United States
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, 2009
or
¨ | 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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
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 ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ (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 ¨ No x
As of November 13, 2009, the Registrant had 26,769,313 shares of common stock outstanding.
Sino Gas International Holdings, Inc.
Table of Contents
Page | ||
PART I - | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | 3 |
Notes to Financial Statements (Unaudited) | 12 | |
Item 2. | Management's Discussion and Analysis or Plan of Operation | 42 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 53 |
Item 4. | Controls and Procedures | 53 |
PART II - | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 55 |
Item 1A. | Risk Factors | 55 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 55 |
Item 3. | Defaults Upon Senior Securities | 55 |
Item 4. | Submission of Matters to a Vote of Security Holders. | 55 |
Item 5. | Other Information | 55 |
Item 6. | Exhibits | 55 |
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SINO GAS INTERNATIONAL HOLDINGS, INC
REVIEWED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
STATED IN US DOLLARS
3
Sino Gas International Holdings, Inc.
CONTENTS | PAGES | |
Report of Registered Independent Public Accounting Firm | 5 | |
Consolidated Balance Sheets | 6 – 7 | |
Consolidated Statements of Income | 8 | |
Consolidated Statements of Changes in Stockholders’ Equity | 9 – 10 | |
Consolidated Statements of Cash Flows | 11 | |
Notes to Consolidated Financial Statements | 12 – 41 |
4
To: | The Board of Directors and Stockholders |
Sino Gas International Holdings, Inc.
Report of Registered Independent Public Accounting Firm
We have reviewed the accompanying consolidated interim balance sheets of Sino Gas International Holdings, Inc. as of September 30, 2009 and December 31, 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three-month and nine-month periods ended September 30, 2009 and 2008. These consolidated interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
South San Francisco, California | Samuel H. Wong & Co., LLP | |
November 2, 2009 | Certified Public Accountants |
5
Sino Gas International Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Note | 9/30/2009 | 12/31/2008 | ||||||||
ASSETS | ||||||||||
Current Assets | ||||||||||
Cash & cash equivalents | 2(e) | $ | 1,913,970 | $ | 3,027,543 | |||||
Restricted cash | 3 | 161,859 | 234,279 | |||||||
Notes receivable | - | 109,422 | ||||||||
Accounts receivable | 2(f),4 | 3,120,296 | 6,013,621 | |||||||
Inventory | 369,561 | 347,341 | ||||||||
Advances to suppliers | 2(g) | 4,213,120 | 3,024,518 | |||||||
Prepayments | 504,683 | 370,593 | ||||||||
Other receivables | 2(f) | 964,075 | 3,028,368 | |||||||
Total Current Assets | 11,247,564 | 16,155,686 | ||||||||
Non-Current Assets | ||||||||||
Investment | 2(h),5 | 5,342,647 | 5,159,009 | |||||||
Property, plant & equipment, net | 2(j),6 | 39,807,361 | 33,033,118 | |||||||
Construction in progress | 2(l) | 18,657,145 | 17,155,473 | |||||||
Intangible assets, net | 2(k),7 | 2,301,876 | 2,193,252 | |||||||
Total Non-Current Assets | 66,109,029 | 57,540,852 | ||||||||
TOTAL ASSETS | $ | 77,356,593 | $ | 73,696,538 | ||||||
LIABILITIES | ||||||||||
Current Liabilities | ||||||||||
Bank loans | 8 | $ | 2,193,752 | $ | 2,188,439 | |||||
Accounts payable | 9,000,737 | 6,350,092 | ||||||||
Other payables | 9 | 5,406,991 | 6,174,871 | |||||||
Unearned revenue | 2(m) | 627,654 | 938,696 | |||||||
Accrued liabilities | 253,641 | 189,090 | ||||||||
Total Current Liabilities | 17,482,775 | 15,841,188 | ||||||||
TOTAL LIABILITIES | $ | 17,482,775 | $ | 15,841,188 |
See Accompanying Notes to Consolidated Financial Statements
6
Sino Gas International Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Note | 9/30/2009 | 12/31/2008 | ||||||||
STOCKHOLDERS' EQUITY | ||||||||||
Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,579,839 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively. | 10 | $ | 4,580 | $ | 4,580 | |||||
Additional paid in capital - Preferred Stock B | 5,323,972 | 5,323,972 | ||||||||
Additional paid in capital - Warrants Series: A, B, J, C, D | 311,110 | 311,110 | ||||||||
Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively. | 10 | 95 | 95 | |||||||
Additional paid in capital - Preferred Stock B-1 | 132,662 | 132,662 | ||||||||
Additional paid in capital - Beneficial Conversion Feature | 7,002,292 | 7,002,292 | ||||||||
Common Stock US$0.001 par value; 250,000,000 shares authorized; 26,769,313 and 25,269,313 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively. | 10 | 26,769 | 25,269 | |||||||
Additional paid in capital - Common Stock | 22,513,732 | 23,196,304 | ||||||||
Additional paid in capital - Warrants Series: E, G | 47,946 | 47,946 | ||||||||
Additional paid in capital - Warrants Series: F, R | 107,652 | 107,652 | ||||||||
Statutory reserve | 2(v) | 3,956,728 | 3,956,728 | |||||||
Retained earnings | 12,726,375 | 10,069,896 | ||||||||
Accumulated other comprehensive income | 2(x) | 7,719,905 | 7,676,844 | |||||||
Total Stockholders' Equity | 59,873,818 | 57,855,350 | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 77,356,593 | $ | 73,696,538 |
See Accompanying Notes to Consolidated Financial Statements
7
Sino Gas International Holdings, Inc.
Consolidated Statements of Income
For the three months and nine months ended September 30, 2009 and 2008
(Stated in US Dollars)
Three Months Ended | Nine Months Ended | |||||||||||||||||
Note | 9/30/2009 | 9/30/2008 | 9/30/2009 | 9/30/2008 | ||||||||||||||
Sales revenues | 2(p) | $ | 6,988,621 | $ | 5,440,212 | $ | 19,357,933 | $ | 14,903,850 | |||||||||
Cost of revenues | (4,505,070 | ) | (3,160,189 | ) | (14,074,466 | ) | (9,690,253 | ) | ||||||||||
Gross Profit | 2,483,551 | 2,280,022 | 5,283,466 | 5,213,597 | ||||||||||||||
Operating Expense | ||||||||||||||||||
Selling and marketing expenses | (288,766 | ) | (226,678 | ) | (709,256 | ) | (594,575 | ) | ||||||||||
General and administrative expenses | (656,168 | ) | (650,119 | ) | (1,902,328 | ) | (2,646,999 | ) | ||||||||||
Total operating expense | (944,935 | ) | (876,798 | ) | (2,611,584 | ) | (3,241,573 | ) | ||||||||||
Operating Income | 1,538,616 | 1,403,225 | 2,671,882 | 1,972,024 | ||||||||||||||
Other Income/(Expense) | ||||||||||||||||||
Other income | 83,000 | 58,913 | 94,206 | 673 | ||||||||||||||
Other expense | (11,178 | ) | (27,541 | ) | (33,493 | ) | (511,467 | ) | ||||||||||
Interest income | 941 | 26,970 | 4,019 | 72,632 | ||||||||||||||
Interest expense | (96,264 | ) | - | (180,824 | ) | (157,057 | ) | |||||||||||
Total other income/(expense) | (23,501 | ) | 58,342 | (116,092 | ) | (595,220 | ) | |||||||||||
Earnings from continued operation | 1,515,116 | 1,461,567 | 2,555,790 | 1,376,804 | ||||||||||||||
Income tax | 2(r),12 | (306,479 | ) | (417,975 | ) | (580,383 | ) | (720,773 | ) | |||||||||
Net income | $ | 1,208,636 | $ | 1,043,591 | $ | 1,975,407 | $ | 656,031 | ||||||||||
Earnings per share | 2(z),13 | |||||||||||||||||
- Basic | $ | 0.045 | $ | 0.039 | $ | 0.076 | $ | 0.025 | ||||||||||
- Diluted | $ | 0.038 | $ | 0.033 | $ | 0.064 | $ | 0.021 | ||||||||||
Weighted Average Shares Outstanding | ||||||||||||||||||
- Basic | 26,769,313 | 26,769,291 | 26,058,202 | 26,568,884 | ||||||||||||||
- Diluted | 31,444,570 | 31,169,437 | 30,733,459 | 31,169,437 |
See Accompanying Notes to Consolidated Financial Statements
8
Sino Gas International Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Preferred Stock B | Preferred Stock B-1 | |||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Additional Paid In Capital-Preferred Stock B | Additional Paid in Capital- Warrants Series: A, B, J, C, D | Additional Paid in Capital-Beneficial Conversion Feature | Shares Outstanding | Amount | Additional Paid In Capital- Preferred Stock B-1 | Additional Paid in Capital-Beneficial Conversion Feature | ||||||||||||||||||||||||||||
Balance, January 1, 2008 | 4,971,859 | 4,972 | 5,323,972 | 311,110 | 6,920,263 | 95,418 | 95 | 132,662 | 82,029 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Conversion of Preferred Stock B to Common Stock | (392,020 | ) | (392 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Issuance of Common Stock | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance, December 31, 2008 | 4,579,839 | 4,580 | 5,323,972 | 311,110 | 6,920,263 | 95,418 | 95 | 132,662 | 82,029 | |||||||||||||||||||||||||||
Balance, January 1, 2009 | 4,579,839 | 4,580 | 5,323,972 | 311,110 | 6,920,263 | 95,418 | 95 | 132,662 | 82,029 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Issuance of 2008 Make Good Shares | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Reallocation of Beneficial Conversion Feature | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance, September 30, 2009 | 4,579,839 | 4,580 | 5,323,972 | 311,110 | 6,920,263 | 95,418 | 95 | 132,662 | 82,029 |
See Accompanying Notes to Consolidated Financial Statements
9
Sino Gas International Holdings, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Common Stock | ||||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Additional Paid In Capital | Additional Paid in Capital- Warrants Series: E,G | Additional Paid in Capital-Warrants Series: F,R | Statutory Reserve | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||
Balance, January 1, 2008 | 24,877,271 | 24,877 | 23,196,304 | 47,946 | 107,652 | 3,258,201 | 9,167,930 | 2,268,593 | 50,846,606 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | 1,600,493 | - | 1,600,493 | |||||||||||||||||||||||||||
Conversion of Preferred Stock B to Common Stock | 392,020 | 392 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Issuance of Common Stock | 22 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | 698,527 | (698,527 | ) | - | - | ||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | 5,408,250 | 5,408,250 | |||||||||||||||||||||||||||
Balance, December 31, 2008 | 25,269,313 | 25,269 | 23,196,304 | 47,946 | 107,652 | 3,956,728 | 10,069,896 | 7,676,844 | 57,855,350 | |||||||||||||||||||||||||||
Balance, January 1, 2009 | 25,269,313 | 25,269 | 23,196,304 | 47,946 | 107,652 | 3,956,728 | 10,069,896 | 7,676,844 | 57,855,350 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | 1,975,407 | - | 1,975,407 | |||||||||||||||||||||||||||
Issuance of 2008 Make Good Shares | 1,500,000 | 1,500 | (1,500 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||
Reallocation of Beneficial Conversion Feature | - | - | (681,072 | ) | - | - | - | 681,072 | - | - | ||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | 43,062 | 43,062 | |||||||||||||||||||||||||||
Balance, September 30, 2009 | 26,769,313 | 26,769 | 22,513,732 | 47,946 | 107,652 | 3,956,728 | 12,726,375 | 7,719,905 | 59,873,818 |
9/30/2009 | 12/31/2008 | Total | ||||||||||
Comprehensive Income | ||||||||||||
Net Income | $ | 1,975,407 | $ | 1,600,493 | $ | 3,575,900 | ||||||
Other Comprehensive Income | ||||||||||||
Foreign Currency Translation Adjustment | 43,062 | 5,408,250 | 5,451,312 | |||||||||
Total | $ | 2,018,469 | $ | 7,008,743 | $ | 9,027,212 |
See Accompanying Notes to Consolidated Financial Statements
10
Sino Gas International Holdings, Inc.
Consolidated Statements of Cash Flows
For the three months and nine months ended September 30, 2009 and 2008
(Stated in US Dollars)
Three Months Ended | Nine Months Ended | |||||||||||||||
9/30/2009 | 9/30/2008 | 9/30/2009 | 9/30/2008 | |||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
Net Income | $ | 1,208,636 | $ | 1,043,592 | $ | 1,975,407 | $ | 656,031 | ||||||||
Depreciation expense | 337,328 | 326,246 | 756,862 | 1,228,894 | ||||||||||||
Amortization expense | 8,653 | - | 42,547 | - | ||||||||||||
Withdraw/(deposit) in restricted time deposits | 21,683 | 353,713 | 72,420 | 92,765 | ||||||||||||
Decrease/(increase) in accounts and other receivables | 4,140,180 | 1,821,303 | 5,067,040 | 358,635 | ||||||||||||
Decrease/(increase) in inventory | (83,605 | ) | 12,209 | (22,220 | ) | (56,066 | ) | |||||||||
Decrease/(increase) in prepaid expenses | 13,514 | (319,667 | ) | (1,322,692 | ) | (3,338,084 | ) | |||||||||
Increase/(decrease) in accounts and other payables | (251,509 | ) | 326,093 | 1,636,273 | 1,056,866 | |||||||||||
Cash Sourced/(Used) in Operating Activities | 5,394,880 | 3,563,489 | 8,205,638 | (960 | ) | |||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Investment in equity | (176,553 | ) | (10,776 | ) | (183,637 | ) | (385,884 | ) | ||||||||
Disposal/(purchase) of property, plant & equipment | (5,845,643 | ) | (1,131,927 | ) | (7,531,104 | ) | (3,912,706 | ) | ||||||||
Increase of goodwill | (1,769 | ) | - | (4,074 | ) | (170,961 | ) | |||||||||
Purchase of other intangible assets | (10,113 | ) | 33,956 | (147,098 | ) | - | ||||||||||
Increase in construction in progress | 609,251 | (1,671,961 | ) | (1,501,673 | ) | (4,809,144 | ) | |||||||||
Cash Sourced/(Used) in Investing Activities | (5,424,827 | ) | (2,780,708 | ) | (9,367,585 | ) | (9,278,696 | ) | ||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Proceeds/(repayment) of bank loans | 2,308 | (2,899,810 | ) | 5,313 | 1,641,859 | |||||||||||
Issuance/(conversion) of stock | - | (392,653 | ) | - | (392,653 | ) | ||||||||||
Cash Sourced/(Used) in Financing Activities | 2,308 | (3,292,464 | ) | 5,313 | 1,249,206 | |||||||||||
Net increase in cash & cash equivalents for the period | (27,640 | ) | (2,509,682 | ) | (1,156,635 | ) | (8,030,449 | ) | ||||||||
Effect of currency translation | 87,368 | 902,199 | 43,062 | 3,660,283 | ||||||||||||
Cash & cash equivalents at the beginning of period | 1,854,242 | 8,021,212 | 3,027,543 | 10,915,590 | ||||||||||||
Cash & cash equivalents at the end of period | $ | 1,913,970 | $ | 6,545,424 | $ | 1,913,970 | $ | 6,545,424 | ||||||||
Supplementary cash flows information | ||||||||||||||||
Interest received | $ | 1,412 | $ | 26,970 | $ | 4,019 | $ | 72,632 | ||||||||
Interest paid | 96,264 | - | 180,824 | 157,057 | ||||||||||||
Income tax paid | 306,479 | 597,768 | 580,383 | 720,773 |
See Accompanying Notes to Consolidated Financial Statements
11
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES |
Sino Gas International Holdings, Inc. (the “Company”) was incorporated under the laws of the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company changed its name to American Arms, Inc. on April 5, 1984, and then changed its name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to Sino Gas International Holdings, Inc. on November 17, 2006.
On September 7, 2006, the Company underwent a reverse-merger with Gas Investment China Ltd. (“GIC”), an International Business Company incorporated in the British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange of shares whereby the Company issued an aggregate of 14,361,646 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 37 natural gas distribution systems serving approximately 100,900 residential and five commercial and industrial customers. The Company’s facilities include approximately 710 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 89,000 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”.
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.
12
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
(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 law 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.
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 at September 30, 2009.
13
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Name of Company | Place of Incorporation | Date of Incorporation | Beneficiary Interest % | Equity Interest % | Registered Capital | |||||
GAS Investment China Co., Ltd. | The British Virgin Islands | 6/19/2003 | 100 | 100 | USD 10,000,000 | |||||
Sino Gas Construction, Ltd. | The British Virgin Islands | 1/9/2007 | 100 | 100 | USD 50,000 | |||||
Sino Gas Investment Development, Ltd. | The British Virgin Islands | 1/9/2007 | 100 | 100 | USD 50,000 | |||||
Beijing Zhong Ran Wei Ye Gas Co., Ltd. | PRC | 8/29/2001 | 100 | 100 | RMB 184,916,420 | |||||
Beijing Chenguang Gas, Ltd. | PRC | 10/30/2002 | 100 | 100 | RMB 20,000,000 | |||||
Guannan Weiye Gas Co., Ltd. | PRC | 6/19/2003 | 100 | 100 | RMB 9,510,000 | |||||
Ningjin Weiye Gas Co., Ltd | PRC | 12/3/2003 | 100 | 95 | RMB 3,000,000 | |||||
Yutian Zhongran Weiye Gas Co., Ltd. | PRC | 12/19/2003 | 100 | 90 | RMB 3,000,000 | |||||
Xingtang Weiye Gas Co., Ltd. | PRC | 2/18/2004 | 100 | 95 | RMB 3,000,000 | |||||
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
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Sihong Weiye Gas Co., Ltd. | PRC | 12/3/2004 | 100 | 95 | RMB 10,000,000 | |||||
Sishui Weiye Gas Co., Ltd. | PRC | 12/22/2004 | 100 | 95 | RMB 3,000,000 | |||||
Langfang Weiye Dangerous Goods Transportation Co., Ltd. | PRC | 3/22/2005 | 100 | 95 | RMB 1,000,000 | |||||
Linzhang Weiye Gas Co., Ltd. | PRC | 7/6/2005 | 100 | 85 | RMB 1,000,000 | |||||
Peixian Weiye Gas Co., Ltd. | PRC | 8/22/2005 | 100 | 90 | RMB 45,694,900 | |||||
Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd. | PRC | 9/30/2005 | 100 | 100 | RMB 2,000,000 | |||||
Longyao Zhongran Weiye Gas Co., Ltd. | PRC | 10/13/2005 | 100 | 95 | RMB 3,000,000 | |||||
Yuxian Jinli Gas Co., Ltd. | PRC | 11/8/2005 | 100 | 100 | RMB 9,500,000 | |||||
Hengshui Weiye Gas Co., Ltd. | PRC | 12/20/2005 | 100 | 100 | RMB 3,000,000 | |||||
Shenzhou Weiye Gas Co., Ltd. | PRC | 12/23/2005 | 100 | 95 | RMB 3,000,000 | |||||
Changli Weiye Gas Co., Ltd. | PRC | 12/8/2006 | 100 | 100 | RMB 3,000,000 | |||||
Chenan Chenguang Gas Co., Ltd | PRC | 1/23/2007 | 100 | 100 | RMB 1,500,000 |
15
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Wuhe Weiye Gas Co., Ltd. | PRC | 1/30/2007 | 100 | 100 | RMB 3,000,000 | |||||
Xinji Zhongchen Gas Co., Ltd | PRC | 2/7/2007 | 100 | 100 | RMB 3,000,000 | |||||
Gucheng Weiye Gas Co., Ltd. | PRC | 3/21/2007 | 100 | 100 | RMB 3,000,000 | |||||
Luquan Chenguang Gas Co., Ltd. | PRC | 4/27/2007 | 100 | 100 | RMB 2,000,000 | |||||
Shijiazhuang Chenguang Gas Co., Ltd. | PRC | 6/14/2007 | 100 | 100 | RMB 2,000,000 | |||||
Nangong Weiye Gas Co., Ltd. | PRC | 6/25/2007 | 100 | 100 | RMB 3,000,000 | |||||
Sixian Weiye Gas Co., Ltd. | PRC | 9/3/2007 | 100 | 100 | RMB 3,000,000 | |||||
Baishan Weiye Gas Co., Ltd. | PRC | 7/13/2007 | 100 | 100 | RMB 15,000,000 | |||||
Guyuan Gas Co., Ltd. | PRC | 12/15/2008 | 100 | 100 | RMB 1,000,000 | |||||
Xinhe Gas Co., Ltd. | PRC | 7/2/2009 | 100 | 100 | RMB 1,000,000 |
16
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
(e) Cash and Cash Equivalents
The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.
(f) Accounts and Other Receivable
Accounts and other receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company extends unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable.
(g) Advances to Suppliers
Advances to suppliers represent the cash paid in advance for purchasing raw materials. The advances to suppliers are interest free and unsecured.
(h) Investments in Equity Securities
The 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.
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 city.
Qujing Gas Co., Ltd. is the Company’s 39% owned investment and is principally engaged in the business of gas pipeline construction in Yunnan Province.
Place of Registration | Form of Business Structure | Registered Capital | Nominal Value of Registered Capital | Principle Activities | ||||
PRC | Sino-foreign equity joint venture | RMB 20,000,000 | 40% | Trading of natural gas and gas pipeline construction | ||||
PRC | Equity joint venture | RMB 30,000,000 | 39% | Gas pipeline construction |
17
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
The Company did not record any goodwill when it acquired its equity position in Xiangke and Qujing. Accordingly, in accordance with SFAS 142, the Company has not taken an amortization expense of goodwill during the time it has carried a 40% and 39% stakes in Xiangke and Qujing, respectively.
(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.
18
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
(j) Property, Plant, and Equipment
Property, plant, and equipment, other than construction in progress, are stated at cost less depreciation and amortization and accumulated impairment loss. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows:
Asset Class | Estimated Useful Life | |
Gas Pipelines (Up to December 31, 2007) | 25 years | |
Gas Pipelines (Starting from January 1, 2008) | 50 years | |
Buildings | 25 years | |
Leasehold Improvements | 25 years | |
Machinery & Equipment | 20 years | |
Motor Vehicles | 10 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, such as land use rights, franchises, and accounting software, are stated at cost less accumulated amortization. Amortization is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of these intangibles are as follows:
Asset Class | Estimated Useful Life | |
Land Use Rights | 40 - 50 years | |
Franchises | 30 years | |
Accounting Software | 3 years |
Goodwill is related to the acquisitions of Beijing Chenguang Gas and Guannan Gas. Management annually reviews the carrying value of goodwill using the sum of the discounted cash flows to determine if an impairment charge is necessary. The Company has determined no impairment to goodwill as of date.
19
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
(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. These projects, once completed, will significantly increase the gas supply capacity.
(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.
20
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
(o) Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
9/30/2009 | 12/31/2008 | 9/30/2008 | ||||||||||
Years end RMB : US$ exchange rate | 6.8376 | 6.8542 | 6.8551 | |||||||||
Average yearly RMB : US$ exchange rate | 6.8425 | 6.9623 | 6.9989 |
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. 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.
21
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
(r) Income Taxes
The Company uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed according to the United States and People’s Republic of China (PRC) tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets, whether it is more likely than not that these items will expire either before the Company is able to realize that tax benefit, or that future realization is uncertain.
In respect of the Company’s subsidiaries domiciled and operated in China and British Virgin Islands, the taxation of these entities are summarized below:
· | All of the operating companies are located in the PRC; and GAS Investment China Co., Ltd., Sino Gas Construction, Ltd., and Sino Gas Investment Development, Ltd. are located in the British Virgin Islands. All of these entities are subject to the relevant tax laws and regulations of the PRC, and the British Virgin Islands in which the related entity domiciled. The maximum tax rates of the subsidiaries pursuant to the countries in which they domicile are: - |
Subsidiary | Country of Domicile | Income Tax Rate | ||
PRC Operating Companies (per Note 2. (d) Principals of Consolidation) | PRC | 15.0% | ||
i. GAS Investment China Co., Ltd. ii. Sino Gas Construction, Ltd. iii. Sino Gas Investment Development, Ltd. | British Virgin Islands British Virgin Islands British Virgin Islands | 0.00% 0.00% 0.00% |
· | Effective January 1, 2008, PRC government implements a new 25% tax rate for all enterprises regardless of whether domestic or foreign entity. However, Beijing Gas is exempt from this policy since it is a high-tech green energy enterprise. As a result, the Company will continue enjoying 15% tax holiday. |
22
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
· | Since Sino Gas International Holdings, Inc. is primarily a holding company without any business activities in the United States, the Company shall not be subject to United States income tax for the nine-month ended September 30, 2009 and 2008. |
(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.
(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 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. |
23
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
(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 May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009.
In June 2009, FASB issued FASB Statement No. 166, Accounting for Transfers for Financial Assets and FASB Statement No. 167, a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities.
Statement 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.
24
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.
On July 1, 2009, FASB issued FASB Statement No. 168, The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles. The ASC has become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities and provides that all such guidance carries an equal level of authority. The ASC is not intended to change or alter existing GAAP. The ASC is effective for interim and annual periods ending after September 15, 2009.
Management of the Company does not anticipate that the adoption of these standards will have a material impact on these consolidated financial statements.
(z) 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 |
The restricted cash reflects funds received from financing activities that is held in an escrow account in the United States for the purpose of investor relationship activities.
4. | ACCOUNTS RECEIVABLE |
For natural gas sales, it is due when the gas is sold. Most of residential customers are settled by prepayments with debit cards, while industrial customers are billed and paid according to the contract terms from 10 days to one month.
For construction projects, connection fees are generally collected in installments. First deposits of 30% of total contract sum are received from client when the project commences. Second payment of 30% is received at milestone set out following the contracts. Third payment of 30% is received after the construction is completed. 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.
25
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
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 customer facts and economic conditions. 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 collection is improbable. 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.
The credit and billing policy is that residential customers are billed and collected immediately, whereas industrial customers are billed and paid according to the contract terms from 10 days to one month. For the construction business, customers are billed and pay based on the percentage of completion method of the construction project.
Accounts Receivable | ||||||||
9/30/2009 | 12/31/2008 | |||||||
Accounts Receivable - gross | $ | 3,151,814 | $ | 6,049,415 | ||||
Allowance for bad debt | (31,518 | ) | (35,794 | ) | ||||
Accounts Receivable, net | $ | 3,120,296 | $ | 6,013,621 |
Allowance for Bad Debt | ||||||||
9/30/2009 | 12/31/2008 | |||||||
Beginning Balance | $ | 35,794 | $ | 36,760 | ||||
Addition | - | - | ||||||
Reversal | (4,276 | ) | (966 | ) | ||||
Ending Balance | $ | 31,518 | $ | 35,794 |
Accounts Receivable Aging Report | ||||||||
9/30/2009 | 12/31/2008 | |||||||
30 Days | $ | 1,742,369 | $ | 4,896,066 | ||||
30-60 Days | 184,431 | 258,107 | ||||||
60-90 Days | 468,849 | 292,988 | ||||||
90-180 Days | 320,553 | 311,954 | ||||||
180-360 Days | 400,329 | 205,745 | ||||||
>360 Days | 3,765 | 48,760 | ||||||
Total | $ | 3,120,296 | $ | 6,013,621 |
26
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
The followings are the ten most significant accounts receivable at September 30, 2009:-
Hebei Zhonggang Steel, Ltd. | $ | 670,618 | ||
Beijing Huicheng Real Estate Co., Ltd | 360,378 | |||
Beijing Zhenshi Real Estate Co., Ltd. | 161,141 | |||
Henan Tihua Real Estate Co., Ltd. | 135,540 | |||
Baishan Xiangda Real Estate Co., Ltd | 124,283 | |||
Baishan Jiahe Real Estate Co., Ltd. | 108,257 | |||
Tonghua Tongsheng Real Estate Co., Ltd. | 90,828 | |||
Tangshan Sunda Real Estate Co., Ltd. | 84,028 | |||
Huayou Yiji Oil Special Pipe Co., Ltd | 79,526 | |||
Jiangsu Hongzhe Lake Farm | 68,705 | |||
Total | $ | 1,883,304 |
5. | INVESTMENT |
9/30/2009 | 12/31/2008 | |||||||
Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. | $ | 4,829,309 | $ | 4,817,613 | ||||
Qujing Gas Co., Ltd. | 513,338 | 341,397 | ||||||
Total | $ | 5,342,647 | $ | 5,159,009 |
6. | PROPERTY, PLANT, AND EQUIPMENT, NET |
Property, Plant, and Equipment consisted of the followings at September 30, 2009 and December 31, 2008:
9/30/2009 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 34,641,390 | $ | 1,875,645 | $ | 32,765,746 | ||||||
Motor Vehicles | 5,701,904 | 1,405,489 | 4,296,415 | |||||||||
Machinery & Equipment | 1,482,513 | 244,097 | 1,238,417 | |||||||||
Buildings | 1,572,188 | 237,173 | 1,335,015 | |||||||||
Leasehold Improvements | 81,539 | 58,251 | 23,287 | |||||||||
Office Equipment | 234,142 | 85,660 | 148,481 | |||||||||
Total | $ | 43,713,676 | $ | 3,906,315 | $ | 39,807,361 |
27
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
12/31/2008 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 27,859,313 | $ | 1,532,478 | $ | 26,326,835 | ||||||
Motor Vehicles | 5,600,508 | 1,109,489 | 4,491,019 | |||||||||
Machinery & Equipment | 857,834 | 198,072 | 659,762 | |||||||||
Buildings | 1,568,380 | 193,126 | 1,375,254 | |||||||||
Leasehold Improvements | 80,101 | 48,325 | 31,776 | |||||||||
Office Equipment | 216,435 | 67,963 | 148,472 | |||||||||
Total | $ | 36,182,572 | $ | 3,149,453 | $ | 33,033,119 |
Depreciation expenses included in the consolidated statements of income for the nine months ended September 30, 2009 was $756,862.
7. | INTANGIBLE ASSETS |
Intangible assets consisted of the following at September 30, 2009 and December 31, 2008:-
9/30/2009 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use Rights | $ | 631,733 | $ | 66,365 | $ | 565,368 | ||||||
Franchises | 402,188 | 371,414 | 30,774 | |||||||||
Accounting Software | 40,609 | 16,924 | 23,685 | |||||||||
Goodwill | 1,682,049 | - | 1,682,049 | |||||||||
$ | 2,756,579 | $ | 454,703 | $ | 2,301,876 |
12/31/2008 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use rights | $ | 510,907 | $ | 32,938 | $ | 477,969 | ||||||
Franchises | 401,214 | 369,603 | 31,611 | |||||||||
Accounting Software | 15,312 | 9,615 | 5,697 | |||||||||
Goodwill | 1,677,975 | - | 1,677,975 | |||||||||
$ | 2,605,408 | $ | 412,156 | $ | 2,193,252 |
The Company operates as a local natural gas distributor in a city or county, known as an operation location, under an exclusive franchise agreement between the Company 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. Amortization expenses for the nine months ended September 30, 2009 was $42,547.
28
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
8. | SHORT-TERM BANK LOAN |
Name of Bank | Due Date | Interest Rate | 9/30/2009 | 12/31/2008 | ||||||||||
Bank of Dalian | 12/18/2009 | 6.69 | % | $ | 2,193,752 | $ | 2,188,439 | |||||||
Total | $ | 2,193,752 | $ | 2,188,439 |
Interest expense for the short-term bank loan was $180,824 for the nine-month period ended September 30, 2009.
9. | OTHER PAYABLES |
Other payables consisted of the following at September 30, 2009 and December 31, 2008:-
9/30/2009 | 12/31/2008 | |||||||
Employees’ Welfare Payables | $ | 51,970 | $ | 137,264 | ||||
Amount due to Employees | 47,572 | 366,732 | ||||||
Tax Payable | 11,875 | 267,790 | ||||||
Payables to Subcontractors | 1,431,438 | 1,060,462 | ||||||
Raw Materials | 1,666,743 | 7,272 | ||||||
Employees Training Program | 24,283 | 277,017 | ||||||
Individual Travel Advance | 194,624 | 78,028 | ||||||
Payments for Acquisition of Baishan Gas | 1,978,486 | 3,975,631 | ||||||
Others | - | 4,675 | ||||||
Total | $ | 5,406,991 | $ | 6,174,871 |
29
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
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 26,769,313 shares are 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, with 20,000,000 shares authorized and 0 shares are issued and outstanding; (b) series B convertible preferred stock, with 5,000,000 shares authorized and 4,579,839 shares are issued and outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000 shares 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.
Common Stock
The Company is authorized to issue 250,000,000 shares of common stock, with a par value of $0.001. There were 26,769,313 shares and 25,269,313 shares of common stock issued and outstanding at September 30, 2009 and December 31, 2008, respectively. 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.
30
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
On August 30, 2006, the Company’s board of directors designated 20,000,000 shares of its 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. 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. On September 12, 2007, the Company’s board of directors designated 3,000,000 shares of its preferred stock as series B-1 convertible preferred stock with the same right and privilege as series B convertible preferred stock, and 95,418 shares of series B-1 preferred stock were issued in connection with the September financing transaction. Therefore, at September 30, 2009 and December 31, 2008, the Company has no shares of series A convertible preferred stock issued and outstanding, and has 4,579,839 and 95,418 shares of series B and series B-1 convertible preferred stock issued and outstanding respectively.
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.
31
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Financing Transactions
On September 7, 2006, the Company entered into a stock purchase transaction with Vision Opportunity Master Fund, Ltd., SEI Private Trust Co., and Coronado Capital Partners LP by issuing 2,509,782 shares of series B convertible preferred stock for an aggregate of $6,876,800 in gross cash proceeds. Pursuant to the Purchase Agreement, 2,509,782 Series A Warrants, 1,254,891 Series B Warrants, 2,284,651 Series J Warrants, 2,284,651 Series C Warrants and 1,142,326 Series D Warrants were issued to the private placement investors. Simultaneously, 635,822 shares of series B convertible preferred stock and 241,708 Series A Warrants were issued to the placement agent Kuhns’ Brother. Among the gross proceeds of $6,876,800, $675,000 was used to purchased the Shell, Dolce Ventures, Inc. (Legal acquirer, accounting acquiree), $673,786 was reimbursed to the placement agent Kuhns’ Brother, and $426,978 was paid for legal counsel and other related expenses. The Company received $5,101,036 net proceeds.
On October 20, 2006, the Company entered into another stock purchase transaction with Vision Opportunity Master Fund, Ltd., Nite Capital LP, and Ijaz Malik by issuing 877,664 shares of series B convertible preferred stock for an aggregate of $2,404,800 in gross cash proceeds. Pursuant to the Purchase Agreement, 877,664 Series A Warrants, 438,833 Series B Warrants, 798,938 Series J Warrants, 798,938 Series C Warrants and 399,469 Series D Warrants were issued to the private placement investors. Simultaneously, $235,000 of gross proceeds were reimbursed to the private placement agent and $10,000 of gross proceeds were paid to transfer agent respectively. The Company received $2,159,800 net proceeds.
On May 15, 2007, Vision Opportunity Master Fund, Ltd. exercised 1,094,891 shares of Series J Warrants at $2.74 per share. The Company received $3,000,000 cash gross proceeds. In consideration of exercise of Series J Warrants, 1,094,891 new Series E Warrants and 109,489 Series G Warrants were issued to Vision and placement agent Kuhns’ Brother respectively. Pursuant to the financial advisory agreement between the Company and the placement agent Kuhns’ Brother, the Company totally reimbursed $412,241 of the gross proceeds to Kuhns’ Brother, including $146,374 disbursements of Kuhns’ Brother’s legal counsel. The Company received $2,587,759 net proceeds.
32
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
On September 7, 2007, the Company entered into a securities purchase agreement with a series of private placement investors leading by Vision Opportunity Master Fund, Ltd. for a sale of 8,340,762 shares of the Company’s common stock. The Company generated an aggregate of $18,766,700 gross proceeds. Simultaneously, the Company entered into a Warrant Purchase Agreement, Amendment and Waiver (“WPA”) with the holders of its outstanding Warrants and Series B Preferred Stock, who acquired those securities by private placement in September and October of 2006. Pursuant to the WPA, all of the Series A and Series B Warrants issued in 2006 were purchased back by the Company for $3,500,000; the exercise price of Series C Warrants was changed to $3.375; all of the Series D Warrants was purchased for a purchase price of issuing additional 770,897 shares of Series B preferred Stock; all of the outstanding Series J and Series E Warrants were cancelled; additional 271,074 Series F Warrants and 271,074 Series R Warrants were issued respectively. Among the $18,766,700 cash gross proceeds, $3,500,000 was used to purchase back the Series A and Series B Warrants issued in 2006 from private placement investors; $1,473,833 was reimbursed to the placement agent Roth Capital, including the out-of-pocket expenses and $232,028 legal counsel expense. The Company received $13,792,866 net proceeds.
Financial Transactions | ||||||||||||||||
9/7/2006 | 10/20/2006 | 5/15/2007 | 9/7/2007 | |||||||||||||
Gross proceeds | $ | 6,876,800 | $ | 2,404,800 | $ | 3,000,000 | $ | 18,766,700 | ||||||||
Used to Purchase Shell | (675,000 | ) | - | - | - | |||||||||||
Commissions to Placement Agent | (673,786 | ) | (235,000 | ) | (265,867 | ) | (1,241,805 | ) | ||||||||
Legal Counsel & Other Related Expenses | (426,978 | ) | - | (146,374 | ) | (232,028 | ) | |||||||||
Paid to Transfer Agent | - | (10,000 | ) | - | - | |||||||||||
Used to Purchase Warrants A & B | - | - | - | (3,500,000 | ) | |||||||||||
Net proceeds | $ | 5,101,036 | $ | 2,159,800 | $ | 2,587,759 | $ | 13,792,867 |
The following table depicts the issued and outstanding shares of Common Stock, Preferred Stock, and Warrants at September 30, 2009.
Authorized Shares | Shares issued and outstanding | |||||||
Common Stock | 250,000,000 | 26,769,313 | ||||||
Convertible Preferred Stock A | 10,000,000 | - | ||||||
Convertible Preferred Stock B | 5,000,000 | 4,579,839 | ||||||
Convertible Preferred Stock B-1 | 3,000,000 | 95,418 |
33
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Strike Price | Contractual Life | Expiration Date | Shares issued and outstanding | Weighted Average Fair Value | |||||||||||
Series A Warrants | 3.84 | 60 Months | 9/6/2011 | 241,708 | 0.70 | ||||||||||
Series C Warrants | 3.38 | 60 Months | 9/6/2011 | 3,083,589 | 0.81 | ||||||||||
Series F Warrants | 4.84 | 36 Months | 9/6/2010 | 271,074 | 0.20 | ||||||||||
Series G Warrants | 3.84 | 48 Months | 9/6/2011 | 109,489 | 0.44 | ||||||||||
Series R Warrants | 4.84 | 36 Months | 9/6/2010 | 271,074 | 0.20 | ||||||||||
Stock Option | 3.00 | 48 Months | 11/1/2010 | 100,000 | 0.92 |
The Company used the Black-Scholes model to calculate the values of Warrants. The following shows the assumptions that were employed in the model:
Warrants A | Warrants C | Warrants F | Warrants G | Warrants R | Stock Option | |||||||||||||||||||
Weighted-average fair value of warrants | 0.70 | 0.81 | 0.20 | 0.44 | 0.20 | 0.92 | ||||||||||||||||||
Strike price | $ | 3.84 | $ | 3.38 | $ | 4.84 | $ | 3.84 | $ | 4.84 | $ | 3.00 | ||||||||||||
Risk-free interest rate | 4.18 | % | 4.18 | % | 4.18 | % | 4.18 | % | 4.18 | % | 4.18 | % | ||||||||||||
Expected volatility | 40.00 | % | 40.00 | % | 40.00 | % | 40.00 | % | 40.00 | % | 40.00 | % | ||||||||||||
Years to maturity | 5.00 | 5.00 | 3.00 | 4.00 | 3.00 | 4.00 |
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Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
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 at September 30, 2009:-
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 | - | - | - | - | 12,653,662 | 12,654 | 4,064,862 | 47 | % | |||||||||||||||||||||||
Minority Investor | - | - | - | - | 3,428,551 | 3,428 | 747,457 | 13 | % | |||||||||||||||||||||||
Private Placement- Investor | 4,579,839 | 4,580 | 95,418 | 95 | 10,687,100 | 10,687 | 22,943,683 | 40 | % | |||||||||||||||||||||||
Beneficial- Conversion Feature | - | - | - | - | - | - | 7,002,292 | - | ||||||||||||||||||||||||
4,579,839 | 4,580 | 95,418 | 95 | 26,769,313 | 26,769 | 35,439,366 | 100 | % |
35
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
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 the 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.
Financial Position Segment Report
As of September 30, 2009
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 7,393,829 | $ | 3,629,945 | $ | 223,789 | $ | 11,247,564 | ||||||||
Non-Current Assets | 21,768,602 | 44,340,428 | - | 66,109,029 | ||||||||||||
Total Assets | 29,162,431 | 47,970,373 | 223,789 | 77,356,593 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 1,514,313 | 15,816,430 | 152,032 | 17,482,775 | ||||||||||||
Total Liabilities | 1,514,313 | 15,816,430 | 153,032 | 17,482,775 | ||||||||||||
Net Assets | 27,648,118 | 32,153,943 | 71,757 | 59,873,818 | ||||||||||||
Liabilities & Equities | $ | 29,162,431 | $ | 47,970,373 | $ | 223,789 | $ | 77,356,593 |
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Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Operation Result Segment Report
For the nine months ended September 30, 2009
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Sales Revenue | $ | 15,265,503 | $ | 7,494,485 | $ | (3,402,055 | ) | $ | 19,357,933 | |||||||
Cost of Revenue | (14,803,848 | ) | (2,672,673 | ) | 3,402,055 | (14,074,466 | ) | |||||||||
Gross Profit | 461,655 | 4,821,811 | - | 5,283,466 | ||||||||||||
Operating Expense | (201,936 | ) | (2,109,141 | ) | (300,507 | ) | (2,611,584 | ) | ||||||||
Operating Income/(Loss) | 259,719 | 2,712,670 | (300,507 | ) | 2,671,882 | |||||||||||
Other Income/(Loss) | (10,185 | ) | (106,381 | ) | 474 | (116,092 | ) | |||||||||
Earnings before tax | 249,534 | 2,606,289 | (300,033 | ) | 2,555,790 | |||||||||||
Income tax | (50,712 | ) | (529,671 | ) | - | (580,383 | ) | |||||||||
Net Income | $ | 198,822 | $ | 2,076,618 | $ | (300,033 | ) | �� | $ | 1,975,407 |
Financial Position Segment Report
As of December 31, 2008
Gas | Gas Pipeline | Shell, BVIs, & | ||||||||||||||
Distribution | Installation | Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 11,815,718 | $ | 3,915,982 | $ | 423,986 | $ | 16,155,686 | ||||||||
Non-Current Assets | 14,474,690 | 43,066,162 | - | 57,540,852 | ||||||||||||
Total Assets | 26,290,408 | 46,982,144 | 423,986 | 73,696,538 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 1,353,788 | 14,487,400 | - | 15,841,188 | ||||||||||||
Total Liabilities | 1,353,788 | 14,487,400 | - | 15,841,188 | ||||||||||||
Net Assets | 24,936,619 | 32,494,745 | 423,986 | 57,855,350 | ||||||||||||
Liabilities & Equities | $ | 26,290,407 | $ | 46,982,144 | $ | 423,986 | $ | 73,696,538 |
37
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
Operation Result Segment Report
For the nine months ended September 30, 2008
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | 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 | ) | ||||||||
Operating Income/(Loss) | 462,576 | 2,262,197 | (752,749 | ) | 1,972,024 | |||||||||||
Other Income/(Loss) | (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 |
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.
38
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
12. | INCOME TAX |
January 1, 2008, the PRC government implemented a new income tax laws for all enterprises. The new law imposed a 25% income tax rate on Company’s subsidiary Beijing Gas. As such, Beijing Gas provided a $778,480 income tax expense for the year ended December 31, 2008. Subsequently, in 2009, the Beijing Gas was granted by the PRC government a 10% income tax exemption. The exemption is the result of Beijing Gas new recognition as a high-tech green energy enterprise. In accordance with this exemption, Beijing Gas will enjoy a 15% tax rate. Consequently, the PRC government will refund $231,185, (a 10% income tax provision) to Beijing Gas from its 2008 payment. The Company has accounted for this transaction as a reduction of its 2009 income tax expense.
The following table details the difference between the actual tax provisions and the amounts of tax exemption obtained from PRC government for the period ended September 30, 2009.
9/30/2009 | ||||
Provision for Income Tax - PRC Subsidiaries | $ | 811,568 | ||
Tax Exemption - Granted by PRC Government | (231,185 | ) | ||
Income Tax | $ | 580,383 |
39
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
13. | EARNINGS PER SHARE |
Components of basic and diluted earnings per share was as follows:-
9/30/2009 | ||||
Net Income | $ | 1,975,407 | ||
Preferred Dividends | - | |||
Constructive Preferred Dividends | - | |||
Income Available to Common Stockholders | 1,975,407 | |||
Original Shares | 25,269,313 | |||
Addition to Common Stock | 788,889 | |||
Basic Weighted Average Shares Outstanding | 26,058,202 | |||
Addition to Common Stock from Conversion of Preferred Stock B | 4,579,839 | |||
Addition to Common Stock from Conversion of Preferred Stock B-1 | 95,418 | |||
Addition to Common Stock from Exercise of Warrants | - | |||
Diluted Weighted Average Shares Outstanding | 30,733,459 | |||
Earnings Per Share | ||||
- Basic | $ | 0.076 | ||
- Diluted | $ | 0.064 | ||
Weighted Average Shares Outstanding | ||||
- Basic | 26,058,202 | |||
- Diluted | 30,733,459 |
40
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2009 and December 31, 2008
(Stated in US Dollars)
14. | LIQUIDATED DAMAGE |
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 has paid $481,805 in liquidated damages to investors in 2008, which was reported as other expense in the statements of income.
15. | CONTINGENT LIABILITIES |
Pursuant to the warrants purchase agreement related to 2006 private placement financing transactions, the Company was required to reach $7.9 million and $11 million net income target for the fiscal years ended 2007 and 2008 respectively. However, the Company did not meet the stipulated 2007 and 2008 net income target and therefore incurred certain contingent liabilities.
On May 26, 2009, the private placement investors led by Vision Opportunity Master Fund, Ltd. waived the 2007 net income target application. The Company was exempt from the issuance of 1.2 million shares contingent common stock. Simultaneously, 1.5 million shares make good stock held in an escrow account were issued to the private placement investor on May 8, 2009 in the compensation of not attaining the 2008 net income target. A cost of $1,500, based on US$0.001 par value, was debited to additional paid in capital account.
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Item 2. Management’s Discussion and Analysis or Plan of Operation
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 the real estate industry in our targeted 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, which aim to promote the use of natural gas to improve local residents’ quality of life.
We have experienced growth of our connection activities since inception of our business due to the Chinese real estate boom in the past years. However, starting 2007, the Chinese government implemented a series of policies and regulations to curb inflation and the property market. These policies, together with the worldwide financial crisis in 2008, has resulted a slowdown of the real estate market in China and our business, in turn, was affected in 2008. Recently, the Chinese government has changed its policies and prioritized boosting of the economy. The Chinese government has adopted new policies to address the slowdown of the real estate market, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies. The Chinese government has also decided to inject stimulus package to boost the overall economy, including allocation of funds for mass housing projects. We have seen signs of recovery of the real estate market in China in recent months.
There are three pillars in Chinese economy: domestic consumption (both private and public), net exports, and domestic investment. Chinese Government RMB 4 trillion stimulus package has great impacts on China's domestic production and investments in the past several months. Signs of Improvements in investments, retail sales, and industrial output data are encouraging. Retail sales are rebounding in the past three months. Massive government spending on infrastructure boost China's Fixed Asset Investment (FAI) year on year growth average over 30% in the first five months of the year. However, exports and imports, continues to decline. Export decreased 26.4% in the month of May compared with the same period of last year. The export has been negatively affected by the economic slowdown of the U.S. and European countries. In summary, China’s economy is gradually improving with government support.
GDP growth rebounded to 7.9 per cent in the second quarter from 6.1per cent in the first, which represented a 10-year low. In the third quarter, China’s economic growth accelerated to 8.9 per cent.
Our gas users are composed of industrial and residential users. Gas sales to residential users are much less affected by economic and industrial factors and we anticipate that such sales would maintain stable growth in the future, due to the increasing pool of our residential customers. Gas sales to industrial users are subject to the performance of the end industrial users. As we expand into more cities, we expect to add more industrial users in the coming year if capital is available.
Material Opportunities
The gas distribution market is quite fragmented in the small to medium sized cities (population less than 1,000,000). 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 our major growth components. The current worldwide financial crisis has created pricing opportunities for us to acquire projects since we may have opportunities to acquire projects at attractive prices.
Most medium-sized or large cities have already been developed by large gas distributors or are still operated by state-owned companies. Acquisition opportunities exist in state-owned companies, as the central government encourages suppliers to turn them into privately-owned companies. The expansion into these markets would have material impact on the Company, increasing the Company’s assets and revenues significantly. The Company would require additional fundraising for such acquisitions.
42
Material Challenges
There are a vast number of small-to-medium sized cities left undeveloped by our industry, but the competition is intense, as there are many small new players in the market attracted by the profitability and growth potentials of the natural gas 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.
We have 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 residential users in small and medium-sized cities need to be educated about the benefits of using natural gas. Time is required for residents to realize the benefits of natural gas. 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 energy resources, such as natural gas, than large cities, and residents depend more on coal.
China’s energy market is highly regulated by the government with regard to the purchase and sale price of natural gas. When an adjustment to the purchase price by the government occurs, gas distributors will correspondingly increase the sale price, 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 not often adjusted natural gas price, but we cannot rule out the possibilities of the increase of natural gas prices in the future. We can adjust the sale price accordingly after the increase of purchase price. However, passing the increase to end users 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 Periods
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 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 exploring opportunities to diversify our business by expanding into related areas, such as pipeline and gas station businesses. However, we do not expect to expand into these areas in large scale in the near future.
Liquidity and Capital Resources
Natural gas distribution is a capital-intensive industry that requires large amounts of capital for the construction of pipelines and gas stations, and the purchase of transportation vehicles. The Company would be constrained by inadequate capital when developing into larger cities or engaging in merger and acquisition activities. With such situations, the Company would require additional fundraising to finance such business activities.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
During the three months ended September 30, 2009, net revenues were $6,988,621, representing an increase of 28.46 % from the same period of last year. Gross profit for the three months ended September 30, 2009 was $2,483,551, representing an increase of 8.93% from the same period of last year. Our operating income for the three months ended September 30, 2009 was $1,538,616, representing an increase of 9.65% from the same period of 2008. Net income for the three months ended September 30, 2009 was $1,208,636, representing an increase of 15.82% from $1,043,591 for the same period of 2008.
43
For the 3 months ended September 30, | ||||||||||||
2009 | 2008 | Change | ||||||||||
US$ | US$ | |||||||||||
Net Revenues | 6,988,621 | 5,440,212 | 28.46 | % | ||||||||
Gross Profit | 2,483,551 | 2,280,022 | 8.93 | % | ||||||||
Operating Income | 1,538,616 | 1,403,225 | 9.65 | % | ||||||||
Net Income | 1,208,636 | 1,043,592 | 15.82 | % | ||||||||
Gross Margin | 35.54 | % | 41.91 | % | -15.21 | % | ||||||
Net Margin | 17.29 | % | 19.18 | % |
Net Revenues
We generate revenues from two sources: connection fees for constructing connections to our natural gas distribution network, and sales of natural gas.
Total net revenues for the three months ended September 30, 2009 were $6,988,621, compared to $5,440,212 for the same period in 2008, representing an increase of 28.46%. The increase was mainly due to the increase of gas sales. During this period, we connected 7,239 new residential households to our gas distribution network, resulting in total connection fees of $3,342,309. Gas sales during the same period were $3,646,312. In comparison, we connected 6,857 new residential households to our gas distribution network for the same period in 2008, resulting in total connection fees of $3,401,014. Gas sales during the period were $2,039,198.
44
For the 3 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
(In $ million) | US$ | % | US$ | % | % | |||||||||||||||
Net Revenues | 6.99 | 100 | % | 5.44 | 100 | % | 28.46 | % | ||||||||||||
Connection Fees | 3.34 | 48 | % | 3.40 | 63 | % | -1.73 | % | ||||||||||||
Gas Sales | 3.65 | 52 | % | 2.04 | 37 | % | 78.81 | % |
The increases in our net revenues for the three months ended September 30, 2009 were mainly due to the increase of gas sales. With more customers added to our existing gas network distribution system, our gas sales increased accordingly.
Connection Fees
Connection fees during the three months ended September 30, 2009 were $3.34 million, representing a slightly decrease of 1.73% over the same period of 2008, accounting for 48% of the total net revenue as compared with approximately 63% of the total net revenue for the same period in 2008. The source of connection fees was mainly from the development of new residential users.
For the 3 months ended September 30, | ||||||||||||||||||||
(in US$ millions) | 2009 | 2008 | Change | |||||||||||||||||
US$ | % | US$ | % | % | ||||||||||||||||
Connection Fees | 3.34 | 100 | % | 3.40 | 100 | % | -1.73 | % | ||||||||||||
Residential Users | 3.339 | 99.91 | % | 3.40 | 100 | % | -1.81 | |||||||||||||
Industrial Users | 0.003 | 0.09 | % | 0.00 | 0 | % |
Gas Sales
In terms of volume, we sold 10.55 million cubic meters of natural gas during the three months ended September 30, 2009, compared with 5.91 million cubic meters for the same period of 2008. In terms of monetary value, gas sales were $3.65 million during the three months ended September 30, 2009, accounting for 52% of total net revenue for the three months ended September 30, 2009, representing an increase of 78.81% over the same period of 2008. Gas sales to residential users increased 222.31% to $1.45 million for the three months ended September 30, 2009 from $0.45 million in the same period of 2008. Gas sales to industrial and commercial users increased 38.36% to $2.20 million for the three months ended September 30, 2009 from $1.59 million in the same period of 2008.
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For the 3 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gas Sales | 3.65 | 100 | % | 2.04 | 100 | % | 78.81 | % | ||||||||||||
Residential Users | 1.45 | 40 | % | 0.45 | 22 | % | 222.31 | % | ||||||||||||
Industrial and Commercial Users | 2.20 | 60 | % | 1.59 | 78 | % | 38.36 | % |
Overall, the increases of gas sales were primarily due to the fact that our invested projects maintained steady development, and more users were added to our gas distribution network.
As our residential customer base grows, gas sales to residential users would increase gradually.
Cost of Revenues
Cost of revenues for the three months ended September 30, 2009, which includes cost of connection and cost of gas sales, was $4.51 million, representing an increase of 42.56% from $3.16 million in the same period of 2008.
For the 3 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Cost of Revenues | 4.51 | 100 | % | 3.16 | 100 | % | 42.56 | % | ||||||||||||
Connection Cost | 1.04 | 23 | % | 1.16 | 37 | % | -10.18 | % | ||||||||||||
Gas Cost | 3.46 | 77 | % | 2.00 | 63 | % | 73.2 | % |
Cost of Connection
The cost of connection decreased 10.18% to $1.04 million during the three months ended September 30, 2009 from $1.16 million for the same period in 2008.
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Cost of connection includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, and installation and maintenance fees.
Considering the city's overall planning and our long-term interests, the capacity of the gas pipeline network we designed to distribute gas for a city usually greatly exceeded the number of households we served at the beginning of our service, which makes the cost of connection, specifically the depreciation of pipelines and maintenance cost relatively high if the number of residential users connected is low. However, with the connection of more households to the gas pipelines, the average cost to each household will be gradually reduced.
Cost of Gas Sales
The cost of gas sales increased 73.2% to $3.46 million during the three months ended September 30, 2009 from $2.0 million for the same period in 2008.
The cost of natural gas sales includes the purchase and transportation of natural gas and depreciation of delivery equipment.
Gross Profit
During the three months ended September 30, 2009, gross profit was $2.48 million, representing an increase of approximately 8.93% from the same period of 2008. Gross profit from connection fees was $2.3 million for the three months ended September 30, 2009, accounting for 93% of total gross profit. In comparison, gross profit from connection fees was $2.24 million for the three months ended September 30, 2008, accounting for 98% of total gross profit. Gross profit from gas sales was $0.18 million for the three months ended September 30, 2009, accounting for 7% of total gross profit, compared to $0.04 million, accounting for 2% of total gross profit in the same period of 2008.
For the 3 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gross Profit | 2.48 | 100 | % | 2.28 | 100 | % | 8.93 | % | ||||||||||||
Connection | 2.30 | 93 | % | 2.24 | 98 | % | 2.66 | % | ||||||||||||
Gas | 0.18 | 7 | % | 0.04 | 2 | % | 356.62 | % |
Gross margin during the three months ended September 30, 2009 was 35.54%, compared to 41.91% during the same period in 2008.
Gross margin for connection fees for the three months ended September 30, 2009, was 68.79%, compared to 65.85% in the same period of 2008.
Gross margin for sales of natural gas was 5.06% for the three months ended September 30, 2009, compared to 1.98% during the same period of 2008.
Selling and Marketing Expenses
Our selling and marketing expenses in the three months ended September 30, 2009 were $0.29 million, approximately 4.13% of our net revenues, compared with $0.23 million or 4.17 % of our net revenues in the same period of 2008.
General and Administrative Expenses and Other Expenses
General and administrative expenses were $0.66 million for the three months ended September 30, 2009, which were 0.93% higher than $0.65 million for the same period of 2008. Other expense was $23.5 thousand for the three months ended September 30, 2009, compared with other income of $58.3 thousand for the same period of 2008.
Operating Income
The operating income for the three months ended Sep.30, 2009 was $1.54 million, representing an increase of 10%, compared to the operating income of $1.4 million for the same period of 2008.
Income tax
Income tax was $0.31 million for the three months ended September 30, 2009, compared to $0.42 million for the same period of 2008.
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Net Income
Net income for the three months ended September 30, 2009 was $1.21 million, representing an increase of 15.82% from $1.04 million for the same period of 2008. The improvement is mainly due to the increase of gross margin and reduction of income tax expense.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
During the nine months ended September 30, 2009, our net revenues and gross profit were $19,357,933 and $5,283,466, respectively, representing an increase of 29.89% and 1.34%, respectively, from those of the same period in the previous year. Our operating income in 2009 was $2,671,882, representing an increase of 35.49% from 2008. Net income for the nine months ended September 30, 2009 was $1,975,407, representing an improvement of 201.12% from $656,031 for the same period of 2008.
For the 9 months ended September 30, | ||||||||||||
2009 | 2008 | Change | ||||||||||
US$ | US$ | % | ||||||||||
Net Revenues | 19,357,933 | 14,903,850 | 29.89 | % | ||||||||
Gross Profit | 5,283,466 | 5,213,597 | 1.34 | % | ||||||||
Operating Income | 2,671,882 | 1,972,024 | 35.49 | % | ||||||||
Net Income | 1,975,407 | 656,031 | 201.12 | % | ||||||||
Gross Margin | 27.29 | % | 34.98 | % | -21.98 | % | ||||||
Net Margin | 10.2 | % | 4.4 | % |
Net Revenues
We generate revenues from two sources: connection fees for constructing connections to our natural gas distribution network and sales of natural gas.
Total net revenues for the nine months ended September 30, 2009 were $19,357,933, compared to $14,903,850 for the same period in 2008, representing an increase of 29.89%. The increase was due to increase of both natural gas and connection fees revenue, resulting from the higher connection per unit we charged to the customer. During this period, we connected 17,452 new residential households to our gas distribution network, resulting in total connection fees of $7,494,485. Gas sales during the same period amounted to $11,863,448. In comparison, we connected 18,543 new residential households to our gas distribution network in 2008, resulting in total connection fees of $6,310,753. Gas sales during the period amounted to $8,593,097.
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For the 9 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
(In $ million) | US$ | % | US$ | % | % | |||||||||||||||
Net Revenues | 19.36 | 100 | % | 14.9 | 100 | % | 29.89 | % | ||||||||||||
Connection Fees | 7.49 | 39 | % | 6.31 | 42 | % | 18.76 | % | ||||||||||||
Gas Sales | 11.86 | 61 | % | 8.59 | 58 | % | 38.06 | % |
Connection Fees
Connection fees during the nine months ended September 30, 2009 were $7.49 million, representing an increase of 18.76% over the same period of 2008, accounting for 39% of the total net revenue compared with approximately 42% for the same period in 2008. With regard to the source of connection fees, almost all connection fees came from the development of new residential users. We connected 17,452 residential users during the nine months ended September 30, 2009.
For the 9 months ended September 30, | ||||||||||||||||||||
(in US$ millions) | 2009 | 2008 | Change | |||||||||||||||||
US$ | % | US$ | % | % | ||||||||||||||||
Connection Fees | 7.49 | 100 | % | 6.31 | 100 | % | 18.76 | % | ||||||||||||
Residential Users | 7.41 | 99 | % | 6.31 | 100 | % | 17.37 | % | ||||||||||||
Industrial Users | 0.09 | 1 | % | 0.00 | 0 | % | % |
Such increase was primarily attributable to the higher average connection fees per unit compared to the same period of 2008. In the first half of 2009, we developed certain residential projects with higher connection fees per unit. The higher connection fees per unit helped to increase the total connection fees revenue.
Gas Sales
Overall, the increases of gas sales were primarily due to the fact that our invested projects maintained steady development, and more users were added to our gas distribution network. In terms of value, gas sales were $11.86 million during the nine months ended September 30, 2009, accounting for 61% of total net revenue in 2009, representing an increase of 38.06% over the year 2008. Gas sales to residential increased 129.56% from $2.07 million in 2008 to $4.76million in 2009. Gas sales to industrial and commercial users increased 9%, from $6.52 million in 2008 to $7.11 million in 2009.
For the 9 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gas Sales | 11.86 | 100 | % | 8.59 | 100 | % | 38.06 | % | ||||||||||||
Residential Users | 4.76 | 40 | % | 2.07 | 24 | % | 129.56 | % | ||||||||||||
Industrial and Commercial Users | 7.10 | 60 | % | 6.52 | 76 | % | 9.00 | % |
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Cost of Revenues
Cost of revenues for the nine months ended September 30, 2009, which includes cost of connection and cost of gas sales was $14.07 million, an increase of 45.24%, from $9.69 million in the same period of 2008.
For the 9 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Cost of Revenues | 14.07 | 100 | % | 9.69 | 100 | % | 45.24 | % | ||||||||||||
Connection Cost | 2.67 | 19 | % | 1.98 | 20 | % | 34.83 | % | ||||||||||||
Gas Cost | 11.4 | 81 | % | 7.71 | 80 | % | 47.92 | % |
Cost of Connection
The cost of connection increased 34.83% to $2.67 million during the nine months ended September 30, 2009 from $1.98 million for the same period in 2008. This increase, which outpaced the 18.76% increase in connection fees revenue during the same period, is mainly due to higher cost of raw materials, parts, and installation and maintenance fees.
Cost of connection includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, and installation and maintenance fees.
Considering the city's overall planning and the long-term interests of our company, the capacity of the gas pipeline network we designed to distribute gas for a city usually greatly exceeded the number of households we served at the very beginning, which makes the cost of connection, specifically the depreciation of fixed assets and maintenance cost greatly increase. However, with connection of more households to the gas pipelines, the average cost to each household will be gradually reduced.
Cost of Gas Sales
The cost of gas sales increased 47.92% to $11.4 million during the nine months ended September 30, 2009 from the same period in 2008, when it was $7.71 million. This increase, which surpassed the 38.06% increase in sales of natural gas during the same period, is largely due to the increase of rental expenses on gas delivery equipments and higher fuel costs.
The cost of natural gas sales includes the purchase and transportation of natural gas and depreciation of delivery trucks.
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Gross Profit
Gross profit slightly increased from $5.21 million in 2008 to $5.28 million for 2009.
For the 9 months ended September 30, | ||||||||||||||||||||
2009 | 2008 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gross Profit | 5.28 | 100 | % | 5.21 | 100 | % | 1.34 | % | ||||||||||||
Connection | 4.82 | 91 | % | 4.33 | 83 | % | 11.4 | % | ||||||||||||
Gas | 0.46 | 9 | % | 0.89 | 17 | % | -47.84 | % |
During the nine months ended September 30, 2009, gross profit was $5.28 million, a slightly increase of approximately 1.34% from the same period of 2008. Gross profit from connection fees is $4.82 million for the nine months of 2009, accounting for 91% of total gross profit. In comparison, gross profit from connection fees was $4.33 million for the nine months of 2008, accounting for 83% of total gross profit. Gross profit from gas sales was $0.46 million, accounting for 9% of total gross profit, compared to $0.89 million, 17% of total gross profit in the same period of 2008.
Gross margin during nine months ended September 30, 2009 is 27.29%, compared to 34.98% during the same period in 2008.
Gross margin for connection fees for the nine months ended September 30, 2009 was 64.34%, compared to 68.59% during the same period of 2008. Higher cost of raw materials, parts, and installation and maintenance fees contributed to the decrease.
Gross margin for sales of natural gas was 3.89% for the nine months ended September 30, 2009, compared to 10.30% during the same period of 2008. The decrease was due to an increase of rental expenses on gas delivery trucks and higher cost of fuel.
Selling and Marketing Expenses
Our selling and marketing expenses in the nine months ended September 30, 2009 were $709,256 and approximately 3.66% of our net revenues, compared with $594,575, or 3.99% of net revenues in the same period of 2008.
General and Administrative Expenses and other expenses
General and administrative expenses were $1.90 million for the nine months ended September 30, 2009, which was 28.13% lower than $2.65 million for the same period last year. Other expense was $0.12 million for the nine months ended September 30, 2009, compared with 0.60 million for the same period of 2008. The decrease was largely due to the elimination of non-recurrent expenses incurred in first half of 2008, including the fees of legal counsel for registration and fees of financial consultant, the escrow account expenses , costs for Sarbanes-Oxley compliance consultation, and the penalties of late registration and late registration statement effectiveness.
Operating Income
The operating income for the nine months ended September 30, 2009 was $2.67 million, representing an increase of 35.5%, compared to the operating income of $1.97 million in 2008.
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Income tax
Income tax was $0.58million for the nine months ended September 30, 2009, compared to $0.72 million in 2008.
Net Income
Net income in the nine months ended September 30, 2009 was $1.98 million, representing a strong improvement of 201.12% from $0.66 million in the same period in 2008. This improvement was due to the significant decrease of SG&A and other expenses, reduction of income tax expense, and increase of gross profit during the first nine months ended September 30, 2009 as compared to the same period of 2008.
Liquidity and Capital Resources
Cash and cash equivalents were $2.08 million as of September 30, 2009, a decrease of $1.18 million as compared to $3.26 million of cash and cash equivalents as of December 31, 2008.
In the nine months of 2009, the major source of cash was the Company’s operating activities. Cash sourced in operating activities during the nine months ended September 30, 2009 is $8.21 million, an increase of $8.21million from $960 during the same period of 2008. Such increase was mainly due to the increase of net income, adjusted for non-cash expense items and changes in working capital.
There are no financing activities during the nine months ended September 30, 2009, resulting in a decrease of $1.24 million from that during the same period of 2008.
Cash used in investing activities during the nine months ended September 30, 2009 is $9.37million, a slight increase from $9.28 million during the same period of 2008.
Accounts Receivable
Accounts receivable as of September 30, 2009 were $3.12 million, a decrease of $2.89 million from $6.01 million as of December 31, 2008.
Our accounts receivable is expected to gradually decrease during the first nine months of 2009 due to our businesses’ seasonality. Connection fees are generally higher in the third and fourth quarters of every year than in the first two quarters. Accounts receivable are collected in the beginning of the following year. The management also makes great efforts to collect accounts receivable to reduce the outstanding balance.
Notes Receivable
There are no notes receivable as of September 30, 2009
Inventory
Inventory of $0.37 million as of September 30, 2009 was comprised of spare parts and natural gas.
Fixed Assets
Fixed Assets as of September 30, 2009 were $43.71million, representing an increase of $7.53 million from $36.18 million as of December 31, 2008. The table below is a breakdown of our fixed assets at cost:
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2009 | 2008 | |||||||
At Cost | ||||||||
Gas Pipelines | $ | 34,641,390 | $ | 27,859,313 | ||||
Motor Vehicles | 5,701,904 | 5,600,508 | ||||||
Machinery & Equipment | 1,482,513 | 857,834 | ||||||
Buildings | 1,572,188 | 1,568,380 | ||||||
Leasehold Improvements | 81,539 | 80,101 | ||||||
Office Equipment | 234,142 | 216,435 | ||||||
Less Accumulated depreciation | (3,906,315 | ) | (3,149,453 | ) | ||||
$ | 39,807,361 | $ | 33,033,118 |
Bank Loans
Bank loans as of September 30, 2009 were $2.19 million, no change from that as of December 31, 2008.
Accounts Payables
Accounts payables as of September 30, 2009 was $9.0 million, representing an increase of $2.65million from that as of December 31, 2008.
Other Payables
Other payables as of September 30, 2009 were $5.41million, representing a decrease of $0.76 million from that as of December 31, 2008.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act and have designed disclosure controls and procedures or caused disclosure controls and procedures 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, disclosure controls and procedures 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 disclosure controls and procedures as of September 30, 2009. Based on that evaluation, our management concluded that, as of September 30, 2009, our Company’s disclosure controls and procedures was not effective due to the material weaknesses described below.
Internal Control over Financial Reporting
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.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.
Our internal control over financial reporting was not effective as a result of the following identified material weaknesses:
(1) There was not adequate resources and personnel within the Company to carry out the comprehensive internal audit functions which include the formulation of systematic risk assessment procedures, the annual audit plan and budget and anti-fraud audit.
(2) A more comprehensive Code of Conduct and Ethics (the “Code”), which is applicable to all Company directors, officers and employees, is still work-in-progress as of September 30, 2009.
(3) A more comprehensive Related Party Transactions Policy and the master list of all Related Parties are still work-in-progress as of September 30, 2009.
Management’s Plan for Remediation of Material Weaknesses
In light of our Company’s internal control over financial reporting 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) With the limited quality personnel resource supplies in the market, the management had already engaged a third party professional to assist in establishing the internal audit functions since July 2009 whereas another round of internal control assessment had been carried out in September 2009. The Internal Audit Manual and Internal Audit Charter were completed and pending for the approval of the board of directors. Going forward, the Company will prepare the internal audit and anti-fraud plan and budget based on the risk assessment results. The respective internal audit work procedures will be executed based on the approved internal audit plan;
(2) Management is expected to release the comprehensive Code of conduct by December 31, 2009. The Company will update the Code on an annual basis, while trainings and seminars will be arranged to all new and existing management and employees so as to enhance the awareness of the Code of Ethics. In the future, all employees will be required to sign a declaration to acknowledge that the employee has read and will comply with the Code; and
(3) Management is expected to release the comprehensive Related Parties Transaction Policy by March 31, 2010. The Company will update the master list as well as the policy on an annual basis.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2009, 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
None.
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 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
SIGNATURES
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 13, 2009 | By: | /s/ Yuchuan Liu |
Yuchuan Liu | ||
Chairman and Chief Executive Officer |
SINO GAS INTERNATIONAL HOLDINGS, INC. | ||
Date: November 13, 2009 | By: | /s/ Yugang Zhang |
Yugang Zhang | ||
Chief Financial Officer |
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