U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2008
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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company 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 13, 2008, the Registrant had 25,084,644 shares of common stock outstanding.
Sino Gas International Holdings, Inc.
Table of Contents
Page | ||
PART I - | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | 1 |
Notes to Financial Statements (Unaudited) | 7 | |
Item 2. | Management's Discussion and Analysis or Plan of Operation | 29 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 43 |
Item 4. | Controls and Procedures | 43 |
PART II - | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 44 |
Item 1A. | Risk Factors | 44 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 44 |
Item 3. | Defaults Upon Senior Securities | 44 |
Item 4. | Submission of Matters to a Vote of Security Holders. | 44 |
Item 5. | Other Information | 44 |
Item 6. | Exhibits | 45 |
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statement
Sino Gas International Holdings, Inc.
Reviewed Consolidated Financial Statements
September 30, 2008 and December 31, 2007
(Stated in US Dollars)
3
SINO GAS INTERNATIONAL HOLDINGS, INC.
CONTENTS | PAGES | |||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUTANTING FIRM | 1 | |||
CONSOLIDATED BALANCE SHEETS 3 | 2 | |||
CONSOLIDATED STATEMENTS OF INCOME | 3-4 | |||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 5 | 5-6 | |||
CONSOLIDATED STATEMENTS OF CASH FLOWS | 7 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 - 10 | 8 - 29 |
4
Board of Directors and Stockholders
Sino Gas International Holdings, Inc.
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying consolidated interim balance sheets of Sino Gas International Holdings, Inc. as of September 30, 2008 and December 31, 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three-month and nine-month periods ended September 30, 2008 and 2007. These consolidated interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
South San Francisco, California October 30, 2008 | Samuel H. Wong & Co., LLP Certified Public Accountants |
5
Sino Gas International Holdings, Inc. |
Consolidated Balance Sheets |
As of September 30, 2008 and December 31, 2007 |
(Stated in US Dollars) |
ASSETS | September 30, 2008 | December 31, 2007 | ||||||||
Note | Unaudited | Audited | ||||||||
Current Assets | ||||||||||
Cash & cash equivalents | 2(e) | $ | 6,545,424 | $ | 10,915,590 | |||||
Restricted cash | 3 | 386,155 | 478,920 | |||||||
Notes receivable | 364,692 | 825,119 | ||||||||
Accounts receivable | 2(f),4 | 6,234,020 | 7,315,253 | |||||||
Other receivables | 5 | 4,283,720 | 3,100,695 | |||||||
Inventory | 264,043 | 207,976 | ||||||||
Advances to suppliers | 2(g) | 3,271,841 | 27,372 | |||||||
Prepayments and others | 413,993 | 320,380 | ||||||||
Total Current Assets | 21,763,888 | 23,191,305 | ||||||||
Non-Current Assets | ||||||||||
Investment | 2(h) | 4,393,194 | 4,007,310 | |||||||
Property, plant & equipment, net | 2(j),6 | 27,256,377 | 24,572,565 | |||||||
Construction in progress | 2(l) | 16,365,966 | 11,556,820 | |||||||
Intangible assets, net | 2(k),7 | 2,199,211 | 2,028,250 | |||||||
Total non-current assets | 50,214,748 | 42,164,945 | ||||||||
TOTAL ASSETS | $ | 71,978,636 | $ | 65,356,250 | ||||||
LIABILITIES & STOCKHOLDERS' EQUITY | ||||||||||
Current Liabilities | ||||||||||
Bank Loans | 8 | $ | 4,376,304 | $ | 2,734,444 | |||||
Accounts payable | 4,450,222 | 716,707 | ||||||||
Other payables | 9 | 7,188,484 | 10,383,657 | |||||||
Unearned revenue | 2(m) | 1,182,990 | 312,573 | |||||||
Accrued liabilities | 10,369 | 362,263 | ||||||||
Total current liabilities | 17,208,369 | 14,509,644 | ||||||||
TOTAL LIABILITIES | $ | 17,208,369 | $ | 14,509,644 | ||||||
See accompanying notes to financial statements and accountant’s report
6
Sino Gas International Holdings, Inc. |
Consolidated Balance Sheets |
As of September 30, 2008 and December 31, 2007 |
(Stated in US Dollars) |
September 30, 2008 | December 31, 2007 | |||||||||
Note | Unaudited | Audited | ||||||||
STOCKHOLDERS' EQUITY | ||||||||||
Preferred Stock A US $0.001 par value; 20,000,000 shares authorized; 0 and 275,111 shares issued and outstanding as of September 30, 2008 and December 31, 2007 respectively | 10 | $ | - | $ | 275 | |||||
Preferred Stock B US $0.001 par value; 5,000,000 shares authorized; 4,579,839 and 4,971,859 shares issued and outstanding as of September 30, 2008 and December 31, 2007 respectively | 10 | 4,580 | 4,972 | |||||||
Preferred Stock B-1 US $0.001 par value; 10,000,000 shares authorized; 95,418 and 0 shares issued and outstanding as of September 30, 2008 and December 31, 2007 respectively | 95 | - | ||||||||
Common Stock US $0.001 par value; 250,000,000 shares authorized; 26,769,313 and 25,282,380 shares issued and outstanding as of September 30, 2008 and December 31, 2007 respectively | 10 | 26,769 | 25,283 | |||||||
Additional Paid in Capital | 34,853,735 | 35,247,303 | ||||||||
Statutory Reserve | 3,258,201 | 3,258,201 | ||||||||
Retained Earnings | 11,088,461 | 10,432,430 | ||||||||
Accumulated Other Comprehensive Income | 5,538,425 | 1,878,142 | ||||||||
TOTAL STOCKHOLDERS' EQUITY | 54,770,266 | 50,846,606 | ||||||||
TOTAL LIABILITIES AND | ||||||||||
STOCKHOLDERS' EQUITY | $ | 71,978,636 | $ | 65,356,250 |
See accompanying notes to financial statements and accountant’s report
7
Sino Gas International Holdings, Inc. |
Consolidated Statements of Income |
For the three months and nine months periods ended September 30, 2008 and 2007 |
(Stated in US Dollars) |
Three Months Ended | Nine Months Ended | ||||||||||||
Sep 30, | Sep 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Sales Revenue | $ | 5,440,212 | $ | 5,652,240 | $ | 14,903,850 | $ | 10,886,612 | |||||
Cost of Revenue | (3,160,189 | ) | (1,965,085 | ) | (9,690,253 | ) | (5,696,918 | ) | |||||
Gross Profit | 2,280,022 | 3,687,155 | 5,213,597 | 5,189,694 | |||||||||
Operating Expenses | |||||||||||||
Selling and marketing expenses | (226,678 | ) | (176,739 | ) | (594,575 | ) | (376,233 | ) | |||||
General & administrative expenses | (650,119 | ) | (621,952 | ) | (2,646,999 | ) | (1,310,811 | ) | |||||
Total operating expenses | (876,798 | ) | (798,691 | ) | (3,241,573 | ) | (1,687,044 | ) | |||||
Operating Income/(Loss) | 1,403,225 | 2,888,464 | 1,972,024 | 3,502,650 | |||||||||
Other Income (Expenses) | |||||||||||||
Other income | 58,913 | - | 673 | 9,046 | |||||||||
Other expenses | (27,541 | ) | (25,978 | ) | (511,467 | ) | (13,197 | ) | |||||
Interest income | 26,970 | - | 72,632 | 11,527 | |||||||||
Interest expense | - | - | (157,057 | ) | - | ||||||||
Total other income (expense) | 58,342 | (25,978 | ) | (595,220 | ) | 7,376 | |||||||
Earnings before tax | 1,461,567 | 2,862,486 | 1,376,804 | 3,510,026 | |||||||||
Income tax | (417,975 | ) | (227,887 | ) | (720,773 | ) | (255,230 | ) | |||||
Net Income | $ | 1,043,591 | $ | 2,634,599 | $ | 656,031 | $ | 3,254,796 | |||||
Earnings per share | |||||||||||||
Basic | $ | 0.039 | $ | 0.147 | $ | 0.025 | $ | 0.206 | |||||
Diluted | $ | 0.033 | $ | 0.121 | $ | 0.021 | $ | 0.166 | |||||
Weighted Average Shares Outstanding | |||||||||||||
Basic | 26,769,291 | 17,889,867 | 26,568,884 | 15,779,750 | |||||||||
Diluted | 31,169,437 | 21,856,124 | 31,169,437 | 19,573,911 |
See accompanying notes to financial statements and accountant’s report
8
Sino Gas International Holdings, Inc. |
Consolidated Statements of Stockholders’ Equity |
As of September 30, 2008 and December 31, 2007 |
(Stated in US Dollars) |
Preferred Stock A | Preferred Stock B | Preferred Stock B-1 | Common Stock | |||||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Shares Outstanding | Amount | Shares Outstanding | Amount | Shares Outstanding | Amount | Additional Paid in Capital | Statutory Reserve | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||
Balance, January 1, 2007 | - | - | 4,023,268 | 4,023 | - | - | 14,693,186 | 14,694 | 18,488,040 | 2,025,022 | 3,958,239 | 824,296 | 25,314,314 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | - | 7,707,370 | - | 7,707,370 | |||||||||||||||||||||||||||
Issue of stock and warrant | 275,111 | 275 | 948,591 | 949 | - | - | 10,589,194 | 10,589 | 16,759,263 | - | - | - | 16,771,076 | |||||||||||||||||||||||||||
Appropriations of Retained Earnings | - | - | - | - | - | - | - | - | - | 1,233,179 | (1,233,179 | ) | - | - | ||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | - | - | 1,053,846 | 1,053,846 | |||||||||||||||||||||||||||
Balance, December 31, 2007 | 275,111 | 275 | 4,971,859 | 4,972 | - | - | 25,282,380 | 25,283 | 35,247,303 | 3,258,201 | 10,432,430 | 1,878,142 | 50,846,606 | |||||||||||||||||||||||||||
Balance, January 1, 2008 | 275,111 | 275 | 4,971,859 | 4,972 | - | - | 25,282,380 | 25,283 | 35,247,303 | 3,258,201 | 10,432,430 | 1,878,142 | 50,846,606 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | - | 656,031 | - | 656,031 | |||||||||||||||||||||||||||
Issuance and Conversion of Stock | (275,111 | ) | (275 | ) | (392,020 | ) | (392 | ) | 95,418 | 95 | 1,486,933 | 1,486 | - | - | - | - | 914 | |||||||||||||||||||||||
Stock Issuance Cost | - | - | - | - | - | - | - | - | (393,568 | ) | - | - | - | (393,568 | ) | |||||||||||||||||||||||||
Appropriations of Retained Earnings | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | - | - | 3,660,283 | 3,660,283 | |||||||||||||||||||||||||||
Balance, September 30, 2008 | - | - | 4,579,839 | 4,580 | 95,418 | 95 | 26,769,313 | 26,769 | 34,853,735 | 3,258,201 | 11,088,461 | 5,538,425 | 54,770,266 |
See accompanying notes to financial statements and accountant’s report
9
Sino Gas International Holdings, Inc. |
Consolidated Statements of Stockholders’ Equity |
As of September 30, 2008 and December 31, 2007 |
(Stated in US Dollars) |
Accumulated Comprehensive Income | ||||||||||
12/31/2007 | 9/30/2008 | Total | ||||||||
Comprehensive Income | ||||||||||
Net Income | $ | 7,707,370 | $ | 656,031 | $ | 8,363,401 | ||||
Other Comprehensive Income | ||||||||||
Foreign Currency Translation Adjustment | 1,053,846 | 3,660,283 | 4,714,129 | |||||||
$ | 8,761,216 | $ | 4,316,314 | $ | 13,077,530 |
See accompanying notes to financial statements and accountant’s report
10
Sino Gas International Holdings, Inc. |
Consolidated Statements of Cash Flows |
For the three months and nine months periods ended September 30, 2008 and 2007 |
(Stated in US Dollars) |
Three Months Ended | Nine Months Ended | ||||||||||||
Sep 30, | Sept 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Cash flow from operating activities | |||||||||||||
Net Income | $ | 1,043,592 | $ | 2,634,599 | $ | 656,031 | $ | 3,254,796 | |||||
Depreciation and Amortization expenses | 326,246 | 847,152 | 1,228,894 | 1,544,072 | |||||||||
Withdraw/(invested) in restricted time deposits | 353,713 | (172,986 | ) | 92,765 | 2,951,555 | ||||||||
Decrease/(increase) in accounts and other receivables | 1,821,303 | 259,352 | 358,635 | (371,075 | ) | ||||||||
Decrease/(increase) in inventory | 12,209 | (225,010 | ) | (56,066 | ) | (282,700 | ) | ||||||
Increase in prepaid expenses | (319,667 | ) | - | (3,338,084 | ) | - | |||||||
Increase in accounts and other payables | 326,093 | 1,186,313 | 1,056,866 | 4,140,130 | |||||||||
Cash sourced/(used) in operating activities | 3,563,489 | 4,529,420 | (960 | ) | 11,302,353 | ||||||||
Cash flows from investing activities | |||||||||||||
Cash (paid)/received for investments | (10,776 | ) | - | (385,884 | ) | - | |||||||
(Purchase)/sale of property, plant & equipment | (1,131,927 | ) | (6,205,268 | ) | (3,912,706 | ) | (10,938,911 | ) | |||||
(Purchase)/Sale of intangible assets | 33,956 | (1,159,406 | ) | (170,961 | ) | (852,243 | ) | ||||||
Acquisition of subsidiaries | - | (19,126 | ) | - | (192,293 | ) | |||||||
Increase in construction in progress | (1,671,961 | ) | (1,514,904 | ) | (4,809,144 | ) | (4,331,340 | ) | |||||
Cash sourced/(used) in investing activities | (2,780,708 | ) | (8,964,279 | ) | (9,278,696 | ) | (16,314,787 | ) | |||||
Cash flows from financing activities | |||||||||||||
Proceeds/(repayment) of bank borrowings | (2,899,810 | ) | 37,404 | 1,641,859 | 229,979 | ||||||||
Dividend paid | - | (521,121 | ) | - | (521,121 | ) | |||||||
Issuance/(conversion) of stock | (392,653 | ) | 14,566,850 | (392,653 | ) | 17,154,609 | |||||||
Cash sourced/(used) in financing activities | (3,292,464 | ) | 14,083,133 | 1,249,206 | 16,863,467 | ||||||||
Net Increase/(Decrease) in Cash & Cash Equivalents for the Year | (2,509,682 | ) | 9,648,274 | (8,030,449 | ) | 11,851,033 | |||||||
Effect of Currency Translation on cash and cash equivalents | 902,199 | 172,485 | 3,660,283 | 984,691 | |||||||||
Cash & Cash Equivalents - Beginning of Year | 8,021,212 | 6,653,639 | 10,915,590 | 3,638,673 | |||||||||
Cash & Cash Equivalents - End of Year | $ | 6,545,424 | $ | 16,474,397 | $ | 6,545,424 | $ | 16,474,397 | |||||
Supplementary cash flow information | |||||||||||||
Interest received | $ | 26,970 | $ | - | $ | 72,632 | $ | 11,527 | |||||
Interest paid | - | - | 157,057 | - | |||||||||
Income tax paid | 597,768 | 227,887 | 720,773 | 255,230 |
See accompanying notes to financial statements and accountant’s report
11
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
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 14,361,646 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. (Legal acquirer, accounting acquiree) and the historical financial statements of Gas Investment China Co. Ltd. (Legal acquiree, accounting acquirer)
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 24 natural gas distribution systems serving approximately 87,500 residential and five commercial and industrial customers. The Company’s facilities include approximately 700 kilometers of pipeline and delivery networks (including delivery trucks) 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.
12
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
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.
13
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
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, 2008 and December 31, 2007 (whichever applicable 2007).
Name of Company | Place of Incorporation | Date of Incorporation | Beneficiary interest % | Equity Interest % | Registered Capital | |||||
The British | ||||||||||
GAS Investment China Co., Ltd. | Virgin Islands | 6/19/2003 | 100 | 100 | USD 10,000,000 | |||||
The British | ||||||||||
Sino Gas Construction Limited | Virgin Islands | 1/9/2007 | 100 | 100 | USD 50,000 | |||||
Beijing Zhong Ran Wei Ye Gas Co., Ltd | PRC | 8/29/2001 | 100 | 100 | RMB 184,916,420 | |||||
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 | 1/30/2007 | 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 |
14
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Name of Company | Place of Incorporation | Date of Incorporation | Beneficiary interest % | Equity Interest % | Registered Capital | |||||
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 | 3/21/2007 | 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 | 6/14/2007 | 100 | 100 | RMB 2,000,000 | |||||
Luquan Chenguang Gas Co., Ltd | PRC | 4/27/2007 | 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 |
15
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Name of Company | Place of Incorporation | Date of Incorporation | Beneficiary interest % | Equity Interest % | Registered Capital | |||||
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 |
(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 equity method of accounting was used to account for the Company’s investment in equity securities for which the Company did not have controlling equity interest. Non controlling equity interest for the Company is typically a position of less than 50% beneficial ownership.
16
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
The consolidated statement of income includes the Company's share of the post-acquisition results of the investment’s performance for the year. In the consolidated balance sheet, investments in equity securities are stated at the Company's share of the net assets of the investments plus any potential premium, or less discounts paid at the time of acquisition, and less any identified impairment loss.
Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned investment and is principally engaged in sale of compressed natural gas to domestic households and industrial firms around the suburbs of Beijing as well as the suburban areas of the Hebei Province and Tianjin.
Name of Associate Company | Place of Registration | Form of Business Structure | Registered Capital | Nominal Value of Registered Capital | Principal 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 |
The Company did not record any goodwill when it acquired its equity position in Xiangke. Accordingly, in accordance with SFAS 142, the Company has not taken an amortization expense of goodwill during the time it has carried a 40% stake in Xiangke.
(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.
17
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
(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 (Up to December 31, 2007) | 25 years |
Gas Pipelines (Starting from January 1, 2008) | 50 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 of September 30, 2008, the pipelines under construction include mainly the projects in Beijing. These projects, once completed, will significantly increase the gas supply capacity.
18
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
(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 September 30, 2008 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.
Exchange Rates | 9/30/2008 | 6/30/2008 | 3/31/2008 | 12/31/2007 | |||||||||
Year end RMB : US$ exchange rate | 6.8551 | 6.8718 | 7.0222 | 7.3141 | |||||||||
Average yearly RMB : US$ exchange rate | 6.99886 | 7.07263 | 7.1757 | 7.6172 |
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 collectability 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 include 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.
19
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Sales of natural gas are recognized when goods are delivered and title has passed.
(q) | Investment Income |
Investment 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, 2008, 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 25%.
(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.
20
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
(v) | Statutory 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 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.
(y) | Recent Accounting Pronouncements |
In December 2007, the Financial Accounting Standards Board issued FASB Statement No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R provides additional guidance on improving the relevance, representational faithfulness, and comparability of the financial information that a reporting entity provides in its financial reports about a business combination and its effects. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company believes there will be no material impact on its financial statements upon adoption of this standard.
In December 2007, the Financial Accounting Standards Board issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company believes there will be no material impact on its financial statements upon adoption of this standard.
21
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, (‘‘SFAS 141(R)’’). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations, but also provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired and liabilities assumed arising from contingencies, the capitalization of in-process research and development at fair value, and the expensing of acquisition-related costs as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. In the event that the Company completes acquisitions subsequent to its adoption of SFAS 141 (R), the application of its provisions will likely have a material impact on the Company’s results of operations, although the Company is not currently able to estimate that impact.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements − an amendment of ARB No. 51. SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent (previously referred to as minority interests), and the amount of consolidated net income, be clearly identified, labeled and presented in the consolidated financial statements. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners as components of equity. It is effective for fiscal years beginning after December 15, 2008, and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements are applied prospectively. The Company does not expect the adoption of SFAS 160 to have a material impact on its financial condition or results of operations.
The Company does not anticipate that the adoption of the above standards will have a material impact on these consolidated financial statements.
Earnings Per Share |
Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method for warrants and the as-if method for convertible securities. Dilutive potential common shares include outstanding warrants, and convertible preferred stock.
3. | RESTRICTED CASH |
Restricted Cash represents compensating balances held at banks to partially secure banking facilities in the form of loans and notes payable. The imposed restrictions dictate that funds cannot be withdrawn when there are outstanding loans and notes payable, and the funds are only allowed to be used to settle bank indebtedness. The funds deposited as compensating balances are interest bearing. The amount of restricted cash varies based on the Bank’s credit policy at the time that the Company requests for increase or extension of credit facilities.
22
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
4. | ACCOUNTS RECEIVABLE |
For natural gas sales, it is due when the gas is sold. Normally, most of them are settled by prepayments from the customers.
In general for construction projects, deposits of 30% of total contract sum are received from client when the project commences. Second payment of 30% is received after the construction is completed for around 6 months. The final sum of the remaining portion normally acts as retention money for quality warranty to the developer. The retention money would be received by the company after the 1 year warranty period.
The phrase "receivables are due within one year of aging" means the receivable that are within one year of aging.
The "amounts are not due within one year" are mostly retention money from construction sales that are based on contracts. The continued demand from the natural gas sales from them also help assure the amount could be collected. No experience of wholly-unsettled accounts receivable in the year September 30, 2008 and December 31, 2007
Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in the general and administrative expenses.
Outstanding account balances are reviewed individually for collectibles. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection. The Company does not have any off-balance-sheet credit exposure to its customers, except for outstanding notes receivable discounted with banks that are subject to recourse for non-payment.
The credit and billing policy is that, for the residential customer, we collect prepayment from customers; for the industrial customers, we settle the payment based on the contract terms signed, from 10 days to one month; for the construction business, we collect the payment from customer based on the percentage of the construction progress. The risk that business faces from inability to collect account is Operation risk in industrial customers.
23
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Accounts Receivable | |||||||
9/30/2008 | 12/31/2007 | ||||||
Gross accounts receivable | $ | 6,264,245 | $ | 7,352,013 | |||
Allowance for bad debt | (30,225 | ) | (36,760 | ) | |||
Net accounts receivable | $ | 6,234,020 | $ | 7,315,253 |
Allowance for Bad Debt | |||||||
9/30/2008 | 12/31/2007 | ||||||
Beginning balance | $ | 36,760 | $ | 32,838 | |||
Addition | 19,197 | 26,909 | |||||
Less - write off | (25,732 | ) | (22,987 | ) | |||
Ending balance | $ | 30,225 | $ | 36,760 |
Accounts Receivable Aging Report | |||||||
9/30/2008 | 12/31/2007 | ||||||
30 Days | $ | 4,413,506 | $ | 5,557,172 | |||
30-60 Days | 1,149,535 | 1,212,413 | |||||
60-90 Days | 857,245 | 8,747 | |||||
90-180 Days | 397,833 | - | |||||
180-360 Days | 446,051 | 27,489 | |||||
>360 Days | 119,386 | 509,433 | |||||
Total | $ | 6,234,020 | $ | 7,315,254 |
The followings are the largest ten accounts receivable as of September 30, 2008: -
Shuqian Mingwei Zhiye, Ltd. | $ | 258,202 | ||
Baishan Zhongfang Construction, Ltd. | 258,931 | |||
Tonghua Tongsheng Real Estate, Ltd. | 271,611 | |||
Peixuan Jiannan Development, Ltd. | 283,001 | |||
Beijing Yincheng Construction, Ltd. | 287,698 | |||
Sihong Jinwan Development, Ltd. | 318,887 | |||
Guannan Fangwu Construction, Ltd. | 368,485 | |||
Lianyun Port Development, Ltd. | 381,614 | |||
Xuzhou Shenyuan Real Estate, Ltd. | 415,578 | |||
Hebei Zhonggang Steel, Ltd. | 708,201 | |||
Total | $ | 3,552,208 |
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Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
5. OTHER RECEIVABLES
The followings are the ten largest other receivables as of September 30, 2008: -
9/30/2008 | ||||
Hebei Wentan Development Co., | $ | 14,588 | ||
Beijing Guizhong Material, Ltd. | 15,810 | |||
Shahe Greatwall, Ltd. | 22,632 | |||
Shenzhen Shenqi Investment, Ltd. | 24,310 | |||
Peixian Development, Ltd. | 29,175 | |||
Beijing Zhongshi Investment, Ltd. | 43,763 | |||
Tongshan Jiaxing Gas, Ltd. | 70,891 | |||
Tianjin Feite Consultant, Ltd. | 437,630 | |||
Hebei Xili Medicine, Ltd. | 954,486 | |||
Shanhou Consultant Ltd. | 1,906,562 | |||
Total | $ | 3,519,849 |
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Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
6. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consist of the following as of September 30, 2008 and December 31, 2007: -
9/30/08 | 12/31/07 | ||||||
At Cost | |||||||
Gas Pipelines | $ | 21,945,187 | $ | 18,885,734 | |||
Motor Vehicles | 5,428,697 | 4,874,685 | |||||
Machinery & Equipment | 808,209 | 885,997 | |||||
Buildings | 1,688,096 | 1,405,638 | |||||
Leasehold Improvements | 73,804 | 68,942 | |||||
Office Equipment | 195,049 | 105,336 | |||||
Total | $ | 30,139,042 | $ | 26,226,336 | |||
Less: Accumulated Depreciation | (2,882,664 | ) | (1,653,771 | ) | |||
Property, Plant and Equipment, net | $ | 27,256,377 | $ | 24,572,565 |
9/30/08 | 12/31/07 | ||||||
Accumulated Depreciation | |||||||
Gas Pipelines | $ | 1,357,838 | $ | 591,419 | |||
Motor Vehicles | 1,036,268 | 687,354 | |||||
Machinery & Equipment | 189,113 | 161,703 | |||||
Buildings | 192,901 | 128,514 | |||||
Leasehold Improvements | 45,191 | 34,070 | |||||
Office Equipment | 61,354 | 50,711 | |||||
Total | $ | 2,882,664 | $ | 1,653,771 |
Depreciation expense included in the consolidated statements of income for the period ended September 30, 2008 was $1,228,893.
26
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
7. INTANGIBLE ASSETS
Intangible assets consist of the following as of September 30, 2008 and December 31, 2007: -
9/30/08 | 12/31/07 | ||||||
At Cost | |||||||
Land use rights | $ | 510,840 | $ | 452,345 | |||
Franchises | 401,161 | 359,464 | |||||
Goodwill | 1,677,755 | 1,562,202 | |||||
Other | 17520 | 9,563 | |||||
Total | $ | 2,607,276 | $ | 2,383,574 | |||
Less: Accumulated Amortization | (408,065 | ) | (355,324 | ) | |||
Intangible Assets, net | $ | 2,199,211 | $ | 2,028,250 |
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 amortization.
8. | SHORT-TERM BANK LOANS |
Short-term bank loans are as follows:
Name of Bank | Due Date | Interest Rate | Amount | |
9/30/2008 | 12/31/2007 | |||
China Renmin Bank | 7/1/2008 | 7.22% plus 10% fluctuation market rate | $ - | $ 2,734,444 |
Huashang Bank | 10/30/2008 | 9.00% | $ 4,376,304 | $ - |
9. OTHER PAYABLES
Other payables at September 30, 2008 and December 31, 2007 consist of the following: -
9/30/2008 | 12/31/2007 | ||||||
Employees’ welfare payables | $ | 145,208 | $ | 176,236 | |||
Amount due to employees | 23,266 | 150,711 | |||||
Tax payable | 513,001 | 922,620 | |||||
Other Payable | 6,507,009 | 9,134,091 | |||||
Total | $ | 7,188,484 | $ | 10,383,657 |
27
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
All the amounts due to employees are unsecured, interest free, and have no fixed repayment terms.
The followings are the ten largest other payables as of September 30, 2008: -
9/30/2008 | ||||
Baishan Zhongfan Real Estate, Ltd. | $ | 14,588 | ||
Baishan Natural Gas Company | 14,588 | |||
Educational Development, Ltd. | 42,251 | |||
He Shunchun | 72,938 | |||
Social Benefit Management Group | 75,239 | |||
Social Insurance Management Team | 124,220 | |||
Shenzhen Bolian, Ltd. | 204,228 | |||
Beijing Qianshi Technology Development, Ltd. | 242,442 | |||
Chenguang Weizhong Consultant, Ltd. | 437,630 | |||
Baishan City Gas, Ltd. | 3,996,332 | |||
Total | $ | 5,224,456 |
10. CAPITAL STOCK
The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which there are 26,769,313 shares issued and outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001 per share. The preferred stock consists of (a) series A convertible preferred stock, of which 20,000,000 shares have been authorized and 275,111 shares are issued and outstanding; and (b) series B convertible preferred stock, of which 5,000,000 shares have been authorized and 4,764,486 shares are issued and outstanding. (c) series B-1 convertible preferred stock, of which 10,000,000 shares have been authorized and 95,418 shares are issued and outstanding.
The following is a summary of the material terms of its capital stock. This summary is subject to and qualified in its entirety by its Articles of Incorporation, as amended and corrected, certificates of designations for its series A, series B, and series B-1 convertible preferred stock, its by-laws and by the applicable provisions of Utah law.
28
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Common Stock
The Company is authorized to issue 250,000,000 shares of common stock, with a par value of $0.001. There are 26,769,313 shares of common stock issued and outstanding as of September 30, 2008. All shares of common stock have one vote per share on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. The common stock currently outstanding is validly issued, fully paid and non-assessable. In the event of liquidation of the company, the holders of common stock will share equally in any balance of the company's assets available for distribution to them after satisfaction of creditors and preferred shareholders, if any. The holders of common stock are entitled to equal dividends and distributions per share with respect to the common stock when, as and if, declared by the board of directors from funds legally available.
Preferred Stock
In addition to the 250,000,000 shares of common stock, The Company is authorized to issue 100,000,000 shares of preferred stock, with a par value of $0.001 per share. Shares of the preferred stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the board of directors prior to the issuance.
On August 30, 2006, the Company’s board of directors designated 20,000,000 shares of its authorized $0.001 par value per share preferred stock as series A convertible preferred stock and 5,000,000 shares of its preferred stock as series B convertible preferred stock. On August 31, 2006, the Company filed certificates of designations for the series A and series B convertible preferred stock with the Office of the Secretary of State of Utah. On September 6, 2006, the board of directors amended the designations of the Series B convertible preferred stock and the Company filed an amended certificate of designations for the Series B convertible preferred stock with the Office of the Secretary of State of Utah. The board of directors created the series A convertible preferred stock to allow the Company to consummate the share exchange transaction with the Gas (BVI) Shareholders and the series B convertible preferred stock in connection with its private financing transactions, although the Company does not have sufficient unissued authorized common stock to allow for a complete conversion. Each of the shares of series A convertible preferred stock was automatically converted into one share of its common stock upon the effectiveness of its reverse stock-split on November 17, 2006. Therefore, as of December 31, 2006, the Company has no shares of series A convertible preferred stock issued and outstanding.
Conversion
The Company issued 14,361,646 of its common shares upon the automatic conversion of its series A convertible preferred shares after the 304.44-for-1 reverse stock-split on November 17, 2006. The Company no longer has any series A convertible preferred shares outstanding.
Each share of the series B convertible preferred stock will become convertible into common stock, at the option of its holder after the 304.44-for-1 reverse stock-split, based on the then applicable conversion rate, which is initially one share of series B convertible preferred stock for one share of common stock.
29
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
As a result of miscommunication between the Stock Transfer Agent and management of the Company, certain discrepancies in the Company’s capitalization were discovered between the company record and stock transfer agent record. These discrepancies had since been reconciled and corrected in this quarter, as highlighted below: -
i. | Preferred Stock A |
275,111 shares of Preferred Stock A issued upon reverse-merger on or about September 7, 2006 had actually been converted by the Sino-Gas (BVI) shareholders into shares of common stock on November 17, 2006.
ii. | Preferred Stock B |
392,020 shares of Preferred Stock B originally issued to the private investors have been converted into common stock between 3/27/2008 and 6/23/2008.
iii. | Common Stock |
As of September 30, 2008, the number of shares issued and outstanding has been revised to 26,769,313 shares from 25,282,380 shares at December 31, 2007, reporting a discrepancy of 1,486,933 shares attributable to: -
Description | Shares | |
i. | Vision Opportunity Master Fund, Inc. exercised on May 15, 2007, 1,094,891 Series J Warrants converted into common stock. | 1,094,891 |
ii. | Preferred Stock B issued to private investors converted into common stock between 3/27/2008 and 6/23/2008. | 393,020 |
Subtotal | 1,486,911 | |
Discrepancy Stock Cancelled | 22 | |
Total | 1,486,933 | |
30
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Total Capitalization
The Following table depicts an analysis of total capitalization for the issuance of Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional Paid in Capital as of September 30, 2008:
Preferred Stock B | Preferred Stock B-1 | Common Stock | |||||||||||||||||||||||
Name of Shareholders | Number of Shares outstanding | Capital | Number of Shares outstanding | Capital | Number of Shares outstanding | Capital | Additional Paid in Capital | % of Equity Holdings | |||||||||||||||||
Manager / Insider | - | - | - | - | 12,653,661 | 12,654 | 4,144,333 | 47 | % | ||||||||||||||||
Minority Investors | - | - | - | - | 3,428,551 | 3,429 | 667,986 | 13 | % | ||||||||||||||||
Private Placement Investors | 4,579,839 | 4,580 | 95,418 | 95 | 10,687,100 | 10,687 | 23,622,552 | 40 | % | ||||||||||||||||
Beneficial Conversion Feature | - | - | - | - | - | - | 6,418,864 | - | |||||||||||||||||
4,579,839 | 4,580 | 95,418 | 95 | 26,769,313 | 26,769 | 34,853,735 | 100 | % |
31
Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
11. 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.
Balance Sheet Segment Report | ||||||||
As of September 30, 2008 |
Gas Distribution | Gas pipeline Installation | Others | Total | ||||||||||
Assets | |||||||||||||
Current Assets | $ | 15,241,752 | $ | 5,051,443 | $ | 1,470,693 | $ | 21,763,888 | |||||
Non-Current Assets | 12,631,771 | 37,582,977 | - | 50,214,748 | |||||||||
Total Assets | $ | 27,873,523 | $ | 42,634,420 | $ | 1,470,693 | $ | 71,978,636 | |||||
Liabilities | |||||||||||||
Current Liabilities | $ | 1,470,627 | $ | 15,737,742 | $ | - | $ | 17,208,369 | |||||
Total Liabilities | $ | 1,470,627 | $ | 15,737,742 | $ | - | $ | 17,208,369 | |||||
Net Assets | $ | 26,402,895 | $ | 26,896,679 | $ | 1,470,693 | $ | 54,770,266 |
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Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Income Statement Segment Report | ||||||||
For the nine months ended September 30, 2008 |
Gas Distribution | Gas pipeline Installation | Others | Total | ||||||||||
Sales Revenue | $ | 8,593,097 | $ | 6,310,753 | $ | - | $ | 14,903,850 | |||||
Cost of Revenue | (7,708,001 | ) | (1,982,252 | ) | - | (9,690,253 | ) | ||||||
Gross Profit | 885,096 | 4,328,501 | - | 5,213,597 | |||||||||
Operating Expense | (422,520 | ) | (2,066,304 | ) | (752,749 | ) | (3,241,573 | ) | |||||
Other Income / Expense | (19,254 | ) | (94,161 | ) | (481,805 | ) | (595,220 | ) | |||||
Earnings before tax | 443,322 | 2,168,036 | (1,234,554 | ) | 1,376,804 | ||||||||
Income tax | (122,363 | ) | (598,410 | ) | - | (720,773 | ) | ||||||
Net Income | $ | 320,959 | $ | 1,569,626 | $ | (1,234,554 | ) | $ | 656,031 | ||||
Balance Sheet Segment Report | ||||||||
As of December 31, 2007 |
Gas Distribution | Gas pipeline Installation | Others | Total | ||||||||||
Assets | |||||||||||||
Current Assets | $ | 11,509,765 | $ | 3,814,583 | $ | 7,866,957 | $ | 23,191,305 | |||||
Non-Current Assets | 10,606,803 | 31,558,142 | - | 42,164,945 | |||||||||
Total Assets | $ | 22,116,568 | $ | 35,372,725 | $ | 7,866,957 | $ | 65,356,250 | |||||
Liabilities | |||||||||||||
Current Liabilities | $ | 1,228,727 | $ | 13,149,074 | $ | 131,843 | $ | 14,509,644 | |||||
Total Liabilities | $ | 1,228,727 | $ | 13,149,074 | $ | 131,843 | $ | 14,509,644 | |||||
Net Assets | $ | 20,887,841 | $ | 22,223,651 | $ | 7,735,114 | $ | 50,846,606 |
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Sino Gas International Holdings, Inc. |
Notes to Consolidated Financial Statements |
For the nine months periods ended September 30, 2008 and 2007 |
Income Statement Segment Report | ||||||||
For the nine months ended September 30, 2007 |
Gas Distribution | Gas pipeline Installation | Others | Total | ||||||||||
Sales Revenue | $ | 4,888,896 | $ | 5,997,716 | $ | - | $ | 10,886,612 | |||||
Cost of Revenue | (4,348,660 | ) | (1,348,258 | ) | - | (5,696,918 | ) | ||||||
Gross Profit | 540,236 | 4,649,458 | - | 5,189,694 | |||||||||
Operating Expense | (175,618 | ) | (1,511,426 | ) | - | (1,687,044 | ) | ||||||
Other Income | 768 | 6,608 | - | 7,376 | |||||||||
Earnings before tax | 365,386 | 3,144,640 | - | 3,510,026 | |||||||||
Income tax | (4,922 | ) | (250,308 | ) | - | (255,230 | ) | ||||||
Net Income | $ | 360,464 | $ | 2,894,332 | $ | - | $ | 3,254,796 |
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.
No other measures of segment profit or loss and assets have been provided or reviewed by the company's chief operating decision maker.
12. Liquidated Damages
The Company entered into a registration rights agreement related to a private placement financing transaction with accredited investors on September 13, 2007. Pursuant to the agreement, the Company had to (1) file the registration statement within 45 days of the execution, and (2) declare the effectiveness within 150 days of filing the registration statement. However, the Company did not meet the aforementioned requirements under the registration rights agreement, and was subjected to liquidated damages. The Company, which has paid $481,805 in liquidated damages to investors in 2008, was reported as other expense in the statements of income.
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The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth elsewhere in this Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
Economic & Industrial Trend
We generate revenue from two sources: connection fees for constructing connections to our natural gas distribution network, and sales of natural gas. Our connection activities are closely related to the development of real estate industry in our targeting cities in China, given the fact that almost all of our connection fees are from new residential apartments. Natural gas facilities in new apartments are often required by local governments, who aim to promote the use of natural gas to improve local residents’ life quality.
We have experienced high growth of our connection activities since inception of our business, thanks to Chinese real estate boom in the past five years. We see no major factors that will change the trend of real estate industry in the coming year. Therefore we expect to continue to see growth of household connections, especially in small-to-medium sized cities where the real estate market is at an early developing stage.
If Chinese real estate market does slow down in the future, our connection business would be negatively affected as a result of fewer new household connections.
Our gas users are composed of industrial and residential users. Gas sales from residential users are much less affected by economic and industrial factors and would maintain stable growth in the future, due to the increasing pool of our residential customers. Gas sales from industrial users is subject to the operating performance of the end industrial user and development of new users. Gas sales to our industrial users have increased 89% during the first half of 2008, as our existing users have expanded their production capacity. As we develop into more cities, we expect to add one to two industrial users in the coming year.
Material Opportunities
The gas distribution market is quite fragmented in the small (population less than 100,000)-to-medium (population between 100,000 to 300,000) sized cities. We have been in active talks with potential project targets. The size of the projects varies from small cities, like the ones we have, to medium-sized cities. For small city markets, many of them are still untapped or undeveloped. The development of these markets is generally considered major growth components of the company.
Regarding medium-sized or large cities, most of them have already been developed by large distributors or are still operated by state-owned companies. Acquisition opportunities exist for those still run by state-owned companies, as the central government encourages suppliers to turn them into privately-owned companies. The acquisition of these markets would have material impact on the company, increasing the company’s assets and revenues significantly. The company has finalized one acquisition, and needs to raise money to fund another acquisition.
Material Challenges
There are vast number of small-to-medium sized cities left undeveloped, but the competition is intense, as there are many small new players in the market attracted by the profitability and growth potential of the business. Meanwhile, from time to time, we are also facing competitions from stronger competitors, as large city markets are getting saturated and our competitors are beginning to expand into smaller cities.
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We are facing limited opportunities in developing into first-tier cities in China, as most of them have already been taken by other large gas distributors, such as Xin’ao Gas Co. Ltd (largest in China) in the past decade.
Still, potential users in small and medium-sized cities need to be educated by the benefits of natural gas. It takes some time for them to get to know how natural gas can improve the quality of life. This is especially true for new markets, where there is no use of natural gas. Small cities tend to be more reluctant for use of new energies than large cities where residents depend more on coal, rather than natural gas.
China’s energy market is highly regulated by the government, with regard to purchase price and sale price of natural gas. Whenever there is an adjustment to purchase price by the government, gas distributors would increase the sale price correspondingly, subject to a public hearing and government approval. The increase of natural gas price in China is lagging behind that in the international markets, which has soared in the past year. The Chinese government has seldom adjusted natural gas and we can not rule out the possibilities of increase of natural gas price by the government in the future. Even though we can adjust the sale price accordingly after the increase of purchase price, passing the increase to end users. However, it would make natural gas more expensive, as compared to other alternative energies. Thus this increase of price will deter our business development.
Risks in Short-Term and Long-Term
In each of the cities we are developing and aiming to develop, the real estate market is the major factor that impacts us. Most of our residential customers are the new home buyers. If the real estate market turns downward, the demands for new homes would decrease, resulting in fewer natural gas connections, and thus negatively impacting our business.
To reduce the company’s heavy dependence on connection fees, the company is looking at opportunities to diversify its business by expanding into related areas, such as pipeline and gas station business. However, we do not expect to develop into those areas in large scale any time soon and it may take some time for those business to become our major business.
Liquidity and Capital Resources
Natural gas distribution is a typical capital-intensive industry, which requires a large amount of capital for the construction of pipelines and gas stations, purchase of transportation vehicles etc. while the investment would be paid back in the following year with increasing new household connections. Under the organic growth model (growth by the Company without outside funding), the Company can develop new city projects by using the money generated from existing cities. The Company would be constrained by inadequate capital when developing into bigger cities or making Merger &Acquisition activities, under which situation the company needs to raise money to finance its business expansion.
For the three months ended September 30, 2008
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 nine-month periods ended September 30, 2008. 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 in the late first quarter and early second quarter, after being largely inactive in the first quarter due to the cold weather in the north of China, where most of our operations are located. The bulk of the revenue from these operations, however, is not generated until late in the year, when further stages of the construction process have been completed.
For the three months ended September 30, 2008, net sales slightly decreased 3.75% to $5,440,212 compared to the same period of last year. Net profit decreased 60.39% to $1,043,591 during the same three months ended September 30, 2008 compare to the same period of last year.
For the first nine months of the year, net sales increased36.9% to $14,903,850 compared to the same period of last year. Net profit decreased nearly 79.84% to $656,031 during the same nine months ended September 30, 2008 compared to the same period of last year.
The strong performance was mainly due to the significant increase of gas sale from industrial users and residential users. Sino Gas added two industrial users in the second half of 2007, which contributes to $ 0.79 million Gas Sales in the first nine months of 2008. The increase of number of connected household has also resulted in an increase of residential gas usage. As of Sep 30, 2008, our distribution network included 112,251 connected households, compared to 69,890 connected users one year earlier. During the nine months ended Sep 30, 2008, we constructed natural gas pipelines connected to 18,543 residential households, as compared to 21,629 new household connections during the same period in 2007.
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RESULTS OF OPERATIONS
Three Months Ended Sep 30, 2008 Compared to Three Months Ended Sep 30, 2007
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, 2008 was$5,440,212, compared to $5,652,240 for the same period in 2007, representing a slight decrease of 3.75%. The decrease was due to increase of average selling price of natural gas, and partially offset by decrease of new customers connecting to our gas distribution network. During this period, we connected 6,857 new residential households to our gas distribution network, resulting in total connection fees of $3,401,014. Gas sales during the period amounted to5.91 million cubic meters, or $2.04 million.
In comparison, during the same period one year ago, 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 to6.45 million cubic meters, or $1.64 million.
The following table summarizes our net revenue during the periods indicated:
For the three months ended Sep 30 | ||||||||||||||||
2008 | 2007 | Change | ||||||||||||||
( $ thousand) | US$ | % | US$ | % | % | |||||||||||
Total Revenue | 5,440.2 | 100 | % | 5,652.2 | 100 | % | -3.75 | % | ||||||||
Connection Fees | 3401.0 | 63 | % | 4011.8 | 71 | % | -15.23 | % | ||||||||
Gas Sales | 2,039.2 | 37 | % | 1640.4 | 29 | % | 24.31 | % |
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Connection fees
Connection fees during three months ended Sep 30, 2008 were $3,401,014, representing a decrease of 15.23% from $4,011,844 for the same period last year. Connection fees accounted for approximately 63% of total revenue during the period, compared with approximately71% for the same period in 2007.
We had connected a total of 6,857 new residential households during the three months ended September 30, 2008 in the twenty-eight cities where we have developed or acquired gas distribution network.
Gas sales
We sold approximately 5.91 million cubic meters of natural gas to our customers during the three months ended September 30, 2008, accounting for roughly $2.04 million, or37.5% of total net revenue. In comparison, gas sold in the three months ended September 30, 2007 totaled6.45 million cubic meters, accounting for $1.64 million, or 29%, of net revenue. Gas sales increased $0.40 million, or 24.31%, from the same period one year ago.
Among the total gas sales, industrial users accounted for $1.27 million, residential users accounted for $0.45 million. The others are accounted for $0.32 million. In comparison, during the three months ended September 30, 2007, industrial users accounted for $0.83 million gas sales, residential users accounted for $0.39 million and others accounted for $0.43 million.
Cost of Revenue
Our cost of revenue, which includes cost of connections and cost of natural gas sales, was $3,160,189for the three months ended September 30, 2008.
The table below sets forth our cost of revenues for the periods indicated:
For the three months ended September 30, | |||||||||||||
2008 | 2007 | ||||||||||||
($ thousands) | US$ | % | US$ | % | |||||||||
Cost of Revenue | 3,160.2 | 100 | % | 1,965.1 | 100 | % | |||||||
Connection Cost | 1,161.4 | 37 | % | 707.7 | 36 | % | |||||||
Gas Cost | 1,998.9 | 63 | % | 1257.4 | 64 | % |
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Cost of Connections
Our cost of connections during the three months ended September 30, 2008 was $1.16 million, or 37% of total cost of revenue. By comparison, the cost of connections during the three months of 2007 was $0.7 million, or 36% of total cost of revenue.
Cost of connection increased around 64.11% 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 58.96% to $2.00 million during the three months ended September 30, 2008 from the same period in 2007, when it was $1.26 million and 64% of total cost of revenue. This increase, which outpaced the 24.31% increase in sales of natural gas during the same interval, is largely due to the increase of rental expenses on gas delivery trucks, and under provision of natural gas cost for the second quarter, which was recorded in the third quarters. When we look at the gross margin of natural gas sales on year to date basis, the gross margin is consistent with the same period of last year.
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 ($0.072) per cubic meter. Management believes that this transportation cost per cubic meter is likely to remain constant in spite of the increased depreciation costs from the newly purchased vehicles described above, because the vehicles will allow delivery of additional natural gas to customers in sufficient numbers to offset those costs
Gross Profit
For the three months ended September 30, | |||||||||||||
2008 | 2007 | ||||||||||||
($ thousand) | US$ | % | US$ | % | |||||||||
Gross Profit | 2,280 | 100 | % | 3,687 | 100 | % | |||||||
Connection | 2,240 | 98.23 | % | 3304 | 89.61 | % | |||||||
Gas | 40.4 | 1.77 | % | 383 | 10.39 | % |
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During the three months ended Sep 30, 2008, gross profit was $2.28 million, an decrease of approximately38.16% from the same period of 2007. Gross profit from connection fees is $2.24 million for the three months ended September 30, 2008, accounting for98.23% of total gross profit. In comparison, gross profit from connection fees was $3.30 million for the three months ended September 30, 2007, accounting for89.61% of total gross profit. Gross profit from gas sales was $0.04 million, compared to $0.38 million in the same period of 2007.
Gross margin during the three months ended September 30, 2008 is 41.91%, compared to65.23% during the three months ended September 30, 2007. Gross margin for connection fees for the third quarter of 2008 was 65.85%, as compared to82.36% for the same quarter of 2007.
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. Meanwhile, the raw material cost pertains to connection has also increased this year. During this period, we connected 6,857 new residential households to our gas distribution network, in comparison, during the same period one year ago, we connected 15,043 new residential households to our gas distribution network.
Gross margin for sales of natural gas was 1.98% during the same period, compared with 23.35% in the same period of 2007. The decrease was due to increase of rental expenses on gas delivery trucks, and under provision of natural gas cost for the second quarter, which was recorded in the third quarters..
Sale and marketing expenses
Our sale and marketing expenses in the three months ended September 30, 2008 were $226,678 and approximately 4.17% of our net sales, compared with $176,739, or 3.13% of net sales in the same period of 2007. 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.
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General and administrative expenses
General and administrative expenses were $0.65 million for the three months ended September 30, 2008, which was 4.53% higher than $0.62 million for the same period last year. The increase was largely due to the increase in the number of operating subsidiaries we own, from 26 to 27, which led to increases in salary, social insurance, traveling expenses and other expenses.
General and administrative expenses equaled 12% of our net sales in the three months ended September 30, 2008, compared with 11% in the same period one year ago.
Income Tax
For 2008, the income tax rate applicable to Beijing Gas, the main subsidiary of Sino Gas in China, is currently 25%.
The income tax rate of our subsidiaries is 25%, 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 three months ended September 30, 2008 was $1.04 million, representing a decrease of 60.39% from $2.63 million in the same period in 2007. This is mainly due to the significant decrease of connection fee compared with the same period of last year. During this period, we connected 6,857 new residential households to our gas distribution network, in comparison, during the same period one year ago, we connected 15,043 new residential households to our gas distribution network. Two years ago, Chinese government implemented a series of policy and regulations to curb inflation and property market. This has resulted in slow down of real estate market in China. This has affected Real Estate developer, our customer, to grant contract to us to perform new connection service.
Net profit margin is 19%, compared with 47% for the same period one year ago.
Nine Months Ended Sep 30, 2008 Compared to Nine Months Ended Sep 30, 2007
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, 2008 was $14,903,850, compared to $10,886,612 for the same period in 2007, representing an increase of 37 %. 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 18,543 new residential households to our gas distribution network, resulting in total connection fees of $6,310,753. Gas sales during the same period amounted to25.9 million cubic meters, or $8,593,097. In comparison, during the same period one year ago, 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 period amounted to 18.18 million cubic meters, or $4,888,896.
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The following table summarizes our net revenue during the periods indicated:
For the nine months ended Sep 30 | ||||||||||||||||
2008 | 2007 | Change | ||||||||||||||
( $ thousand) | US$ | % | US$ | % | % | |||||||||||
Total Revenue | 14,903.9 | 100 | % | 10,886.6 | 100 | % | 36.9 | % | ||||||||
Connection Fees | 6,310.8 | 42 | % | 5,977.7 | 55 | % | 5.22 | % | ||||||||
Gas Sales | 8,593.1 | 58 | % | 4,888.9 | 45 | % | 75.77 | % |
Connection fees
Connection fees during nine months ended Sep 30, 2008 were $6,310,753, representing an increase of about 5% from $5,997,716 for the same period last year. Connection fees accounted for approximately 42% of total revenue during the period, compared with approximately 55% for the same period in 2007.
We had connected a total of18,543 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.
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Gas sales
We sold approximately 25.9 million cubic meters of natural gas to our customers during the nine months ended September 30, 2008, accounting for roughly $8.6 million, or58% of total net revenue. In comparison, gas sold in the first nine months of 2007 totaled18.2 million cubic meters, accounting for $4.9 million, or 45%, of net revenue. Gas sales increased $3.7 million, or 75.77%, from the same period one year ago.
Among the total gas sales, industrial users accounted for $3.45 million, residential users accounted for $2.07 million. The rest, most of which was sold through other gas distributors, accounted for $3.07 million.
In comparison, during the nine months ended September 30, 2007, industrial users accounted for $1.98million gas sales, residential users accounted for $1.19 million and others accounted for $1.72millon.
Gas sales from industrial users increased 74.5%. We added two industrial users at the end of 2007. That contributes the significant increase of Gas Sales from industrial users..
The following table summarizes our gas sales during the periods indicated:
For the Nine months ended September 30 | |||||||||||||
2008 | 2007 | ||||||||||||
($ thousand) | US$ | % | US$ | % | |||||||||
Gas Sales | |||||||||||||
Industrial users | 3,448.9 | 40 | % | 1,975.9 | 40 | % | |||||||
Residential users | 2,071.4 | 24 | % | 1,189.1 | 25 | % | |||||||
Others | 3,072.9 | 36 | % | 1,723.9 | 35 | % | |||||||
Total | 8,593.1 | 100 | % | 4888.9 | 100 | % |
The five 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 | 6,752 | 2,324.1 | |||||
Hebei Tangshan Changsheng | 681.3 | 226.9 | |||||
North China Petro First Machinery | 1,176.8 | 394.8 | |||||
Langfang Elite | 247.5 | 76.9 | |||||
Hebei Jihengyuan Group | 867.4 | 390.2 |
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Cost of Revenue
Our cost of revenue, which includes cost of connection and cost of natural gas sales, was $9,690,253 for the nine months ended September 30, 2008.
The table below sets forth our cost of revenues for the periods indicated:
For the Nine months ended September 30, | |||||||||||||
2008 | 2007 | ||||||||||||
($ thousands) | US$ | % | US$ | % | |||||||||
Cost of Revenue | 9,690.3 | 100 | % | 5,697.0 | 100 | % | |||||||
Connection Cost | 1,982.3 | 20 | % | 1,348.3 | 24 | % | |||||||
Gas Cost | 7,708.0 | 80 | % | 4,348.7 | 76 | % |
Cost of Connections
Our cost of connection during the nine months ended September 30, 2008 was $1.98 million, or20% of total cost of revenue. By comparison, the cost of connection during the nine months of 2007 was $1.35 million, or 24% of total cost of revenue.
Cost of connection increased around 47% from the same period one year ago, 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. Meanwhile, the raw material cost pertains to connection has also increased this year.
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 77% from the nine months ended September 30, 2007, when it was $4.35 million and 76% of total cost of revenue. It is consistent on year to year basis.
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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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 supplied 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 ($0.217) per cubic meter during the rest of the year.
Gross Profit
For the nine months ended September 30, | |||||||||||||
2008 | 2007 | ||||||||||||
($ thousand) | US$ | % | US$ | % | |||||||||
Gross Profit | 5,214 | 100 | % | 5,190 | 100 | % | |||||||
Connection | 4,329 | 83 | % | 4,650 | 90 | % | |||||||
Gas | 885 | 17 | % | 540 | 10 | % |
During the nine months ended Sep 30, 2008, gross profit was $5.21 million, an increase of approximately 0.46% from the same period of 2007. Gross profit from connection fees is $4.33million for the first nine months of 2008, accounting for83% of total gross profit. In comparison, gross profit from connection fees was $4.65 million for the first nine months of 2007, accounting for 90% of total gross profit. Gross profit from gas sales was $0.89 million, compared to $0.54 million in the same period of 2007.
Gross margin during the nine months ended September 30, 2008 is 34.98%, compared to 47.7% during the nine months ended September 30, 2007. Gross margin for connection fees for the first nine months of 2008 was 68.59%, compared to77.52% for the first nine months of 2007.
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. Meanwhile, the raw material cost pertains to connection has also increased this year.
Gross margin for sales of natural gas was 10.3% during the same period, compared with 11.05% during the same period of 2007, due to the relatively higher transportation expense incurred this year.
Sale and marketing expenses
Our sale and marketing expenses in the nine months ended September 30, 2008 were $594.6 thousand and approximately 3.99% of our net sales, compared with $376,233 and less than 3.46% of net sales during the same period of 2007. 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 $2.65 million for the nine months ended September 30, 2008, which was 102% higher than $1.31million for the same period last year. The increase was largely due to the contingent expenses of 1.2 million, including the penalties and interests of late registration and late effectiveness of 481,800 USD, the fee of legal counsel induced by then pending registration and financial consultant of 344,565 USD, the escrow account expenses of 246,186, and the Oxley-Sarbanes costs about 140,000 USD for consultation, which was disclosed in the second quarter. And it also include the increase in the number of operating subsidiaries we own, from 26 to 28, which led to increases in salary, social insurance, traveling expenses and other expenses as normal. The increase was also due in part to increased depreciation relating to new assets described above.
Income Tax
For 2008, the income tax rate applicable to Beijing Gas, the main subsidiary of Sino Gas in China, is currently 25%.
The income tax rate of our subsidiaries is 25%, 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, 2008 was $0.66 million, representing an decrease of 79.84% from $3.25 million in the same period in 2007. This is due to the significant decrease of connection fee compared with the same period of last year and the increase of SG&A expense. During this period, we connected 18,543 new residential households to our gas distribution network, in comparison, during the same period one year ago; we connected 21,629 new residential households to our gas distribution network. Two years ago, Chinese government implemented a series of policy and regulations to curb inflation and property market. This has resulted in slow down of real estate market in China. This has affected Real Estate developer, our customer, to grant contract to us to perform new connection service. And the boost general and administrative expenses mentioned above also negatively influenced our performance.
Net profit margin is 4.4%, compared with 29.9%for the same period last year.
Liquidity and Capital Resources
As of September 30, 2008, cash and cash equivalents were $6.5 million, a decrease of $4.4 million from $10.9 million as of December 31, 2007 which was due to the increase in cash flow from operating, partly offset by our investment activities and financing activities.
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Cash flow from operating activities during the nine months ended September 30, 2008 is $3.56 million, an increase of $4.52 million from the end of 2007.
Accounts Receivable
Accounts receivable as of September 30, 2008 were $6.23 million, representing a decrease of $1.1 million from $7.32 million as of December 31, 2007. 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 2007 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 $0.36 million as of September 30, 2008 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, 2008 were $7.19 million, a decrease of $3.2 million from the end of 2007.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) or 15d-15(e) ) as required by Exchange Act Rule 13a-15(b) or 15d-15(b) as of the end of the third quarter of 2008. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are not effective due to the material weaknesses described below.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and have designed internal control over financial reporting or caused internal control over financial reporting to be designed under its supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, as applicable. Due to its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, our management conducted its evaluation of the effectiveness of our Company’s internal control over financial reporting as of September 30, 2008, using the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that, as of September 30, 2008, our Company’s internal control over financial reporting was not effective due to the material weaknesses described below.
(1) The Company has not yet established a comprehensive Code of Conduct and Ethics (the “Code”) which is applicable to all Company directors, officers and employees.
(2) Our Internal Audit Department has not taken an active role in the conduct of its activities due to insufficient resources. The annual plan, budget, and specific procedures to perform the internal audit function has not been developed, and the anti-fraud audit plan has not been developed either.
(3) Our Audit Committee was not comprised of sufficient independent directors who are "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Our Audit Committee did not appoint a member who qualifies as an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B. Our written Audit Committee Charter was not submitted to the Boards for approval.
(4) Our Company did not formulate a Related Party Transactions Policy and develop a master list of all Related Parties.
Management’s Plan for Remediation of Material Weaknesses
In light of the conclusion that our Company’s internal control over financial reporting was not effective, our management has worked, and will continue to work, to address these weaknesses in our internal control over financial reporting. Implementations of certain remedial measures include the following:
(1) We are going to issue the Code, and arrange respective training to all the employees in the near future. Training which includes the content of the Code will be provided to new employees at the time of hiring. All the employees will be required to sign an affidavit acknowledging that the employee has read and will intend to comply with the Code;
(2) The management is committed to develop a comprehensive and risk-based internal audit function within the Company. With the limited human capital supplies in the market, we have engaged a third party professional to assist the management in establishing the internal control system. At the same time, we have enhanced our efforts of recruitment and interviews are undergoing. We expect that an internal audit department will be set up in the near future. With the continuous assistance from the third party professional, the roles and responsibilities of the internal audit department will be formulated and a risk-based internal audit plan will be developed and approved by the Audit Committee within a month after the set up.
(3) The Board of Directors has appointed Mr. Zhang Xin Min on March 10, 2008, Mr. Zhang serves as a financial expert of Audit Committee and will provide oversight/monitoring over our financial reporting mechanism.
Changes in Internal Control over Financial Reporting
During the period ended September 30, 2008, there was no change in our internal controls over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 18, 2008, Sino Gas consummated a spin-off of Pegasus Tel, Inc. (“Pegasus”), a Delaware corporation and a wholly-owned subsidiary of Sino Gas, to Sino Gas’ stockholders of record as of August 15, 2008 (“Spin-off”). The Ratio of Distribution of the Spin-off was one (1) share of common stock of Pegasus for every twelve (12) shares of common stock of Sino Gas (1:12). Fractional shares were rounded up to the nearest whole-number. An aggregate of 2,215,136 shares of Pegasus common stock were issued pursuant to the Spin-off to an aggregate of 167 Sino Gas stockholders. The Pegasus common stock issued in the Spin-off are “restricted securities” (as defined in Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”)), and were issued pursuant to Section 4(2) of the Securities Act due to the fact that the distribution did not involve a public offering. There is no public market for the spin-off Pegasus shares. There was no consideration for the spun-off shares. The spin-off was pro rata. Sino Gas provided adequate information because it is a reporting company and has been for more than 90 days, and Sino Gas spun-off restricted shares of Pegasus.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits
The following exhibits are hereby filed as part of this Quarterly Report on Form 10-Q.
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 |
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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 Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing.
SINO GAS INTERNATIONAL HOLDINGS, INC. | ||
Date: November 14, 2008 | By: | /s/ Yuchuan Liu |
Yuchuan Liu | ||
Chairman and Chief Executive Officer |
SINO GAS INTERNATIONAL HOLDINGS, INC. | ||
Date: November 14, 2008 | By: | /s/ Yugang Zhang |
Yugang Zhang | ||
Chief Financial Officer |
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