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: June 30, 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.) |
No.18 Zhong Guan Cun Dong St. Haidian District Beijing, P. R. China 100083 |
(Address of principal executive offices) |
011-86-10-82600527
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 August 17, 2007, the Company had 16,423,360 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) | 6 | |||
Item 2. | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | |||
Item 3. | ||||
Controls and Procedures | 29 | |||
PART II. - OTHER INFORMATION | ||||
Item 2. | ||||
Unregistered Sales of Equity Securities and Use of Proceeds | 29 | |||
Item 5. | ||||
Other Information | 29 | |||
Item 6. | ||||
Exhibits | 30 | |||
Signatures | 31 |
PART I
Item 1. Financial Statements
SINO GAS INTERNATIONAL HOLDINGS, INC.
UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
(Stated in US dollars)
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONTENTS | PAGES |
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM | 1 |
CONSOLIDATED BALANCE SHEETS | 2 - 3 |
CONSOLIDATED STATEMENTS OF INCOME | 4 |
CONSOLIDATED STATEMENTS OF CASH FLOWS | 5 |
NOTES TO FINANCIAL STATEMENTS | 6 - 15 |
Board of Directors and Stockholders
Sino Gas International Holdings, Inc.
Report of Registered Independent Public Accounting Firm
We have reviewed the accompanying interim consolidated balance sheets of Sino Gas International Holdings, inc. as of June 30, 2007 and December 31, 2006, and the related consolidated statements of income for the six months and the year then ended and cash flows for the six-month and three-month periods then ended. These interim consolidated 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 information 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 consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles.
South San Francisco, California | Samuel H. Wong & Co., LLP |
August 3, 2007 | Certified Public Accountants |
1
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
Notes | June 30, 2007 | December 31, 2006 | |||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 6,653,639 | $ | 3,638,673 | |||
Restricted cash | - | 3,124,541 | |||||
Notes receivable | 1,031,503 | 477,390 | |||||
Accounts receivable | 5,064,425 | 6,534,740 | |||||
Inventory | 57,690 | - | |||||
Advances to suppliers | 1,063,674 | 68,309 | |||||
Prepayments and others | 122,344 | 141,878 | |||||
Other receivables | 1,834,598 | 1,263,800 | |||||
Total current assets | $ | 15,827,873 | $ | 15,249,331 | |||
Long term assets | |||||||
Investments in equity securities | 3,087,297 | 2,939,029 | |||||
Plant and equipment, net | 14,645,720 | 10,608,530 | |||||
Construction in progress | 7,444,513 | 4,628,076 | |||||
Intangible assets | 307,108 | 457,830 | |||||
Goodwill | 112,750 | - | |||||
TOTAL ASSETS | $ | 41,425,261 | $ | 33,882,796 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities | |||||||
Bank Loans | $ | 2,623,020 | $ | 2,430,445 | |||
Accounts payable | 6,794,401 | 3,891,388 | |||||
Other payables | 1,295,103 | 1,790,500 | |||||
Unearned revenue | 840,221 | 37,760 | |||||
Accrued liabilities | 135,705 | 325,922 | |||||
Total current liabilities | $ | 11,688,450 | $ | 8,476,015 | |||
Minority interest | 65,575 | - | |||||
TOTAL LIABILITIES | $ | 11,754,025 | $ | 8,476,015 |
See accompanying notes to financial statements and accountant’s report
2
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
Notes | 2007 | 2006 | |||||
STOCKHOLDERS’ EQUITY | |||||||
Preferred Stock A US$0.001 par value; 20,000,000 authorized; nil and nil issued and outstanding as of June 30, 2007 and December 31, 2006 respectively | - | - | |||||
Preferred Stock B US$0.001 par value; 5,000,000 authorized; 3,387,446 and 4,023,268 issued and outstanding as of June 30, 2007 and December 31, 2006 respectively | $ | 3,387 | $ | 4,023 | |||
Common Stock US$0.001 par value; 250,000,000 authorized; 16,423,360 and 14,692,647 issued and outstanding as of June 30, 2007 and December 31, 2006 respectively | 16,423 | 14,693 | |||||
Additional paid-in-capital | 14,655,841 | 12,069,176 | |||||
Statutory reserves | 2,269,315 | 2,025,022 | |||||
Retained earnings | 11,089,768 | 10,469,571 | |||||
Accumulated other comprehensive income | 1,636,502 | 824,296 | |||||
$ | 29,671,236 | $ | 25,406,781 | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 41,425,261 | $ | 33,882,796 |
See accompanying notes to financial statements and accountant’s report
3
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
Six months ended June 30, | Three months ended June 30, | ||||||||||||
Notes | 2007 | 2006 | 2007 | 2006 | |||||||||
Net revenues | $ | 5,234,372 | $ | 1,499,540 | $ | 2,796,145 | $ | 841,276 | |||||
Cost of revenues | 3,731,833 | 983,487 | 1,894,203 | 463,800 | |||||||||
Gross profit | 1,502,539 | 516,053 | 901,942 | 377,476 | |||||||||
Operating expenses | |||||||||||||
Selling and marketing expenses | 199,494 | 26,825 | 143,296 | 16,622 | |||||||||
General and administrative expenses | 688,859 | 253,820 | 247,485 | 136,677 | |||||||||
Income from continuing operations | $ | 614,186 | $ | 235,409 | $ | 511,161 | $ | 224,177 | |||||
Finance costs, net | 33,550 | (3,142 | ) | 38,920 | (3,056 | ) | |||||||
Other income | 11,781 | 43,465 | (24,307 | ) | 43,465 | ||||||||
Other expenses | (11,977 | ) | (2 | ) | (10,482 | ) | (2 | ) | |||||
Income before taxation | $ | 647,540 | $ | 275,730 | $ | 515,292 | $ | 264,585 | |||||
Income tax | 27,343 | 17,587 | 10,478 | 16,584 | |||||||||
Net income | $ | 620,197 | $ | 258,142 | $ | 504,814 | $ | 248,001 | |||||
Net income per share, | |||||||||||||
Basic | $ | 0.04 | $ | 0.02 | $ | 0.03 | $ | 0.02 | |||||
Diluted | $ | 0.03 | $ | 0.02 | $ | 0.03 | $ | 0.02 | |||||
Weighted average shares outstanding | |||||||||||||
of common stock, | |||||||||||||
Basic | 15,216,279 | 14,361,646 | 15,273,626 | 14,361,646 | |||||||||
Diluted | 19,486,791 | 14,361,646 | 19,360,386 | 14,361,646 |
See accompanying notes to financial statements and accountant’s report
4
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTHS AND THREE-MONTHS ENDED JUNE 30, 2007 AND 2006
(Stated in US Dollars)
Six months ended June 30, | Three months ended June 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
Cash Flows from Operating Activities | |||||||||||||
Net income | $ | 620.197 | $ | 258,142 | $ | 504,814 | $ | 248,050 | |||||
Depreciation and Amortization | 696,453 | 65,154 | 657,609 | 32,188 | |||||||||
(Increase)/decrease in accounts and other receivables | (630,427 | ) | 2,562,340 | (940,846 | ) | 1,293,092 | |||||||
(Increase) in inventories | (57,690 | ) | (12,899 | ) | (57,690 | ) | (12,899 | ) | |||||
Increase/(decrease) in accounts and other payables | 3,019,392 | (908,689 | ) | 532,069 | 147,155 | ||||||||
Net cash provided by operating activities | $ | 3,648,392 | $ | 1,964,049 | $ | 532,069 | $ | 1,707,587 | |||||
Cash Flows from Investing Activities | |||||||||||||
Purchase of plant and equipment | $ | (4,733,643 | ) | $ | (2,117,412 | ) | $ | (1,412,955 | ) | $ | (2,066,095 | ) | |
Restricted Cash | 3,124,541 | - | - | - | |||||||||
Payment for the construction in progress | (2,816,436 | ) | - | (1,471,000 | ) | 151,996 | |||||||
Payment of cost of intangible assets | 307,163 | (5,678 | ) | 479,373 | (10,871 | ) | |||||||
Acquisition of subsidiaries | (173,167 | ) | (27,854 | ) | 757,634 | (27,854 | ) | ||||||
Increase in minority interest | 65,575 | - | 65,575 | - | |||||||||
Net Cash Used in Investing Activities | $ | (4,225,967 | ) | $ | (2,150,944 | ) | $ | (1,646,948 | ) | $ | (1,952,824 | ) | |
Cash Flows from Financing Activities | |||||||||||||
Repayment of Bank borrowings | 192,575 | - | 2,623,020 | - | |||||||||
Issue of share capital | 2,587,759 | - | 2,587,759 | - | |||||||||
Net Cash Provided by Financing Activities | $ | 2,780,334 | $ | - | $ | 5,210,779 | $ | - | |||||
Net in Cash & Cash Equivalents Sourced/(Used) | $ | 2,202,760 | $ | (186,895 | ) | $ | 4,095,900 | $ | (245,237 | ) | |||
Effect of foreign currency translation on Cash & Cash equivalents | 812,206 | (27,121 | ) | 212,575 | 1,452 | ||||||||
Cash & Cash Equivalents at Beginning of Period | 3,638,673 | 907,667 | 2,345,164 | 937,436 | |||||||||
Cash & Cash Equivalents at End of Period | $ | 6,653,639 | $ | 693,651 | 6,653,639 | $ | 693,651 | ||||||
Supplementary cash flow information: | |||||||||||||
Interest received | $ | 98,584 | $ | - | $ | 3,931 | $ | - | |||||
Interest paid | 54,610 | 3,142 | 10,993 | 3,056 | |||||||||
Income tax paid | 27,343 | 17,587 | 10,478 | 16,584 |
See accompanying notes to financial statements and accountant’s report
5
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 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.
On September 7, 2006, the Company underwent a reverse-merger with Gas Investment China Ltd. (“GIC”), an International Business Company incorporated in the British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange of shares whereby the Company issued an aggregate of 14,599.942 shares to the shareholders of GIC in exchange for all of the issued and outstanding shares of GIC. For financial reporting purposes, this transaction is classified as a recapitalization of Sino Gas International Holdings, Inc. and the historical financial statements of Gas Investment China Co. Ltd.
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.
6
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
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.
(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.
(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.
7
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
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 June 30, 2007 and 2006 (whichever applicable 2006).
Name of Company | Place of Incorporation | Date of Incorporation | Beneficiary interest % | Equity Interest % | Registered Capital | |||||
GAS Investment China Co., Ltd. | The British Virgin Islands | 6/19/2003 | 100 | 100 | USD 10,000,000 | |||||
Sino Gas Construction Limited | The British 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 | |||||
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.
8
(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.
(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.
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.
9
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(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 June 30, 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 $4 million at June 30, 2007.
10
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(m) | Unearned Revenue |
Unearned revenue represents prepayments by customers for gas purchases and advance payments on construction and installation of pipeline contracts. The Company records such prepayment as unearned revenue when the payments are received.
(n) | Financial Instruments |
The carrying amounts of all financial instruments approximate fair value. The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. The carrying amounts of borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
(o) | Foreign Currency Translation |
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
2007 | 2006 | ||||||
Months end RMB : US$ exchange rate | 7.6248 | 7.8175 | |||||
Average monthly RMB : US$ exchange rate | 7.7230 | 7.9819 |
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.
11
(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. As of June 30, 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.
12
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(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.
(y) | 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.
13
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(z) | 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.
3. CAPITALIZATION
Pursuant to an agreement entered into between the Company and Vision Opportunity Master Fund, Limited (the Investor) dated May 15, 2007, the Company agreed to modify the Series B Convertible Preferred Stock Purchase Agreement of September 7, 2006 which included the Series J Warrant to purchase 1,993,355 shares of common stock on or before September 7, 2007. The modification, in fact, created a new financing plan to the effect that (a) the original Series J warrant of 1,094,891 shares to be purchased on May 15, 2007 at a price of $2,74; (b) a new Series J Warrant to purchase 898,464 shares on or before September 7, 2007 at a price of $3.01 and (c) a new Series E Warrant to purchase 1,094,891 shares on or before May 15, 2012 at a price of $3.01.
As of June 30, 2007, the Company has received net proceeds of $2,587,759 for the issuance of 1,094,891 shares at $2.74 as a result of the exercise of Series J Warrant.
14
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
Gross Proceeds: 1,094,381 shares at $2.74 | $ | 3,000,001 | ||
Less: Issuance Cost and Expenses | 412,242 | |||
Net Proceeds: | $ | 2,587,759 |
Pursuant to Series B Convertible Preferred Stock Purchase Agreements dated September 7, 2006 and October 20, 2006, the Company agreed to issue warrant to each Series B Preferred Stock investor to purchase shares of common stock for a term of one year from the closing date.
Series of Warrant | Number of Shares | Exercise Price | |||||
Series A | 3,387,446 | $ | 3.84 | ||||
Series B | 1,693,723 | 5.48 | |||||
Series C | 3,083,588 | 4.22 | |||||
Series D | 1,541,794 | 6.03 | |||||
Series E | 1,094,891 | 3.01 | |||||
Series J | 1,989,697 | 3.01 | |||||
12,790,139 |
15
Item 2. Management’s Discussion and Analysis
The following discussion and analysis of the consolidated financial condition and results of operations of Sino Gas International Holdings, Inc. (“we,” “us” or the “Company”) should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this quarterly report. Because we conduct our operations through our subsidiary Beijing Zhong Ran Wei Ye Gas Co., Ltd. (“Beijing Gas”) and the subsidiaries of Beijing Gas in the People’s Republic of China (the “PRC”), the following discussion focuses on the operations of those companies.
FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis (“MD&A”) includes “forward-looking statements.” All statements, other than statements of historical fact, included in this MD&A regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations are forward-looking statements. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to materially differ from those predicted by such statements. While we believe that the assumptions concerning future events are reasonable, we caution that there are inherent risks and difficulties in making these predictions, especially those arising out of our limited operating history, any failure on our part to compete effectively, any inability we might have to fund our future capital expenditures and our possible inability to control our growth.
Overview
As measured by net revenue, net income, and the other categories of performance set forth below, our business enjoyed significant growth during the three- and six-month periods ended June 30, 2007.
16
· | Net revenue increased 232% to $2,796,145 for the three months ended June 30, 2007 as compared to $841,276 for the same period in 2006. Net revenue increased 249% to $5,234,372 for the six months ended June 30, 2007 as compared to $1,499,540 for the same period in 2006. |
· | Net income increased 95% to $504,814 during the three month period ended June 30, 2007 from $248,001 in the same period in 2006. Net income increased 140% to $620,197 during the six month period ended June 30, 2007 from $258,142 in the same period in 2006. |
Due to the seasonal nature of our business, the second quarter of the calendar year is not traditionally our strongest. Construction of pipelines and gas stations begins again during this quarter, after being largely inactive in the preceding quarter due to the cold weather in the northern PRC, where most of our operations are located. The bulk of the revenue from these operations, however, is not generated until later in the year, when further stages of the construction process have been completed. Given this seasonal pattern, management believes that our strong growth in the second quarter, as measured by net revenue and the other metrics described below, may continue and lead to potentially stronger growth, by the same metrics, during the second half of 2007.
The stronger performance during the quarter ended June 30, 2007 as compared with the same period last year is due to our strategic acquisitions and new construction at existing project locations, which have resulted in a larger customer base. During the three months ended June 30, 2007, we constructed natural gas pipeline connections to 4,336 residential households, as compared to 1,094 new household connections during the same period in 2006. As of June 30, 2007, our distribution network included approximately 70,000 connected users, compared with 25,000 connected users one year earlier.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
Net Revenue
We generate revenue from two sources: connection fees for constructing connections to our natural gas distribution network, and sales of natural gas. Total net revenue for the three months ended June 30, 2007 was $2,796,145, compared to $841,276 for the same period in 2006, representing an increase of 232%. The increase was due to increases in new connections of customers to our gas distribution network and in the number of customers purchasing natural gas. During this period, we connected 4,336 new residential households to our gas distribution network, resulting in total connection fees of $1,349,377. Gas sales during the period amounted to 4,500,880 cubic meters, or $1,425,609.
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The following table summarizes our net revenue during the periods indicated:
( $ thousand) | For the 3 months ended June 30, | |||||
2007 | 2006 | Change | ||||
US$ | % | US$ | % | % | ||
Total Revenue | 2,796.1 | 100% | 841.3 | 100% | 232% | |
Connection Fees | 1,349.4 | 48% | 239.8 | 29% | 463% | |
Gas Sales | 1,425.6 | 51% | 601.5 | 71% | 137% | |
Others | 21.1 | 1% | N/A |
Connection fees
Connection fees during the quarter ended June 30, 2007 were $1,349,377, representing an increase of more than 460% from $239,797 in the same quarter last year. Connection fees accounted for approximately 50% of total revenue during the quarter, compared with approximately 28.5% for the same period in 2006.
Excluding Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), which we acquired in January 2007, connection fees from our previously existing operating locations were $1,126,000, which includes new connections for 3,949 households. Connection fees during the quarter were relatively low compared with prior periods, as our connection operations were principally focused on last year’s remaining projects and early development of some newer projects.
Beijing Chenguang connected 387 new household users in the three months ended June 30, 2007, which contributed $223,400 to our total connection fees. The higher connection fees per household for Beijing Chenguang are due to the development of a luxury residential area, Dongfang Taiyangcheng, which resulted in significantly higher connection fees than for typical residential areas.
All connection fees during the second quarter of 2007 came from our residential customers.
The table below provides information about our four largest customers for connection fees during the quarter ended June 30, 2007:
Residential Projects | Connected Households | Connection Fees ($ in Thousands) | ||
Jiangsu Peixian Datun | 2,500 | 756 | ||
Beijing Chenguang Dongfang Taiyangcheng | 76 | 64 | ||
Hebei Xinhe Longyuan | 225 | 58 | ||
Anhui Wuhe | 200 | 54 |
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Gas sales
We sold 4,508,800 cubic meters of natural gas to our customers during the quarter ended June 30, 2007, contributing $1,425,609, or 51% of total net revenue. In comparison, gas sold in the same quarter of 2006 totaled 2,000,000 cubic meters, contributing $601,500, or 71.5%, of net revenue. Gas sales increased $824,109, or 137%, from the same period one year ago. Gas sales in the quarter ended June 30, 2007 were generated by our previously existing projects, which, excluding the recently-acquired Beijing Chenguang, generated $352,900 in gas sales, an increase of 57% from the same period one year ago. Beijing Chengguang generated $471,200 in gas sales. Of the gas sold by Beijing Chengguang, gas sold to residential customers amounted to $66,000 and gas sold to industrial customers amounted to $405,200.
The following table summarizes our gas sales during the periods indicated:
($ thousand) | For the 3 months ended June 30, | |||
2007 | 2006 | |||
Gas Sales | US$ | % | US$ | % |
Industrial users | 708.2 | 50% | 365.4 | 61% |
Residential users | 342.0 | 24% | 108.1 | 18% |
Others | 375.4 | 26% | 128.0 | 21% |
Total | 1,425.6 | 100% | 601.5 | 100% |
We sell natural gas to industrial, residential, and commercial customers. During the three months ended June 30, 2007, sales to industrial customers generated $708,200 of natural gas sales, sales to residential customers generated $342,000, and sales to commercial customers generated $375,400. These sales represent increases in sales to industrial customers of 93.8%, to residential customers of 216.4%, and to commercial customers of 193.3%, compared with sales to such customers of $365,400, $108,100, and $128,000, respectively, in the same quarter of 2006.
The table below provides information about our three largest customers for natural gas (all of which are industrial customers that supply gas to residential developments):
Residential Projects | Gas Sales (M³) | Gas Sales ($1,000) | ||
Hebei Zhonggang | 2,001 | 599 | ||
Hebei Tangshan Changsheng | 275 | 81.7 | ||
Langfang Elite | 99.5 | 27.4 |
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The average price of gas sold to these industrial customers was $0.31 per cubic meter. Hebei Zhonggang is currently our largest industrial user, with daily gas consumption exceeding 20,000 cubic meters, or approximately 30% of our total daily gas consumption. Residential customers pay gas fees using a prepaid “smart card.”
Other Revenue
During the three months ended June 30, 2007, we also generated $21,159 in revenue from the lease of our natural gas delivery and storage facilities through our subsidiary Beijing Chenguang.
Cost of Revenue
Our cost of revenue, which includes cost of connection fees and cost of natural gas sales, was $1,809,800 for the three month period ended June 30, 2007. (This figure does not include the payment of local taxes of approximately $84,200, which were later refunded to us.)
The table below sets forth our cost of revenues for the periods indicated:
($ thousands) | For the 3 months ended June 30, | |||
2007 | 2006 | |||
US$ | % | US$ | % | |
Cost of Sales | 1,809.8 | 100% | 463.8 | 100% |
Connection Cost | 431.8 | 24% | 33.5 | 7% |
Gas Cost | 1,378 | 76% | 430.3 | 93% |
Cost of Connections
Our cost of connection fees during the quarter ended June 30, 2007 was $431,800 or 24% of total cost of revenue. By comparison, the cost of connection fees during the same quarter of 2006 was $33,500, or 7.22% of total cost of revenue. The significant increase in cost of connection fees is due to both the expansion of our operations and the increased cost of gas station maintenance resulting from the development of our gas stations.
Cost of connection fees includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, and installation and maintenance fees.
Cost of Natural Gas Sales
The cost of natural gas sales increased 220% from the quarter ended June 30, 2006, when it was $430,300 and 92.78% of total cost of revenue, to the quarter ended June 30, 2007, when it was $1,378,000 and 76% of total cost of revenue. This increase, which outpaced the 137% increase in sales of natural gas during the same interval, is largely due to the addition of gas delivery trucks acquired for approximately RMB 12 million ($1.58 million), the depreciation of which added to our cost of natural gas sales. We believe that the impact of that depreciation will be gradually reduced as our business and customer base grow.
20
The cost of natural gas sales includes the purchase and transportation of natural gas and depreciation of delivery trucks. The purchase price that gas distributors pay for natural gas, which is determined by the PRC government, is approximately RMB 1.6 to 1.9 ($0.21 to $0.25) per cubic meter. Langfang Development Zone Wei Ye Dangerous Goods Transportation Co. Ltd, one of our subsidiaries, is responsible for our gas transportation, and transportation cost per cubic meter is relatively constant at RMB 0.55 ($0.072) per cubic meter. Management believes that this transportation cost per cubic meter is likely to remain constant in spite of the increased depreciation costs from the newly purchased vehicles described above, because the vehicles will allow delivery of additional natural gas to customers sufficient to offset those costs
Our biggest natural gas supplier is the North China Oil Field Fourth Oil Extraction Plant of Petro China Company, with whom we signed a ten-year gas supply agreement in 2003. We purchased 3,387,600 cubic meters of natural gas from Petro China at the price of RMB 1.55 ($0.204) per cubic meter. At the beginning of each year in the ten-year contract period, we negotiate with Petro China on the price and supply amount according to market conditions. In 2007, Petro China will supply a total of 10 million cubic meters of natural gas at RMB 1.55 ($0.204) per cubic meter between April 1 and October 31 and RMB 1.65 ($0.217) per cubic meter during the rest of the year.
Gross Profit
During the quarter ended June 30, 2007, gross profit was $965,200, an increase of approximately 130% from the same quarter of 2006. Gross profit from connection fees increased 345% to $917,600, from $206,000 in the same quarter of 2006. Gross profit from gas sales was $47,600, as compared to $171,100 in the same quarter of 2006.
Gross margin for connection fees for the quarter ended June 30, 2007 was 68%. Because we typically recognize most of our connection fees in the fourth quarter, we believe it is likely that gross margins for connection fees will return to previous levels of 70% to 75% in the second half of 2007. Gross margin for sales of natural gas was 3.4% during the quarter ended June 30, 2007, compared with 6% in the same quarter of 2006 due to the relatively higher depreciation levels described above. Management also believes that this margin is likely to return to previous higher levels of approximately 10% as we distribute gas to an increasing number of gas users connected to our distribution networks.
Selling and marketing expenses
Our selling expenses in the quarter ended June 30, 2007 were $143,300 and equaled approximately 5% of our net sales, compared with $16,622 and less than 2% of net sales in the second quarter of 2006. This substantial increase was principally due to increases in marketing-related fees, including travel and communications.
21
General and administrative expenses
General and administrative expenses were $247,500 for the three months ended June 30, 2007, or 81% higher than $136,677 in the same period one year ago. The increase is largely due to the increase in the number of operating subsidiaries we own, from 13 to 20, leading to increases in salary, social insurance, traveling expenses and other expenses. The increase is also due in part to increased depreciation relating to new assets described above.
As a percentage of net sales, general and administrative expenses equaled 8.8% of our net sales in the second quarter of 2007, compared with 16.3% in the same period one year ago. The reduction in general and administrative expenses relative to net sales is, we believe, due to economies of scale that have been achieved by the expansions of our business described above.
Income from Continuing Operations
Income from continuing operations in the second quarter of 2007 was $511,161, representing an increase of $287,000, or 128%, from $224,177 in the same period last year. The increase in Income from continuing operations is due primarily to the increase in net sales described above.
Income Tax
For 2007, the income tax rate applicable to Beijing Gas, the main subsidiary of Sino Gas in China, is 7.5%. Beijing Gas is classified as a foreign high-tech enterprise by the tax regulatory authority, and therefore has enjoyed a favorable tax rate for the past five years, with an income tax rate of zero in 2004 and 2005 and 7.5% from 2005 to 2007.
The income tax rate of our subsidiaries is 33%, except for Beijing Chenguang, which has also been classified as a foreign high-tech enterprise and is subject to the favorable income tax rate of 7.5% from 2006 to 2008.
The income tax accrued during the three month period ended June 30, 2007 was $10,478, lower than the $16,584 accrued during the same period in 2006, due to a refund of 2005 taxes from the tax bureau.
Net Income
Net income in the second quarter of 2007 was $504,814, representing an increase of 104% from $248,001 in the same period in 2006. The increase can be attributed to the continuous growth of our existing markets and the acquisition of Beijing Chenguang. Due to the seasonal nature of our business, management believes it is likely that net income will increase substantially in the second half of 2007.
22
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Net Revenue:
Total net revenue for the six-month period ended June 30, 2007 was $5,234,372, representing an increase of 249% from $1,499,540 for the same period in 2006. The increase was due to the increase of new connections and gas users. During this period, we added 6,586 new residential households, resulting in total connection fees of $1,964,713. Gas sales amounted to 11,734,384 cubic meters, or $3,248,500.
The following table summarizes our net revenue for the periods indicated:
$ thousand | Six Months Ended June30, 2007 | Six Months Ended June 30, 2006 | Change | ||
US$ | % of Net Revenue | US$ | % of Net Revenue | % | |
Net Revenue | 5,234.3 | 100% | 1,499.5 | 100 | 249% |
Connection Fees | 1,964.7 | 37.5% | 358.6 | 23.9% | 448% |
Gas Sales | 3,248.5 | 62% | 1,140.9 | 76.1% | 185% |
Others | 21.1 | 0.5% | N/A |
Connection Fees
Connection fees during the six month period ended June 30, 2007 were $1,964,713, representing an increase of more than 440% from $358,657 for the same period in 2006. Connection fees accounted for approximately 38% of total net revenue during the six month period ended June 30, 2007, compared to 24% for the same period in 2006.
Excluding Beijing Chenguang, which we acquired in January of this year, connection fees during the six month period ended June 30, 2007 were approximately $1,491,347, resulting from the connection of 5,099 new residential households to our gas distribution network, as compared to $358,657 for the same period in 2006, resulting from the connection of 1,560 new residential households.
Beijing Chenguang connected 1,487 new residential households during the six months ended June 30, 2007, which contributed approximately $473,366 to our total connection fees. All of our connection fees for the six month period ended June 30, 2007 were from the connection of residential customers.
The table below provides information about our four most significant customers for connection fees during the six months ended June 30, 2007:
Residential Projects | Connected Households | Connection Fees ($ in Thousands) | ||
Jiangsu Peixian Datun | 2,780 | 756.3 | ||
Shijiangzhuang Jinshi | 660 | 161.7 | ||
Hebei Dinghua | 438 | 107.8 | ||
Beijing Ying Group | 417 | 103.5 |
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Gas sales
Gas sales to our customers were $3,248,500 (for 11,734,384 cubic meters of natural gas) during the six month period ended June 30, 2007, representing 62%, of total net revenue for that period. Gas sales during the six month period ended June 30, 2006 were $1,140,883 (for 3,900,637 cubic meters), representing 76% of the total net revenue. Gas sales increased $2,107,617, or 185%, from the same period in 2006, due to our previously existing projects (excluding Beijing Chenguang), which generated $1,1912,744 in gas sales, an increase of 68% from the same period in 2006. Beijing Chenguang sold 5,097,431 cubic meters, or $1,335,756, of gas during the period, of which sales to residential customers amounted to $169,871 and sales to industrial customers amounted to $1,174,885.
The table below summarizes our gas sales for the periods indicated:
($’s in thousands) | For the Six Month Period ended June 30 | |||
2007 | 2006 | |||
Gas Sales | US$ | % | US$ | % |
Main Industrial users | 803.5 | 25% | 194.6 | 17% |
Residential users | 1,149.8 | 35% | 829.7 | 73% |
Others industrial and commercial | 1,295.2 | 40% | 116.5 | 10% |
Total | 3,248.5 | 100% | 1,140.8 | 100% |
For the six months ended June 30, 2007, sales of natural gas to industrial customers were $1,149,756, sales to residential customers were $803,515, and sales to commercial and industrial customers were $3,248,500. In comparison, during the six month period ended June 30, 2006, we had natural gas sales of $829,706 to industrial customers, $194,628 to residential customers and $116,548 to commercial and other users.
The table below lists our three largest natural gas customers during the six months ended June 30, 2007, all of which are industrial customers:
Residential Projects | Gas Sales (M³) | Gas Sales ($1,000) | ||
Hebei Zhonggang | 3,332,813 | 992,035 | ||
Hebei Sanhe yanshen | 2,834,132 | 756,793 | ||
Shunxin Yangguang | 847,523 | 203,757 | ||
Tangshan Changsheng | 436,232 | 130,286 |
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Hebei Zhonggang was our largest industrial customer, with daily gas consumption in excess of 20,000 cubic meters. Residential customers purchase gas using a prepaid “smart card.”
Other Revenue
We have revenue of $21,159 from the lease of our delivery and storage facilities through our subsidiary Beijing Chenguang.
Cost of Revenue
Our cost of revenue, which includes cost of connection fees and cost of natural gas sales, was $3,647,501 for the six month period ended June 30, 2007. Cost of connection fees was $556,262 and cost of natural gas sales was $3,091,239 during the period.
The table below summarizes our cost of revenue during the periods indicated:
For the Six Month Period ended June 30 | ||||
2007 | 2006 | |||
US$ | % | US$ | % | |
Cost of revenue | 3,647,501 | 100% | 983,487 | 100% |
Connection Cost | 556,262 | 15.3% | 64,215 | 7% |
Gas Cost | 3,091,239 | 84.7% | 919,272 | 93% |
Cost of Connections
Cost of connection fees during the six month period ended June 30, 2007 was $556,262, which represented 15.3% of our total cost of revenue during the period. Cost of connection fees during the six month period ended June 30, 2006 was $33,500, which represented 7.22% of the total cost of revenue during that period. The significant increase in cost of connection fees is due to both the expansion of our operations and the increased cost of gas station maintenance resulting from the development of our gas stations.
Cost of connection fees includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, and installation and maintenance fees.
25
Cost of Natural Gas Sales
The cost of natural gas sales in the six month period ended June 30, 2007 was $3,091,239, which represented 84.7% of the total cost of revenue during the period. The cost of natural gas sales for the six month period ended June 30, 2006 was $919,272, which represented 93% of the total cost of revenue during that period. Cost of natural gas sales increased 236% from the six month period ended June 30, 2006. This increase, which outpaced the 185% increase in sales of natural gas during the same interval, is largely due depreciation on gas delivery trucks that we purchased for approximately RMB 12 million ($1.58 million). We believe that the impact of that depreciation will be gradually reduced as our business and customer base grow.
The cost of natural gas sales includes the purchase and transportation of natural gas and depreciation of delivery trucks. The purchase price that gas distributors pay for natural gas, which is determined by the PRC government, is approximately RMB 1.6 to 1.9 ($0.21 to $0.25) per cubic meter. Langfang Development Zone Wei Ye Dangerous Goods Transportation Co. Ltd, one of our subsidiaries, is responsible for our gas transportation, and transportation cost per cubic meter is relatively constant at RMB 0.55 ($0.072) per cubic meter. Management believes that this transportation cost per cubic meter is likely to remain constant in spite of the increased depreciation costs from the newly purchased vehicles described above, because the vehicles will allow delivery of additional natural gas to customers sufficient to offset those costs.
Our biggest natural gas supplier is the North China Oil Field Fourth Oil Extraction Plant of Petro China Company, with whom we signed a ten-year gas supply agreement in 2003. We purchased 3,387,600 cubic meters of natural gas from Petro China at the price of RMB 1.55 ($0.204) per cubic meter. At the beginning of each year in the ten-year contract period, we negotiate with Petro China on the price and supply amount according to market conditions. In 2007, Petro China will supply a total of 10 million cubic meters of natural gas at RMB 1.55 ($0.204) per cubic meter between April 1 and October 31 and RMB 1.65 ($0.217) per cubic meter during the rest of the year.
Gross Profit
Gross profit for the six month period ended June 30, 2007 was $1,502,539, representing an increase of approximately 130% from $516,053 for the same period in 2006.
Gross profit from connection fees increased nearly 380% to $1,408,451, from $294,441 the same period in 2006. Gross profit from gas sales was $157,261, as compared to $221,611 for the same period in 2006. Gross margin from gas sales was 4.8% during the six month period ended June 30, 2007. Management believes it is likely that this number will increase as we acquire additional users.
Selling and Marketing Expenses
Selling and marketing expenses in the six month period ended June 30, 2007 were $199,494, compared with $26,825 in the six month period ended June 30, 2006. Selling expenses equaled 4% of our net sales for the six month period ended June 30, 2007 compared to 2% for the same period for the prior year. The increase was primarily due to the increase in the salaries, social insurance, traveling fees and communication fees of the marketing department.
26
General and administrative expenses
General and administrative expenses were $688,859 for the six months ended June 30, 2007, compared to $253,820 for the same period in 2006, representing an increase of 171%. General and administrative expenses equaled 13% of our net sales, compared with 17 % for the same period in 2006. The increase is largely due to the increase in the number of operating subsidiaries we own, from 13 to 20, leading to increases in salary, social insurance, traveling expenses and other expenses. The increase is also due in part to increased depreciation relating to new assets described above.
Income from Continuing Operations
Income from continuing operations for the six month period ended June 30, 2007 was $614,186, an increase of $378,777, or 161%, from $235,409 for the same period in 2006.
Income Tax
For 2007, the income tax rate applicable to Beijing Gas, the main subsidiary of Sino Gas in China, is 7.5%. Beijing Gas is classified as a foreign high-tech enterprise by the tax regulatory authority, and therefore has enjoyed a favorable tax rate for the past five years, with an income tax rate of zero in 2004 and 2005 and 7.5% from 2005 to 2007.
The income tax rate of our subsidiaries is 33%, except for Beijing Chenguang, which has also been classified as a foreign high-tech enterprise and is subject to the favorable income tax rate of 7.5% from 2006 to 2008.
The income tax accrued during the six month period ended June 30, 2007 was $27,343, compared to $17,587 for the six month period ended June 30, 2006.
Net Income
Net income for the six month period ended June 30, 2007 was $620,197, compared to $258.142 for the same period in 2006, representing an increase of 140%. The increase can be attributed to the continuous growth of our existing markets and the acquisition of Beijing Chenguang. Due to the seasonal nature of our business, management believes it is likely that net income will increase substantially in the remaining quarters of 2007.
Liquidity and Capital Resources
As of June 30, 2007, cash and cash equivalents were $6.65 million, an increase of $3.01 million from $3.64 million as of December 31, 2006, due to the increase in cash flow from operating and financing activities, partly offset by our investment activities.
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For the first six months of 2007, cash flow from operations was $3.65 million, as compared to $530,000 in the same period one year ago.
There was a large increase in cash flow from financing activities during the first six months of 2007, as we raised $3 million in gross proceeds from our existing investors in May, 2007 through the exercise of warrants and we took out a one year loan in the amount of RMB 20 million (approximately $2.63 million), accruing interest at an adjustable rate (currently 6.0225% per year), with interest payable quarterly, from Industrial Bank, Beijing Branch. We used these funds for the development of new projects and acquisitions. During the quarter ended March 30, 2007, we repaid an RMB 20 million short-term loan from Shenzhen Development Bank.
Net cash outflow from investing activities for the six months ended June 30, 2007 was $4,225,967, representing an increase of $2.58 million from the same period last year, due to acquisitions and the connection of new users to our distribution networks.
Accounts Receivable
Accounts receivable as of June 30, 2007 were $5,064,400, representing a decrease of $1,407,300 from $6,534,700 as of December 31, 2006. This decrease is primarily due to our seasonal business cycle, in which many accounts receivable are recorded upon completion of construction projects in the fourth quarter, and are collected in the second quarter of the following year. The term of most of our accounts receivable is one year. As of the end of the second quarter, 90% of accounts receivable dated from 2005 had been collected, and the remainder were primarily warranty payments. A warranty payment is the final payment that a customer makes for a construction project. It consists of the final 10% of the total project cost, and it becomes payable one year after construction has been completed, provided that no significant problems with the construction have arisen during the year. Management believes that we are likely to collect most of the outstanding warranty payments from 2005 in the third quarter of 2007.
Because several important ongoing construction projects are scheduled for completion in the second half of 2007, we expect our accounts receivable to increase during that time.
Fixed assets:
Fixed assets as of June 30, 2007 were $14.6 million, an increase of $4 million from $10.6 million as of the end of fiscal 2006. The increase is primarily due to the acquisitions of fixed assets, most of which are pipelines, of Beijing Chengguang, valued at RMB 2,731,800. We also purchased containers used for gas delivery at a purchase price $409,700 during the quarter.
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Accounts Payable
Accounts payable as of June 30, 2007 were $6.79 million, an increase of $2.9 million from the end of 2006. This increase is due primarily to our acquisition of Beijing Chenguang, in connection with which we are scheduled to make an additional payment of $2.09 million.
Item 3. Controls and Procedures
At the conclusion of the quarter ended June 30, 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 June 30, 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 2. Unregistered Sales of Securities
Please see the first paragraph under Item 5 of this report, which is incorporated into this Item by reference.
Item 5. Other Information
On May 15, 2007, we entered into a warrant exercise agreement with Vision Opportunity Master Fund, Ltd. (“Vision”), a holder of our Series J Warrants, pursuant to which, on the same date, Vision exercised Series J Warrants to purchase 1,094,891 shares of our common stock at a purchase price of $2.74 per share. In consideration of, and in order to provide incentive for, this exercise, which provided us with gross proceeds of $3,000,001, we issued to Vision Series E Warrants, with substantially the same terms as the exercised Series J Warrants, to purchase 1,094,891 shares of our common stock at a purchase price of $3.01 per share. At the same time, pursuant to our engagement agreement with Kuhns Brothers Securities, Inc., we issued to Kuhns Brothers, as a placement agent fee, Series G Warrants, with substantially the same terms as the exercised Series J Warrants, to purchase 109,489 shares of our common stock, or 10% of the shares issued to Vision.
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Copies of the warrant exercise agreement, Series E Warrant and Series G Warrant are attached as exhibits to this report.
On April 12, 2007, we terminated our engagement agreement with Kuhns Brothers.
Item 6. Exhibits.
Exhibit List
No. | Description |
3.1 | Amended Articles of Incorporation. |
3.2 | Amended Bylaws. (1) |
4.1 | Series E Warrant. |
4.2 | Series G Warrant. |
10.1 | Warrant Exercise Agreement between the Company and Vision Opportunity Master Fund, Ltd. |
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.
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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: August 17, 2007 | By: | /s/ Chen Fang |
Chen Fang | ||
Director and Chief Financial Officer |
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