U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
x | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 2007
or
o | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 000-51364
SINO GAS INTERNATIONAL HOLDINGS, INC.
(Name of small business issuer in its charter)
Utah | 32-0028823 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
No.18 Zhong Guan Cun Dong St. Haidian District Beijing, P. R. China | 100083 |
(Address of principal executive offices) | (Zip Code) |
Issuer's telephone number: 86-10-82600527
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
As of November 12, 2007, the Registrant had 24,764,122 shares of common stock outstanding.
Sino Gas International Holdings, Inc.
Table of Contents
Page | ||
PART I - | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
Notes to Financial Statements (Unaudited) | 6 | |
Item 2. | Management's Discussion and Analysis or Plan of Operation | 21 |
Item 3. | Controls and Procedures | 31 |
PART II - | OTHER INFORMATION | 33 |
Item 1. | Legal Proceedings | 33 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 |
Item 3. | Defaults Upon Senior Securities | 33 |
Item 4. | Submission of Matters to a Vote of Security Holders. | 33 |
Item 5. | Other Information | 33 |
Item 6. | Exhibits | 34 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SINO GAS INTERNATIONAL HOLDINGS, INC.
UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 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 – 18 |
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 September 30, 2007 and December 31, 2006, and the related consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 2007 and 2006. 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 |
November 10, 2007 | Certified Public Accountants |
1
SINO GAS INTERNATIONAL HOLDINGS, INC. |
CONSOLIDATED BALANCE SHEETS |
AT SEPTEMBER 30, 2007 AND DECEMBER 31, 2006 |
(Stated in US Dollars) |
Notes | September 30, 2007 | December 31, 2006 | ||||||||
ASSETS | (unaudited) | (audited) | ||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 16,474,397 | $ | 3,638,673 | ||||||
Restricted cash | 172,986 | 3,124,541 | ||||||||
Notes receivable | 623,071 | 477,390 | ||||||||
Accounts receivable | 6,329,633 | 6,534,740 | ||||||||
Inventory | 282,700 | - | ||||||||
Advances to suppliers | 538,731 | 68,309 | ||||||||
Prepayments and others | 118,211 | 141,878 | ||||||||
Other receivables | 4 | 1,247,546 | 1,263,800 | |||||||
Total current assets | $ | 25,787,275 | $ | 15,249,331 | ||||||
Long term assets | ||||||||||
Investments in equity securities | 5 | 3,131,322 | 2,939,029 | |||||||
Plant and equipment, net | 7 | 20,206,229 | 10,608,530 | |||||||
Construction in progress | 8,959,416 | 4,628,076 | ||||||||
Intangible assets | 6 | 354,491 | 457,830 | |||||||
Goodwill | 962,582 | - | ||||||||
TOTAL ASSETS | $ | 59,401,315 | $ | 33,882,796 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current liabilities | ||||||||||
Bank Loans | $ | 2,660,424 | $ | 2,430,445 | ||||||
Accounts payable | 3,447,280 | 3,891,388 | ||||||||
Other payables | 8 | 5,702,409 | 1,790,500 | |||||||
Unearned revenue | - | 37,760 | ||||||||
Accrued liabilities | 1,101,586 | 325,922 | ||||||||
Total current liabilities | $ | 12,911,699 | $ | 8,476,015 | ||||||
TOTAL LIABILITIES | $ | 12,911,699 | $ | 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 SEPTEMBER 30, 2007 AND DECEMBER 31, 2006 |
(Stated in US Dollars) |
Notes | September 30, 2007 | December 31, 2006 | ||||||||
(unaudited) | (audited) | |||||||||
STOCKHOLDERS’ EQUITY | ||||||||||
Preferred Stock A US$0.001 par value; 20,000,000 authorized; nil and nil issued and outstanding as of September 30, 2007 and December 31, 2006 respectively | - | - | ||||||||
Preferred Stock B US$0.001 par value; 5,000,000 authorized; 4,858,343 and 4,023,268 issued and outstanding as of September 30, 2007 and | ||||||||||
December 31, 2006 respectively | 3 | $ | 4,858 | $ | 4,023 | |||||
Common Stock US$0.001 par value; 250,000,000 authorized; 24,764,122 and 14,692,647 issued and outstanding as of September 30, 2007 and | ||||||||||
December 31, 2006 respectively | 3 | 24,764 | 14,693 | |||||||
Additional paid-in-capital | 3 | 29,212,878 | 12,069,176 | |||||||
Statutory reserves | 2,002,684 | 2,025,022 | ||||||||
Retained earnings | 13,435,444 | 10,469,571 | ||||||||
Accumulated other comprehensive income | 1,808,988 | 824,296 | ||||||||
$ | 46,489,616 | $ | 25,406,781 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ | ||||||||||
EQUITY | $ | 59,401,315 | $ | 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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 |
(Stated in US Dollars) |
Nine months ended September 30, | Three months ended September 30, | |||||||||||||||
Notes | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Net revenues | $ | 10,886,612 | $ | 4,971,156 | $ | 5,652,240 | $ | 3,471,616 | ||||||||
Cost of revenues | (5,696,918 | ) | (1,849,128 | ) | (1,965,085 | ) | (865,641 | ) | ||||||||
Gross profit | 5,189,694 | 3,122,028 | 3,687,155 | 2,605,975 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling and marketing expenses | (376,233 | ) | (66,497 | ) | (176,739 | ) | (39,673 | ) | ||||||||
General and administrative expenses | (1,310,811 | ) | (693,973 | ) | (621,952 | ) | (440,154 | ) | ||||||||
Income from continuing operations | $ | 3,502,650 | $ | 2,361,558 | $ | 2,888,464 | $ | 2,126,148 | ||||||||
Finance costs, net | 11,527 | (2,169 | ) | (22,023 | ) | 973 | ||||||||||
Other income | 9,046 | 13,205 | (2,735 | ) | - | |||||||||||
Other expenses | (13,197 | ) | (159 | ) | (1,220 | ) | (30,417 | ) | ||||||||
Income before taxation | $ | 3,510,026 | $ | 2,372,435 | $ | 2,862,486 | $ | 2,096,704 | ||||||||
Income tax | 9 | (255,230 | ) | (183,755 | ) | (227,887 | ) | (166,168 | ) | |||||||
Net income | $ | 3,254,796 | $ | 2,188,680 | $ | 2,634,599 | $ | 1,930,536 | ||||||||
Net income per share, | ||||||||||||||||
Basic | $ | 0.21 | $ | 0.15 | $ | 0.15 | $ | 0.13 | ||||||||
Diluted | $ | 0.17 | $ | 0.15 | $ | 0.12 | $ | 0.13 | ||||||||
Weighted average shares outstanding | ||||||||||||||||
of common stock, | ||||||||||||||||
Basic | 15,779,750 | 14,361,646 | 17,889,867 | 14,361,646 | ||||||||||||
Diluted | 19,573,911 | 14,361,646 | 21,856,124 | 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 NINE-MONTHS AND THREE-MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 |
(Stated in US Dollars) |
Nine months ended September 30, | Three months ended September 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
Cash Flows from Operating Activities | |||||||||||||
Net income | $ | 3,254,796 | $ | 2,188,680 | $ | 2,634,599 | $ | 1,930,538 | |||||
Depreciation and Amortization | 1,544,072 | 799,780 | 847,619 | 734,626 | |||||||||
(Increase)/decrease in accounts and other receivables | (371,075 | ) | (34,644 | ) | 259,352 | (2,596,984 | ) | ||||||
(Increase) in inventories | (282,700 | ) | - | (225,010 | ) | 12,899 | |||||||
Increase/(decrease) in accounts and other payables | 4,140,130 | 526,407 | 1,186,313 | 1,435,096 | |||||||||
Net cash provided by operating activities | $ | 8,350,798 | $ | 3,480,223 | $ | 4,702,873 | $ | 1,516,175 | |||||
Cash Flows from Investing Activities | |||||||||||||
Purchase of plant and equipment | $ | (10,938,911 | ) | $ | (1,042,371 | ) | $ | (6,205,268 | ) | $ | 1,075,041 | ||
Restricted Cash | 2,951,555 | - | (172,986 | ) | - | ||||||||
Payment for the construction in progress | (4,331,340 | ) | (2,727,284 | ) | (1,514,904 | ) | (2,727,284 | ) | |||||
Payment of cost of intangible assets | (852,243 | ) | (11,141 | ) | (1,159,406 | ) | (5,463 | ) | |||||
Acquisition of subsidiaries | (192,293 | ) | (254,474 | ) | (19,126 | ) | (226,620 | ) | |||||
Increase in minority interest | - | - | - | - | |||||||||
Net Cash Used in Investing Activities | $ | (13,363,232 | ) | $ | (4,035,270 | ) | $ | (9,071,690 | ) | $ | (1,884,326 | ) | |
Cash Flows from Financing Activities | |||||||||||||
Repayment of Bank borrowings | 229,979 | - | 37,404 | - | |||||||||
Dividend Paid | (521,121 | ) | - | (521,121 | ) | - | |||||||
Issue of share capital | 17,154,609 | 5,246,891 | 14,566,850 | 5,246,891 | |||||||||
Net Cash Provided by Financing Activities | $ | 16,863,467 | 5,246,891 | $ | 14,083,133 | $ | 5,246,891 | ||||||
Net in Cash & Cash Equivalents Sourced/(Used) | $ | 11,851,033 | $ | 4,691,844 | $ | 9,714,316 | $ | 4,878,740 | |||||
Effect of foreign currency translation on Cash & Cash equivalents | 984,691 | 65,268 | 106,442 | (244,085 | ) | ||||||||
Cash & Cash Equivalents at Beginning of Period | 3,638,673 | 571,194 | 6,653,639 | 693,651 | |||||||||
Cash & Cash Equivalents at End of Period | $ | 16,474,397 | $ | 5,328,306 | $ | 16,474,397 | $ | 5,328,306 |
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 SEPTEMBER 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 SEPTEMBER 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 SEPTEMBER 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 September 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 | |||||
The British | ||||||||||
Sino Gas Construction Limited | Virgin Islands | 1/9/2007 | 100 | 100 | USD 50,000 | |||||
Sino Gas Investment Development Limited | The British Virgin Islands | 1/9/2007 | 100 | 100 | USD 50,000 | |||||
Beijing Zhong Ran Wei Ye Gas Co., Ltd | PRC | 8/29/2001 | 100 | 100 | RMB 112,000,000 | |||||
Peixian Weiye Gas Co., Ltd | PRC | 8/22/2005 | 100 | 90 | RMB 5,000,000 | |||||
Sihong Weiye Gas Co., Ltd | PRC | 12/3/2004 | 100 | 95 | RMB 10,000,000 | |||||
Wuhe Weiye Gas Co., Ltd | PRC | 100 | 100 | RMB 3,000,000 | ||||||
Changli Weiye Gas Co., Ltd | PRC | 12/8/2006 | 100 | 100 | RMB 3,000,000 | |||||
Yutian Zhongran Weiye Gas Co., Ltd | PRC | 12/19/2003 | 100 | 90 | 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 | |||||
Wuqiao Gas Co., Ltd | PRC | 6/30/2004 | 100 | 95 | RMB 2,000,000 | |||||
Jinzhou Weiye Gas Co., Ltd | PRC | 7/19/2004 | 100 | 95 | RMB 5,000,000 | |||||
Shenzhou Weiye Gas Co., Ltd | PRC | 12/23/2005 | 100 | 95 | RMB 3,000,000 | |||||
Ningjin Weiye Gas Co., Ltd | PRC | 12/3/2003 | 100 | 95 | RMB 3,000,000 | |||||
Linzhang Weiye Gas Co., Ltd | PRC | 7/6/2005 | 100 | 85 | RMB 1,000,000 | |||||
Hengshui Weiye Gas Co., Ltd | PRC | 12/20/2005 | 100 | 100 | RMB 3,000,000 | |||||
Longyao Zhongran Weiye Gas Co., Ltd | PRC | 10/13/2005 | 100 | 95 | RMB 3,000,000 | |||||
Xingtang Weiye Gas Co., Ltd | PRC | 2/18/2004 | 100 | 95 | RMB 3,000,000 | |||||
Gucheng Weiye Gas Co., Ltd | PRC | 100 | 100 | RMB 3,000,000 | ||||||
Langfang Development Region Weiye Dangerous Goods Transportation Co., Ltd | PRC | 3/22/2005 | 100 | 95 | RMB 1,000,000 | |||||
Beijing Chenguang Gas Ltd. | PRC | 10/30/2002 | 100 | 100 | RMB 20,000,000 | |||||
Xinji Zhongchen Gas Co., Ltd | PRC | 2/7/2007 | 100 | 100 | RMB 3,000,000 | |||||
Shijiazhuang Chenguang Gas Co., Ltd | PRC | 100 | 100 | RMB 2,000,000 | ||||||
Luquan Chenguang Gas Co., Ltd | PRC | 100 | 100 | RMB 2,000,000 | ||||||
Chenan Chenguang Gas Co., Ltd | PRC | 1/23/2007 | 100 | 100 | RMB 1,500,000 | |||||
Nangong Weiye Gas Co., Ltd | PRC | 6/25/2007 | 100 | 100 | RMB 3,000,000 | |||||
Sishui Weiye Gas Co., Ltd | PRC | 12/22/2004 | 100 | 95 | RMB 3,000,000 | |||||
Guannan Weiye Gas Co., Ltd | PRC | 6/19/2003 | 100 | 100 | RMB 9,510,000 | |||||
Sixian Weiye Gas Co., Ltd | PRC | 9/3/2007 | 100 | 100 | RMB 3,000,000 | |||||
Baishan Weiye Gas Co., Ltd | PRC | 7/13/1007 | 100 | 100 | RMB 15,000,000 |
8
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(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.
(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 SEPTEMBER 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 September 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.
10
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(a) | 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.
(b) | 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.
(c) | 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.
9/30/2007 | 12/312006 | 9/30/2006 | |||
Months end RMB : US$ exchange rate | 7.5176 | 7.8175 | 7.91679 | ||
Average monthly RMB : US$ exchange rate | 7.67578 | 7.9819 | 8.01830 |
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.
(d) | 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
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(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 September 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 SEPTEMBER 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.
(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.
13
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
(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.
3. CAPITALIZATION
On September 7, 2007, the Company entered into a Securities Purchase Agreement with a number of accredited investors providing for the sale to the investors of a total of 8,340,762 shares of the Company’s common stock at $2.25 per share for an aggregate purchase price of $18,766,721.05. The following table depicts consummation of the transaction on September 13, 2007 with respect to the gross and net proceeds of this share transaction:
Gross Proceeds: Sale of 8,340,762 common shares at $2.25 per share | $ | 18,766,721.05 | ||
Less: Compensation paid to Vision for cancellation of E&J | ||||
Warrants of 1,988,698 and 1,094,891 totaling 3,083,589 | ||||
shares respectively | 3,016,721.25 | |||
15,749,999.80 | ||||
Less: Placement Agent Fees; Expenses of this issue | 1,957,132.99 | |||
Net Proceeds | $ | 13,792,866.81 |
14
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
As part of the financing, the Company has simplified its capital structure by canceling or repurchasing some its outstanding warrants from the holders. As consideration for the purchase of the Series A, B and D warrants and the cancellation of the Series E & J warrants, the Company will pay to the prior investors $3.5 million in cash, issue a warrant for the purchase of 271,074 common shares, and issue 770,897 shares of Series B preferred stock. In exchange of the prior investors waivering their right to receive shares of Series B preferred stock under anti-dilution provisions of the relevant stock purchase agreement, the Company agreed to issue to them 700,000 additional shares of Series B preferred stock.
The above-mentioned 770,897 and 700,000 shares of Series B preferred stock have in fact been issued to the related prior investors at $0.001 par value per share during September 2007.
As a result of the above recapitalization plan, the Company has cancelled most of its outstanding warrants and clarified its capital structure without dilution of its equity base.
4. OTHER RECEIVABLES
Other receivables at September 30, 2007 consist of the following:
9/30/2007 | 12/31/2006 | ||||||
Deposits and prepayments | $ | 1,134,309 | $ | 543,013 | |||
Amounts due from employees | 113,237 | 86,464 | |||||
Sundry receivables | - | 634,323 | |||||
$ | 1,247,546 | $ | 1,263,800 |
Amounts due from employees are advances for business traveling and purchases of consumables. All the amounts due from employees/shareholders are unsecured, interest free, and have no fixed repayment terms.
5. INVESTMENTS IN EQUITY SECURITIES
9/30/2007 | 12/31/2006 | ||||||
As at January 1 | $ | 2,939,029 | $ | 2,443,378 | |||
Changes due to foreign currency translation | 192,293 | 495,651 | |||||
As of September 30 / December 31 | $ | 3,131,322 | $ | 2,939,029 | |||
15
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
6. INTANGIBLE ASSETS
Intangible assets consist of the following as of September 30, 2007:
9/30/2007 | 12/31/2006 | ||||||
At Cost | |||||||
Land use rights | $ | 121,445 | $ | 112,565 | |||
Franchises | 355,256 | 336,318 | |||||
Other intangibles | 169,676 | 8,947 | |||||
646,377 | |||||||
Less: Accumulated amortization | (291,886 | ) | |||||
$ | 354,491 | $ | 457,830 |
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.
7. PLANT AND EQUIPMENT, NET
Plant and Equipment consist of the following as of September 30, 2007:
9/30/2007 | 12/31/2006 | ||||||
At Cost | |||||||
Gas Pipelines | $ | 14,632,670 | $ | 8,255,231 | |||
Motor Vehicles | 4,428,483 | 2,204,621 | |||||
Machinery & Equipment | 862,857 | 273,943 | |||||
Buildings | 1,363,667 | 89,799 | |||||
Leasehold Improvements | 384,358 | 47,543 | |||||
Office Equipment | 158,633 | 67,774 | |||||
$ | 21,830,668 | $ | 10,938,911 | ||||
Less: Accumulated depreciation | (1,624,439 | ) | (330,381 | ) | |||
$ | 20,206,229 | $ | 10,608,530 |
16
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
8. OTHER PAYABLES
Other payables at September 30, 2007 consist of the following:
9/30/2007 | 12/31/2006 | ||||||
Employees’ welfare payables | $ | 132,688 | $ | 56,584 | |||
Amount due to employees | - | 11,360 | |||||
Contract payable | 4,743,936 | - | |||||
Tax payable | - | 1,089,804 | |||||
Loan from an unrelated company – Beijing Qian Shi Li | 246,350 | - | |||||
Loan from an unrelated company – Qinghua Yangguang | 13,302 | - | |||||
Loan from an unrelated company – Chenguang Weizhong | 399,064 | ||||||
Sundry payables | 167,069 | 632,752 | |||||
$ | 5,702,409 | $ | 1,790,500 |
All the amounts due to employees are unsecured, interest free, and have no fixed repayment terms. Loans from Beijing Qian Shi Li Technology Development Co.,Ltd (Qian Shi Li), Qinghua Yangguang and Chenguang Weizhong are unsecured, interest free, and have no fixed repayment terms.
9. 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 nine months ended September 30,
9/30/2007 | 12/31/2006 | ||||||
Income before taxation | $ | 3,510,026 | $ | 2,372,435 | |||
Provision for income taxes at PRC income tax rate | 1,158,309 | 782,904 | |||||
Effect of tax exemption granted to the Group | (903,079 | ) | (599,149 | ) | |||
Income tax | $ | 255,230 | $ | 183,755 |
17
SINO GAS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(Stated in US Dollars)
10. SEGMENT INFORMATION
The Company has contracted with customers usually in two revenue segments altogether, one is for the construction and installation of gas facilities and another one is the subsequent sales of gas to that 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 recognition and distinctive from each other for the relevant cost-and-revenue to be incurred and hence separate calculation and subsequent payment of fees for respective business without any interdependence on each other in this respect.
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.
2007 | Gas pipeline | Sales of | ||||||||
construction | piped gas | Consolidated | ||||||||
Turnover | $ | 5,997,716 | 4,888,896 | 10,886,612 | ||||||
Cost of sales | (1,348,258 | ) | (4,348,660 | ) | (5,696,918 | ) | ||||
Segment result | $ | 4,649,458 | 540,236 | 5,189,694 |
2006 | Gas pipeline | Sales of | ||||||||
construction | piped gas | Consolidated | ||||||||
Turnover | $ | 3,104,605 | 1,866,551 | 4,971,156 | ||||||
Cost of sales | (469,824 | ) | (1,379,304 | ) | (1,849,128 | ) | ||||
Segment result | $ | 2,634,781 | 487,247 | 3,122,028 |
The Company's operations are located in the PRC. All revenue is from customers in the PRC. All of the Company’s assets are located in the PRC. Sales of piped gas and gas pipeline construction are carried out in the PRC. Accordingly, no analysis of the Company's sales and assets by geographical market is presented.
18
For the three months ended September 30, 2007
Overview
Asmeasured by net revenue, net income, and the other categories of performance set forth below, our business enjoyed significant growth during the three- and nine-month periods ended September 30, 2007. The third quarter is traditionally a strong season for the company, as the company begins to earn most of its connection fees of the year through the year end with the completion of gas pipeline construction.
Construction of pipelines and gas stations usually begins during late first quarter and early second quarter, after being largely inactive in the first 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.
For the three months ended September 30, 2007, net sales increased 63% to $5,652,240 compared to same period last year. Net profit increased 36% to 2,634,599 during the same three months ended September 30,2007 compare to same period last year.
For the first nine months of the year, net sales increased 119% to $10,886,612 compared to same period last year. Net profit increased nearly 50% to $3,254,796 during the same nine months ended September 30, 2007 compared to the same period last year.
The strong performance was due to our strategic acquisitions and new construction at existing project locations. During the nine months ended Sep 30, 2007, we constructed natural gas pipelines connected to 21,629 residential households, as compared to 12,010 new household connections during the same period in 2006. As of Sep 30, 2007, our distribution network included 69,860 connected users, compared to 35,707 connected users one year earlier.
RESULTS OF OPERATIONS
Three Months Ended Sep 30, 2007 Compared to Three Months Ended Sep 30, 2006
Net Revenues
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 September 30, 2007 was $5,652,240, compared to $3,471,616 for the same period in 2006, representing an increase of 63%. The increase was due to new customers connecting to our gas distribution network and new customers purchasing our natural gas. During this period, we connected 15,043 new residential households to our gas distribution network, resulting in total connection fees of $4,011,844. Gas sales during the period amounted to 6.45 million cubic meters, or $1.64 million.
In comparison, during the same period one year ago, we connected 10,500 new residential households to our gas distribution network, resulting in total connection fees of $2,745,948. Gas sales during the period amounted to 2.69 million cubic meters, or $0.73 million.
The following table summarizes our net revenue during the periods indicated:
For the three months ended Sep 30 | ||||||||||||||||
2007 | 2006 | Change | ||||||||||||||
( $ thousand) | US$ | % | US$ | % | % | |||||||||||
Total Revenue | 5,652.2 | 100 | % | 3,471.6 | 100 | % | 63 | % | ||||||||
Connection Fees | 4,011.8 | 71 | % | 2,745.9 | 79 | % | 46 | % | ||||||||
Gas Sales | 1,640.4 | 29 | % | 725.7 | 21 | % | 126 | % |
21
Connection fees
Connection fees during three months ended Sep 30, 2007 were $4,011,844, representing an increase of 46% from $2,745,948 for the same period last year. Connection fees accounted for approximately70% of total revenue during the period, compared with approximately 79% for the same period in 2006.
We had connected a total of 15,043 new residential households during the three months ended September 30, 2007 in the twenty-four cities where we have developed or acquired gas distribution network. During the three months ended September 30, 2007, Peixian Weiye Gas Co., Ltd (Peixian Weiye), one of our subsidiaries, located in Peixian, Jiangsu Province, had connected 5,990 new residential households, generating $2 million connection fees.
In July, Sino Gas, through Peixian Weiye, signed agreement with Shanghai Datun Energy Co., Ltd., one of our major customers in Pei Xian to connect additional 6,000 households, the second phase of connecting a total of 18,000 new households for the customer.
In July 2007, we established a new subsidiary, Baishan Zhong Ran We Ye Gas Co., Ltd. ('Baishan Gas'), in Baishan City, Jilin Province, and acquired all of the operating assets of Baishan Gas Co., Ltd. ('Baishan'), a local gas operator,. Since then , we have developed 6,100 new residential households by the end of September 30, 2007, generating $1.1 million connection fees.
Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in January 2007, connected 1,350 new residential households in the three months ended September 30, 2007, resulting in approximately $413,500 to our total connection fees.
Gas sales
We sold approximately 6.45 million cubic meters of natural gas to our customers during the three months ended September 30, 2007, accounting for roughly $1.64 million, or 15% of total net revenue. In comparison, gas sold in the three months ended September 30, 2006 totaled 2.69 million cubic meters, accounting for $0.73 million, or 6.7%, of net revenue. Gas sales increased $0.9 million, or 126%, from the same period one year ago.
Among the total gas sales, industrial users accounted for $0.83 million, residential users accounted for $0.39 million. The rest, most of which was sold through other gas distributors, accounted for $0.43 million. In comparison, during the three months ended September 30, 2006, industrial users accounted for $0.49 million gas sales, residential users accounted for $0.1066 million and others accounted for $0.128 million.
Gas sales from industrial users increased 70% percent, as we developed one new industrial user and two of our industrial users increased their gas consumption.
Cost of Revenue
Our cost of revenue, which includes cost of connections and cost of natural gas sales, was $1,965,085 for the three months ended September 30, 2007.
The table below sets forth our cost of revenues for the periods indicated:
For the three months ended September 30, | |||||||||||||
2007 | 2006 | ||||||||||||
($ thousands) | US$ | % | US$ | % | |||||||||
Cost of Revenue | 1,965.1 | 100 | % | 865.6 | 100 | % | |||||||
Connection Cost | 707.7 | 36 | % | 405.6 | 47 | % | |||||||
Gas Cost | 1,257.4 | 64 | % | 460 | 53 | % |
22
Cost of Connections
Our cost of connections during the three months ended September 30, 2007 was $0.7 million, or 36% of total cost of revenue. By comparison, the cost of connections during the three months of 2006 was $0.4 million, or 47% of total cost of revenue.
Cost of connection increased around 74% from the same period one year ago, 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 173% to $1.26 million during the three months ended September 30, 2007 from the same period in 2006, when it was $0.46 million and 53% of total cost of revenue. This increase, which outpaced the 126% 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.
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 set 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 Hazardous Goods Transportation Co. Ltd, one of our subsidiaries, is responsible for our gas transportation, and transportation cost per cubic meter is relatively stable at RMB 0.55 ($0.072) per cubic meter. Management believes that this transportation cost per cubic meter is likely to remain constant in spite of the increased depreciation costs from the newly purchased vehicles described above, because the vehicles will allow delivery of additional natural gas to customers in sufficient numbers to offset those costs
Gross Profit
For the three months ended September 30, | |||||||||||||
2007 | 2006 | ||||||||||||
($ thousand) | US$ | % | US$ | % | |||||||||
Gross Profit | 3,687 | 100 | % | 2,606 | 100 | % | |||||||
Connection | 3,304 | 90 | % | 2,340 | 90 | % | |||||||
Gas | 383 | 10 | % | 266 | 10 | % |
23
During the three months ended Sep 30, 2007, gross profit was $3.69 million, an increase of approximately 40% from the same period of 2006. Gross profit from connection fees is $3.3 million for the three months ended September 30, 2007, accounting for 90% of total gross profit. In comparison, gross profit from connection fees was $2.34 million for the three months ended September 30, 2006, accounting for 90% of total gross profit. Gross profit from gas sales was $0.38 million, compared to $0.27 million in the same period of 2006.
Gross margin during the three months ended September 30, 2007 is 65%, compared to 75% during the three months ended September 30, 2006. Gross margin for connection fees for the third quarter of 2007 was 82%, as compared to 85% for the same quarter of 2006.
The decrease of connection gross margin are because we built gas distribution infrastructure which can be used for 25-30 years by the total potential residential households in our operating cities and now only a small proportion of residential households have been connected. As a result, the depreciation under the cost of connection is relatively higher.
Gross margin for sales of natural gas was 23% during the same period, compared with 37% in the same period of 2006. The decrease was due to the relatively higher depreciation for delivery trucks described above.
Sale and marketing expenses
Our sale and marketing expenses in the three months ended September 30, 2007 were $176,700 and approximately 3.13% of our net sales, compared with $39,700 , or 1.14% of net sales in the same period of 2006. This increase of sale and marketing expenses was principally due to increases in marketing-related fees, including travel and communications resulting from expansion of our business.
24
General and administrative expenses
General and administrative expenses were $0.62 million for the three months ended September 30, 2007, which was 41% higher than $0.44 million for the same period last year. The increase was largely due to the increase in the number of operating subsidiaries we own, from 13 to 26, which led to increases in salary, social insurance, traveling expenses and other expenses. The increase was also due in part to increased depreciation relating to new assets described above.
General and administrative expenses equaled 11% of our net sales in the three months ended September 30, 2007, compared with 13% in the same period one year ago. The reduction in general and administrative expenses relative to net sales was due to economies of scale as a result of the expansions of our business 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 is expected to be 15%, the standard rate for foreign high-tech enterprises.
The income tax rate of our subsidiaries is 18-33%, except for Beijing Chenguang and Beijing Gas, because Beijing Chenguang has also been classified as a foreign high-tech enterprise and is subject to a favorable income tax rate of 7.5% from 2006 to 2008.
Net Income
Net income in the nine months ended September 30, 2007 was $2.63 million, representing an increase of 37% from $1.93 million in the same period in 2006. The increase can be attributed to the continuous growth of our existing markets and the acquisitions we have made. Due to the seasonal nature of our business, management believes it is likely that net income will continue to increase substantially in the fourth quarter of 2007.
Net profit margin is 47%, compared with 56% for the same period one year ago.
Nine Months Ended Sep 30, 2007 Compared to Nine Months Ended Sep 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 nine months ended Sep 30, 2007 was $10,886,612, compared to $4,971,156 for the same period in 2006, representing an increase of 119 %. The increase was due to new customers connecting to our gas distribution network and new customers purchasing our natural gas. During this period, we connected 21,629 new residential households to our gas distribution network, resulting in total connection fees of $5,997,716. Gas sales during the same period amounted to 18.18 million cubic meters, or $4,888,896. In comparison, during the same period one year ago, we connected 12,010 new residential households to our gas distribution network, resulting in total connection fees of $3,104,605. Gas sales during the period amounted to 6.81 million cubic meters, or $1,866,551.
The following table summarizes our net revenue during the periods indicated:
25
For the nine months ended Sep 30 | ||||||||||||||||
2007 | 2006 | Change | ||||||||||||||
( $ thousand) | US$ | % | US$ | % | % | |||||||||||
Total Revenue | 10,886.6 | 100 | % | 4,971.2 | 100 | % | 119 | % | ||||||||
Connection Fees | 5,977.7 | 55 | % | 3,104.6 | 62 | % | 93 | % | ||||||||
Gas Sales | 4,888.9 | 45 | % | 1,866.6 | 38 | % | 162 | % |
Connection fees
Connection fees during nine months ended Sep 30, 2007 were $5,997,71, representing an increase of more than 93% from $3,104,605 for the same period last year. Connection fees accounted for approximately 55% of total revenue during the period, compared with approximately 62% for the same period in 2006.
We had connected a total of 21,629 new residential households during the first nine months of the year in the twenty-four cities where we have developed or acquired gas distribution network. During the nine months ended September 30, 2007, Peixian Weiye Gas Co., Ltd (Peixian Weiye), one of our subsidiaries, located in Peixian, Jiangsu Province, had connected 9,154 new residential households, generating $2.8 million connection fees.
In July, Sino Gas, through Peixian Weiye, signed agreement with Shanghai Datun Energy Co., Ltd., one of our major customers in Pei Xian to connect additional 6,000 households, the second phase of connecting a total of 18,000 new households for the customer.
In July 2007, we established a new subsidiary, Baishan Zhong Ran We Ye Gas Co., Ltd. ('Baishan Gas'), in Baishan City, Jilin Province and acquired all of the operating assets of Baishan Gas Co., Ltd. ('Baishan'), a local gas operator. Since then, we have developed 6,100 residential households by the end of September 30, 2007, generating $1.1 million connections fees.
Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in January 2007, connected 2,837 new residential households in the nine months ended September 30, 2007, which accounted for $886,900 for total connection fees.
All the connections fees we have earned are from residential households during the first nine months of the year. Below is a list of our top five customers with respect to connections fees:
1) | Shanghai Datun Energy Co., Ltd in Peixian, Jiangsu Province. During the nine months ended September 30, 2007, we had connected 8,780 new residential households, generating connection fees of $2.74 million. |
2) | Shijiazhuang Jinshe Real Estate Co.,Ltd in Shijiazhuang, Hebei Province. During the nine months ended September 30, 2007, we had connected 834 new residential households, generating connection fees of $282,400. |
3) | Baishan Kaixia Real Estaate Co., Ltd in Baishan, Jilin Province. During the nine months ended September 30, 2007, we had connected 1,250 new residential households, generating connection fees of $228,400. |
4) | Baishan Jiahe Real Estate Co., Ltd in Baishan, Jilin Province. During the nine months ended September 30, 2007, we had connected 1,156 new residential households, generating connection fees of $210,900. |
5) | Hebei Dihua Real Estate Co., Ltd in Luquan, Hebei Province. During the nine months ended September 30, 2007, we had connected 642 new residential households, generating connection fees of $158,700. |
26
Gas sales
We sold approximately 18.2 million cubic meters of natural gas to our customers during the nine months ended September 30, 2007, accounting for roughly $4.9 million, or 45% of total net revenue. In comparison, gas sold in the first nine months of 2006 totaled 6.8 million cubic meters, accounting for $1.86 million, or 38%, of net revenue. Gas sales increased $3 million, or 162%, from the same period one year ago.
Among the total gas sales, industrial users accounted for $1.98 million, residential users accounted for $1.19 million. The rest, most of which was sold through other gas distributors, accounted for $1.72 million.
In comparison, during the nine months ended September 30, 2006, industrial users accounted for $1.3 million gas sales, residential users accounted for $307,000 and others accounted for $243,600.
Gas sales from industrial users increased 52% percent, as we developed one new industrial users and two of our industrial users increased their gas consumption. We had four industrial users as of September 30, 2007, as compared to three as of September 30, 2006.
The following table summarizes our gas sales during the periods indicated:
For the Nine months ended September 30 | |||||||||||||
2007 | 2006 | ||||||||||||
($ thousand) | US$ | % | US$ | % | |||||||||
Gas Sales | |||||||||||||
Industrial users | 1,975.9 | 40 | % | 1,315.9 | 71 | % | |||||||
Residential users | 1,189.1 | 25 | % | 307.1 | 16 | % | |||||||
Others | 1,723.9 | 35 | % | 243.6 | 13 | % | |||||||
Total | 4,888.9 | 100 | % | 1,866.6 | 100 | % |
The four industrial users account for 40% of our total gas sales. The daily gas consumption of industrial users is far higher than that of the residential households, as the gas is heavily used for industrial production.
The table below provides information about our industrial users for natural gas:
Industrial Projects | Gas Sales (1000 M³) | Gas Sales ($1,000) | |||||
Hebei Zhonggang | 5,376.2 | 1,611.6 | |||||
Hebei Tangshan Changsheng | 712.2 | 212.3 | |||||
North China Petro First Machinery | 423.6 | 112.3 | |||||
Langfang Elite | 142.4 | 39.7 |
For the nine months ended September 30, 2007, gas sales from Hebei Zhonggang is $1.6million, 45% higher than $1.1 million during the same period one year ago, as the company increased its production. We just completed the second phase construction of gas distribution infrastructure for Hebei Zhonggang, which will increase our gas supply capacity from 30,000 cubic meters per day to 50,000 cubic meters. Gas sales from Hebei Tangshan Changsheng is $212,3 00, slightly higher than $210,400 in the same period one year ago.
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Langfang Elite began to use gas from April this year and North China Petro First Machinery began to use gas from June this year.
Cost of Revenue
Our cost of revenue, which includes cost of connection and cost of natural gas sales, was $5,696,918 for the nine months ended September 30, 2007.
The table below sets forth our cost of revenues for the periods indicated:
For the Nine months ended September 30, | |||||||||||||
2007 | 2006 | ||||||||||||
($ thousands) | US$ | % | US$ | % | |||||||||
Cost of Revenue | 5,697.0 | 100 | % | 1,849.1 | 100 | % | |||||||
Connection Cost | 1,348.3 | 24 | % | 469.8 | 25 | % | |||||||
Gas Cost | 4,348.7 | 76 | % | 1,379.3 | 75 | % |
Cost of Connections
Our cost of connection during the nine months ended September 30, 2007 was $1.35 million, or 24% of total cost of revenue. By comparison, the cost of connection during the nine months of 2006 was $0.47 million, or 25% of total cost of revenue.
Cost of connection increased around 187% from the same period one year ago, 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 215% from the nine months ended September 30, 2006, when it was $1.38 million and 75% of total cost of revenue. This increase, which outpaced the 162% 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.
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 set 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 Hazardous Goods Transportation Co. Ltd, one of our subsidiaries, is responsible for our gas transportation, and transportation cost per cubic meter is relatively stable at RMB 0.55 ($0.072) per cubic meter. Management believes that this transportation cost per cubic meter is likely to remain stable 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 new customers in sufficient numbers to offset those costs
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For the nine months ended September 30, 2007, we have purchased a total of 9.75 million cubic meters of natural gas, about 75% of which were purchased from North China Oil Field Fourth Oil Extraction Plant of Petro China in the form of CNG (Compressed Natural Gas).
We signed a ten-year gas supply agreement in 2003. 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 ($0.217) per cubic meter during the rest of the year.
Gross Profit
For the nine months ended September 30, | |||||||||||||
2007 | 2006 | ||||||||||||
($ thousand) | US$ | % | US$ | % | |||||||||
Gross Profit | 5,190 | 100 | % | 3,122 | 100 | % | |||||||
Connection | 4,650 | 90 | % | 2,635 | 84 | % | |||||||
Gas | 540 | 10 | % | 487 | 16 | % |
During the nine months ended Sep 30, 2007, gross profit was $5.19 million, an increase of approximately 66% from the same period of 2006. Gross profit from connection fees is $4.65 million for the first nine months of 2007, accounting for 90% of total gross profit. In comparison, gross profit from connection fees was $2.63 million for the first nine months of 2006, accounting for 85% of total gross profit. Gross profit from gas sales was $0.54 million, compared to $0.49 million in the same period of 2006.
Gross margin during the nine months ended September 30, 2007 is 47.7%, compared to 62.8% during the nine months ended September 30, 2006. Gross margin for connection fees for the first nine months of 2007 was 77.5%, compared to 84.9% for the first nine months of 2006.
The decrease of connection gross margin are mainly because we built gas distribution infrastructure which can be used for 25-30 years by the total potential residential households in our operating cities and now only a small proportion of residential households have been connected. As a result, the depreciation under the cost of connection is relatively higher. As we develop more households in the cities, the margin will be improved.
Gross margin for sales of natural gas was 11% during the same period, compared with 26% during the same period of 2006, due to the relatively higher depreciation for delivery trucks described above.
Sale and marketing expenses
Our sale and marketing expenses in the nine months ended September 30, 2007 were $376.2 thousand and approximately 3.45% of our net sales, compared with $66,500 and less than 1.34% of net sales during the same period of 2006. This increase of sale and marketing expenses was principally due to increases in marketing-related fees, including travel and communications resulted from expansion of our business.
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General and administrative expenses
General and administrative expenses were $1.31 million for the nine months ended September 30, 2007, which was 90% higher than $0.69 million for the same period last year. The increase was largely due to the increase in the number of operating subsidiaries we own, from 13 to 26, which led to increases in salary, social insurance, traveling expenses and other expenses. The increase was also due in part to increased depreciation relating to new assets described above.
General and administrative expenses equaled 12% of our net sales in the first nine months of 2007, compared with 13.6% in the same period one year ago. The reduction in general and administrative expenses relative to net sales was due to economies of scale as a result of the expansions of our business 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 is expected to be 15%, the standard rate for foreign high-tech enterprises.
The income tax rate of our subsidiaries is 18-33%, except for Beijing Chenguang and Beijing Gas.. Beijing Chenguang 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.
Net Income
Net income in the nine months ended September 30, 2007 was $3.25 million, representing an increase of 48.71% from $2.19 million in the same period in 2006. The increase can be attributed to the continued growth of our existing markets and the acquisitions we have made. Due to the seasonal nature of our business, management believes it is likely that net income will continue to increase substantially in the fourth quarter of 2007.
Net profit margin is 30%, compared with 44% for the same period last year.
Liquidity and Capital Resources
As of September 30, 2007, cash and cash equivalents were $16.47 million, an increase of $12.84 million from $3.64 million as of December 31, 2006 which was due to the increase in cash flow from operating and financing activities, partly offset by our investment activities.
We have the following major financing activities during the first nine months of the year: we completed equity financing of $18.77 million in September, 2007 and the net proceeds of the financing for the company is $13.79 million; in May we received $3 million in gross proceeds and $2.3 million in net proceeds from the exercise of warrants by investors; we took out a one year loan in the amount of RMB 20 million (approximately $2.6 million), accruing interest at an adjustable rate (currently at 6.0225% per year), with interest payable quarterly, from Industrial Bank, Beijing Branch; during the quarter ended March 30, 2007, we repaid an RMB 20 million (approximately $2.6 million) short-term loan from Shenzhen Development Bank.
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We used the funds raised for acquisitions and project developments. During the first nine months of 2007, we have paid out about $8 million for investment and acquisition, including $2.5 million for the acquisition of Beijing Chenguang, $2 million for investment in Baishan city, $1 million for investment in Guannan city and $2.5 million for investment and acquisitions of 9 other small city projects.
Cash flow from operating activities during the nine months ended September 30, 2007 is $8.35 million, an increase of $4.87 million from the end of 2006.
Accounts Receivable
Accounts receivable as of September 30, 2007 were $6.33 million, representing a decrease of $0.2 million from $6.53 million 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, accounts receivable dated from 2006 had been mostly 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.
As we expect to see a relative large number of connections completed during the fourth quarter, account receivable is expected to rise sharply during the fourth quarter.
Notes Receivable
Notes receivable of $0.62 million as of September 30, 2007 is the Note issued by Hebei Zhonggang for its use of gas. The Note will be duly honored by bank.
Other Payables
Other payables as of September 30, 2007 were $5.7 million, an increase of $3.9 million from the end of 2006. This increase is due to our acquisition of Beijing Chenguang, in connection with which we are scheduled to make an additional payment of $0.93 million. Also, the former operator of Baishan city gas distribution system we acquired in July transferred its fixed assets valued at around $3.7 million to our company.
Item 3. Controls and Procedures.
a) Evaluation of Disclosure Controls. Yuchuan Liu, our Chief Executive Officer and Fang Chen, our Principal Accounting Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of our third fiscal quarter 2007 pursuant to Rule 13a-15(b) of the Securities and Exchange Act. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. Based on his evaluation, Yuchuan Liu and Fang Chen concluded that our disclosure controls and procedures were effective as of September 30, 2007.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our management team will continue to evaluate our internal control over financial reporting in 2007 as we implement our Sarbanes Oxley testing.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 7, 2007, Sino Gas International Holdings, Inc. (the “Company”) entered into a Securities Purchase Agreement with a number of institutional investors (the “Investors”) providing for the sale to the Investors of a total of 8,340,762 shares of the Company’s Common Stock (the “Shares”) for an aggregate purchase price of $18,766,700 (or $2.25 per Share). For reference, please see 8-K report filed by the Company on September 10, 2007.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
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Item 6. Exhibits
The following exhibits are hereby filed as part of this Quarterly Report on Form 10-QSB.
Exhibit Number: | Description | |
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 | |
33.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Annual Report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing, on November 16, 2007.
SINO GAS INTERNATIONAL HOLDINGS, INC. | |||
By: | /s/ Yuchuan Liu | ||
Yuchuan Liu | |||
Chairman and Chief Executive Officer |
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