China North East Petroleum Clarifies Non-Cash Accounting Adjustments to Previously Issued 2008 and 2009 Financial Statements

HARBIN, China and NEW YORK, March 8 /PRNewswire-Asia-FirstCall/ -- China North East Petroleum Holdings Ltd. (the "Company" or "NEP") (NYSE Amex: NEP), a leading independent oil producing and oilfield services company in Northern China, today announced the impact of its previously announced need to revise its 2008 and 2009 financial statements to account for non-cash accounting adjustments.

As stated in the Company's 8-K filed on February, 23, 2010, the Board of Directors of the Company determined that the Company's financial statements for the year ended December 31, 2008, and each interim quarter within that year, and for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 should no longer be relied upon as a result of certain non-cash errors contained therein regarding the accounting for: (i) warrants issued in conjunction with certain financings in 2008 and 2009, which warrants should have been classified according to EITF-0019 as liability instruments rather than equity instruments; (ii) interest expense calculated using the effective interest method that should have been recorded in each of the reporting periods in question, arising from those certain financings in 2008 and 2009; (iii) changes in the fair value of the reclassified warrants; (iv) ceiling test impairment calculations prepared by the Company for the reporting periods ended December 31, 2008 and March 31, 2009; (v) depreciation, depletion and amortization expenses related to the company's oil and gas properties, net; (vi) recognition of employee stock-based compensation expense; and (vii) a modification of the February 28, 2009 secured debenture that occurred on March 5, 2009, which modification should have been treated as an extinguishment pursuant to EITF 96-19. Additional changes that result from these accounting changes include changes in the Company's reported income tax expense and minority interests in certain of the restated reporting periods. The Company is preparing amended reports for the December 31, 2008 Form 10-K and 2008 and 2009 Forms 10-Q in question, including restated financial statements, and will file those amended reports with the SEC when they are completed.

The summary tables below present the income statement impact of the various changes in each quarter on a stand-alone basis (rather than cumulative across quarters, except for the full-year 2008 data), detailed by the type of change noted above.

    2008 Information:

             Three Months  Three Months  Three Months      Three      Year
              ended March     ended     ended September   Months      ended
               31, 2008      June 30,      30, 2008        ended    December
                               2008                      December   31, 2008
                                                         31, 2008
    Net income
     (as
     previously
     reported): $3,281,259   $3,779,007   $4,938,917   $7,582,855  $19,582,038

    Adjustments
     in Period:
    Interest
     Expense
     (related to
     warrants)    $119,334     $289,735     $283,763     $259,014     $951,846
    Loss (Gain)
     on change
     in fair
     value of
     warrants   $1,459,197  $13,272,092 ($18,982,486) ($1,665,638) ($5,916,835)
    Amorti-
     zation of
     deferred
     financing
     costs         $18,174     $43,336       $42,640      $38,891     $143,041
    Reduction in
     carrying
     cost of oil
     & gas
     properties         --          --            --     $957,601     $957,601
    Depreciation        --          --            --   $1,281,067   $1,281,067
    Employee
     stock-based
     compensation
     expense            --          --      $641,250          --      $641,250
    Loss on
     extinguishment
     of debenture       --          --            --          --            --
    Income tax
     expense            --          --            --   ($320,266)    ($320,266)
    Minority
     interests          --          --            --   ($269,309)    ($269,309)

    Total of
     adjustments
     in period  $1,596,705 $13,605,163  ($18,014,833)   $281,360   ($2,531,605)


    Net income
     (as
     adjusted)  $1,684,554 ($9,826,156)  $22,953,750  $7,301,495   $22,113,643



    2009 Information:

                     Three Months ended  Three Months ended Three Months ended
                      March 31, 2009        June 30, 2009   September 30, 2009
    March 31, 2009
    Net income (as
     previously
     reported):           $2,271,353         $2,817,577           $4,052,709

    Adjustments in
     Period:
    Amortization of
     discount on
     debenture               $15,877          ($509,355)           ($513,415)
    Loss (gain) on
     change in fair
     value of
     warrants                $79,045        $10,922,914          ($1,730,199)
    Amortization of
     deferred
     financing costs          $2,938           ($74,140)            ($74,139)
    Reduction in
     carrying cost
     of oil & gas
     properties           $8,036,358                 --                   --
    Depreciation            $911,402           $787,053             $421,914
    Employee stock-
     based compensation
     expense                      --                 --                   --
    Loss on
     extinguishment
     of debenture         $5,642,821                 --                   --
    Income tax
     expense               ($217,891)         ($177,319)            ($91,353)
    Minority
     interests              ($69,352)          ($60,972)            ($33,057)

    Total of
     adjustments in
     period              $14,401,208        $10,888,181          ($2,020,249)


    Net income (as
     adjusted)          ($12,129,855)       ($8,070,604)          $6,072,958

The ceiling test charges (which resulted in a reduction in carrying value of oil and gas properties) were caused by several errors in the method used by the Company in the calculation. These errors included: a) a computational error which caused incorrect discounting of future estimated cash flows, and b) incorrect tax expense assumptions incorporated in the future estimated cash flow model used by our reserve engineers. As a result of the ceiling test impairments recognized at December 31, 2008 and March 31, 2009, the net carrying value of oil and gas properties was reduced on those dates from $70,193,852 to $67,934,989 and from $67,671,268 to $56,462,878, respectively. Additional detailed balance sheet effects, primarily affecting the Company's retained earnings and additional paid-in capital, will be provided in the forthcoming amended financial reports.

In conjunction with the forthcoming issuance of the amended financial reports, the Company will disclose a material weakness regarding its internal controls over financial reporting. The Company has engaged an external consultant with expertise in financial accounting and reporting, including specifically the additional reporting requirements affecting oil and gas producing companies, to assist with the Company's efforts to maintain effective internal controls over financial reporting.

Mr. Hongjun Wang, President of China North East Petroleum, commented, "While we regret the need to revise our 2008 and 2009 financial statements, I'd like to emphasize that our accounting adjustments are non-cash in nature and do not impact our previously reported revenues, cash balances or EBITDA nor do they impact our operational performance. Our adjusted non-cash adjustments resulted in a gain to our net income for the 2008 fiscal year and negatively impacted our net income through the first nine months of 2009. We are proactively addressing our accounting issues and are taking the necessary steps to strengthen our financial reporting and auditing functions. Such efforts will only make our company stronger as we move forward. We look forward to reporting our fourth quarter 2009 financial results toward the end of March."

Additional information related to this subject can be found in the Company's 8-K filed today with the SEC.

ABOUT CHINA NORTH EAST PETROLEUM

China North East Petroleum Holdings Limited is an independent oil company that engages in the production of crude oil in Northern China. The Company is a pioneer in China's private oil exploration and production industry, and the first Chinese non-state-owned oil company trading on the NYSE Amex.

The Company has a guaranteed arrangement with the PetroChina to sell its produced crude oil for use in the China marketplace. The Company currently operates four oilfields in Northern China. The Company also recently added an oil service subsidiary through its acquisition of Song Yuan Tiancheng Drilling Engineering Co. Ltd. ("Tiancheng"). For more information about the Company, please visit http://www.cnepetroleum.com .

Statements in this press release, including but not limited to those relating to the Company's or management's intentions, beliefs, expectations, hopes, projections, assessment of risks, estimations, plans or predictions for the future, including the impact of the restatement, timing of filings with the SEC and other statements that are not historical facts are forward-looking statements that are based on current expectations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that these expectations will prove correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements include delays and uncertainties that may be encountered in connection with the restatement, final audits and reviews by the Company and its auditors, and other risks described in the Company's annual report on Form 10-K for the year ended December 31, 2008 and its other filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. Investors should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement and the Company undertakes no duty to update any forward-looking statement.

    For more information, please contact:

    United States:
     Chao Jiang
     Senior Vice President, Corporate Finance
     Tel:   +1-212-307-3568
     Email: [email protected]

     Bill Zima
     ICR, Inc.
     Tel: 203-682-8200

    China:
     Yang Dio Zhang
     Chief Financial Officer
     Tel:   +86-451-5558-0253
     Email: [email protected]

SOURCE China North East Petroleum Holdings Ltd.