to the
items specifically discussed above, our business and results of operations are
subject to the uncertainties described under the caption “Risk Factors” which is
a part of the disclosure included in Item 2 of this Report entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
From time
to time, oral or written forward-looking statements are also included in our
reports on Forms 10-K, 10-Q and 8-K, Proxy Statements on Schedule 14A, press
releases, analyst and investor conference calls, and other communications
released to the public. Although we believe that at the time made, the
expectations reflected in all of these forward-looking statements are and will
be reasonable, any or all of the forward-looking statements in this quarterly
report on Form 10-Q, our reports on Forms 10-K and 8-K, our Proxy Statements on
Schedule 14A and any other public statements that are made by us may prove to be
incorrect. This may occur as a result of inaccurate assumptions or as a
consequence of known or unknown risks and uncertainties. Many factors discussed
in this Quarterly Report on Form 10-Q, certain of which are beyond our control,
will be important in determining our future performance. Consequently, actual
results may differ materially from those that might be anticipated from
forward-looking statements. In light of these and other uncertainties, you
should not regard the inclusion of a forward-looking statement in this Quarterly
Report on Form 10-Q or other public communications that we might make as a
representation by us that our plans and objectives will be achieved, and you
should not place undue reliance on such forward-looking statements.
We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent annual and periodic reports filed with the SEC on
Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.
Unless
the context requires otherwise, references to “we,” “us,” “our,” the “Company”
and “NEP” refer specifically to China North East Petroleum Holdings Limited and
its subsidiaries.
PART
I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND SUBSIDIARIES
("NEP")
|
|
Condensed
Consolidated Balance Sheets
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
33,158,348
|
|
|
$
|
13,239,213
|
|
Accounts
receivable, net
|
|
|
6,509,440
|
|
|
|
4,230,080
|
|
Prepaid
expenses and other current assets
|
|
|
3,987,771
|
|
|
|
781,121
|
|
Value
added tax recoverable
|
|
|
-
|
|
|
|
311,240
|
|
Total
Current Assets
|
|
|
43,655,559
|
|
|
|
18,561,654
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Oil
and gas properties, net
|
|
|
65,847,281
|
|
|
|
70,193,852
|
|
Fixed
assets, net
|
|
|
13,820,768
|
|
|
|
1,684,377
|
|
Oil
and gas properties under construction
|
|
|
-
|
|
|
|
714,629
|
|
Total
Property and Equipment
|
|
|
79,668,049
|
|
|
|
72,592,858
|
|
|
|
|
|
|
|
|
|
|
LAND
USE RIGHTS, NET
|
|
|
641,204
|
|
|
|
36,198
|
|
GOODWILL
|
|
|
1,645,589
|
|
|
|
- |
|
DEFERRED
FINANCING COSTS, NET
|
|
|
716,680
|
|
|
|
939,098
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
126,327,081
|
|
|
$
|
92,129,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,178,864
|
|
|
$
|
10,985,894
|
|
Current
portion of secured debenture, net of discount
|
|
|
3,971,112
|
|
|
|
1,489,126
|
|
Other
payables and accrued liabilities
|
|
|
5,677,494
|
|
|
|
742,264
|
|
Due
to related parties
|
|
|
14,625
|
|
|
|
66,262
|
|
Income
tax and other taxes payable
|
|
|
5,598,835
|
|
|
|
3,710,870
|
|
Due
to a stockholder
|
|
|
5,602,176
|
|
|
|
738
|
|
Total
Current Liabilities
|
|
|
29,043,106
|
|
|
|
16,995,154
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
9,347,865
|
|
|
|
13,944,903
|
|
Secured
debenture, net of discount
|
|
|
2,815,879
|
|
|
|
6,594,700
|
|
Deferred
tax payable
|
|
|
64,465
|
|
|
|
762,405
|
|
Total
Long-term Liabilities
|
|
|
12,228,209
|
|
|
|
21,302,008
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
41,271,315
|
|
|
|
38,297,162
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
NEP
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Common
stock ($0.001 par value, 150,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
25,119,619
shares issued and outstanding as of
|
|
|
|
|
|
|
|
|
September 30,
2009; 20,784,080 shares issued and
|
|
|
|
|
|
|
|
|
outstanding
as of December 31, 2008)
|
|
|
25,120
|
|
|
|
20,784
|
|
Additional
paid-in capital
|
|
|
39,934,062
|
|
|
|
21,384,816
|
|
Deferred
stock compensation
|
|
|
(641,250
|
)
|
|
|
(1,248,750
|
)
|
Retained
earnings
|
|
|
|
|
|
|
|
|
Unappropriated
|
|
|
33,677,718
|
|
|
|
24,536,079
|
|
Appropriated
|
|
|
1,372,999
|
|
|
|
1,372,999
|
|
Accumulated
other comprehensive income
|
|
|
3,365,741
|
|
|
|
3,253,068
|
|
Total
NEP Stockholders' Equity
|
|
|
77,734,390
|
|
|
|
49,318,996
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
7,321,376
|
|
|
|
4,513,650
|
|
TOTAL
EQUITY
|
|
|
85,055,766
|
|
|
|
53,832,646
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
126,327,081
|
|
|
$
|
92,129,808
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Operations and Comprehensive
Income
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Three
months ended September 30
|
|
|
Nine
months ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
NET
SALES
|
|
$
|
14,403,921
|
|
|
$
|
19,060,007
|
|
|
$
|
34,654,549
|
|
|
$
|
44,051,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
costs
|
|
|
1,103,163
|
|
|
|
895,155
|
|
|
|
2,769,762
|
|
|
|
2,390,432
|
|
Depreciation
of oil and gas properties
|
|
|
2,824,981
|
|
|
|
3,774,327
|
|
|
|
8,283,230
|
|
|
|
8,155,321
|
|
Amortization
of land use rights
|
|
|
2,982
|
|
|
|
2,975
|
|
|
|
8,943
|
|
|
|
8,743
|
|
Government
oil surcharge
|
|
|
1,655,000
|
|
|
|
4,480,955
|
|
|
|
2,273,167
|
|
|
|
9,865,655
|
|
Total
Cost of Sales
|
|
|
5,586,126
|
|
|
|
9,153,412
|
|
|
|
13,335,102
|
|
|
|
20,420,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
8,817,795
|
|
|
|
9,906,595
|
|
|
|
21,319,447
|
|
|
|
23,631,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
749,204
|
|
|
|
793,479
|
|
|
|
1,932,541
|
|
|
|
1,339,404
|
|
Professional
fees
|
|
|
98,261
|
|
|
|
42,850
|
|
|
|
323,309
|
|
|
|
140,180
|
|
Consulting
fees
|
|
|
142,332
|
|
|
|
91,926
|
|
|
|
298,627
|
|
|
|
319,764
|
|
Depreciation
of fixed assets
|
|
|
69,947
|
|
|
|
50,445
|
|
|
|
209,748
|
|
|
|
160,930
|
|
Total
Operating Expenses
|
|
|
1,059,744
|
|
|
|
978,700
|
|
|
|
2,764,225
|
|
|
|
1,960,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
7,758,051
|
|
|
|
8,927,895
|
|
|
|
18,555,222
|
|
|
|
21,671,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
7,134
|
|
|
|
809
|
|
|
|
7,134
|
|
|
|
66,651
|
|
Other
expense
|
|
|
(20,780
|
)
|
|
|
(2,000
|
)
|
|
|
(22,581
|
)
|
|
|
(107,601
|
)
|
Interest
expense
|
|
|
(236,931
|
)
|
|
|
(296,761
|
)
|
|
|
(777,595
|
)
|
|
|
(721,805
|
)
|
Amortization
of deferred financing cost
|
|
|
(74,139
|
)
|
|
|
(74,140
|
)
|
|
|
(222,418
|
)
|
|
|
(172,992
|
)
|
Amortization
of discount on debenture
|
|
|
(513,415
|
)
|
|
|
(486,803
|
)
|
|
|
(1,515,473
|
)
|
|
|
(1,135,874
|
)
|
Imputed
interest expense
|
|
|
(70,210
|
)
|
|
|
(16,794
|
)
|
|
|
(120,127
|
)
|
|
|
(49,535
|
)
|
Interest
income
|
|
|
25,141
|
|
|
|
4,238
|
|
|
|
44,905
|
|
|
|
34,204
|
|
Total
Other Expense, net
|
|
|
(883,200
|
)
|
|
|
(871,451
|
)
|
|
|
(2,606,155
|
)
|
|
|
(2,086,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME BEFORE INCOME TAXES
|
|
|
6,874,851
|
|
|
|
8,056,444
|
|
|
|
15,949,067
|
|
|
|
19,584,138
|
|
Income
tax expense
|
|
|
(2,186,156
|
)
|
|
|
(2,390,961
|
)
|
|
|
(5,273,823
|
)
|
|
|
(5,695,498
|
)
|
NET
INCOME
|
|
|
4,688,695
|
|
|
|
5,665,483
|
|
|
|
10,675,244
|
|
|
|
13,888,640
|
|
Less:
net income attributable to noncontrolling interests
|
|
|
(635,986
|
)
|
|
|
(711,301
|
)
|
|
|
(1,533,605
|
)
|
|
|
(1,687,394
|
)
|
NET
INCOME ATTRIBUTABLE TO NEP COMMON STOCKHOLDERS
|
|
|
4,052,709
|
|
|
|
4,954,182
|
|
|
|
9,141,639
|
|
|
|
12,201,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income
|
|
|
41,798
|
|
|
|
152,651
|
|
|
|
125,193
|
|
|
|
2,020,632
|
|
Less:
foreign currency translation gain attributable to noncontrolling
interests
|
|
|
(4,180
|
)
|
|
|
(15,265
|
)
|
|
|
(12,520
|
)
|
|
|
(202,063
|
)
|
Foreign
currency translation gain attributable to NEP common
stockholders
|
|
|
37,618
|
|
|
|
137,386
|
|
|
|
112,673
|
|
|
|
1,818,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO NEP COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
|
|
$
|
4,090,327
|
|
|
$
|
5,091,568
|
|
|
$
|
9,254,312
|
|
|
$
|
14,019,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
basic
|
|
$
|
0.19
|
|
|
$
|
0.25
|
|
|
$
|
0.43
|
|
|
$
|
0.63
|
|
-
diluted
|
|
$
|
0.17
|
|
|
$
|
0.24
|
|
|
$
|
0.41
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
basic
|
|
|
21,780,364
|
|
|
|
19,987,123
|
|
|
|
21,143,560
|
|
|
|
19,480,284
|
|
-
diluted
|
|
|
24,025,976
|
|
|
|
20,676,711
|
|
|
|
22,266,408
|
|
|
|
19,642,216
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
For
the nine months ended September 30, 2009 and 2008
(Unaudited)
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,141,639 |
|
|
$ |
12,201,246 |
|
Adjusted
to reconcile net income to cash provided by
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of oil and gas properties
|
|
|
8,283,230 |
|
|
|
8,155,321 |
|
Depreciation
of fixed assets
|
|
|
209,748 |
|
|
|
160,930 |
|
Amortization
of land use rights
|
|
|
8,943 |
|
|
|
8,743 |
|
Amortization
of deferred financing costs
|
|
|
222,418 |
|
|
|
172,992 |
|
Amortization
of discount on debenture
|
|
|
1,515,473 |
|
|
|
1,135,874 |
|
Amortization
of stock option compensation
|
|
|
475,207 |
|
|
|
163,402 |
|
Warrants
issued for services
|
|
|
280,737 |
|
|
|
154,171 |
|
Noncontrolling
interests
|
|
|
1,533,605 |
|
|
|
1,687,394 |
|
Stocks
issued for consulting services
|
|
|
88,000 |
|
|
|
27,125 |
|
Stock-based
compensation for employee services
|
|
|
607,500 |
|
|
|
168,750 |
|
Imputed
interest expense
|
|
|
120,127 |
|
|
|
49,535 |
|
Gain
on disposal of fixed assets
|
|
|
(7,134 |
) |
|
|
- |
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,279,360 |
) |
|
|
(5,742,601 |
) |
Prepaid
expenses and other current assets
|
|
|
(3,206,650 |
) |
|
|
(1,863,807 |
) |
Value
added tax recoverable
|
|
|
311,240 |
|
|
|
651,905 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
(209,102 |
) |
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(7,404,068 |
) |
|
|
(3,458,626 |
) |
Other
payables and accrued expenses
|
|
|
242,706 |
|
|
|
(195,033 |
) |
Income
tax and other taxes payable
|
|
|
1,242,325 |
|
|
|
4,918,065 |
|
Deferred
tax payable
|
|
|
(697,940 |
) |
|
|
(543,100 |
) |
Net
cash provided by operating activities
|
|
|
10,687,746 |
|
|
|
17,643,184 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase
of oil and gas properties
|
|
|
(3,053,668 |
) |
|
|
(18,300,636 |
) |
Purchase
of fixed assets
|
|
|
(185,369 |
) |
|
|
(668,233 |
) |
Additions
to oil and gas properties under construction
|
|
|
- |
|
|
|
(649,786 |
) |
Proceeds
from disposal of fixed assets
|
|
|
28,656 |
|
|
|
- |
|
Cash
outflow from acquisition of a subsidiary (Note 4)
|
|
|
(7,837,926 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(11,048,307 |
) |
|
|
(19,618,655 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from issuance and sale in a public offering of
|
|
|
|
|
|
|
|
|
common
stock and warrants, net
|
|
|
17,276,003 |
|
|
|
- |
|
Payment
of deferred financing costs
|
|
|
- |
|
|
|
(1,186,229 |
) |
Proceeds
from issuance of secured debenture
|
|
|
- |
|
|
|
15,000,000 |
|
Repayment
of secured debenture
|
|
|
(2,500,000 |
) |
|
|
(750,000 |
) |
Proceeds
from exercise of stock warrants
|
|
|
1,200 |
|
|
|
12,000 |
|
Increase
in amount due to a stockholder
|
|
|
5,601,438 |
|
|
|
660,153 |
|
Decrease
in amounts due to related parties
|
|
|
(51,637 |
) |
|
|
(2,644,819 |
) |
Net
cash provided by financing activities
|
|
|
20,327,004 |
|
|
|
11,091,105 |
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE ON CASH
|
|
|
(47,308 |
) |
|
|
(1,428,255 |
) |
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
19,919,135 |
|
|
|
7,687,379 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
13,239,213 |
|
|
|
74,638 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
33,158,348 |
|
|
$ |
7,762,017 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$ |
5,975,876 |
|
|
$ |
4,932,518 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
540,664 |
|
|
$ |
721,805 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE FOR NON-CASH OPERATING
ACTIVITIES:
|
|
|
|
|
|
During
2009, the Company issued 15,000 S-8 shares of common stock valued at
$66,000 for consulting services.
|
|
|
|
|
|
|
|
|
|
|
During
2009, the Company issued 5,000 S-8 shares of common stock valued at
$22,000 for consulting services.
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements
CHINA NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
1 BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the
opinion of management, the unaudited condensed consolidated financial statements
contain all adjustments consisting only of normal recurring accruals considered
necessary to present fairly the Company's financial position at September 30,
2009, the results of operations for the three and nine months ended September
30, 2009 and 2008 and cash flows for the nine months ended September 30, 2009
and 2008. The results for the three and nine months ended September 30, 2009 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 2009.
These financial statements should be read in conjunction
with the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2008, previously filed with the Securities and Exchange Commission
on March 30, 2009.
FASB Launches New Accounting
Standards Codification
In June
2009 the Financial Accounting Standards Board (“FASB”) issued FASB Accounting
Standards Codification (“Codification”) as the single source of authoritative
GAAP recognized by the FASB to be applied by nongovernmental entities effective
for interim and annual periods ending after September 15, 2009. Rules
and interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The Codification
supersedes all existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification have become non-authoritative.
Following
the Codification, FASB will not issue new standards in the form of Statements,
FASB Staff Positions (“FSP”) or Emerging Issues Task Force (“EITF”) Abstracts.
Instead, it will issue Accounting Standards Updates, which will serve to update
the Codification, provide background information about the guidance and provide
the basis for conclusions on the changes to the Codification.
GAAP is
not intended to be changed as a result of the FASB's Codification, but it will
change the way the guidance is organized and presented. As a result, these
changes will have a significant impact on how companies reference GAAP in their
financial statements and in their accounting policies. The Trust has
adopted the Codification in this quarterly report by using plain English to
describe FASB broad topic references.
NOTE
2 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.
Song Yuan
City Hong Xiang Petroleum Technical Services Co., Ltd. (“Hong Xiang Technical”)
was incorporated in the People’s Republic of China (“PRC”) on December 5, 2003
to provide technical advisory services to oil and gas exploration companies in
the PRC.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
2 ORGANIZATION (CONTINUED)
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 exploration 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.
On
September 25, 2009, Song Yuan Technical acquired from third parties 100% of the
equity interest of Song Yuan Tiancheng Drilling Engineering Co., Ltd.
(“Tiancheng”) at a consideration of $13,000,000 in cash. Tiancheng provides
contract land drilling services to customers for exploration and production of
crude oil in the PRC.
North
East Petroleum, Hong Xiang Petroleum Group, Song Yuan Technical, LongDe, Yu Qiao
and Tiancheng are hereinafter referred to as (“the Company”).
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
3 PRINCIPLES OF CONSOLIDATION
The
accompanying unaudited condensed consolidated financial statements for 2009
include the unaudited financial statements of North East Petroleum and its
wholly owned subsidiary, Hong Xiang Petroleum
Group and 90% equity interest owned subsidiaries, Song Yuan Technical,
LongDe, Yu Qiao and Tiancheng (collectively, “the Company”). The noncontrolling
interests represent the minority shareholders’ 10% share of the results of Song
Yuan Technical, LongDe, Yu Qiao and Tiancheng.
The
accompanying unaudited condensed consolidated financial statements for 2008
include the unaudited financial statements of North East Petroleum and its
wholly owned subsidiary, Hong Xiang Petroleum
Group and 90% equity interest owned subsidiaries, Song Yuan Technical,
LongDe and Yu Qiao. The noncontrolling 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.
NOTE 4 BUSINESS
COMBINATION
On
September 25, 2009, Song Yuan Technical entered into a Share Transfer Agreement
(the “Agreement”) with the stockholders (“Selling Stockholders”) of Tiancheng.
Pursuant to the Agreement, Song Yuan Technical acquired all of the Selling
Stockholders’ interest in Tiancheng at a consideration of US$13,000,000 (the
“Purchase Price”) for 100% of the equity in Tiancheng held by the Selling
Stockholders. The Purchase Price is payable in two installments. The first
installment of US$6,500,000 is due within 15 days from the date of execution of
the Agreement and the second installment of US$6,500,000 is due within 15 days
after the completion of the registration of the transfer of title of 95% of the
equity interest in Tiancheng with the local Industry and Commerce Bureau
and the establishment of a trust holding 5% of the equity interest in
Tiancheng by one of the Selling Stockholders for the benefit of Song Yuan
Technical. The trust is established in order to comply with certain laws of the
People’s Republic of China.
On
September 27, 2009, the Selling Stockholders completed the registration of the
transfer of title of 95% of the equity interest in Tiancheng to Song Yuan
Technical and the establishment of the trust.
Tiancheng
is engaged in providing contract land drilling services to customers for
exploration and production of crude oil in the PRC.
The
preliminary allocation of the net assets acquired is as follows:
Cash
and cash equivalents
|
|
$ |
645,533 |
|
Property
and equipment, net
|
|
|
12,178,235 |
|
Land
use rights, net
|
|
|
613,867 |
|
Goodwill
|
|
|
1,645,589 |
|
Total
assets
|
|
|
15,083,224 |
|
Less:
Other payables and accrued expenses
|
|
|
(175,983 |
) |
Income
tax and other taxes payable
|
|
|
(645,640 |
) |
Noncontrolling
interests
|
|
|
(1,261,601 |
) |
|
|
|
|
|
Total
purchase price
|
|
$ |
13,000,000 |
|
As of
September 30, 2009, $8,483,459 was paid to the Selling Stockholders and the
remaining outstanding balance of $4,516,541 was included in Other Payables and
Accrued Expenses (See note 7).
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 4 BUSINESS
COMBINATION (CONTINUED)
Analysis
of the net outflow of cash and cash equivalents in respect of the business
combination is as follows:
Consideration
paid
|
|
$ |
8,483,459 |
|
Less:
cash and cash equivalents acquired
|
|
|
(645,533 |
) |
|
|
|
|
|
Net
cash outflow
|
|
$ |
7,837,926 |
|
The
acquisition of Tiancheng was accounted for as a purchase under ASC Topic 805
Business Combinations (formerly SFAS No. 141(revised 2007), Business
Combinations). Accordingly, the operating results of Tiancheng have been
included in the consolidated statements of operation and comprehensive income
after the effective date of the acquisition of September 25, 2009.
The
following table reflects the unaudited pro forma combined results of operations
for the three and nine months ended September 30, 2009, assuming the acquisition
of Tiancheng had occurred and was completed at the beginning of
2009.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
19,931,524 |
|
|
$ |
49,355,004 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,794,685 |
|
|
$ |
13,962,300 |
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
-
basic
|
|
$ |
0.27 |
|
|
$ |
0.66 |
|
-
diluted
|
|
$ |
0.24 |
|
|
$ |
0.63 |
|
NOTE 5 PREPAID EXPENSES
AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets at September 30, 2009 and December 31, 2008
consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
$ |
353,259 |
|
|
$ |
690,838 |
|
Deposits
paid to suppliers
|
|
|
85,528 |
|
|
|
50,330 |
|
Deposits
paid for puchase of drilling equipment
|
|
|
3,363,753 |
|
|
|
- |
|
Other
receivables
|
|
|
185,231 |
|
|
|
39,953 |
|
|
|
$ |
3,987,771 |
|
|
$ |
781,121 |
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 6 FIXED
ASSETS
The
following is a summary of fixed assets at September 30, 2009 and December 31,
2008:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Buildings
|
|
$ |
2,095,441 |
|
|
$ |
1,075,061 |
|
Drilling
rigs and equipment
|
|
|
12,584,971 |
|
|
|
- |
|
Furniture,
fixtures and equipment
|
|
|
300,570 |
|
|
|
224,180 |
|
Motor
vehicles
|
|
|
1,478,528 |
|
|
|
1,064,636 |
|
|
|
|
16,459,510 |
|
|
|
2,363,877 |
|
Less:
accumulated depreciation
|
|
|
(2,638,742 |
) |
|
|
(679,500 |
) |
Fixed
assets, net
|
|
$ |
13,820,768 |
|
|
$ |
1,684,377 |
|
Depreciation
expense for the nine months ended September 30, 2009 and the year ended December
31, 2008 was $209,748 and $229,434 respectively.
NOTE 7 OTHER PAYABLES AND
ACCRUED EXPENSES
Other
payables and accrued expenses at September 30, 2009 and December 31, 2008
consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Other
payables
|
|
$ |
496,363 |
|
|
$ |
494,553 |
|
Due
to former stockholders of Tiancheng
|
|
|
|
|
|
|
|
|
for
acquisition of the subsidiary
|
|
|
4,516,541 |
|
|
|
- |
|
Accrued
professional fees
|
|
|
175,414 |
|
|
|
117,335 |
|
Other
accrued expenses
|
|
|
489,176 |
|
|
|
130,376 |
|
|
|
$ |
5,677,494 |
|
|
$ |
742,264 |
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
8 SECURED DEBENTURE
The following is a summary of secured
debenture at September
30, 2009 and December 31,
2008:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
8%
Secured Debenture, net of unamortized discount of
|
|
|
|
|
|
|
$4,963,009
as of September 30, 2009 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 28, 2012
|
|
$ |
6,786,991 |
|
|
$ |
8,083,826 |
|
|
|
|
6,786,991 |
|
|
|
8,083,826 |
|
Less:
current maturities
|
|
|
(3,971,112 |
) |
|
|
(1,489,126 |
) |
Long-term
portion
|
|
$ |
2,815,879 |
|
|
$ |
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 per share (“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. Pursuant to Section 2(e) of the
Series B and C Common Stock Purchase Warrant issued on February 28, 2008 (the “B
Warrants” and “C Warrants”) for the purchase of 3,600,000 shares of common stock
of Company, the exercise price of the B Warrants and C Warrants have been reset
to $2.35 per share.
On March
5, 2009, the Company and the Investor entered into Amendment No.1 to 8% Secured
Debenture (the "Amendment") which amended 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 AMEX LLC or NASDAQ until August
30, 2010, and the Company issued four-year warrants to the Investor to purchase
up to (i) 250,000 shares of common stock at an exercise price of $2 per share
and (ii) 250,000 shares of common stock at an exercise price of $2.35 per share.
Also pursuant to the Amendment, the parties have agreed to amend the monthly
principal repayment schedule of the Debenture.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
8 SECURED DEBENTURE (CONTINUED)
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 $8,101,160 for the beneficial conversion feature
granted to the Investor. The beneficial conversion feature is reflected as a
discount to the carrying value of the debenture and is being amortized as an
interest expense over the term of the debenture.
Interest
expense on the secured debenture for the three and nine months ended September
30, 2009 was $236,931 and $777,595 respectively.
Discount
amortized on the secured debenture for the three and nine months ended September
30, 2009 was $513,415 and $1,515,473 respectively.
NOTE 9 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):
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
Net
income attributable to NEP common stockholders
|
|
|
|
|
|
|
used
in computing basis net income per share
|
|
$ |
9,142 |
|
|
$ |
12,201 |
|
Net
income attributable to NEP common stockholders
|
|
|
|
|
|
|
|
|
used
in computing diluted net income per share
|
|
$ |
9,142 |
|
|
$ |
12,201 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares
used in the computation of basic net income per share
|
|
|
|
|
|
|
|
|
(weighted
average common stock outstanding)
|
|
|
21,144 |
|
|
|
19,480 |
|
Dilutive
potential common stock:
|
|
|
|
|
|
|
|
|
Options
and warrants
|
|
|
1,122 |
|
|
|
144 |
|
Shares
used in the computation of diluted net income per share
|
|
|
22,266 |
|
|
|
19,624 |
|
Basic
net income per share
|
|
$ |
0.43 |
|
|
$ |
0.63 |
|
Diluted
net income per share
|
|
$ |
0.41 |
|
|
$ |
0.62 |
|
For the
nine months ended September 30, 2009, options to purchase 370,000 shares of
common stock and warrants to purchase 960,000 shares of common stock with
exercise prices greater than the average fair market value of the Company’s
stock of $3.16 were not included in the calculation because the effect is
anti-dilutive.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 9 NET INCOME PER SHARE
(CONTINUED)
|
|
Three
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
Net
income attributable to NEP common stockholders
|
|
|
|
|
|
|
used
in computing basis net income per share
|
|
$ |
4,053 |
|
|
$ |
4,954 |
|
Net
income attributable to NEP common stockholders
|
|
|
|
|
|
|
|
|
used
in computing diluted net income per share
|
|
$ |
4,053 |
|
|
$ |
4,954 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares
used in computation of basic net income per share
|
|
|
|
|
|
|
|
|
(weighted
average common stock outstanding)
|
|
|
21,780 |
|
|
|
19,987 |
|
Dilutive
potential common stock:
|
|
|
|
|
|
|
|
|
Options
and warrants
|
|
|
2,246 |
|
|
|
690 |
|
Shares
used in computation of diluted net income per share
|
|
|
24,026 |
|
|
|
20,677 |
|
Basic
net income per share
|
|
$ |
0.19 |
|
|
$ |
0.25 |
|
Diluted
net income per share
|
|
$ |
0.17 |
|
|
$ |
0.24 |
|
For the
three months ended September 30, 2009, warrants to purchase 960,000 shares of
common stock with exercise prices greater than the average fair market value of
the Company’s stock of $4.81 were not included in the calculation because the
effect is anti-dilutive.
NOTE
10 COMMITMENTS AND CONTINGENCIES
(A) Lease
commitment
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,
December 31, 2009, January 20, 2011 and January 31, 2010 at annual rental of
$183, $5,850, $19,013 and $20,160 respectively.
As of
September 30, 2009, the Company had outstanding commitments with respect to the
above operating leases, which are due as follows:
2009
|
|
$ |
11,302 |
|
2010
|
|
|
20,876 |
|
2011
|
|
|
1,768 |
|
2012
|
|
|
183 |
|
Thereafter
|
|
|
1,967 |
|
|
|
$ |
36,096 |
|
(B) Capital
commitments
As of
September 30, 2009, the Company had commitments for capital expenditure of
$9,426,000 with a contractor to complete the drilling of 43 oil
wells.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
11 STOCK-BASED COMPENSATION
From May
2008 to May 2009, 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 September 30, 2009, stock options granted under the Company’s 2006
Stock Option/Stock Issuance Plan to purchase 470,000 shares of its Common Stock
(the “Options”) at an exercise prices from $2.94 to $4.50 per share were
outstanding. 25% of the 160,000 stock options shall vest upon grant and 25%
shall vest every three months thereafter, these stock options granted shall
expire ten years 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
|
102%
to 173%
|
0%
|
0.49%
to 2.66%
|
$2.94
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 0.49% 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.
As of
September 30, 2009, 470,000 stock options with a fair value of approximately
$1,218,848 were granted to staff, of which the Company recognized $475,207 as
staff compensation expenses included in selling, general and administrative
expenses for the nine months ended September 30, 2009.
As of
September 30, 2009, the total compensation cost related to stock options not yet
recognized was $406,662 and these will be recognized over the next twelve
months.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
11 STOCK-BASED COMPENSATION (CONTINUED)
The
following is a summary of the stock options activity:
|
|
Number
of
Options
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
|
|
Balance,
December 31, 2008
|
|
|
410,000 |
|
|
$ |
4.43 |
|
Granted
|
|
|
60,000 |
|
|
$ |
2.94 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
Balance,
September 30, 2009
|
|
|
470,000 |
|
|
$ |
4.24 |
|
The
following is a summary of the status of options outstanding at September 30,
2009:
Outstanding
Options
|
|
Exercisable
Options
|
Exercise
Price
|
|
Number
|
|
Average
Remaining
Contractual
Life
|
|
Average
Exercise
Price
|
|
Number
|
|
Weighted
Average
Exercise
Price
|
$4.05
|
|
60,000
|
|
8.67
years
|
|
$4.05
|
|
60,000
|
|
$4.05
|
$4.50
|
|
40,000
|
|
8.88
years
|
|
$4.50
|
|
40,000
|
|
$4.50
|
$4.50
|
|
310,000
|
|
8.88
years
|
|
$4.50
|
|
310,000
|
|
$4.50
|
$2.94
|
|
60,000
|
|
9.67
years
|
|
$2.94
|
|
30,000
|
|
$2.94
|
NOTE
12 STOCKHOLDERS’ EQUITY
The following table summarizes the changes in equity for
the nine months ended September 30, 2009 (in thousands):
|
|
NEP
Common
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Stockholders
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity as of December 31, 2008
|
|
$ |
49,319 |
|
|
$ |
4,513 |
|
|
$ |
53,832 |
|
Common
stock
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
Additional
paid-in capital
|
|
|
18,549 |
|
|
|
- |
|
|
|
18,549 |
|
Deferred
stock compensation
|
|
|
608 |
|
|
|
- |
|
|
|
608 |
|
Net
income
|
|
|
9,142 |
|
|
|
1,534 |
|
|
|
10,676 |
|
Other
comprehensive income
|
|
|
113 |
|
|
|
12 |
|
|
|
125 |
|
Share
of net assets on acquisition of Tiancheng
|
|
|
- |
|
|
|
1,262 |
|
|
|
1,262 |
|
Total
equity as of September 30, 2009
|
|
$ |
77,735 |
|
|
$ |
7,321 |
|
|
$ |
85,056 |
|
(1)
|
On
May 8, 2009, the Company issued 120,000 shares of common stock to a
consultant who exercised the Class A Warrants at the exercise price of
$0.01 per share.
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
12 STOCKHOLDERS’ EQUITY (CONTINUED)
(B)
|
Stock
issuances (Continued)
|
(2)
|
On
July 16, 2009, the Company issued 15,000 S-8 shares of common stock to a
consultant for consulting services. The stock was valued at the closing
price on the date of grant of $4.40 per share, yielding an aggregate fair
value of $66,000. The Company recognized expense of $66,000 for the nine
months ended September 30, 2009.
|
(3)
|
On
July 16, 2009, the Company issued 5,000 S-8 shares of common stock to a
consultant for consulting services. The stock was valued at the closing
price on the date of grant of $4.40 per share, yielding an aggregate fair
value of $22,000. The Company recognized expense of $22,000 for the nine
months ended September 30, 2009.
|
(4)
|
On
July 27, 2009, the Company issued 65,007 shares of its common stock to a
consultant at a volume weighted average price of $4.1474 per share
pursuant to a cashless exercise option in place of the consultant
exercising all of his Class B Warrants for 150,000 shares of common stock
at $2.35 per share.
|
(5)
|
On
August 10, 2009, the Company issued 130,532 shares of its common stock to
a consultant at a volume weighted average price of $6.21 per share
pursuant to a cashless exercise option in place of the consultant
exercising all of his Class C Warrants for 210,000 shares of common stock
at $2.35 per share.
|
(6)
|
On
September 15, 2009, the Company entered into a Securities Purchase
Agreement with several investors. The Securities Purchase Agreement
relates to the issuance and sale in a public offering by the Company of an
aggregate of 4,000,000 shares of its common stock, at a price of $4.60 per
share and warrants to purchase up to an additional 800,000 shares of
common stock (See note 12(C)4). The Company received gross proceeds of
approximately $18.4 million before placement agent fees and other
expenses.
|
(1)
|
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 exercise prices of Class B Warrants
and Class C Warrants were subsequently revised to $2.35 per share. The
Class B Warrants are subject to certain call rights. The Company’s stock
was trading at $2.93 at the time of issuance of warrants. The warrants
have been determined to have a total market value of $788,306 using the
Black-Scholes option pricing model with market value per common stock of
$2.13, $1.48 and $1.48 for Class A Warrants, Class B Warrants and Class C
Warrants respectively, an exercise period of 2 years and a volatility of
158%, 82% and 82% respectively. The Company recognized $49,945 and
$147,306 as consulting expenses for the three and nine months ended
September 30, 2009 respectively.
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
12 STOCKHOLDERS’ EQUITY (CONTINUED)
(C)
|
Issuance
of warrants (Continued)
|
(2)
|
Pursuant
to an engagement agreement with effect from February 28, 2008 for a term
of two years, the Company issued to a law firm for legal services at rates
lower than its billing rate a warrant for 100,000 shares of the common
stock of the Company at an exercise price equal to $2.15 per share. This
warrant may be exercised until January 1, 2013. The Company’s stock was
trading at $2.14 at the time of issuance of the warrant. The warrant shall
be exercisable as of the effective date of the engagement agreement. The
warrant has been determined to have a market value of $158,420 using the
Black-Scholes option pricing model with market value per common stock of
$1.58, an exercise period of 2 years and a volatility of 158%. The Company
recognized $19,803 and $125,416 as professional fees for the three and
nine months ended September 30, 2009
respectively.
|
(3)
|
Pursuant
to a consulting agreement with effect from April 29, 2009 for a term of
two years, the Company issued to a consultant for investor relations
consulting services a four-year warrant for 50,000 shares of the common
stock of the Company at an exercise price equal to $2.65 per share. The
Company’s stock was trading at $1.90 at the time of issuance of the
warrant. The warrant shall be exercisable as of the effective date of the
consulting agreement. The warrant has been determined to have a market
value of $38,472 using the Black-Scholes option pricing model with market
value per common stock of $0.77, an exercise period of 2 years and a
volatility of 92%. The Company recognized $4,809 and $8,015 as consulting
expenses for the three and nine months ended September 30, 2009
respectively.
|
(4)
|
Pursuant
to the Securities Purchase Agreement with effect from September 15, 2009,
the Company issued to several investors warrants to purchase up to 800,000
shares of its common stock. The warrants are exercisable beginning six
months after their initial issuance at an exercise price of $6.00 per
share until March 15, 2011. The exercise price and number of shares
issuable upon exercise are subject to adjustment in the event of stock
splits or dividends, business combinations, sale of assets or other
similar transactions. The Company’s stock was trading at $5.03 at the time
of issuance of the warrant. The warrant has been determined to have a
market value of $1,440,522 using the Black-Scholes option pricing model
with market value per common stock of $1.80, an exercise period of 1 year
and a volatility of 107%. The Company recognized $1,440,522 as additional
paid-in capital for the nine months ended September 30,
2009.
|
(5)
|
Pursuant
to an engagement agreement with effect from September 10, 2009, the
Company issued to a placement agent a five-year warrant for 80,000 shares
of the common stock of the Company at an exercise price equal to $6.00 per
share as placement agent fees. The Company’s stock was trading at $5.13 at
the time of issuance of the warrant. The warrant shall be exercisable as
of the effective date of the engagement agreement. The warrant has been
determined to have a market value of $231,547 using the Black-Scholes
option pricing model with market value per common stock of $2.89, an
exercise period of 2 years and a volatility of 117%. The Company
recognized $231,547 as additional paid-in capital for the nine months
ended September 30, 2009.
|
(6)
|
Pursuant
to a consulting agreement with effect from September 10, 2009, the Company
issued to a consultant for financial advisory services on the placement of
4 million shares of common stock a five-year warrant for 80,000 shares of
the common stock of the Company at an exercise price equal to $6.00 per
share. The Company’s stock was trading at $5.13 at the time of issuance of
the warrant. The warrant shall be exercisable as of the effective date of
the engagement agreement. The warrant has been determined to have a market
value of $231,547 using the Black-Scholes option pricing model with market
value per common stock of $2.89, an exercise period of 2 years and a
volatility of 117%. The Company recognized $231,547 as additional paid-in
capital for the nine months ended September 30,
2009.
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE
13 RELATED PARTY TRANSACTIONS
(1)
|
As
of September 30, 2009, the Company
owed a stockholder $5,602,176 which is unsecured and repayable on
demand. Imputed interest is computed at 5% per annum on the amount
due.
|
(2)
|
As
of September 30, 2009, the Company
owed a related party $14,625 which is unsecured and repayable on
demand. Imputed interest is computed at 5% per annum on the amount
due.
|
(3)
|
Total
imputed interest expenses recorded as additional paid-in capital amounted
to $70,210 and $120,127 for the three and nine months ended September 30, 2009
respectively.
|
(4)
|
The
Company paid a stockholder $877 and $4,384 for leased office spaces for
the three and nine months ended September
30, 2009 respectively.
|
NOTE
14 SEGMENTS
The
Company operates in two reportable segments; exploration and production of crude
oil (“Crude oil”) and contract land drilling of
oil wells (“Contract drilling”). The accounting policies of the segments
are the same as described in the summary of significant accounting
policies. The Company evaluates segment performance based on income
from operations. All inter-company transactions between segments have
been eliminated. As a result, the components of operating income for
one segment may not be comparable to another segment. The following
is a summary of the Company’s segment information for the three and nine months
ended September 30, 2009 and 2008 (in
thousands):
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil
|
|
$ |
14,404 |
|
|
$ |
19,060 |
|
|
$ |
34,655 |
|
|
$ |
44,052 |
|
Contract
drilling
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
revenues
|
|
$ |
14,404 |
|
|
$ |
19,060 |
|
|
$ |
34,655 |
|
|
$ |
44,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil
|
|
$ |
8,818 |
|
|
$ |
9,907 |
|
|
$ |
21,319 |
|
|
$ |
23,631 |
|
Contract
drilling
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
gross profit
|
|
$ |
8,818 |
|
|
$ |
9,907 |
|
|
$ |
21,319 |
|
|
$ |
23,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil
|
|
$ |
8,534 |
|
|
$ |
9,510 |
|
|
$ |
20,579 |
|
|
$ |
22,661 |
|
Contract
drilling
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
income from operations
|
|
|
8,534 |
|
|
|
9,510 |
|
|
|
20,579 |
|
|
|
22,661 |
|
Corporate
and other
|
|
|
(1,659 |
) |
|
|
(1,454 |
) |
|
|
(4,630 |
) |
|
|
(3,077 |
) |
Net
income before income taxes
|
|
$ |
6,875 |
|
|
$ |
8,056 |
|
|
$ |
15,949 |
|
|
$ |
19,584 |
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
Crude
oil
|
|
$ |
104,648 |
|
|
$ |
90,023 |
|
Contract
drilling
|
|
|
18,264 |
|
|
|
- |
|
Intanbile
assets, net
|
|
|
1,646 |
|
|
|
- |
|
Corporate
and other
|
|
|
1,769 |
|
|
|
2,107 |
|
|
|
$ |
126,327 |
|
|
$ |
92,130 |
|
NOTE 15 CONCENTRATIONS AND
RISKS
During
2009, 99% and 1% of the Company's assets were located in the PRC and the United
States respectively.
During
2009, 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.
The accounts receivable from PetroChina
as of September 30, 2009 was $6,509,440.
NOTE 16 RECLASSIFICATIONS
Certain
reclassifications have been made in the condensed consolidated financial
statements for the nine months ended September 30, 2008 to conform to the
current period’s presentation.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 17 THE EFFECT OF RECENTLY ISSUED ACCOUNTING
STANDARDS
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 2008, the FASB issued Staff Position No. FAS 132(R)-1 “Employers’
Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”) (ASC
Topic 715-20-65). FSP FAS 132(R)-1 (ASC Topic 715-20-65) requires more detailed
disclosures about employers’ plan assets in a defined benefit pension or other
postretirement plan, including employers’ investment strategies, major
categories of plan assets, concentrations of risk within plan assets, and inputs
and valuation techniques used to measure the fair value of plan assets. FSP FAS
132(R)-1 (ASC Topic 715-20-65) also requires, for fair value measurements using
significant unobservable inputs (Level 3), disclosure of the effect of the
measurements on changes in plan assets for the period. The disclosures about
plan assets required by FSP FAS 132(R)-1 (ASC Topic 715-20-65) must be provided
for fiscal years ending after December 15, 2009. As this pronouncement is only
disclosure-related, it will not have an impact on the financial position and
results of operations.
In May
2009, the FASB issued a new statement that establishes general standards of
accounting for, and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be issued.
The new statement, located in ASC Topic 855 Subsequent Events (formerly SFAS
165, Subsequent Events) requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for why that date was
selected, that is, whether that date represents the date the financial
statements were issued or were available to be issued. The new statement is
effective for interim or annual periods ending after June 15, 2009, which was
the quarter ending June 30, 2009 for the Company. The adoption of
this new statement did not have a material impact on our consolidated financial
statements.
In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS 166”) (ASC Topic
810). SFAS 166 (not part of the codification yet) amends various provisions of
SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities—a replacement of FASB Statement No. 125”
by removing the concept of a qualifying special-purpose entity and removes the
exception from applying FIN 46(R) to variable interest entities that are
qualifying special-purpose entities; limits the circumstances in which a
transferor derecognizes a portion or component of a financial asset; defines a
participating interest; requires a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and requires enhanced disclosure; among
others. SFAS 166 will be effective as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Early adoption is not permitted. This
guidance will be codified under FASB ASC Topic 860, “Transfers and Servicing”
when it becomes effective. The Company does not expect the standard to have any
impact on the Company’s financial position.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 17 THE EFFECT OF RECENTLY ISSUED
ACCOUNTING STANDARDS (CONTINUED)
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”) (not part of the codification yet). SFAS 167 amends
FASB Interpretation No. 46 (Revised December 2003) “Consolidation of
Variable Interest Entities—an interpretation of ARB No. 51” (FIN 46(R)) to
require an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity; to require ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity;
to eliminate the quantitative approach previously required for determining the
primary beneficiary of a variable interest entity; to add an additional
reconsideration event for determining whether an entity is a variable interest
entity when any changes in facts and circumstances occur such that holders of
the equity investment at risk, as a group, lose the power from voting rights or
similar rights of those investments to direct the activities of the entity that
most significantly impact the entity’s economic performance; and to require
enhanced disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a variable interest
entity. SFAS 167 will be effective as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. Early adoption is not permitted. This
guidance will be codified under FASB ASC Topic 810, “Consolidation” when it
becomes effective. The Company does not expect the standard to have any impact
on the Company’s financial position.
In August
2009, the FASB issued ASU No. 2009-05 “Measuring Liabilities at Fair
Value”, now codified under FASB ASC Topic 820, “Fair Value Measurements and
Disclosures”, (“ASU 2009-05”) which amends Fair Value Measurements and
Disclosures – Overall (ASC Topic 820-10) to provide guidance on the fair value
measurement of liabilities. This update requires clarification for circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1) a valuation technique that uses either the
quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities or similar liabilities when traded as an asset; or 2)
another valuation technique that is consistent with the principles in ASC Topic
820 such as the income and market approach to valuation. The amendments in this
update also clarify that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. This update further clarifies that if the fair value
of a liability is determined by reference to a quoted price in an active market
for an identical liability, that price would be considered a Level 1 measurement
in the fair value hierarchy. Similarly, if the identical liability has a quoted
price when traded as an asset in an active market, it is also a Level 1 fair
value measurement if no adjustments to the quoted price of the asset are
required. This update is effective for our fourth quarter 2009. Management does
not expect this new guidance to have a material impact on the Company’s consolidated
financial statements.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”,
(“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted.
Management is currently evaluating the potential impact of ASU2009-13 on our
financial statements.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 17 THE EFFECT OF RECENTLY ISSUED ACCOUNTING
STANDARDS (CONTINUED)
In
October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That
Include Software Elements, now codified under FASB ASC Topic 985, “Software”,
(“ASU 2009-14”). ASU 2009-14 removes tangible products from the scope of
software revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by
the scope of the software revenue guidance. ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Management is currently evaluating the potential impact of ASU
2009-14 on our financial statements.
In
October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”,
now codified under FASB ASC Topic 470 “Debt”, (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of
issuance, a share-lending arrangement entered into on an entity’s own shares
should be measured at fair value in accordance with Topic 820 and recognized as
an issuance cost, with an offset to additional paid-in
capital. Loaned shares are excluded from basic and diluted earnings
per share unless default of the share-lending arrangement occurs. The
amendments also require several disclosures including a description and the
terms of the arrangement and the reason for entering into the
arrangement. The effective dates of the amendments are dependent upon
the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15,
2009. Management is currently evaluating the potential impact
of ASU 2009-15 on our financial statements.
NOTE
18 SUBSEQUENT EVENTS
During
October 2009, the Company repaid $5,046,000 due to a stockholder.
On
October 9, 2009, the Company issued 632,562 shares of common stock to the
Investor for the partial exercise of Series B Warrants issued by the Company to
the Investor on February 28, 2008 at the exercise price of $2.35 per share. The
payment of the aggregate exercise price of $1,486,521 was made in the form of
cancellation of repayment of principal and interest accrued as of September 30,
2009 pursuant to the 8% Secured Debenture issued to the Investor on February 28,
2008 as amended on March 5, 2009.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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:
|
●
|
Deviations
in and volatility of the market price of crude oil produced by
us;
|
|
●
|
Uncertainties
in the estimation of proved reserves and in the projection of future rates
of production;
|
|
●
|
Timing
and amount of production;
|
|
●
|
The
availability of, and our ability to raise additional capital resources and
provide liquidity to meet cash flow needs;
|
|
●
|
Fluctuations
in foreign currency exchange rates and interest rates;
|
|
●
|
Our
ability to find, acquire, lease, develop, and produce from new properties;
and
|
|
●
|
The other risks and
uncertainties which are described below under “RISK
FACTORS.”
|
OVERVIEW
OF OUR BUSINESS
Overview
We are
engaged in the exploration and production of crude oil in Northern China. We
have an arrangement with PetroChina to sell our crude oil production for
use in the China marketplace. We currently operate 259 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:
Details
of Oil and Gas Properties and Activities
Field
|
Acreage
|
Producing
wells #
|
Proven
Reserves (bbls)
|
Qian112
|
5,115
|
227
|
5,292,591
|
Da34
|
2,298
|
7
|
13,240
|
Gu31
|
1,779
|
7
|
95,729
|
He301
|
2,471
|
18
|
52,232
|
Total
|
11,663
|
259
|
5,453,792
|
Additionally,
through our newly acquired subsidiary, Song Yuan Tiancheng Drilling Engineering
Co. Ltd., we provide contract drilling and other oilfield services for
state-owned and non-state-owned oil companies in Northern China.
The
flowing 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”), entered into
among PetroChina Group, Yu Qiao and the Company 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 in 2007.
In May
2003, LongDe entered into a 20-year contract with PetroChina Group. Pursuant to
the contract, LongDe has the right to explore, develop and produce oil at the
Hetingbao 301 oilfield in the PRC. In addition, pursuant to the contract 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 the 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 Jun
(“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 LongDe 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 ChangShan 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.
Acquisition
of Tiancheng
On
September 27, 2009, we acquired through Song Yuan Technical all of the
beneficial ownership of all of the equity interest in Song Yuan Tiancheng
Drilling Engineering Co., Ltd. or “Tiancheng.” In order to comply with certain
PRC laws, 5% of the equity interest in Tiancheng is held in trust by one of the
Tiancheng selling stockholders for the benefit of Song Yuan Technical, while the
other 95% of the equity interest in Tiancheng is held directly by Song Yuan
Technical. Tiancheng provides oil drilling services. Tiancheng
currently has seven drilling teams with the same number of rigs in house, which
include one 4,000 meters rig (~13,000 feet depth), three 3,000 meters rigs
(~9,800 feet depth) and three 2,000 meters rigs (~6,500 feet depth)
respectively. Two of its seven drilling teams have received approvals issued by
the Qualification Administrative Committee of China National Petroleum
Corporation (PetroChina) and another three drilling teams are expected to be
granted such approval by the end of the year when the Committee conducts the
annual inspection on the qualification certificates for drilling for PetroChina
oilfields. Tiancheng has existing drilling contracts with PetroChina and other
private oil companies to provide drilling and oilfield services.
The
acquisition of Tiancheng was accounted for as a purchase under ASC Topic 805
Business Combinations (formerly SFAS No. 141(revised 2007), Business
Combinations). Accordingly, the operating results of Tiancheng have been
included in the consolidated statements of operation and comprehensive income
after the effective date of the acquisition of September 25, 2009.
The
following table reflects the unaudited pro forma combined results of operations
for the three and nine months ended September 30, 2009, assuming the acquisition
of Tiancheng had occurred and was completed at the beginning of
2009.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
19,931,524 |
|
|
$ |
49,355,004 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
5,794,685 |
|
|
$ |
13,962,300 |
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
-
basic
|
|
$ |
0.27 |
|
|
$ |
0.66 |
|
-
diluted
|
|
$ |
0.24 |
|
|
$ |
0.63 |
|
For more
financial information about the Tiancheng acquisition, please refer to the
financial statement Note 4 Business Combination section.
Listing
on the NYSE Amex LLC.
On June
15, 2009, the Company’s common stock commenced trading on the NYSE Amex LLC
(“AMEX”). Upon trading on AMEX, the Company changed its ticker symbol from
“CNEH.OB” to “NEP”.
Oil
and Gas Properties and Activities
As of
September 30, 2009, the Company had a total of 259 producing wells, including
227 producing wells at the Qian’an 112 oilfield, 18 producing wells at the
Hetingbao 301 oilfield, 7 producing wells at the Daan 34 oilfield and 7
producing wells at the Gudian 31 oilfield. Additionally, we have 3 wells under
construction in Qian’an 112 oilfield.
All of
the Company’s crude oil production is sold to the 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 a
leading global provider of energy and metals information that collects and
publishes pricing data on a wide range of petroleum and non-petroleum commodity
types. An independent provider, Platts serves the oil, natural gas, electricity,
emissions, nuclear power, coal, petrochemical, shipping, and metals markets from
17 offices worldwide. Price paid to the Company is FOB at the local Jilin
Province PetroChina oil storage depot. As the oil produced in China is heavy and
sour, compared with light and sweet oil quoted as West Texas Intermediate
(“WTI”) and Brent, therefore, the oil price we receive from PetroChina generally
is slightly discounted to the WTI or Brent price.
And the
following table shows the difference between WTI and MOPS China in monthly oil
price.
Month
|
Oil
Sale Price
|
WTI
|
MOPS-China
|
Jul-08
|
133
|
116
|
Aug-08
|
116
|
119
|
Sep-08
|
103
|
101
|
Oct-08
|
76
|
85
|
Nov-08
|
57
|
68
|
Dec-08
|
41
|
45
|
Jan-09
|
41
|
41
|
Feb-09
|
39
|
38
|
Mar-09
|
47
|
41
|
Apr-09
|
49
|
46
|
May-09
|
59
|
52
|
Jun-09
|
69
|
54
|
Jul-09
|
64
|
63
|
Aug-09
|
71
|
61
|
Sep-09
|
69
|
69
|
(Note:
data references to Wall Street Journal, and MOPS China price is exchanged from
RMB to USD at the exchange rate of 6.8376)
As noted
in the table above, compared with WTI prices, the MOPS China price generally has
a slight discount due to the lower oil quality and there is also one-month time
lag between the prices.
PetroChina
pays the Company for crude oil sold 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 crude 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.
Operating
Performance
Our
operating performance is influenced by several factors, the most significant of
which are the price we receive for our crude oil and the quantities of crude oil
that we are able to produce. Global crude oil prices are the most
important factor affecting the price that we receive for our crude oil
production. The prices received for different grades of crude oil are
based upon the world price of crude oil, which is then adjusted based upon the
particular grade. Typically, light crude oil is sold at a premium,
while heavy grades of crude (such as the type we produce from the four fields we
operate) are discounted.
Our crude
oil development and acquisition activities require substantial and continuing
capital expenditures. Historically, the sources of financing to fund
our capital expenditures have included:
|
●
|
Cash
flow from operations;
|
|
●
|
Sales
of equity securities;
|
|
●
|
Loans
from shareholders and third parties; and
|
|
●
|
Extension
of credit from our suppliers, including particularly our suppliers of well
drilling and completion services.
|
For the
three months ended September 30, 2009 (the “Current Quarter”), the sale price we
received for our crude oil production averaged $64.33 per barrel, compared with
$111.90 per barrel for the three months ended September 30, 2008 (the
“Comparable Quarter”). For the nine months ended September 30, 2009, the
sale price we received for our crude oil production averaged $51.53 per barrel,
compared with $103.60 per barrel for the same period ended a year
ago.
Our oil
producing activities are accounted for using the full cost method of
accounting. Under this accounting method, we capitalize all costs
incurred in connection with the acquisition of oil properties and the
exploration for and development of oil reserves. These costs include
lease acquisition costs, geological and geophysical expenditures, costs of
drilling productive and non-productive wells (to date, all of the wells we have
drilled have been productive wells), conversion of productive wells into
production support infrastructure such as water-injection wells, and overhead
expenses directly related to land and property acquisition and exploration and
development activities. Proceeds from the disposition of oil
properties are accounted for as a reduction in capitalized costs, with no gain
or loss recognized unless a disposition involves a material change in the
relationship between capitalized costs and reserves, in which case the gain or
loss is recognized.
Depreciation
of the capitalized costs of oil properties, including estimated future
development costs, is based upon estimates of proved oil reserves and
production. Unproved oil properties are not amortized, but are
individually assessed for impairment. The cost of any impaired
property is transferred to the balance of oil properties being
depleted. Reserve values are calculated annually, at our fiscal
year-end, by a third-party geological consulting company, and are estimated in
accordance with ASC Topic 932, “Extractive
Activities - Oil and Gas”, (formerly FAS 19
– Financial Accounting and Reporting by Oil and Gas Producing Companies (as
amended)), SEC Regulation S-K and Regulation S-X under the Securities Act of
1933 and the Securities Exchange Act of 1934, and the SEC’s Industry Guide
2.
Production,
Average Sales Prices, and Production Costs
Our
business operations are characterized by frequent, and sometimes significant,
changes in the price we receive for the crude oil we produce and in the volumes
of crude oil we produce. The following table shows selected operating
data for the three and nine months ended September 30, 2009 and September 30,
2008.
|
|
Three
months ended September 30
|
|
|
Nine months
ended September 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Oil
Output (Bbl)
|
|
|
224,750
|
|
|
|
172,730
|
|
|
|
671,352
|
|
|
|
422,788
|
|
Avg.
Sale Price ($/bbl)
|
|
$
|
64.33
|
|
|
$
|
111.90
|
|
|
$
|
51.53
|
|
|
$
|
103.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Revenue
|
|
$
|
14,403,921
|
|
|
$
|
19,060,007
|
|
|
$
|
34,654,549
|
|
|
$
|
44,051,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
Costs
|
|
$
|
1,103,163
|
|
|
$
|
895,155
|
|
|
$
|
2,769,762
|
|
|
$
|
2,390,432
|
|
Depreciation
|
|
$
|
2,824,981
|
|
|
$
|
3,774,327
|
|
|
$
|
8,283,230
|
|
|
$
|
8,155,321
|
|
Amortization
|
|
$
|
2,982
|
|
|
$
|
2,975
|
|
|
$
|
8,943
|
|
|
$
|
8,743
|
|
Oil
Surcharge
|
|
$
|
1,655,000
|
|
|
$
|
4,480,955
|
|
|
$
|
2,273,167
|
|
|
$
|
9,865,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
$
|
8,817,795
|
|
|
$
|
9,906,595
|
|
|
$
|
21,319,447
|
|
|
$
|
23,631,368
|
|
As shown
in the above table, the significant decline of oil prices in 2009 compared with
2008 caused our revenues to decrease substantially. However, increases in our
production output partially offset the impact of this declinein oil
prices.
The
following table reflects the significant oil sale price fluctuation in China in
the past 12 months.
Month
|
Oil
Sale Price
|
RMB/Ton
|
USD/Bbl
|
Jul-08
|
5854
|
116
|
Aug-08
|
6026
|
119
|
Sep-08
|
5095
|
101
|
Oct-08
|
4280
|
85
|
Nov-08
|
3423
|
68
|
Dec-08
|
2267
|
45
|
Jan-09
|
2078
|
41
|
Feb-09
|
1941
|
38
|
Mar-09
|
2051
|
41
|
Apr-09
|
2302
|
46
|
May-09
|
2603
|
52
|
Jun-09
|
2708
|
54
|
Jul-09
|
3180
|
63
|
Aug-09
|
3064
|
61
|
Sep-09
|
3475
|
69
|
(Note:
1 Ton = 7.38 Bbls, Exchange rate 1 USD = 6.8376 RMB as of
9/30/2009)
As noted
in the table above, oil prices have declined significantly from their August
2008 levels. The decline in commodity prices has caused us to reduce our 2009
level of drilling activity and spending.
Contract
Drilling Services
China
North East Petroleum’s newest subsidiary, Song Yuan Tiancheng Drilling
Engineering Co. Ltd (“Tiancheng”), founded in December 2007, provides contract
drilling and other oilfield services for state-owned and non-state-owned oil
companies in Northern China.
Tiancheng
is one of the four private contract drilling and service companies that has been
qualificated and licensed to operate in PetroChina’s Jilin
oilfield. Tiancheng has also been granted contracts to drill for
PetroChina. Compared to the other three drilling companies operating in the
Jilin oilfield, Tiancheng is the largest, in terms of the number of drilling
rigs owned in house. Tiancheng was started with only two rigs at the
end of 2007, and now has seven drilling teams with the same number of rigs,
which include one 4,000 meters rig (capable drill down to ~13,000 feet depth),
three 3,000 meters rigs (~9,800 feet) and three 2,000 meters rigs (~6,500 feet)
respectively. Two of its seven drilling teams have received approvals issued by
the Qualification Administrative Committee of China National Petroleum
Corporation (PetroChina) and another three drilling teams are expected to be
granted such approval by the end of the year when the Committee conducts the
annual inspection on the qualification certificates for drilling in PetroChina
oilfields.
Tiancheng
enters into drilling contracts with PetroChina and other private oil companies
to provide oilfield drilling services, and generates revenue based on the depth
of each well drilled for clients. Clients will typically pay 30% of the total
projected drilling costs as a down payment to start the drilling process, and
pay the remaining balance within 12 months according to the specific contract
term.
In the
first nine months of 2009, Tiancheng has completed contracts to drill 80 shallow
wells, which include 74 wells for state-owned PetroChina Jilin Branch and six
wells for non-state-owned Daqing Shunwei Energy Development Co. Ltd. The total
drilling depth accomplished this year is 105,896 meters (~347,428 feet), with
the revenue of $14,700,455 and net income of $4,820,661 or $0.22 in
fully-diluted, pro forma EPS for nine months ended September 30, 2009. Tiancheng
currently has existing contracts to drill 86 additional wells, and more
contracts are under negotiation to increase the utilization of rigs and continue
to grow sales revenue.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2009 Compared To Three Months Ended September 30,
2008
Revenues. Revenues
for the Current Quarter were $14,403,921 compared to $19,060,007 for
the Comparable Quarter, a decrease of $4,656,086, or 24%. This decrease was due
to a decrease in the average price we received for our crude oil. The average oil price for
the Current Quarter was $64.33, a 43% decrease from $111.90 for the Comparable
Quarter. Our output of crude oil for the Current Quarter was 224,219 barrels
compared to 172,730 barrels for the Comparable Quarter, an increase of 30%,
which substantially offset the impact of lower oil prices. This increase
in production was mainly due to: (i) an increase in the number of producing
wells from 218 in the Comparable Quarter to 259 in the Current Quarter; (ii)
refracturing and other technical improvements made to the existing wells;
and (iii) implementation of a water injection network, which helped to maintain
production levels at certain of our existing wells.
Cost of
sales. Cost of sales decreased by 39%, from $9,153,412 for the
three months ended September 30, 2008 to $5,586,126 for the three months ended
September 30, 2009. The decrease in cost of sales resulted primarily from a
decrease in the oil surcharge paid to the PRC government, due to the decline in
oil prices generally. For the Current Quarter, the Company paid an oil surcharge
of $1,655,000 to the PRC government as compared to $4,480,955 paid for the
Comparable Quarter. Under a regulation introduced in June 2006, a
surcharge is imposed on the portion of the selling price of crude oil as
set forth in the table below.
|
|
|
$40-45
|
|
20%
|
$45-50
|
|
25%
|
$50-55
|
|
30%
|
$55-60
|
|
35%
|
Above
$60
|
|
40%
|
For
example, if the MOPS China oil price is $57 per barrel, the oil surcharge is
$4.45 per barrel ($1+$1.25+$1.5+0.7); if the oil price is $75 per barrel, the
oil surcharge is $11.5 per barrel ($1+$1.25+$1.5+$1.75+$6).
Operating Expenses.
Operating expenses totaled $1,059,744 for the Current Quarter, compared to
$978,700 for the Comparable Quarter, an increase of 8%. This increase
is primarily a result of an increase in consulting fee from $91,926 in the
Comparable Quarter to $142,332 in the Current Quarter, as well as an increase in
professional fees from $42,850 in the Comparable Quarter to $98,261 in the
Current Quarter as a result of recent business development
activities.
Other Income
(Expense). Other expenses increased from $871,451 for the
Comparable Quarter to $883,200 for the Current Quarter. This increase is
primarily the result of increase in other expense which increased from $2,000 in
the Comparable Quarter to $20,780 in the current quarter.
Net
Income. Net income decreased by 18%, from $4,954,182 for the
Comparable Quarter to $4,052,709 for the Current Quarter, primarily as a result
of the decrease in average selling price and increased non-cash expenses as
described above.
Nine
Months Ended September 30, 2009 Compared To Nine Months Ended September 30,
2008
Revenues. Revenues
for the nine months ended September 30, 2009 were $34,654,549 compared
to $44,051,519 for the nine months ended September 30, 2008, a decrease of
$9,396,970, or 21%. This decrease was due to a decrease in the average
price we received for our crude oil. The average oil price for
the nine months ended September 30, 2009 was $51.53, a 50% decrease from $103.60
for the same period in 2008. Our output of crude oil for the nine months ended
September 30, 2009 was 671,352 barrels compared to 422,788 barrels for the same
period in 2008, an increase of 59%, which substantially offset the impact of
lower oil prices. This increase in production was mainly due to: (i) an
increase in the number of producing wells, (ii) refracturing and other technical
improvements made to the existing wells; and (iii) implementation of a
water injection network, which helped to maintain production levels at certain
of our existing wells.
Cost of
sales. Cost of sales decreased by 35%, from $20,420,151 for
the nine months ended September 30, 2008 to $13,335,102 for the nine months
ended September 30, 2009. The decrease in cost of sales resulted primarily from
a decrease in the oil surcharge paid to the PRC government, due to the decline
in oil prices generally. For the nine months ended September 30, 2009, the
Company paid an oil surcharge of $2,273,167 to the PRC government as compared to
$9,865,655 paid for the same period in 2008. Under a regulation introduced
in June 2006, a surcharge of 20% is imposed on the portion of the selling price
of crude oil which exceeds $40 per barrel and a surcharge of 40% is imposed on
the portion of the selling price of crude oil which exceeds $60 per
barrel. This government oil surcharge tax is paid by the Company on a
quarterly basis, following the end of each quarter.
Operating Expenses.
Operating expenses totaled $2,764,225 for the nine months ended September 30,
2009, compared to $1,960,278 for the nine months ended September 30, 2008, an
increase of 41%. This increase is primarily a result of an increase of
approximately $593,137 in selling, general and administrative costs
(“SG&A”). SG&A costs increased largely due to non-cash
charges associated with stock and option grants made to Directors and certain
key employees in the second and third quarters of 2008. Amortization
of the discount on the debenture was recognized for only seven out of nine
months in the Comparable Period, versus the full nine months in the Current
Period, which accounts for the increase. In addition, professional
fees increased from $140,180 in the Comparable Quarter to $323,309 in the
Current Quarter due to the Company’s recent business development
activities.
Other Income
(Expense). Other expenses increased from $2,086,952 for the
nine months ended September 30, 2008 to $2,606,155 for the nine months ended
September 30, 2009. This increase is primarily the result of increase in
amortization of the discount on debenture which increased from $1,135,874 in the
Comparable Quarter to $1,515,473 in the Current Quarter.
Net
Income. Net income decreased by 25% from $12,201,246 for the
nine months ended September 30, 2008 to $9,141,639 for the nine months ended
September 30, 2009, primarily as a result of the decrease in average selling
price and increased non-cash expenses as described above.
LIQUIDITY
AND CAPITAL RESOURCES
We have
historically financed our operations and capital expenditures through cash flows
from operations, the issuance of secured debt and the issuance of new shares of
our common stock. Our capital resources consist primarily of cash flows from our
oil producing properties. Our level of earnings and cash flows depend
upon many factors, including the price we receive for crude oil we
produce.
As of
September 30, 2009, the Company had cash and cash equivalents of $33,158,348,
other current assets of $10,497,211 and current liabilities of
$29,043,106. For the nine months ended September 30, 2009, our
primary sources of liquidity were $10,687,746 provided by operating activities
and $20,327,004 in cash provided by financing activities. This cash
balance of $33,158,348 represents an increase of $10,483,324 over our cash
balance as of June 30, 2009 and an increase of $19,919,135 over our cash balance
as of December 31, 2008.
Net cash
provided by operating activities was $10,687,746 for the nine months ended
September 30, 2009 compared to net cash provided by operating activities of
$17,643,184 for the same period in 2008. The decrease in net cash provided by
operating activities was the result of a number of changes in our operating
accounts. Cash from operating activities decreased due to a reduction
in net income and higher cash payments of income and other
taxes. Also the decrease in accounts receivable and increase in
accounts payable in the Current Period compared to the Comparable Period caused
the reduction.
Net cash
used in investing activities was $11,048,307 for the nine months ended September
30, 2009 compared to $19,618,655 for the same period in 2008. This decrease is
primarily due to the significant decrease in purchase of oil and gas properties
of $15,246,968 during the nine months ended September 30, 2009.
Net cash
provided by financing activities was $20,327,004 for the nine months ended
September 30, 2009 as compared to $11,091,105 for the same period in 2008. This
was primarily a result of the financing by the issuance and sale in a public
offering by the Company of an aggregate of 4,000,000 shares of its common stock
on September 15, 2009, at a price of $4.60 per share and warrants to purchase up
to an additional 800,000 shares of common stock. The Company received gross
proceeds of approximately $18.4 million before placement agent and other
expenses.
The
Company has paid for the development of its producing oil wells and oil wells
under construction, along with its acquisition of an oil well drilling and
servicing company, with cash from operations as well as by funds raised through
the issuance of secured debt, common stock and warrants to purchase the
Company’s common stock. The Company is continually evaluating opportunities to
expand production and grow the Company’s operations. The Company may
require additional resources to fully implement the Company’s business plan and
growth strategy. Our ability to obtain additional capital to achieve
certain of these expansion goals will depend on market conditions, national and
global economies and other factors beyond its control. We cannot
assure you that the Company will be able to implement or capitalize on various
financing alternatives or otherwise obtain required capital, the need for which
could be substantial given the Company’s business and development
goals. However, the Company anticipates that cash flows from
operations will be sufficient to fund continued development at the four oil
fields it currently operates and to fund continued operations at its oil well
drilling and servicing subsidiary.
Capital
Commitments
As of
September 30, 2009, the Company had commitments for capital expenditure of
$9,426,000 with a contractor to complete the drilling of 43 oil
wells.
Crude
Oil Price Trends
Changes
in crude oil prices significantly affect our revenues, financial condition and
cash flows. Markets for crude oil have historically been volatile and
we expect this trend to continue. Prices for crude oil typically
fluctuate in response to relatively minor changes in supply and demand, market
uncertainty, seasonal, economic, political and other factors beyond our
control. Although we are unable to accurately predict the prices we
receive for our oil, any significant or sustained decline in oil prices may
materially adversely affect our financial condition, liquidity, ability to
obtain future debt or equity financing and operating results.
Production
Trends
Like all
other oil exploration and production companies, we experience natural production
declines at existing wells. We recognize that oil production from a
given well naturally decreases over time and that a downward trend in our
overall production could occur unless the natural declines are offset by
additional production from new wells, investment in measures to increase the
production from existing wells (such as CO2 and water
injection), or acquisitions of producing properties. If any
production declines we experience are other than a temporary trend, and if we
cannot economically replace our reserves, our results may be materially
adversely affected and our stock price may decline. Our future growth
will depend upon our ability to continue to add oil reserves in excess of our
production at a reasonable cost.
We have
achieved increased production and revenue from our four oilfields as a result of
our significant investments in these areas. As of September 30, 2009,
we have drilled 262 wells out of the 675 wells that we believe can be drilled in
our four oilfields. Of these, 259 are produced oil in the Current
Quarter and 3 are the wells under construction. We anticipate that we will
continue to drill new wells and increase production in these
areas. We are also actively seeking additional oil fields that we can
lease and operate.
Operating
Expense Trends
Costs
associated with oil well drilling, improvement (e.g. fracturing and water
injection), and maintenance in the northeastern Chinese oil fields where we
operate have remained relatively constant over the past year. Similarly, service
rates charged by oil field service companies have remained relatively constant
over the past year. We are also generally somewhat buffered
from changes in world oil prices due to the impact of the government oil
surcharge tax. When prices rise, the amount of oil surcharge tax that
we are required to pay increases; conversely price declines reduce the amount of
oil surcharge tax. In the Current Quarter, the approximate amount of
oil surcharge tax we paid was $7.36 per barrel, as compared to $25.94 per barrel
in the Comparable Quarter.
CRITICAL
ACCOUNTING POLICIES
Proved Reserves. Proved oil
and gas reserves, as defined by SEC Regulation S-X Rule 4-10(a) (2)(i), (2)(ii),
(2)(iii), (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.
RECENT
ACCOUNTING PRONOUNCEMENTS updated
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 2008, the FASB issued Staff Position No. FAS 132(R)-1 “Employers’
Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”) (ASC
Topic 715-20-65). FSP FAS 132(R)-1 (ASC Topic 715-20-65) requires more detailed
disclosures about employers’ plan assets in a defined benefit pension or other
postretirement plan, including employers’ investment strategies, major
categories of plan assets, concentrations of risk within plan assets, and inputs
and valuation techniques used to measure the fair value of plan assets. FSP FAS
132(R)-1 (ASC Topic 715-20-65) also requires, for fair value measurements using
significant unobservable inputs (Level 3), disclosure of the effect of the
measurements on changes in plan assets for the period. The disclosures about
plan assets required by FSP FAS 132(R)-1 (ASC Topic 715-20-65) must be provided
for fiscal years ending after December 15, 2009. As this pronouncement is only
disclosure-related, it will not have an impact on the financial position and
results of operations.
In May
2009, the FASB issued a new statement that establishes general standards of
accounting for, and disclosure of events that occur after the balance sheet date
but before the financial statements are issued or are available to be issued.
The new statement, located in ASC Topic 855 Subsequent Events (formerly SFAS
165, Subsequent Events) requires entities to disclose the date through which
subsequent events were evaluated as well as the rationale for why that date was
selected, that is, whether that date represents the date the financial
statements were issued or were available to be issued. The new statement is
effective for interim or annual periods ending after June 15, 2009, which was
the quarter ending June 30, 2009 for the Company. The adoption of
this new statement did not have a material impact on our consolidated financial
statements.
In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS 166”) (ASC Topic
810). SFAS 166 (not part of the codification yet) amends various provisions of
SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities—a replacement of FASB Statement No. 125”
by removing the concept of a qualifying special-purpose entity and removes the
exception from applying FIN 46(R) to variable interest entities that are
qualifying special-purpose entities; limits the circumstances in which a
transferor derecognizes a portion or component of a financial asset; defines a
participating interest; requires a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and requires enhanced disclosure; among
others. SFAS 166 will be effective as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Early adoption is not permitted. This
guidance will be codified under FASB ASC Topic 860, “Transfers and Servicing”
when it becomes effective. The Company does not expect the standard to have any
impact on the Company’s financial position.
In June
2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”) (not part of the codification yet). SFAS 167 amends
FASB Interpretation No. 46 (Revised December 2003) “Consolidation of
Variable Interest Entities—an interpretation of ARB No. 51” (FIN 46(R)) to
require an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity; to require ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity;
to eliminate the quantitative approach previously required for determining the
primary beneficiary of a variable interest entity; to add an additional
reconsideration event for determining whether an entity is a variable interest
entity when any changes in facts and circumstances occur such that holders of
the equity investment at risk, as a group, lose the power from voting rights or
similar rights of those investments to direct the activities of the entity that
most significantly impact the entity’s economic performance; and to require
enhanced disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a variable interest
entity. SFAS 167 will be effective as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. Early adoption is not permitted. This
guidance will be codified under FASB ASC Topic 810, “Consolidation” when it
becomes effective. The Company does not expect the standard to have any impact
on the Company’s financial position.
In August
2009, the FASB issued ASU No. 2009-05 “Measuring Liabilities at Fair
Value”, now codified under FASB ASC Topic 820, “Fair Value Measurements and
Disclosures”, (“ASU 2009-05”) which amends Fair Value Measurements and
Disclosures – Overall (ASC Topic 820-10) to provide guidance on the fair value
measurement of liabilities. This update requires clarification for circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1) a valuation technique that uses either the
quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities or similar liabilities when traded as an asset; or 2)
another valuation technique that is consistent with the principles in ASC Topic
820 such as the income and market approach to valuation. The amendments in this
update also clarify that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. This update further clarifies that if the fair value
of a liability is determined by reference to a quoted price in an active market
for an identical liability, that price would be considered a Level 1 measurement
in the fair value hierarchy. Similarly, if the identical liability has a quoted
price when traded as an asset in an active market, it is also a Level 1 fair
value measurement if no adjustments to the quoted price of the asset are
required. This update is effective for our fourth quarter 2009. Management does
not expect this new guidance to have a material impact on the Company’s consolidated
financial statements.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements”, now codified under FASB ASC Topic 605, “Revenue Recognition”,
(“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted.
Management is currently evaluating the potential impact of ASU2009-13 on our
financial statements.
In
October 2009, the FASB issued ASU 2009-14, “Certain Arrangements That
Include Software Elements, now codified under FASB ASC Topic 985, “Software”,
(“ASU 2009-14”). ASU 2009-14 removes tangible products from the scope of
software revenue guidance and provides guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by
the scope of the software revenue guidance. ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. Management is currently evaluating the potential impact of ASU
2009-14 on our financial statements.
In
October, 2009, the FASB issued ASU 2009-15, “Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”,
now codified under FASB ASC Topic 470 “Debt”, (“ASU 2009-15”), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of
issuance, a share-lending arrangement entered into on an entity’s own shares
should be measured at fair value in accordance with Topic 820 and recognized as
an issuance cost, with an offset to additional paid-in
capital. Loaned shares are excluded from basic and diluted earnings
per share unless default of the share-lending arrangement occurs. The
amendments also require several disclosures including a description and the
terms of the arrangement and the reason for entering into the
arrangement. The effective dates of the amendments are dependent upon
the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15,
2009. Management is currently evaluating the potential impact
of ASU 2009-15 on our financial statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not
required.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
Quarterly Report on Form 10-Q (the “Evaluation Date”). The purpose of this
evaluation is to determine if, as of the Evaluation Date, our disclosure
controls and procedures were operating effectively such that the information,
required to be disclosed in our Securities and Exchange Commission (“SEC”)
reports (i) was recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) was accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were operating effectively.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial reporting that
occurred during the third quarter of fiscal year 2009 that have materially
affected, or are reasonably likely to materially affect our internal controls
over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None.
There has
been no material change in the Company’s risk factors as previously disclosed in
the Company’s Annual Report on Form 10-K filed with the SEC on March 30,
2009.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
Exhibit
No.
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Principal 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
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
China
North East Petroleum Holdings
Limited
|
|
|
|
|
|
November
16, 2009
|
By:
|
/s/ Wang
Hongjun
|
|
|
|
Wang
Hongjun
|
|
|
|
President
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Zhang Yang
|
|
November
16, 2009
|
|
Zhang
Yang
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Financial and Accounting
Officer)
|
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Principal 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
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
37