U.S.
Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-QSB
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the quarterly period ended March 31,
2005
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the transition period from _______ to
_______
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LTD.
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
87-0638750
|
|
(State
or other jurisdiction of
|
(IRS
Employer identification No.)
|
|
incorporation
or organization)
|
|
5237
Farago Ave., Temple City, CA 91780
(Address
of principal executive offices)
(626)
448-7637
(Issuer's
telephone number, including area code)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [x] No [ ]
Number
of
shares of common stock outstanding as of June
14,
2005: 18,274,080
Number
of
shares of preferred stock outstanding as of June
14,
2005: -0-
ITEM
1.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
MARCH 31, 2005 (UNAUDITED)
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONTENTS
Pages
__________________________________________________________________________________________
Condensed
Consolidated Balance Sheet as of March 31, 2005
(Unaudited)
1
__________________________________________________________________________________________
Condensed
Statements of Operations for the three months ended March 31, 2005
(Consolidated)
and
2004
(Unaudited)
2
__________________________________________________________________________________________
Condensed
Statements of Cash Flows for the three months ended March 31, 2005
(Consolidated) and
2004
(Unaudited).
3
__________________________________________________________________________________________
Notes
to
Condensed Consolidated Financial Statements as of March 31, 2005
(Unaudited)
4 - 7
__________________________________________________________________________________________
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEET
AS
OF
MARCH 31, 2005
(UNAUDITED)
The
accompanying notes are an integral part of these financial
statements
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONDENSED
STATEMENTS OF OPERATIONS
FOR
THE
THREE MONTHS ENDED MARCH 31, 2005
(CONSOLIDATED)
AND 2004
(UNAUDITED)
The
accompanying notes are an integral part of these financial statement
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
CONDENSED
STATEMENTS OF CASH FLOWS
FOR
THE
THREE MONTHS ENDED MARCH 31, 2005
(CONSOLIDATED)
AND 2004
(UNAUDITED)
The
accompanying notes are an integral part of these financial
statements
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
MARCH 31, 2005
(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 March 31,
2005,
the results of operations for the three months ended March 31, 2005, and
cash
flows for the three months ended March 31, 2005. The results for the three
months ended March 31, 2005 are not necessarily indicative of the results
to be
expected for the entire fiscal year ending December 31, 2005. These financial
statements should be read in conjunction with the Company's annual report
on
Form 10-KSB as filed with the Securities and Exchange Commission.
NOTE
2 REVERSE MERGER
China
North East Petroleum Holdings Limited (“North East Petroleum”) is a US listed
company which was incorporated in Nevada on August 20, 1999 under the name
of
Draco Holding Corporation (“Draco”).
Draco
is authorized to issue 20,000,000 shares of common stock of $0.001 par value.
On
June 28, 2004, the Articles of Incorporation were amended to change the name
of
the Company to China North East Petroleum Holdings Limited and increase its
authorized shares of common stock from 20,000,000 to 50,000,000.
Hong
Xiang Petroleum Group Limited ("Hong Xiang Petroleum Group") was incorporated
in
the British Virgin Islands (“BVI”) on August 28, 2003.
On
December 5, 2003, Song
Yuan
City Hong Xiang Petroleum Technical Services Co., Ltd. (“Hong Xiang Technical”)
was incorporated in the People’s Republic of China (“PRC”) as a limited
liability company with a registered capital of $484,000. Hong Xiang Technical
provides technical advisory services to oil and gas exploration companies
in the
PRC.
During
2004, Hong Xiang Petroleum Group acquired a 100% ownership of Hong Xiang
Technical.
During
2004, Hong Xiang Technical acquired a 100% interest in Song Yuan City Yu
Qiao
Qianan Hong Xiang Oil and Gas Development Co., Ltd. (“Hong Xiang Oil
Development”), a limited liability company incorporated on April 1, 2003 in the
PRC with a registered capital of $604,800.
Hong
Xiang Oil Development is engaged in the exploration and production of crude
oil
in Jilin Oil Region, the PRC. Subsequent to the Cooperative Exploration Contract
entered by the non-operating interest owner and Jilin Office, PetroChina
Group
(“Sub-Owner”) in December 2002, Hong Xiang Oil Development entered into another
Cooperative Exploration Contract (the “Contract”) with the non-operating
interest owner in respect of the development rights to the proven reserves
in
the Qian’an Oil Field Zone 112 (the “Zone”) in Jilin Oil Region for 20 years
(the “Contract Period”).
In
accordance with the Contract, Hong Xiang Oil Development was responsible
to
provide working capital and developing the Zone. Production from
the Zone
is shared in the following manner:-
The
acquisition of Hong Xiang Oil Development by Hong
Xiang Technical has been accounted for as a reorganization of entities under
common control as the companies were beneficially owned by principally identical
shareholders and share common management. The financial statements have been
prepared as if the reorganization had occurred retroactively.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
MARCH 31, 2005
(UNAUDITED)
On
March
29, 2004, Draco executed a Plan of Exchange (“the Agreement”) with all the
shareholders of Hong Xiang Petroleum Group to exchange 18,700,000 shares
of
common stock of Draco for 100% of the outstanding shares of Hong Xiang Petroleum
Group.
The
Agreement was consummated on April 30, 2004. As a result of the Agreement,
the
exchange of shares with Hong Xiang Petroleum Group have been accounted for
as a
reverse acquisition under the purchase method of accounting since the
shareholders of Hong Xiang Petroleum Group obtained control of the consolidated
entity (“North East Petroleum”). Accordingly, the merger of North East Petroleum
and Hong Xiang Petroleum Group has been recorded as a recapitalization by
Hong
Xiang Petroleum Group, with Hong Xiang Petroleum Group being treated as the
continuing entity. The financial statements have been prepared as if the
reorganization had occurred retroactively. North East Petroleum, Hong Xiang
Petroleum Group, Hong Xiang Technical and Hong Xiang Oil Development are
hereafter referred to as (“the Company”).
Accordingly,
the financial statements include the following:
| a) |
The
balance sheet consists of the net assets of the acquirer at historical
cost and the net assets of the acquiree at historical cost;
and
|
| b) |
The
statements of operations include the operations of the acquirer
for the
years presented and the operations of the acquiree from the date
of the
merger.
|
The
financial statements of the acquiree are not significant. Therefore, no pro
forma financial statements are submitted.
In
addition to completion of the Exchange, on April 30, 2004, Draco executed
a
Distribution Agreement with its wholly-owned subsidiary, Jump’n Jax, Inc., a
Utah corporation (“Jump’n Jax”) pursuant to which the Company agreed to
distribute all of the outstanding shares of Jump’n Jax as a dividend to the
shareholders of record of Draco as of March 8, 2004. Under the Distribution
Agreement, the effective date of dividend was also April 30, 2004.
NOTE
3 PRINCIPLES OF CONSOLIDATION
The
accompanying unaudited condensed financial statements for 2005 (consolidated)
and 2004 include the financial statements of North East Petroleum and its
wholly
owned subsidiaries, Hong Xiang Petroleum Group, Hong Xiang Technical and
Hong
Xiang Oil Development. All significant inter-company accounts and transactions
have been eliminated in consolidation.
NOTE
4 USE OF ESTIMATES
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE
5 OIL AND GAS PROPERTIES
The
Company follows the full cost method of accounting for oil and gas properties.
Accordingly, all costs associated with acquisition of development
rights,
and development of oil reserves, including directly related overhead costs,
are
capitalized.
Depreciation,
depletion and amortization of capitalized costs, excluding unproved properties,
are based on the unit-of-production methods based on proved reserves.
Investments in unproved properties and
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
MARCH 31, 2005
(UNAUDITED)
major
development projects are not amortized until proved reserves associated with
the
projects can be determined or until impairment occurs. If the results
of
an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
In
addition, the capitalized costs are subject to a “ceiling test”, which basically
limits such costs to the aggregate of the “estimated present value”, discounted
at a 10-percent interest rate of future net revenues from proved reserves,
based
on current economic and operating conditions, plus the lower of cost or fair
market value of unproved properties.
Sales
of
portion of development rights and other proved and unproved properties are
accounted for as adjustments of capitalized costs with no gain or loss
recognized, unless such adjustments would significantly alter the relationship
between capitalized costs and proved reserves of oil and gas, in which case
the
gain or loss is recognized in income.
Abandonment
of oil and gas properties other than the development rights are accounted
for as
adjustments of capitalized costs with no loss recognized
NOTE
6 EARNINGS PER SHARE
Basic
earnings per share are computed by dividing income available to common
stockholders by the weighted average number of common stocks outstanding
during
the period. Diluted income per share is computed similar to basic income
per
share except that the denominator is increased to include the number of
additional common stocks that would have been outstanding if the potential
common stocks had been issued and if the additional common stocks were diluted.
There are no potentially dilutive securities for 2005 and 2004.
NOTE
7 ENVIRONMENTAL COSTS
The
PRC
has adopted extensive environmental laws and regulations that affect the
operations of the oil and gas industry. The outcome of environmental liabilities
under proposed or future environmental legislation cannot be reasonably
estimated at present, and could be material. Under existing legislation,
however, the management believes that there are no probable liabilities that
will have a material adverse effect on the financial position of the
Company.
NOTE
8 SHAREHOLDERS’ EQUITY
(A) Stock
issuances
On
March
29, 2004, the Company executed a Plan of Exchange pursuant to which the Company
agreed to issue 18,700,000 new shares of common stock to the shareholders
of
Hong Xiang Petroleum Group in exchange for 100% of registered capital of
Hong
Xiang Petroleum Group. The Plan of Exchange was consummated on April 30,
2004.
During
2004, North East Petroleum issued 1,199,080 shares of common stock for the
recapitalization with Hong Xiang Petroleum Group (see Note 1).
During
2004, the Company issued 90,000 and 100,000 shares of common stock for
consulting services. The stock was valued at the closing price on the date
of
grant, or at $1.11 and $0.45 per share respectively, yielding an aggregate
value
of $99,900 and 45,000 respectively. The expense of the services was charged
to
operations in the accompanying financial statements.
During
January 2005, a stockholder of the Company returned 2,715,000 shares of common
stock to the Company.
CHINA
NORTH EAST PETROLEUM HOLDINGS LIMITED
AND
SUBSIDIARIES
NOTES
TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS
OF
MARCH 31, 2005
(UNAUDITED)
During
February 2005, the Company issued 750,000 and 150,000 shares of common stock
for
consulting services. The stock was valued at the closing price on the date
of
grant, or at $1.08 and $0.92 per share respectively, yielding an aggregate
value
of $810,000 and 138,000 respectively. The expense of the services was charged
to
operations in the accompanying financial statements.
| (B) |
Appropriated
retained earnings
|
The
Company is required to make appropriations to reserves funds, comprising
the
statutory surplus reserve, statutory public welfare fund and discretionary
surplus reserve, based on after-tax net income determined in accordance with
generally accepted accounting principles of the People’s Republic of China (the
“PRC GAAP”). Appropriation to the statutory surplus reserve should be at least
10% of the after tax net income determined in accordance with the PRC GAAP
until
the reserve is equal to 50% of the entities’ registered capital. Appropriations
to the statutory public welfare fund are at 5% to 10% of the after tax net
income determined in accordance with the PRC GAAP. The statutory public welfare
fund is established for the purpose of providing employee facilities and
other
collective benefits to the employees and is non-distributable other than
in
liquidation. Appropriations to the discretionary surplus reserve are made
at the
discretion of the Board of Directors.
During
2005 and 2004, the Company appropriated $49,969 and $0, respectively to the
reserves funds based on its net income under the PRC GAAP.
NOTE
9 RELATED
PARTY TRANSACTIONS
Two
directors and stockholders had advanced funds totaling $2,174,524 to the
Company
as of June 30, 2004 as unsecured loan, accruing interest at rate of 6% per
annum. The advances are payable upon demand. Total interest expense payable
to
the director and stockholder amounted to $34,442 and $0 for the three months
ended March 31, 2005 and 2004 respectively.
ITEM
2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
discussion contained in this prospectus contains “forward-looking statements”
that involve risk and uncertainties. These statements may be identified by
the
use of terminology such as “believes”, “expects”, “may”, or “should”, or
“anticipates”, or expressing this terminology negatively or similar expressions
or by discussions of strategy. The cautionary statements made in this prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this prospectus. Our actual results could differ
materially from those discussed in this prospectus. Important factors that
could
cause or contribute to such differences include those discussed under the
caption entitled “risk factors,” as well as those discussed elsewhere in this
prospectus.
OUR
COMPANY
We
were
incorporated in the State of Nevada on August 20, 1999.
Since
2004, we
have
been
engaged
in the extraction and production of crude oil in Jilin Province, People's
Republic of China, through Song
Yuan
City Yu Qiao Qianan Hong Xiang Oil and Gas Development Co., Limited,
our wholly-owned subsidiary organized and existing under the laws of the
People’s Republic of China. The oil field is called Jilin Qian’an Oil Field Zone
112 (“Qian’an 112”), located at 9 kilometers southwest of Qian’an City with a
total exploration area of 20.7 square kilometers. Pursuant to a 20-year
exclusive Cooperative Exploration Contract (the “Contract”) signed between and
among PetroChina Group, a corporation organized and existing under the laws
of
the People’s Republic of China (“PetroChina”), Song Yuan City Yu Qiao Oil and
Gas Exploration Limited Corp., a corporation organized and existing under the
laws of the People’s Republic of China (“Yu Qiao”) and us, we have the right to
explore and pump oil at Qian’an 112 and take responsibility for well logging,
drill-stem testing and core sampling. PetroChina will take 20% of our output
in
the first ten years and then 40% of our output until the end of the Contract;
and Yu Qiao will take 2% of our output as a management fee for managing the
process of oil production.
We
are
also seeking the opportunities to acquire additional extraction rights in other
portions of the Qian’an Field or in other newly discovered fields.
Results
of Operations.
Sales.
We
recorded revenue of $351,113 for the three months ended March 31, 2005, versus
sales revenue of $447,608 for the same period ended in 2004, a decrease of
approximately $96,000 or 21%. Such decrease was a result of decreased drilling
output in the first quarter of 2005. Some of the pipes and equipments were
maintained periodically. Our limited capital investment restricted our ability
to finish the maintenance in time, resulting approximately 10% of the drilling
equipments stopped operating.
Cost
of
Sales.
Costs
of
sales for the three months ended March 31, 2005 were $24,509, or approximately
7% of sales, compared to $189,483, or approximately 42% of sales, for the same
period ended in 2004. A decrease of approximately $160,000 or 87% was primarily
the result of decreased cost of oil well drilling operation and decreased
depreciation and amortization.
Oil
well
drilling operation costs from our producing properties for the three months
ended March 31, 2005 were $7,652 compared to $164,403 for the three months
ended
March 31, 2004, a decrease of approximately $150,000 or 95%. Such decrease
was due to the construction of most oil wells done in 2004. The cost related
to
drilling operation was limited.
Depreciation,
depletion, and amortization costs for the three months ended March 31, 2005
decreased to 7,861 from $12,540 for the three months ended March 31, 2004,
a
decrease of approximately $5,000 or 37%. Such decrease was due to the disposal
of oil and gas properties in the first quarter of 2005.
We
expect
to keep cost of sales as a percentage of sales at a low level because we had
short-distance delivery which was good for us to control the storage and
delivery cost.
Expenses.
Operating
expenses for the three months ended March 31, 2005 were $996,691, compared
to
$27,030 for the three months March 31, 2004, an increase of approximately
$970,000. The increase was due primarily to the costs of consulting
fees, which amounted to $948,000 for the three months ended March 31,
2005.
Income
Taxes
Income
taxes are provided in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), “Accounting
for Income Taxes.”
A
deferred tax asset or liability is recorded for all temporary differences
between financial and tax reporting and net operating
loss-carryforwards.
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that, some portion or all of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted
for the effect of changes in tax laws and rates on the date of enactment. We
currently do not have any deferred tax assets.
Net
Income / Loss
We
had a
net loss of
$790,007, or
$0.04
per common share, for the three months ended March 31, 2005, versus a net income
of $153,358, or $0.01 per common share, for the same period ended March 31,
2004. The increase in net loss in the first quarter of 2005 was due primarily
to
the consulting fee of $948,000 for the three months ended March 31, 2005, versus
no consulting fees for the same period ended in 2004.
Impact
of
Inflation.
We
believe that inflation has had a negligible effect on operations since
inception. We believe that we can offset inflationary increases in the cost
of
operations by increasing sales and improving operating
efficiencies.
Oil
Pricing
Oil
prices were near or above record levels for most of the first quarter.
Our
oil prices are largely determined by oil prices in the world market.
Global supply and demand and geopolitical factors are the key determinants
of
oil prices. The rapid growth of energy use in developing countries,
most
notably China, is driving a rapid increase in worldwide oil consumption.
Higher prices could result in reduced consumption and/or increasing supplies
that could moderate the current high price levels. Over the past several
years oil has been an increasing part of our production mix. As a result
higher oil prices have contributed to the increased revenue from oil sales
more
than in the past, and we would suffer a greater impact if oil prices were to
decrease.
Liquidity
and Capital Resources.
On
March
31, 2005, we had cash of $2,935 and working capital deficit of $3,950,390.
The
working capital deficit was due primarily to the other payable and accrued
liabilities of $875,981, which was related to the management fee payable to
Yu
Qiao, and the director and stockholder loan of $2,174,524, which was related
to
our initial investment in oil and gas properties.
On
March
31, 2004, we had cash of $7,936 and working capital deficit of $3,876,441.
The
working capital deficit was due primarily to the other payable and accrued
liabilities of $1,769,439, which was attributable to the management fee payable
to Yu Qiao, and the director and stockholder loan of $1,692,647 for the initial
investment.
Net
cash
flows
provided
by operating
activities were
$2,148
for
the
three months ended March 31, 2005 as compared with net cash flows used in
operating activities of
$415,505 for
the
same period in 2004. The increase in cash provided by operations was primarily
attributable to the increase in stocks issued for services and decrease in
accounts payable and other payable for the first quarter of 2004.
Net
cash
flows
provided
by investing
activities were
$182,005
for
the
three months ended March 31, 2005 as compared with net cash flows used in
investing activities of
$13,043 for
the
same period in 2004. The cash flows provided by investment in the first quarter
of 2005 were primarily attributable to the disposal of oil and gas properties.
The cash flows used in investment in the first quarter of 2004 were due to
the
purchase of oil and gas properties.
Net
cash flows
used in
financing
activities were
$182,005
for
the
three months ended March 31, 2005 as compared with net cash flows provided
by
financing activities of
$428,785 for
the
same period in 2004. The cash flows used in financing activities in the first
quarter of 2005 were due primarily to the repayment to directors and
stockholders.
Overall,
the
estimated capital investment required to fully develop Qian’an 112 is
approximately $23 million. If we raise the funds through issuance of equity
related or debt securities, such securities may have rights to obtain our common
stock, such as warrants or options. Shareholders may experience additional
dilution from exercise of these financial instruments. We cannot be certain
that
additional financing will be available when required or at all. If we raise
capital successfully, we will seek to acquire additional extraction rights
in
other portions of the Qian’an Field or in other newly discovered fields.
If
we are
unable to receive additional cash from our majority stockholder, we may need
to
rely on financing from outside sources through debt or equity transactions.
Failure to obtain such financing could have a material adverse effect on
operations and financial condition.
ITEM
3. CONTROLS
AND PROCEDURES
Quarterly
Evaluation of Controls
As
of the
end of the period covered by this quarterly report on Form 10-Q, we evaluated
the effectiveness of the design and operation of (i) our disclosure controls
and
procedures ("Disclosure Controls"), and (ii) our internal control over financial
reporting ("Internal Controls"). This evaluation ("Evaluation") was performed
by
our Chief Executive Officer, Wei, Guo Ping (“CEO”) and by our President and
Acting Principal Accounting Officer, Wang, Hong Jun, (“CFO”). In this section,
we present the conclusions of our CEO based on and as of the date of the
Evaluation, (i) with respect to the effectiveness of our Disclosure Controls,
and (ii) with respect to any change in our Internal Controls that occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect our Internal Controls.
CEO
and
CFO Certifications
Attached
to this quarterly report, as Exhibits 31.1 and 31.2, are certain certifications
of the CEO and CFO, which are required in accordance with the Exchange Act
and
the Commission's rules implementing such section (the "Rule 13a-14(a)/15d-14(a)
Certifications"). This section of the quarterly report contains the information
concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a)
Certifications. This information should be read in conjunction with the Rule
13a-14(a)/15d-14(a) Certifications for a more complete understanding of the
topic presented.
Disclosure
Controls and Internal Controls
Disclosure
Controls are procedures designed with the objective of ensuring that information
required to be disclosed in our reports filed with the Commission under the
Exchange Act, such as this quarterly report, is recorded, processed, summarized
and reported within the time period specified in the Commission's rules and
forms. Disclosure Controls are also designed with the objective of ensuring
that
material information relating to the Company is made known to the CEO and the
CFO by others, particularly during the period in which the applicable report
is
being prepared. Internal Controls, on the other hand, are procedures which
are
designed with the objective of providing reasonable assurance that (i) our
transactions are properly authorized, (ii) our assets are safeguarded against
unauthorized or improper use, and (iii) our transactions are properly recorded
and reported, all to permit the preparation of complete and accurate financial
statements in conformity with accounting principals generally accepted in the
United States.
Limitations
on the Effectiveness of Controls
Our
management does not expect that our Disclosure Controls or our Internal Controls
will prevent all error and all fraud. A control system, no matter how well
developed and operated, can provide only reasonable, but not absolute assurance
that the objectives of the control system are met. Further, the design of the
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that all control issues and instances so of fraud,
if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision -making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of
two
or more people, or by management override of the control. The design of a system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed
in
achieving its stated objectives under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or because
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Scope
of
the Evaluation
The
CEO
and CFO's evaluation of our Disclosure Controls and Internal Controls included
a
review of the controls' (i) objectives, (ii) design, (iii) implementation,
and
(iv) the effect of the controls on the information generated for use in this
quarterly report. In the course of the Evaluation, the CEO and CFO sought to
identify data errors, control problems, acts of fraud, and they sought to
confirm that appropriate corrective action, including process improvements,
was
being undertaken. This type of evaluation is done on a quarterly basis so that
the conclusions concerning the effectiveness of our controls can be reported
in
our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The
overall goals of these various evaluation activities are to monitor our
Disclosure Controls and our Internal Controls, and to make modifications if
and
as necessary. Our external auditors also review Internal Controls in connection
with their audit and review activities. Our intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including improvements and corrections) as conditions
warrant.
Among
other matters, we sought in our Evaluation to determine whether there were
any
significant deficiencies or material weaknesses in our Internal Controls, which
are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether we had identified any
acts of fraud, whether or not material, involving management or other employees
who have a significant role in our Internal Controls. This information was
important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and CFO
disclose that information to our Board (audit committee), and to our independent
auditors, and to report on related matters in this section of the quarterly
report. In the professional auditing literature, "significant deficiencies"
are
referred to as "reportable conditions". These are control issues that could
have
significant adverse affect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce, to a relatively low level,
the risk that misstatement cause by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employee in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Evaluation, and in each case, if a problem was identified, we considered what
revisions, improvements and/or corrections to make in accordance with our
ongoing procedures.
Conclusions
Based
upon the Evaluation, the Company's CEO and CFO have concluded that, subject
to
the limitations noted above, our Disclosure Controls are effective to ensure
that material information relating to the Company is made known to management,
including the CEO and CFO, particularly during the period when our periodic
reports are being prepared, and that our Internal Controls are effective to
provide reasonable assurance that our financial statements are fairly presented
inconformity with accounting principals generally accepted in the United States.
Additionally, there has been no change in our Internal Controls that occurred
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to affect, our Internal Controls.
PART
II.
OTHER
INFORMATION
Item
1.
Legal Proceedings
None.
Item
2.
Changes in Securities
None.
Item
3.
Defaults Upon Senior Securities
None.
Item
4.
Submission of Matters to a Vote of Security Holders
None.
Item
5.
Other Information
None.
Item
6.
Exhibits and Reports on Form 8-K
(a)
Exhibits
(b)
Reports on Form 8-K
|
(1)
|
We
filed a current report on Form 8-K, dated May 4, 2005, in order to
report
the changes in our certifying
accountant.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
CHINA
NORTH EAST PETROLEUM HOLDINGS LTD.
(Registrant)
|
||
| |
|
|
| Date: June 14, 2005 | By: | /s/ Wang, Hong Jun |
|
Wang, Hong Jun President
|
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