UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2007 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File number 000-51364
SINO GAS INTERNATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in charter)
Utah | 32-0028823 | |
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
The Farmhouse 558 Lime Rock Road Lime Rock, Connecticut 06039 |
(Address of principal executive offices) |
(860) 435-7000
Issuer’s telephone number
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 14, 2007, the Company had 14,920,346 shares of its common stock, par value $.001 per share, outstanding.
Transitional Small Business Disclosure Format: Yes o No x
Table of Contents
PART I. - FINANCIAL INFORMATION | |
Item 1. | |
Financial Statements | 1 |
Notes to Condensed Consolidated Financial Statements (Unaudited) | 7 |
Item 2. | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 |
Item 3. | |
Controls and Procedures | 28 |
PART II. - OTHER INFORMATION | |
Item 6. | |
Exhibits | 28 |
Signatures | 29 |
i
PART I
Item 1. Financial Statements
SINO GAS INTERNATIONAL HOLDINGS, INC.
REVIEWED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
(Stated in US dollars)
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONTENTS | PAGES |
INDEPENDENT AUDITOR’S REPORT | 1 |
CONSOLIDATED BALANCE SHEETS | 2 - 3 |
CONSOLIDATED STATEMENTS OF INCOME | 4 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | 5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS | 6 |
NOTES TO FINANCIAL STATEMENTS | 7 - 21 |
ii
Board of Directors and Stockholders
Sino Gas International Holdings, Inc.
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying interim balance sheet of Sino Gas International Holdings, Inc. as of March 31, 2007 and 2006, and the related consolidated statements of income, retained earnings, and cash flows for the three-month periods then ended. These interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
South San Francisco, California | Samuel H. Wong & Co., LLP |
May 7, 2007 | Certified Public Accountants |
1
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND 2006
(Stated in US Dollars)
Notes | 2007 | 2006 | ||||||||
ASSETS | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 2,345,164 | $ | 937,436 | ||||||
Notes receivable | 64,592 | - | ||||||||
Accounts receivable | 5,529,115 | 5,898,898 | ||||||||
Advances to suppliers | 572,455 | 364,131 | ||||||||
Prepaid expenses | 99,378 | 24,790 | ||||||||
Other receivables | 4 | 1,910,158 | 704,623 | |||||||
Total current assets | $ | 10,520,862 | $ | 7,929,878 | ||||||
Long term assets | ||||||||||
Investments in equity securities | 5 | 3,310,647 | 2,454,994 | |||||||
Plant and equipment, net | 7 | 13,890,374 | 3,219,033 | |||||||
Construction in progress | 5,973,513 | 3,206,343 | ||||||||
Intangible assets | 6 | 630,040 | 432,072 | |||||||
Goodwill | 3 | 875,754 | - | |||||||
TOTAL ASSETS | $ | 35,201,190 | $ | 17,242,320 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current liabilities | ||||||||||
Accounts payable | $ | 3,744,612 | $ | 2,979,506 | ||||||
Other payables | 8 | 657,999 | 1,392,388 | |||||||
Unearned revenue | 16,879 | 175,093 | ||||||||
Accrued liabilities | 3,083,235 | 87,423 | ||||||||
Acquisition payable | 3 | 1,937,759 | - | |||||||
Total current liabilities | $ | 9,440,484 | $ | 4,634,410 | ||||||
TOTAL LIABILITIES | $ | 9,440,484 | $ | 4,634,410 |
See accompanying notes to financial statements and accountant’s report
2
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF MARCH 31, 2007 AND 2006
(Stated in US Dollars)
Notes | 2007 | 2006 | ||||||||
Minority interest | 64,592 | - | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||||
Preferred stock A US$0.001 par value; 20,000,000 authorized; nil and nil issued and outstanding as of March 31, 2007 and 2006 respectively | - | - | ||||||||
Preferred stock B US$0.001 par value; 5,000,000 authorized; 3,795,571 and nil issued and outstanding as of March 31, 2007 and 2006 respectively | $ | 3,796 | $ | - | ||||||
Common stock US$0.001 par value; 250,000,000 authorized; 14,920,344 and 14,361,646 issued and outstanding as of March 31, 2007 and 2006 respectively | 14,920 | 14,362 | ||||||||
Additional paid-in-capital | 12,069,176 | 4,812,650 | ||||||||
Statutory reserves | 2,025,022 | 1,219,720 | ||||||||
Retained earnings | 10,584,954 | 6,321,886 | ||||||||
Accumulated other comprehensive | ||||||||||
income | 998,246 | 239,292 | ||||||||
$ | 25,696,114 | $ | 12,607,910 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ | ||||||||||
EQUITY | $ | 35,201,190 | $ | 17,242,320 | ||||||
See accompanying notes to financial statements and accountant’s report
3
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2007 | 2006 | |||||||||
Notes | ||||||||||
Net revenues | 11 | $ | 2,438,227 | $ | 655,092 | |||||
Cost of revenues | (1,837,630 | ) | (517,183 | ) | ||||||
Gross profit | 600,597 | 137,909 | ||||||||
Operating expenses | ||||||||||
Selling and marketing expenses | (56,198 | ) | (10,154 | ) | ||||||
General and administrative expenses | (441,374 | ) | (116,579 | ) | ||||||
Income from continuing operations | $ | 103,025 | 11,176 | |||||||
Finance costs, net | 9 | (5,370 | ) | (86 | ) | |||||
Other income | 36,088 | - | ||||||||
Other expenses | (1,495 | ) | - | |||||||
Income before taxation | $ | 132,248 | $ | 11,090 | ||||||
Income tax | 10 | (16,865 | ) | (998 | ) | |||||
Net income | $ | 115,383 | $ | 10,092 | ||||||
Net income per share, | |||||||
Basic | $ | 0.008 | $ | 0.001 | |||
Diluted | 0.004 | 0.001 | |||||
Weighted average shares outstanding of common | |||||||
stock, | |||||||
Basic | 14,730,597 | 14,361,646 | |||||
Diluted | 28,724,652 | 14,361,646 |
See accompanying notes to financial statements and accountant’s report
4
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
Preferred Shares | Stock B Amount | Common Shares | Stock Amount | Additional Paid-in Capital | Statutory Reserves | Retained Earnings | Accumulated Other comprehensive Income | Total | ||||||||||||||||||||
Balance, January 1, 2006 | - | $ | - | 14,361,646 | $ | 14,362 | 4,812,650 | 1,219,720 | 6,311,794 | 267,865 | 12,626,391 | |||||||||||||||||
Net income | 10,092 | 10,092 | ||||||||||||||||||||||||||
Foreign currency translation | ||||||||||||||||||||||||||||
adjustment | (28,573 | ) | (28,573 | ) | ||||||||||||||||||||||||
Balance, March 31, 2006 | - | $ | - | 14,361,646 | $ | 14,362 | 4,812,650 | 1,219,720 | 6,321,886 | 239,292 | 12,607,910 | |||||||||||||||||
Balance, January 1, 2007 | 4,023,268 | $ | 4,023 | 14,692,647 | $ | 14,693 | 12,069,176 | 2,025,022 | 10,469,571 | 824,296 | 25,406,780 | |||||||||||||||||
Net income | 115,383 | 115,383 | ||||||||||||||||||||||||||
Stock conversion | (227,697 | ) | (227 | ) | 227,697 | 227 | ||||||||||||||||||||||
Foreign currency translation | ||||||||||||||||||||||||||||
adjustment | 173,950 | 173,950 | ||||||||||||||||||||||||||
Balance, March 31, 2007 | 3,795,571 | $ | 3,796 | 14,920,344 | $ | 14,920 | 12,069,176 | 2,025,022 | 10,584,954 | 998,246 | 25,696,114 | |||||||||||||||||
See accompanying notes to financial statements and accountant’s report
5
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2007 | 2006 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 115,383 | $ | 10,092 | |||
Depreciation and amortization | 38,844 | 32,966 | |||||
Equity in investments | (371,618 | ) | 5,534 | ||||
Decrease in accounts and other receivables | 310,419 | 1,600,187 | |||||
Increase/(decrease) in accounts and other payables | 3,023,295 | (1,055,844 | ) | ||||
Net cash provided by operating activities | $ | 3,487,941 | $ | 592,935 | |||
Cash flows from investing activities | |||||||
Purchase of plant and equipment | (3,320,688 | ) | (51,317 | ) | |||
Pledge deposits | 3,124,541 | - | |||||
Payment for the construction in progress | (1,345,436 | ) | (151,996 | ) | |||
Purchase of intangible assets | (172,210 | ) | 5,193 | ||||
Acquisition of subsidiaries | (930,801 | ) | - | ||||
Net cash used in investing activities | $ | (2,644,594 | ) | $ | (198,120 | ) | |
Cash flows from financing activities | |||||||
Repayment of bank borrowings | (2,430,445 | ) | - | ||||
Net cash used in financing activities | $ | (2,430,445 | ) | $ | - | ||
Net in cash and cash equivalents sourced/(used) | (1,587,098 | ) | 394,815 | ||||
Effect of foreign currency translation on cash and | |||||||
cash equivalents | 293,589 | (28,573 | ) | ||||
Cash and cash equivalents - beginning of year | 3,638,673 | 571,194 | |||||
Cash and cash equivalents - end of year | $ | 2,345,164 | $ | 937,436 |
Supplementary cash flow information: | |||||||
Interest received | $ | 94,653 | $ | 240 | |||
Interest paid | 43,617 | 326 | |||||
Income tax paid | 16,865 | 998 |
See accompanying notes to financial statements and accountant’s report
6
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Sino Gas International Holdings, Inc. (“the Company”) was incorporated under the laws of the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company changed its name to American Arms, Inc. on April 5, 1984, and then changed its name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to Sino Gas International Holdings, Inc. on November 17, 2006. The Company is a natural gas services operator, principally engaging in the investment, operation and management of city gas pipeline infrastructure, in the distribution of natural gas to residential and industrial users, in the construction and operation gas stations, and in the development and application of natural gas related technologies.
The Company owns and operates 23 natural gas distribution systems serving approximately 63,000 residential and eight commercial and industrial customers. The Company’s facilities include approximately 700 kilometers of pipeline and delivery networks with a designed daily capacity of approximately 70,000 cubic meters of natural gas.
The common stock of the Company is currently quoted on the National Association of Securities Dealers' Over-the-Counter Bulletin Board under the symbol “SGAS.”
Basis of Presentation and Organization
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (“PRC GAAP”) or in the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company’s subsidiaries to present them in conformity with US GAAP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Method of Accounting
The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
7
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(b) Use of estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
(c) Economic and political risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
8
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(d) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries (“the Group”). Significant inter-company transactions have been eliminated in consolidation. Investments in which the company has a 20 percent to 50 percent voting interest and where the company exercises significant influence over the investor are accounted for using the equity method.
The Company owned its subsidiaries soon after its inception and continued to acquire and own the equity interests throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of March 31, 2007 and 2006 (whichever applicable 2006).
Name of Company | Place of Incorporation | Date of Incorporation | Beneficiary interest % | Equity Interest % | Registered Capital | |||||
The British | ||||||||||
GAS Investment China Co., Ltd. | Virgin Islands | 6/19/2003 | 100 | 100 | USD 10,000,000 | |||||
The British | ||||||||||
Sino Gas Construction Limited | Virgin Islands | 1/9/2007 | 100 | 100 | USD 50,000 | |||||
Pegasus Tel, Inc. | Delaware, U.S.A. | 2/19/2002 | 100 | 100 | USD 1,000 | |||||
Beijing Zhong Ran Wei Ye Gas Co., Ltd | PRC | 8/29/2001 | 100 | 100 | RMB 94,448,517 | |||||
Ningjin Weiye Gas Co., Ltd | PRC | 12/3/2003 | 100 | 95 | RMB 3,000,000 | |||||
Jinzhou Weiye Gas Co., Ltd | PRC | 7/19/2004 | 100 | 95 | RMB 5,000,000 | |||||
Xingtang Weiye Gas Co., Ltd | PRC | 2/18/2004 | 100 | 95 | RMB 3,000,000 | |||||
Linzhang Weiye Gas Co., Ltd | PRC | 7/6/2005 | 100 | 85 | RMB 1,000,000 | |||||
Anping Weiye Gas Co., Ltd | PRC | 8/4/2005 | 100 | 95 | RMB 5,000,000 | |||||
Wuqiao Gas Co., Ltd | PRC | 6/30/2004 | 100 | 95 | RMB 2,000,000 | |||||
Yutian Zhongran Weiye Gas Co., Ltd | PRC | 12/19/2003 | 100 | 90 | RMB 3,000,000 | |||||
Sihong Weiye Gas Co., Ltd | PRC | 12/3/2004 | 100 | 95 | RMB 10,000,000 | |||||
Langfang Development Region Weiye | ||||||||||
Dangerous Goods Transportation Co., Ltd | PRC | 3/22/2005 | 100 | 95 | RMB 1,000,000 | |||||
Peixian Weiye Gas Co., Ltd | PRC | 8/22/2005 | 100 | 90 | RMB 5,000,000 | |||||
Sishui Weiye Gas Co., Ltd | PRC | 12/22/2004 | 100 | 95 | RMB 3,000,000 | |||||
Longyao Zhongran Weiye Gas Co., Ltd | PRC | 10/13/2005 | 100 | 95 | RMB 3,000,000 | |||||
Shenzhou Weiye Gas Co., Ltd | PRC | 12/23/2005 | 100 | 95 | RMB 3,000,000 | |||||
Hengshui Weiye Gas Co., Ltd | PRC | 12/20/2005 | 100 | 95 | RMB 3,000,000 | |||||
Changli Weiye Gas Co., Ltd | PRC | 12/8/2006 | 100 | 95 | RMB 3,000,000 | |||||
Yuxian Jinli Gas Co., Ltd | PRC | 11/8/2005 | 100 | 100 | RMB 9,500,000 | |||||
Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd. | PRC | 9/30/2005 | 100 | 100 | RMB 2,000,000 |
9
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(d) | Principles of Consolidation (Cont’d) |
Name of Company | Place of Incorporation | Date of Incorporation | Beneficiary interest % | Equity Interest % | Registered Capital | |||||
Beijing Chenguang Gas Ltd. | PRC | 10/30/2002 | 100 | 100 | RMB 20,000,000 | |||||
Cheng'an County Chenguang Gas Co., Ltd | PRC | 1/23/2007 | 100 | 100 | RMB 1,500,000 | |||||
Xinji County Zhongchen Gas Co., Ltd | PRC | 2/7/2007 | 100 | 100 | RMB 3,000,000 | |||||
Tianjin Chenguang Gas Co., Ltd | PRC | 3/7/2006 | 90 | 90 | RMB 2,000,000 |
(e) | Cash and Cash Equivalents |
The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.
(f) | Accounts and Other Receivable |
Accounts and other receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company extends unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable.
(g) | Advances to Suppliers |
Advances to suppliers represent the cash paid in advance for purchasing raw materials. The advances to suppliers are interest free and unsecured.
10
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(h) Investments in Equity Securities
The consolidated statement of income includes the Group's share of the post-acquisition results of its associate for the year. In the consolidated balance sheet, investments in equity securities are stated at the Group's share of the net assets of the associates plus the premium paid less any discount on acquisition in so far as it has not already been amortized to the statement of income, less any identified impairment loss.
Portion of | |||||||||
Nominal | |||||||||
Name of | Place | Form of | Value of | ||||||
Associate | of | Business | Registered | Registered | Principal | ||||
Company | Registration | Structure | Capital | Capital | Activities | ||||
Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd | PRC | Sino-foreign equity joint venture | RMB 20,000,000 | 40 | Trading of natural gas and gas pipeline construction |
Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd is the Group's 40% owned joint Venture company and is principally engaged in sale of compressed natural gas to domestic households and industrial around sub-urban areas of Beijing and part of sub-urban areas in Hebei Province and Tianjin.
(i) Accounting for the Impairment of Long-Lived Assets
The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
During the reporting periods, there was no impairment loss.
11
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(j) Plant and Equipment
Plant and equipment, other than construction in progress, are stated at cost less depreciation and amortization and accumulated impairment loss.
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
Gas Pipelines | 25 years |
Motor Vehicles | 10 years |
Machinery & Equipment | 20 years |
Buildings | 25 years |
Leasehold Improvements | 25 years |
Office Equipment | 8 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
(k) Intangible Assets
Intangible assets, are stated at cost less amortization and accumulated impairment loss. Amortization is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:
Land use rights | 40 - 50 years |
Franchises | 30 years |
Other intangibles | 3 years |
(l) Construction in progress
Construction in progress represents the cost of constructing pipelines and is stated at cost. Costs comprise direct and indirect incremental costs of acquisition or construction. Completed items are transferred from construction in progress to the gas pipelines of fixed assets when they are ready for their intended use. The major cost of construction relates to construction materials, direct labor wages and other overhead. Construction of pipeline, through which to distribute natural gas, is one of the Group’s principal businesses. The Group builds city main pipeline network and branch pipeline network to make gas connection to resident users, industrial, and commercial users, with the objective of generating revenue on gas connection and gas usage fees collected from these customers. As at March 31, 2007, the pipelines under construction include mainly the projects in several cities of Hebei and Jiangsu province, and in Beijing. These projects, once completed, will significantly increase the gas supply capacity. Capital commitments in respect of these projects amounted to approximately $4 million at March 31, 2007.
12
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(m) | Unearned Revenue |
Unearned revenue represents prepayments by customers for gas purchases and advance payments on construction and installation of pipeline contracts. The Company records such prepayment as unearned revenue when the payments are received.
(n) | Financial Instruments |
The carrying amounts of all financial instruments approximate fair value. The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. The carrying amounts of borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
(o) | Foreign Currency Translation |
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
2007 | 2006 | ||||||
Months end RMB : US$ exchange rate | 7.7409 | 8.0352 | |||||
Average monthly RMB : US$ exchange rate | 7.7714 | 8.0558 |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(p) Revenue Recognition
Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
Net sales consist of gas and connection fee revenue. Cost of sales includes gas and connection cost.
Gas connection revenue is recognized when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably.
Sales of natural gas are recognized when goods are delivered and title has passed.
13
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(q) Other Income
Other income represents the Group’s share of post- acquisition results of its investment in equity securities for the year.
(r) Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. At March 31, 2007, there was no significant book to tax differences.
Pursuant to the tax laws of PRC, general enterprises are subject to income tax at an effective rate of 33%. Beijing Gas is in the natural gas industry whose development is encouraged by the government. According to the income tax regulation, any company engaged in the natural gas industry enjoys a favorable tax rate. Also, Beijing Gas is exempt from corporate income tax for its first two years and is then entitled to a 50% tax reduction for the succeeding three years. The Company’s first profitable tax year was 2003. Accordingly, the Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards, the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of Beijing Gas are subject to the effective rate of 33%.
(s) Advertising
The Group expensed all advertising costs as incurred
(t) Concentration of Credit Risk
Concentration of credit risk is limited to accounts receivable and is subject to the financial conditions of major customers. The Company does not require collateral or other security to support accounts receivable. The Company conducts periodic reviews of its clients’ financial condition and customers’ payment practices to minimize collection risk on accounts receivable.
(u) Retirement Benefits
Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred.
14
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(v) Statutory Surplus Reserves
As stipulated by the Company Law of the People's Republic of China (PRC) as applicable to Chinese companies with foreign ownership, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
i. | Making up cumulative prior years' losses, if any; |
ii. | Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital; |
iii. | Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and |
iv. | Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting. |
(w) | Statement of Cash Flows |
In accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from the Company’s operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
(x) | Comprehensive Income |
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.
15
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(y) | Recent Accounting Pronouncements |
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, where fair value is the relevant measurement attribute. The standard does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of the Company’s financial statements and the related financial statement disclosures. SAB No.108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings.
The management of the Company does not anticipate that the adoption of these three standards will have a material impact on these consolidated financial statements.
16
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
3. ACQUISITION
On January 15, 2007, Beijing Gas entered into a stock transfer agreement with the shareholders of Beijing Chenguang Gas Ltd., Co., a limited liability company organized under the laws of the PRC, under which Beijing Gas will acquire all the capital stock of Beijing Chenguang for a purchase price of RMB 26 million (or approximately $3,358,782) in cash. Upon consummation of the transactions contemplated by that agreement, Beijing Chenguang will become a wholly-owned subsidiary of Beijing Gas.
As at March 31, 2007, the Company paid $1,421,023 for the acquisition, and the $1,937,759 remains as acquisition payable.
The following table depicts total assets acquired and liabilities assumed from the above-mentioned subsidiaries at fair values. The Purchase Price was $3,358,782, which was more than the Net Assets acquired of $2,483,028 by $875,754. This differential represents Goodwill, which was accounted for according to generally accepted accounting principles in the United States as addressed below.
Cash | $ | 489,448 | ||
Other current assets | 929,104 | |||
Property and equipment | 2,592,788 | |||
Other assets | 734,902 | |||
Total assets acquired | $ | 4,746,242 | ||
Current liabilities | (2,263,214 | ) | ||
Net assets acquired | $ | 2,483,028 | ||
Goodwill | 875,754 | |||
Acquisition price | $ | 3,358,782 |
4. OTHER RECEIVABLES
Other receivables at March 31, consist of the following:
2007 | 2006 | ||||||
Deposit paid | $ | 1,625,672 | $ | 10,043 | |||
Amounts due from employees | 55,807 | 25,489 | |||||
Sundry receivables | 228,679 | 669,091 | |||||
$ | 1,910,158 | $ | 704,623 |
Amounts due from employees are advances for business traveling and purchases of materials. All the amounts due from employees/shareholders are unsecured, interest free, and without fixed repayment terms.
17
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
5. INVESTMENT IN EQUITY SECURITIES
2007 | 2006 | ||||||
As at January 1, at Cost | $ | 2,939,029 | $ | 2,443,378 | |||
Changes due to foreign currency translation | 371,618 | 11,616 | |||||
As at March 31, 2007 | $ | 3,310,647 | $ | 2,454,994 | |||
6. INTANGIBLE ASSETS
Intangible assets consist of the following as of March 31:
2007 | 2006 | ||||||
At Cost | |||||||
Land use rights | $ | 121,445 | $ | 110,110 | |||
Franchises | 355,256 | 325,685 | |||||
Other intangibles | 169,676 | 373 | |||||
646,377 | 436,168 | ||||||
Less: Accumulated amortization | (16,337 | ) | (4,096 | ) | |||
$ | 630,040 | $ | 432,072 | ||||
The Group operates as a local natural gas distributor in a city or county, known as an operation location, under an exclusive franchise agreement between the Group and the local government or entities in charge of gas utility. Franchises are the rights to develop sites in Anping and Jinzhou in China. They are stated at cost less accumulated depreciation.
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SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
7. PLANT AND EQUIPMENT, NET
Plant and Equipment consist of the following as of March 31:
2007 | 2006 | ||||||
At Cost | |||||||
Gas Pipelines | $ | 8,524,074 | $ | 2,837,692 | |||
Motor Vehicles | 3,337,767 | 99,376 | |||||
Machinery & Equipment | 263,930 | 253,536 | |||||
Buildings | 2,317,912 | 86,952 | |||||
Leasehold Improvements | 48,014 | 46,036 | |||||
Office Equipment | 109,536 | 41,607 | |||||
$ | 14,601,233 | $ | 3,365,199 | ||||
Less: Accumulated depreciation | 710,859 | 146,166 | |||||
$ | 13,890,374 | $ | 3,219,033 | ||||
8. OTHER PAYABLES
Other payables at March 31, 2006 and 2007 consist of the following:
2007 | 2006 | ||||||
Employees’ welfare payables | $ | 3,023 | $ | - | |||
Loan from an unrelated company - Qian Shi Li | - | 681,250 | |||||
Loan from an unrelated company - Shi Yi Long Da | - | 500,409 | |||||
Loan from an unrelated company - Tianjin Changlin | 581,328 | - | |||||
Sundry payables | 73,648 | 210,729 | |||||
$ | 657,999 | $ | 1,392,388 | ||||
All the amounts due to employees are unsecured, interest free, and without fixed repayment terms. Loan from Shenzhen Shi Yi Long Da Co., Ltd (Shi Yi Long Da) is unsecured, interest at 6% per annum and due October 2006. This money was paid in October 2006. Loan from Beijing Qian Shi Li Technology Development Co., Ltd. (Qian Shi Li) and Tianjin Changlin Gas Co. Ltd. (Tianjin Changlin) are unsecured, interest free, and without fixed repayment terms.
19
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
9. FINANCE COSTS, NET
Details of finance costs are summarized as follows:
2007 | 2006 | ||||||
Total interest cost incurred | $ | 43,617 | $ | 326 | |||
Interest income | (94,653 | ) | (240 | ) | |||
Other | 56,406 | - | |||||
$ | 5,370 | $ | 86 | ||||
10. INCOME TAX
In accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is 33%. However, in accordance with the relevant taxation laws in the PRC, the Group is eligible for tax concessions and was exempted from part of the PRC income taxes for the year.
The following table accounts for the differences between the actual tax provision and the amounts obtained by applying the applicable PRC corporation income tax rate of 33% to income before taxes for the three months ended March 31,
2007 | 2006 | ||||||
Income before taxation | $ | 132,248 | $ | 11,090 | |||
Provision for income taxes at PRC income tax rate | 43,642 | 3,660 | |||||
Effect of tax exemption granted to the Group | (26,777 | ) | (2,662 | ) | |||
Income tax | $ | 16,865 | $ | 998 | |||
20
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(Stated in US Dollars)
11. BUSINESS SEGMENT
The Company has contracted with customers usually in two business segments altogether, one is for the construction and installation of gas facilities and another one is the subsequent sales of gas to customers through the gas facilities the Company constructs. However, the respective gas facilities contracts and gas supply contracts have separately provided for the basis of revenue and are distinctive from each other for the relevant cost-and-revenue; hence separate calculation and subsequent payment of fees for respective business is without any interdependence on each other.
For management purposes, the company is currently organized into two major operating divisions - gas pipeline construction (installation of gas facilities) and sales of piped gas. These principal operating activities are the basis on which the Company reports its primary segment information.
Gas pipeline | Sales of | |||||||||
2007 | construction | piped gas | Consolidated | |||||||
Turnover | $ | 615,336 | 1,822,891 | 2,438,227 | ||||||
Cost of sales | (124,218 | ) | (1,713,412 | ) | (1,837,630 | ) | ||||
Segment result | $ | 491,118 | 109,479 | 600,597 | ||||||
Gas pipeline | Sales of | |||||||||
2006 | construction | piped gas | Consolidated | |||||||
Turnover | $ | 117,971 | 537,121 | 655,092 | ||||||
Cost of sales | (19,989 | ) | (497,194 | ) | (517,183 | ) | ||||
Segment result | $ | 97,982 | 39,927 | 137,909 | ||||||
Since the Company's operations are conducted in the PRC, all revenue is derived from customers in PRC. No analysis of sales and assets by geographical market is presented because all of the Company’s assets are located in the PRC and sales of piped gas and gas pipeline construction are carried out in PRC,
21
Item 2. Management’s Discussion and Analysis
RESULTS OF OPERATIONS
Three month periods ended March 31, 2007 and 2006
Overview
For the 3 months ended March 31, | |||||
2007 | 2006 | Change | |||
US$ | US$ | % | |||
Net Sales | 2,438,227 | 655,092 | 272.20% | ||
Gross Profit | 600,597 | 137,909 | 335.5% | ||
Operating Income | 103,025 | 11,176 | 821.84% | ||
Net Income | 115,383 | 10,092 | 1043% | ||
Gross Margin | 21.72% | 21.05% | 0.67% | ||
Net Margin | 4.73% | 1.54% | 3.19% |
In the first three months of 2007, we gained roughly 2,250 new household users. Half of these users were located in markets in which we had previously-existing operations, and about half were from new cities in which we acquired operations through our acquisition of Beijing Chenguang Gas Co., Ltd., which took place on January 15, 2007. We continue to follow our growth strategy of improving the penetration rate in cities where we have already established operations while developing new markets through acquisitions and self build-outs.
Boosted by the strong growth in net sales, net income increased more than 10 times from $10,092 in the first three months of 2006 to $115,383 for the first three months of 2007.
Gross margin and net profit margin were lower in the first quarter of 2007 than our prior levels. The modest margins this quarter can be attributed to the larger percentage of gas sales in total net sales, the margin of which is lower than that of gas connections, our other major source of operating revenue. The reduced margins are also due to our increased Selling, General and Administrative expenses as a percentage of net revenues described below. We expect that both gross margin and net profit margin will increase in the third and fourth quarters of this year, when we typically recognize most of our connection fees for construction completed before the end of the year.
22
Net Sales
( $ thousand) | For the 3 months ended March 31 | |||||||||
2007 | 2006 | Change | ||||||||
US$ | % | US$ | % | % | ||||||
Net Sales | 2,438 | 100% | 655 | 100% | 272.25% | |||||
Connection Fees | 615 | 25% | 118 | 18% | 421.19% | |||||
Gas Sales | 1,823 | 75% | 537 | 82% | 239.46% |
Net sales, which consist of connection fees and gas sales, in the first three months of 2007 were $2,438,227, as compared with $665,092 in the same period one year ago.
Net Sales were $2,438,227 in the first quarter of 2007, 272% higher than the first quarter of 2006, when net sales were $655,092. The substantial increase was driven by connections of 2,250 new households and gas sales of 6.22 million cubic meters, as compared with connections of 460 new households and gas sales of 2.37 million cubic meters in the first three months of 2006.
Connection fees
Connection fees were $615,336 in the first quarter of 2007, accounting for 25% of total sales. That was an increase of more than 420% from the $117,971 in the same period one year ago. This increase was due primarily to the 2,250 new household users we gained in the first quarter, as described above. About half of these users came to us through our recently-acquired subsidiary Beijing Chenguang, and about half through older subsidiaries, especially Zhongran Weiye.
Another reason for the increase in connection fees is that because of acquisitions and organic expansion, we had nearly twice as many operating locations in the first quarter of 2007 (twenty-four) as in the first quarter of 2006 (thirteen). As these operating locations develop, they can generate connection fees. Because our operating subsidiaries continue to actively pursue connection and supply contracts with property developers, we believe that the trend of increasing connection fees will continue.
All of our connection fees realized in the first quarter of 2007 were from residential users. We developed a total of 2,250 new household users during the period, including 1,150 household users in markets in which we already operated and 1,100 household users from the markets obtained through the acquisition of Beijing Chenguang Gas. The average connect fee per household is $273.
23
Due to seasonality effects, the first quarter is usually a weak season for gas distribution companies in China in terms of recognition of revenue from connection fees. Construction projects are stopped because of cold weather and the Chinese New Year holiday. New construction projects are begun only in the latter part of the quarter, and only a small portion of connection fees are achieved in this quarter.
To connect new residential users, we usually sign connection agreements with property developers, who represent the resident users living in the residential area. Below are the top five residential projects we have in the first quarter in terms of connection fees.
Residential Projects | Connected Households | Connection fees(1,000) | ||
Jinshi Huayuan Project | 600 | 154.4 | ||
Jinzhou Xisanzhuang Project | 370 | 72 | ||
China Coal Geology Bureau 147 Branch, Datun, Peixian | 200 | 54.1 | ||
Longquan Huayuan Project | 220 | 52.6 | ||
Beijing Xingang Zhuangyuan Project | 220 | 51.5 |
Gas sales
We sold 6.22 million cubic meters gas in the first three months of 2007, generating gas sales of $1.8 million and accounting for 75% of total revenues during the period. In comparison, we sold 2.37 million cubic meters gas in the first three months of 2006, resulting in gas sales of $537,000. Gas sales increased roughly 240%, or $1,285.8 thousand, in the first quarter of 2007 from one year ago. The increase in gas sales is due primarily to our acquisition of Beijing Chenguang as a subsidiary. Beijing Chenguang accounted for 3.75 million cubic meters of gas sold during the first quarter of 2007, and our subsidiary Zhongran Wei Ye accounted for 2.47 million cubic meters in the same period. The average price of gas sold in the first quarter of 2007 was $0.33 per cubic meter.
24
Below is the customer group breakdown of our gas sales:
($ thousand) | For the 3 months ended March 31 | ||||||
2007 | 2006 | ||||||
Gas Sales | US$ | % | US$ | % | |||
Industrial users | $441.60 | 24% | $327.30 | 61% | |||
Residential users | 461.5 | 25% | 25.5 | 5% | |||
Others | 919.8 | 50% | 184.3 | 34% | |||
Total | $1,822.90 | 100% | $537.10 | 100% |
Our major industrial users are Hebei Zhonggang Co., Ltd and Tangshan Changsheng Ceramic Co., Ltd. Daily gas usage by Hebei Zhonggang is close to 15,000 cubic meters. We sold 1.3 million cubic meters of gas to Hebei Zhongguang in the first quarter at unit price of $0.30 per cubic meter. Revenues from gas sales to Hebei Zhongguang in the first three months were $393,000.
In comparison, Hebei Zhonggang consumed one million cubic meter gas in the same period last year. Revenues from Hebei Zhonggang at that period were $265,000. The reason for the increase of gas consumption by Hebei Zhonggang is that the company increased its production. That company’s average daily usage is still far below its designed capability of 30,000 cubic meters per day. We expect the gas usage by Hebei Zhonggang will continue to grow in the future.
Tanghshan Changsheng consumed 161,200 cubic meters of gas in the first quarter of 2007. Revenues from gas sales to Tangshan Changsheng were $48,600 during that period. In comparision, Tangshan Changsheng used 155,500 cubic meters of gas in the first quarter of 2006. This industrial project contributed $45,600 thousand to our total revenues of first three months of 2006.
Cost of sales
($ thousands) | For the 3 months ended March 31, | |||||||||
2007 | 2006 | Change | ||||||||
US$ | % | US$ | % | % | ||||||
Cost of Sales | 1,837 | 100% | 517 | 100% | 255.18% | |||||
Connection Cost | 124 | 6.8% | 20 | 3.9% | 521.0% | |||||
Gas Cost | 1,713 | 93.3% | 497 | 96.1% | 258.8% |
Our cost of sales is composed of connection cost and gas cost. Connection cost is composed of the following cost items: gas meters, in-building pipelines, installation and maintenance.
As no industrial users were developed in the first quarter, all our connection cost was the cost of connecting residential users. Connection cost was $124,000, accounting for 6.8% of total cost, for the three months ended March 31, 2007. Connection cost increased more than five times from the same period one year ago.
25
Gas cost is composed of the purchase price of gas, transportation cost and depreciation of transportation vehicles. Gas cost has been largely unchanged during the past twelve months. The purchase price of gas, which is regulated by the government, remained at $0.21 per cubic meter. Transportation was handled by Langfang Dangerous Goods Transportation Co., Ltd, one of our subsidiaries specializing in transportation of natural gas. Overall transportation cost and depreciation of transportation vehicles increased, but the unit cost of transportation and depreciation remained stable with the increase of gas supplied.
Gas cost was $1.7 million for the three months ended March 31, 2007, accounting for 93.3% of total cost, in correspondence with the large percentage of gas sales in our total sales, compared with $497,000 in the first quarter of 2006.
Our major gas supplier is the Petro China North China Oilfield Fourth Extraction Plant (Petro China). We signed a 10-year natural gas purchase agreement with Petro China in 2003 to purchase up to 10 million cubic meters gas per year. For the three months ended March 31, 2007, Petro China supplied 3.39 million cubic meter gas at an average price of $0.21 per cubic meter in the first quarter.
We also purchased gas, through the newly-acquired Beijing Chenguang, from the following three major gas suppliers:
Huayou Lianhe Gas 1.57 million cubic meters
Yongqing Huayou Gas 1.02 million cubic meters
Fuhua Dadi Gas 0.64 million cubic meter
Gross Income
( $ thousand) | For the 3 months ended March 31, | |||||||||
2007 | 2006 | Change | ||||||||
US$ | % | US$ | % | % | ||||||
Gross Income | 601 | 100% | 137.8 | 100% | 336.14% | |||||
Connection Fees | 490.8 | 82% | 98 | 71% | 400.82% | |||||
Gas Sales | 110 | 18% | 39.8 | 29% | 175.88% |
Gross Income for the first quarter was $601,000, representing an increase of 336.14% over gross income of 137,800 for the first quarter or 2006. The increase is primarily due to the increase in residential connection fees and gas sales described above.
Gross profit margin for connection fees was around 80% in the first three months in 2007, largely unchanged from the 80% of one year ago. That is in line with the margin levels we have seen in the company’s past performance. Gross profit margin for gas sales was around 6% for the first three months in 2007, slightly lower than 7% one year ago. Our total gross margin in the first quarter was 25%, as compared with 21% one year ago.
General, Selling & Administrative Expenses
We incurred general, selling and administrative expenses in the first quarter of 2007 in the creation of one indirect subsidiary through our pre-existing subsidiary Zhongran Weiye Gas Co., Ltd., and three new subsidiaries through our pre-existing subsidiary Beijing Chenguang Gas Co., Ltd. As of March 31, 2007, we have own a total of 24 directly- or indirectly-owned subsidiaries, as compared to 13 subsidiaries in as of March 31, 2006. The related expansion of our business has led to a sharp increase in our General, Selling & Administrative Expenses. We have also incurred expenses in investigating the possibility of new acquisitions in small and medium-sized cities in China, in accordance with our growth strategy.
26
Selling and marketing expenses were $56,198 for the first quarter of 2007, an increase of more than 450% from $10,154 in the same period in 2006, due to the development of the four new subsidiary projects described above.
General and administrative expenses increased 279% to $441,374 in the first quarter of 2007, from $116,579 in the first quarter of 2006. As a result of our business growth, salary and social benefits expenses doubled from around $40,000 in the first quarter of 2006 to around $80,000 in the first quarter of 2007. Employees almost tripled as of the end of March 2007 as compared the same time one year ago, to 308. Depreciation of fixed assets increased nearly $6,000 to $38,844, due primarily to the acquisition of assets of Beijing Chengguang and the development of new projects described above. Our new projects from this quarter have not yet begun to generate fees.
Other income
Other income was $36,088 for the first three months in 2007, as a result of our 40% ownership in Beijing Zhongran Xiangke Oil & Gas Tech Co., Ltd. No income from investment in Beijing Zhongran Xiangke Oil & Gas Tech Co., Ltd was recorded in the first quarter of 2006, as we began to record income from the Zhongran Xiangke only at the end of the year.
Net Income
Net income was $115,383 for the three months ended March 31, 2007, an increase of more than 1,000 percent from $10,092 for the same period last year, due to the increase in connection revenues and gas sales described above, as well as an increase in net profit margin.
Net profit margin in the first quarter of 2007 was 4.73%, compared with 1.54% in the same period one year ago. The major reason for the increase is that gas sales, the margin of which is much lower than that of connection fees, accounted for a lower percentage of total sales (75%) in this quarter, as compared with 82% in the first quarter of 2006. The increase in net profit margin is also due in part to the fact that selling, general and administrative expenses accounted for a high percentage of net sales in the first quarter of 2006 (17% of net sales), due to the relative low net sales in the first quarter of 2006. Net profit margin this quarter was 3.19% higher than one year ago, because the company recorded other income of $36,088 from its equity investment in Beijing Zhongran Xiangke Oil & Gas Tech Co., Ltd.
We expect that our net profit margin will rise in the coming quarters of 2007, especially the third and fourth quarters, when we traditionally achieve most of our connection fees as well as revenues.
Accounts Receivable
Accounts Receivable as of March 31, 2007 was $5,529,115, a decrease of $1,005,625 from $6,534,740 as of December 31, 2006.
Fixed Assets
Fixed Assets as of March 31, 2007 were $ 14.6 million, an increase of $ 11.2 million from one year ago, and an increase of $ 3.7 million from December 31, 2006. The increase is mainly due to the acquisition of the assets of Beijing Chenguang Gas Co. Ltd., which are valued at $2.73 million. The increase also reflects our purchase of transportation equipment, mainly gas containers, valued at $310,000, since the first quarter of 2006.
27
Bank loans
We borrowed RMB 19 million ($2,430,445) through a short-term loan from Shenzhen Development Bank for operational purposes in late 2006 and early 2007 separately by using $3 million from the two equity financings we finished in late 2006 as a pledge deposit. We paid off the entire balance of the loan in March 2007, before the loan matured.
Liquidity and Capital Resources
Our cash and cash equivalents were $2,345,164 as of March 31, 2007, compared with $3,638,67 as of Dec 31, 2006. This decrease is primarily due to repayment of the bank loan described above. We do not believe the decrease will have any significant effect on our ability to pursue our growth strategy as planned. We intend to pursue additional sources of financing to meet our capital needs. If we fail to find additional sources of financing on favorable terms, our ability to pursue our growth strategy could be significantly affected.
Item 3. Controls and Procedures
At the conclusion of the quarter ended March 31, 2007, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and Chief Financial Officer, 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 Exchange Act. Based on this evaluation, our officers concluded that, as of March 31, 2007, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported reliably and within the time periods specified in the applicable rules and forms and that such information is accumulated and communicated to our chief executive officer and chief financial officer in a manner that allows for timely decisions regarding required disclosure.
In the course of our evaluation, we did not discover any change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II
Item 6. Exhibits.
Exhibit List
No. | Description |
3.1 | Amended Articles of Incorporation. (1) |
3.2 | Amended Bylaws. (1) |
31.1 | Certification of Yuchuan Liu pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Fang Chen pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2006.
28
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SINO GAS INTERNATIONAL HOLDINGS, INC. | ||
| | |
Date: May 15, 2007 | By: | /s/ Yu Chuan Liu |
Yu Chuan Liu | ||
Chairman of the Board, Director and Chief Executive Officer |
| | |
Date: May 15, 2007 | By: | /s/ Chen Fang |
Chen Fang | ||
Director and Chief Financial Officer |
29