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 March 31, 2010
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 | 90-0438712 |
(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 May 13, 2010, the Registrant had 26,769,313 shares of common stock outstanding.
Sino Gas International Holdings, Inc.
Table of Contents
Page | ||
PART I - | FINANCIAL INFORMATION | 2 |
Item 1. | Financial Statements | 3 |
Notes to Financial Statements (Unaudited) | 12 | |
Item 2. | Management's Discussion and Analysis or Plan of Operation | 48 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 54 |
Item 4. | Controls and Procedures | 54 |
PART II - | OTHER INFORMATION | 54 |
Item 1. | Legal Proceedings | 54 |
Item 1A. | Risk Factors | 54 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 54 |
Item 3. | Defaults Upon Senior Securities | 54 |
Item 4. | Removed and Reserved | 54 |
Item 5. | Other Information | 54 |
Item 6. | Exhibits | 54 |
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Sino Gas International Holdings, Inc.
Reviewed Consolidated Financial Statements
March 31, 2010 and December 31, 2009
(Stated in US Dollars)
3
Sino Gas International Holdings, Inc.
Content | Page | |
Report of Independent Registered Public Accounting Firm | 5 | |
Consolidated Balance Sheets | 6 - 7 | |
Consolidated Statements of Income | 8 | |
Consolidated Statements of Stockholders’ Equity | 9 - 10 | |
Consolidated Statements of Cash Flows | 11 | |
Notes to Consolidated Financial Statements | 12 - 47 |
4
To: | The Board of Directors and Stockholders of |
Sino Gas International Holdings, Inc.
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying consolidated interim balance sheets of Sino Gas International Holdings, Inc. as of March 31, 2010 and December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three-month periods ended March 31, 2010 and 2009. 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 |
April 30, 2010 | Certified Public Accountants |
5
Sino Gas International Holdings, Inc.
Consolidated Balance Sheets
As of March 31, 2010 and December 31, 2009
(Stated in US Dollars)
3/31/2010 | 12/31/2009 | ||||||||||
ASSETS | |||||||||||
Current Assets | Notes | ||||||||||
Cash & cash equivalents | 2(e) | $ | 7,505,613 | $ | 9,820,890 | ||||||
Restricted cash | 3 | 95,425 | 126,400 | ||||||||
Notes receivable | 204,795 | 351,021 | |||||||||
Accounts receivable | 2(f),4 | 6,495,162 | 5,036,609 | ||||||||
Inventory | 576,108 | 416,931 | |||||||||
Advance to suppliers | 2(g) | 4,041,051 | 4,814,420 | ||||||||
Prepayment and others | 477,588 | 446,840 | |||||||||
Other receivables | 2(f) | 1,725,770 | 1,686,115 | ||||||||
Total Current Assets | 21,121,512 | 22,699,226 | |||||||||
Non-Current Assets | |||||||||||
Investment | 2(h),5 | 7,032,465 | 7,031,333 | ||||||||
Property, plant & equipment, net | 2(j),6 | 49,023,402 | 47,772,011 | ||||||||
Construction in progress | 2(l) | 13,372,320 | 13,357,395 | ||||||||
Intangible assets, net | 2(k),7 | 2,210,430 | 2,217,699 | ||||||||
Total Non-current Assets | 71,638,617 | 70,378,438 | |||||||||
Total Assets | $ | 92,760,129 | $ | 93,077,664 | |||||||
LIABILITIES & STOCKHOLDERS' EQUITY | |||||||||||
LIABILITIES | |||||||||||
Current Liabilities | |||||||||||
Bank loans | 8 | $ | 2,925,174 | $ | 2,925,174 | ||||||
Accounts payable | 7,216,072 | 8,560,120 | |||||||||
Other payables | 9 | 4,889,926 | 6,339,571 | ||||||||
Accrued liabilities | 162,220 | 453,335 | |||||||||
Unearned revenue | 2(m) | 700,664 | 620,860 | ||||||||
Total Current Liabilities | 15,894,056 | 18,899,060 | |||||||||
Non-current Liabilities | |||||||||||
Long-term bank loans | 8 | 8,776,934 | 6,581,641 | ||||||||
Non-current Convertible Bonds | 10 | 5,009,457 | 4,329,101 | ||||||||
Total Liabilities | $ | 29,680,447 | $ | 29,809,802 |
See Accompanying Notes to Financial Statements and Accountant’s Report
6
Sino Gas International Holdings, Inc.
Consolidated Balance Sheets
As of March 31, 2010 and December 31, 2009
(Stated in US Dollars)
STOCKHOLDERS' EQUITY | 3/31/2010 | 12/31/2009 | |||||||||
Notes | |||||||||||
Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,579,839 shares issued and outstanding as of March 31, 2010 and December 31, 2009. | 11 | $ | 4,580 | $ | 4,580 | ||||||
Additional paid in capital - Preferred Stock B | 5,323,972 | 5,323,972 | |||||||||
Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares issued and outstanding as of March 31, 2010 and December 31, 2009. | 11 | 95 | 95 | ||||||||
Additional paid in capital - Preferred Stock B-1 | 132,662 | 132,662 | |||||||||
Common Stock US$0.001 par value; 250,000,000 shares authorized; 26,769,313 shares issued and outstanding as of March 31, 2010 and December 31, 2009. | 11 | 26,769 | 26,769 | ||||||||
Additional paid in capital - Common Stock | 22,513,732 | 22,513,732 | |||||||||
Additional paid in capital - Warrants Series: A, B, J, C, D | 311,110 | 311,110 | |||||||||
Additional paid in capital - Warrants Series: E, G | 47,946 | 47,946 | |||||||||
Additional paid in capital - Warrants Series: F, R | 107,652 | 107,652 | |||||||||
Additional paid in capital - Convertible Bonds Detachable Warrants | 223,367 | 223,367 | |||||||||
Additional paid in capital - Beneficial Conversion Feature | 8,094,814 | 8,094,814 | |||||||||
Statutory reserve | 2(v) | 4,612,191 | 4,612,191 | ||||||||
Retained earnings | 13,934,503 | 14,143,089 | |||||||||
Accumulated other comprehensive income | 2(x) | 7,746,287 | 7,725,883 | ||||||||
Total Stockholders' Equity | 63,079,682 | 63,267,862 | |||||||||
Total Liabilities & Stockholders' Equity | $ | 92,760,129 | $ | 93,077,664 |
See Accompanying Notes to Financial Statements and Accountant’s Report
7
Sino Gas International Holdings, Inc.
Consolidated Statements of Income
For the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
Notes | 3/31/2010 | 3/31/2009 | |||||||||
Revenue | $ | 6,957,661 | $ | 5,037,692 | |||||||
Cost of revenue | (4,833,148 | ) | (3,773,212 | ) | |||||||
Gross Profit | 2,124,513 | 1,264,480 | |||||||||
Operating Expenses | |||||||||||
Selling expenses | 271,243 | 203,072 | |||||||||
General and administrative expenses | 906,531 | 512,447 | |||||||||
Total operating expenses | (1,177,774 | ) | 715,519 | ||||||||
Operating Income | 946,739 | 548,961 | |||||||||
Other Income/(Expense) | |||||||||||
Investment income | 2(q) | - | - | ||||||||
Other income | 5,382 | 161 | |||||||||
Other expense | 17 | (1,300 | ) | (5,729 | ) | ||||||
Interest income | 4,770 | 1,850 | |||||||||
Interest expense | 10 | (924,841 | ) | (41,452 | ) | ||||||
Total other income/(expense) | (915,989 | ) | (45,170 | ) | |||||||
Earnings before income tax | 30,750 | 503,791 | |||||||||
Income tax | 2(r),12 | (239,334 | ) | (158,155 | ) | ||||||
Net income | $ | (208,586 | ) | $ | 345,637 | ||||||
Income available to common stockholders for basic EPS | $ | (208,586 | ) | $ | 345,637 | ||||||
Interest expense for convertible bonds, net of tax | - | - | |||||||||
Income available to common stockholders for diluted EPS | $ | (208,586 | ) | $ | 345,637 | ||||||
Earnings Per Share | 2(z),14 | ||||||||||
Basic | $ | (0.01 | ) | $ | 0.01 | ||||||
Diluted | $ | (0.01 | ) | $ | 0.01 | ||||||
Weighted Average Shares Outstanding | |||||||||||
Basic | 26,769,313 | 25,269,313 | |||||||||
Diluted | 26,769,313 | 29,944,570 |
See Accompanying Notes to Financial Statements and Accountant’s Report
8
Sino Gas International Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
As of March 31, 2010 and December 31, 2009
(Stated in US Dollars)
Preferred Stock B | Preferred Stock B-1 | Common Stock | ||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | Additional Paid In Capital-Preferred Stock B | Shares Outstanding | Amount | Additional Paid In Capital-Preferred Stock B-1 | Shares Outstanding | Amount | Additional Paid In Capital-Common Stock | ||||||||||||||||||||||||||||
Balance at January 1, 2009 | 4,579,839 | 4,580 | 5,323,972 | 95,418 | 95 | 132,662 | 25,269,313 | 25,269 | 23,196,304 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Issuance of 2007 Make Good Common Stock | - | - | - | - | - | - | 1,500,000 | 1,500 | (1,500 | ) | ||||||||||||||||||||||||||
Re-allocation of Beneficial Conversion Feature | - | - | - | - | - | - | - | - | (681,072 | ) | ||||||||||||||||||||||||||
Issuance of Convertible Bonds | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Appropriate of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance at December 31, 2009 | 4,579,839 | 4,580 | 5,323,972 | 95,418 | 95 | 132,662 | 26,769,313 | 26,769 | 22,513,732 | |||||||||||||||||||||||||||
Balance at January 1, 2010 | 4,579,839 | 4,580 | 5,323,972 | 95,418 | 95 | 132,662 | 26,769,313 | 26,769 | 22,513,732 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance at March 31, 2010 | 4,579,839 | 4,580 | 5,323,972 | 95,418 | 95 | 132,662 | 26,769,313 | 26,769 | 22,513,732 |
See Accompanying Notes to Financial Statements and Accountant’s Report
9
Sino Gas International Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
As of March 31, 2010 and December 31, 2009
(Stated in US Dollars)
Common Stock | ||||||||||||||||||||||||||||||||||||
Additional Paid in Capital-Warrants Series: A,B,J,C,D | Additional Paid in Capital-Warrants Series: E,G | Additional Paid in Capital-Warrants Series: F,R | Additional Paid in Capital-Convertible Bonds Detachable Warrants | Additional Paid in Capital-Beneficial Conversion Feature | Statutory Reserve | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||
Balance at January 1, 2009 | 311,110 | 47,946 | 107,652 | - | 7,002,292 | 3,956,728 | 10,069,896 | 7,676,844 | 57,855,350 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | 4,047,584 | - | 4,047,584 | |||||||||||||||||||||||||||
Issuance of 2007 Make Good Common Stock | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Re-allocation of Beneficial Conversion Feature | - | - | - | - | - | - | 681,072 | - | - | |||||||||||||||||||||||||||
Issuance of Convertible Bonds | - | - | - | 223,367 | 1,092,522 | - | - | - | 1,315,889 | |||||||||||||||||||||||||||
Appropriate of Retained Earnings | - | - | - | - | - | 655,463 | (655,463 | ) | - | - | ||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | 49,039 | 49,039 | |||||||||||||||||||||||||||
Balance at December 31, 2009 | 311,110 | 47,946 | 107,652 | 223,367 | 8,094,814 | 4,612,191 | 14,143,089 | 7,725,883 | 63,267,862 | |||||||||||||||||||||||||||
Balance at January 1, 2010 | 311,110 | 47,946 | 107,652 | 223,367 | 8,094,814 | 4,612,191 | 14,143,089 | 7,725,883 | 63,267,862 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | (208,586 | ) | - | (208,586 | ) | |||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | 20,404 | 20,404 | |||||||||||||||||||||||||||
Balance at March 31, 2010 | 311,110 | 47,946 | 107,652 | 223,367 | 8,094,814 | 4,612,191 | 13,934,503 | 7,746,287 | 63,079,682 |
12/31/2009 | 3/31/2010 | Total | ||||||||||
Comprehensive Income | ||||||||||||
Net Income | $ | 4,047,584 | $ | (208,586 | ) | $ | 3,838,998 | |||||
Other Comprehensive Income | ||||||||||||
Foreign Currency Translation Adjustment | 49,039 | 20,404 | 69,443 | |||||||||
Total | $ | 4,096,623 | $ | (188,182 | ) | $ | 3,908,441 |
See Accompanying Notes to Financial Statements and Accountant’s Report
10
Sino Gas International Holdings, Inc.
Consolidated Statements of Cash Flows
For the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
3/31/2010 | 3/31/2009 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Income | $ | (208,586 | ) | $ | 345,637 | |||
Depreciation expense | 338,917 | 332,656 | ||||||
Amortization expense of intangible assets | 7,427 | 2,267 | ||||||
Amortization expense of convertible bonds discount | 680,356 | - | ||||||
Withdraw from restricted time deposits | 30,975 | 4,342 | ||||||
Decrease/(increase) in accounts and other receivables | (1,351,982 | ) | 57,335 | |||||
Decrease/(increase) in inventory | (159,177 | ) | 35,721 | |||||
Decrease/(increase) in prepaid expenses | 742,620 | (862,362 | ) | |||||
Increase/(decrease) in accounts and other payables | (3,005,004 | ) | 633,024 | |||||
Cash Sourced/(Used) in Operating Activities | (2,924,453 | ) | 548,620 | |||||
Cash Flows from Investing Activities | ||||||||
Increase of investment | (1,131 | ) | (6,481 | ) | ||||
Purchase of property, plant, and equipment | (1,590,308 | ) | (53,942 | ) | ||||
Purchase of other intangible asset | (158 | ) | (3,274 | ) | ||||
(Increase)/decrease in construction in progress | (14,924 | ) | (1,580,130 | ) | ||||
Cash Sourced/(Used) in Investing Activities | (1,606,521 | ) | (1,643,828 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Proceeds from bank loans | 2,195,293 | 2,749 | ||||||
Cash Sourced/(Used) in Financing Activities | 2,195,293 | 2,749 | ||||||
Increase/(decrease) in cash & cash equivalents for the year | (2,335,681 | ) | (1,092,459 | ) | ||||
Effect of currency translation on cash and cash equivalents | 20,404 | 44,351 | ||||||
Cash & cash equivalents at the beginning of year | 9,820,890 | 3,027,543 | ||||||
Cash & cash equivalents at the end of year | $ | 7,505,613 | $ | 1,979,435 | ||||
Supplementary cash flow information | ||||||||
Interest received | $ | 4,770 | $ | 1,850 | ||||
Interest paid | $ | 245,814 | $ | 41,452 | ||||
Income taxes paid | $ | 239,335 | $ | 158,115 |
11
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(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 natural gas distribution systems in 35 small and medium size cities and serving approximately 152,000 residential and seven industrial customers. The Company’s facilities include approximately 1040 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 110,000 cubic meters of natural gas.
The common stock of the Company is currently quoted on the National Association of Securities Dealers' Over-the-Counter Bulletin Board under the symbol “SGAS”.
Basis of Presentation and Organization
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (“PRC GAAP”) or in the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company’s subsidiaries to present them in conformity with US GAAP.
12
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) Method of Accounting
The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
(b) Use of estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.
(c) Economic and political risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to law and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
13
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
(d) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries (“the Group”). Significant inter-company transactions have been eliminated in consolidation. Investments in which the company has a 20 percent to 50 percent voting interest and where the company exercises significant influence over the investor are accounted for using the equity method.
The Company owned its subsidiaries soon after its inception and continued to acquire and own the equity interests throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of March 31, 2010.
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 206,000,000 | ||||||||
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 |
14
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
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 | ||||||||
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 5,000,000 | ||||||||
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 |
15
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
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 | ||||||||
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 |
16
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
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 Weiye Gas Co., Ltd. | PRC | 7/2/2009 | 100 | 100 | RMB 1,000,000 | ||||||||
Hebei Weiye Gas Co., Ltd. | PRC | 12/18/2009 | 100 | 100 | RMB 75,439,270 | ||||||||
Gaocheng Weiye Gas Co., Ltd. | PRC | 1/27/2010 | 100 | 100 | RMB 200,000 |
(e) Cash and Cash Equivalents
The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.
(f) Accounts and Other Receivable
Accounts and other receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company extends unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable.
(g) Advances to Suppliers
Advances to suppliers represent the cash paid in advance for purchasing raw materials. The advances to suppliers are interest free and unsecured.
(h) Investments in Equity Securities
The equity method of accounting was used to account for the Company’s investment in equity securities for which the Company did not have controlling equity interest. Non-controlling equity interest for the Company is typically a position of less than 50% beneficial ownership.
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.
17
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. (“Xiangke Oil Gas”) 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.
Qujing Gas Co., Ltd. (“Qujing Gas”) 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 | ||||||
P.R.C | Sino-foreign equity joint venture | RMB 20,000,000 | 40 | % | Distribution of natural gas and gas pipeline construction | |||||
P.R.C | Equity joint venture | RMB 30,000,000 | 39 | % | Distribution of natural gas and gas pipeline construction |
The Company did not record any goodwill when it acquired its equity position in Xiangke Oil Gas and Qujing Gas. 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 March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
(j) Property, Plant and Equipment
Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and impairment loss. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment are as follows:
Assets 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 are stated at cost less accumulated amortization and impairment loss. Amortization is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:
Asset Class | Estimated Useful Life | |
Land use rights | 20 - 50 years | |
Franchises | 30 years | |
Accounting software | 3 years |
For goodwill, impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate goodwill carrying values exceed estimated reporting unit fair values. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Based on the impairment tests performed, there was no impairment of goodwill for the three months ended March 31, 2010.
19
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(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.
(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.
3/31/2010 | 12/31/2009 | |||||||
Years end RMB : US$ exchange rate | 6.8361 | 6.8372 | ||||||
Average yearly RMB : US$ exchange rate | 6.8360 | 6.8409 |
20
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
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 Company’s share of post-acquisition results of its investment in equity securities for the year.
(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.
21
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
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 | 25.0 | % | |||
i. GAS Investment China Co., Ltd. | British Virgin Islands | 0.00 | % | |||
ii. Sino Gas Construction, Ltd. | British Virgin Islands | 0.00 | % | |||
iii. Sino Gas Investment Development, Ltd. | British Virgin Islands | 0.00 | % |
· | Effective January 1, 2008, PRC government implements a new 25% tax rate for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday, which is defined as "two-year exemption followed by three-year half exemption" hitherto enjoyed by tax payers. As a result of the new tax law, standard 15% tax rate preference terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized. |
· | 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 three months ended March 31, 2010. |
22
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
(s) Advertising
The Company 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. |
(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.
23
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
(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 June 2009, FASB issued FASB Statement No. 166, Accounting for Transfers for Financial Assets (FASB ASC 860 Transfers and Servicing) and FASB Statement No. 167 (FASB ASC 810 Consolidation), a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation).
Statement 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FASB ASC 860 Transfers and Servicing), 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. Statement No. 166 (FASB ASC 860 Transfers and Servicing) must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date. The Company is still evaluating the impact of the above pronouncement.
Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation), 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. Statement No. 167 (FASB ASC 810 Consolidation) shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is still evaluating the impact of the above pronouncement.
24
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
On June 30, 2009, FASB issued FASB Statement No. 168, Accounting Standards Codification™ ( FASB ASC 105 Generally Accepted Accounting Principles) a replacement of FASB Statement No. 162 the Hierarchy of Generally Accepted Accounting Principles. On the effective date of this standard, FASB Accounting Standards Codification™ (ASC) became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. If an accounting change results from the application of this guidance, an entity should disclose the nature and reason for the change in accounting principle in their financial statements. This new standard flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC). Exceptions include all rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants, and certain grandfathered guidance having an effective date before March 15, 1992. Statement No. 168 is the final standard that will be issued by FASB in that form. There will no longer be, for example, accounting standards in the form of statements, staff positions, Emerging Issues Task Force (EITF) abstracts, or AICPA Accounting Statements of Position.
The Company is currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on its consolidated results of operations and financial condition.
(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.
25
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
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.
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.
26
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
Accounts Receivable | ||||||||
3/31/2010 | 12/31/2009 | |||||||
Gross accounts receivable | $ | 6,560,770 | $ | 5,087,484 | ||||
Allowance for bad debt | (65,607 | ) | (50,875 | ) | ||||
Net accounts receivable | $ | 6,495,162 | $ | 5,036,609 |
Allowance for Bad Debt | ||||||||
3/31/2010 | 12/31/2009 | |||||||
Beginning balance | $ | 50,875 | $ | 35,794 | ||||
Addition | 4,732 | 15,081 | ||||||
Reversal | - | - | ||||||
Ending balance | $ | 65,607 | $ | 50,875 |
Accounts Receivable Aging Report | ||||||||
3/31/2010 | 12/31/2009 | |||||||
<30 Days | $ | 3,229,237 | $ | 3,639,712 | ||||
30-60 Days | 874,194 | 276,004 | ||||||
60-90 Days | 1,589,588 | 118,704 | ||||||
90-180 Days | 236,619 | 422,179 | ||||||
180-360 Days | 375,751 | 446,515 | ||||||
>360 Days | 189,772 | 133,496 | ||||||
Total | $ | 6,495,162 | $ | 5,036,609 |
The following are the ten most significant accounts receivable at March 31, 2010:
Hebei Zhonggang Steel, Ltd. | $ | 676,355 | ||
Baishan Huixin Real Estate Co., Ltd | 614,192 | |||
Beijing Huicheng Construction Co., Ltd. | 435,542 | |||
Baishan Xingda Real Estate Co., Ltd. | 417,177 | |||
Baishan Yongsheng Real Estate Co., Ltd. | 349,742 | |||
Baishan Lixia Real Estate Co., Ltd. | 319,636 | |||
Jiangsu Zhongzheng Zhiye Ltd. | 265,343 | |||
Shengcheng Real Estate Co., Ltd. | 210,464 | |||
Hebei Haitian Real Estate Co., Ltd. | 200,590 | |||
Jiangsu Souyi Zhiye Ltd | 192,796 | |||
Total | $ | 3,681,837 |
27
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
5. | INVESTMENT |
Ref. | 3/31/2010 | 12/31/2009 | ||||||||
(1) | Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. | $ | 5,291,706 | $ | 5,290,855 | |||||
(2) | Qujing Gas Co., Ltd. | 1,711,502 | 1,711,227 | |||||||
(3) | China Construction Bank | 29,257 | 29,251 | |||||||
Total | $ | 7,032,465 | $ | 7,031,333 |
(1). | The Company invested $1,642,152 (RMB 13,465,648) on Xiangke Oil Gas in the acquisition of 40% equity position. The $5,291,706 investment consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ prior years operation results. |
The following tabulation presented the condensed balance sheets and statements of income of Xiangke Oil Gas as of and for the year ended December 31, 2009.
Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. | |||||||||
Condensed Balance Sheets | Condensed Statements of Income | ||||||||
12/31/2009 | 12/31/2009 | ||||||||
Assets | |||||||||
Current Assets | $ | 6,135,845 | Revenue | $ | 7,379,777 | ||||
Non-Current Assets | 19,672,751 | Cost of revenue | (3,819,923 | ) | |||||
Total Assets | 25,808,596 | Gross profit | 3,559,854 | ||||||
Liabilities | Operating expenses | (1,951,894 | ) | ||||||
Current Liabilities | 11,267,927 | Other expenses | (47,251 | ) | |||||
Total Liabilities | 11,267,927 | Earnings before tax | 1,560,709 | ||||||
Net Assets | 14,540,669 | Income tax | (248,259 | ) | |||||
Total Liabilities & Net Assets | $ | 25,808,596 | Net income | $ | 1,312,450 |
(2). | Along with two local partners in Qujing city, the second largest city in Yunnan province of P.R.C, the Company established Qujing Gas Co., Ltd. with registered capital of $4,387,761 (RMB 30,000,000). The Company’s investment of $1,711,502 (RMB 11,700,000) presented 39% equity ownership of Qujing Gas. Since Qujing Gas has not finished the required registration procedures with local government, there was no business activity during the first quarter of 2010. |
(3). | The investment of $29,257 (RMB 200,000) with China Construction Bank was a long-term investment fund. |
28
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
6. | PROPERTY, PLANT AND EQUIPMENT |
Property, Plant, and Equipment consisted of the followings at March 31, 2010 and December 31, 2009:
3/31/2010 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 39,208,530 | $ | 2,235,813 | $ | 36,972,717 | ||||||
Motor Vehicles | 5,775,811 | 1,605,477 | 4,170,334 | |||||||||
Machinery & Equipment | 1,482,838 | 290,088 | 1,192,750 | |||||||||
Buildings | 6,902,741 | 376,810 | 6,525,931 | |||||||||
Leasehold Improvements | 81,557 | 61,992 | 19,565 | |||||||||
Office Equipment | 240,155 | 98,050 | 142,105 | |||||||||
Total | $ | 53,691,632 | $ | 4,668,230 | $ | 49,023,402 |
12/31/2009 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 37,329,888 | $ | 2,069,545 | $ | 35,260,342 | ||||||
Motor Vehicles | 5,775,903 | 1,506,012 | 4,269,890 | |||||||||
Machinery & Equipment | 1,482,599 | 267,076 | 1,215,524 | |||||||||
Buildings | 7,194,148 | 335,461 | 6,858,686 | |||||||||
Leasehold Improvements | 80,113 | 59,409 | 20,704 | |||||||||
Office Equipment | 238,673 | 91,809 | 146,863 | |||||||||
Total | $ | 52,101,324 | $ | 4,329,313 | $ | 47,772,011 |
Gas pipelines purchased prior to 2008 were depreciated over their 25 years useful lives. Starting from 2008, the Company purchased new quality of pipelines under 50 years warranty. The new gas pipelines were depreciated over their 50 years useful lives.
Depreciation expenses included in the consolidated statements of income for the three months and twelve months ended March 31, 2010 and December 31, 2009 were $338,917 and $1,179,860 respectively.
29
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
7. | INTANGIBLE ASSETS |
Intangible assets consisted of the following at March 31, 2010 and December 31, 2009:
3/31/2010 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use Rights | $ | 543,204 | $ | 58,903 | $ | 484,301 | ||||||
Franchises | 402,276 | 372,105 | 30,171 | |||||||||
Accounting Software | 38,863 | 20,880 | 17,983 | |||||||||
Goodwill | 1,677,975 | - | 1,677,975 | |||||||||
$ | 2,662,318 | $ | 451,888 | $ | 2,210,430 |
12/31/2009 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use rights | $ | 543,117 | $ | 52,318 | $ | 490,799 | ||||||
Franchises | 402,211 | 371,740 | 30,471 | |||||||||
Accounting Software | 38,858 | 20,404 | 18,454 | |||||||||
Goodwill | 1,677,975 | - | 1,677,975 | |||||||||
$ | 2,662,160 | $ | 444,462 | $ | 2,217,699 |
The Company operated 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 were the rights to develop sites in Anping and Jinzhou in China. They were stated at cost less accumulated amortization.
Goodwill was related to the acquisitions of Beijing Chenguang Gas, Yuxian Weiye Gas and Guannan Weiye Gas. Management annually reviewed 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.
30
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
8. | LOANS |
a. SHORT-TERM BANK LOANS
Name of Bank | Due Date | Interest Rate | 3/31/2010 | 12/31/2009 | ||||||||||
Bank of Dalian - Beijing Branch | 12/24/2010 | 5.31 | % | $ | 2,925,174 | $ | 2,925,174 | |||||||
Total | $ | 2,925,174 | $ | 2,925,174 |
The loans provided by Bank of Dalian were secured by Beijing Chenguang Gas, Ltd.’s registered capital of $2,925,174 (RMB 20,000,000), CEO Mr. Liu Yuchuan and COO Mr. Zhou Zhicheng’s properties, which have been appraised at total fair market value of $933,254 (RMB 6,380,854).
Interest expenses for the short-term bank loans were $38,832 for the three months ended March 31, 2010.
b. LONG-TERM BANK LOANS
Name of Bank | Due Date | Interest Rate | 3/31/2010 | 12/31/2009 | ||||||||||
China Construction Bank - Zhongguancun Branch | 12/14/2011 | 5.94 | % | $ | 4,388,466 | $ | 4,387,761 | |||||||
China Development Bank - Beijing Branch | 12/24/2012 | 5.40 | % | 2,194,234 | 2,193,880 | |||||||||
China Development Bank - Beijing Branch | 3/22/2013 | 5.40 | % | 2,194,234 | - | |||||||||
Total | $ | 8,776,934 | $ | 6,581,641 |
The Company obtained the loans from Construction Bank of China and China Development Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd (“Guarantor”). Guarantor guaranteed to the Banks the entire principal and accrued interest. The Company pledged all Beijing Zhongran Weiye Gas’ subsidiaries to the guarantor and was required to pay 2% of the outstanding loans as financial service to the guarantor per annum. Because the Company lacked the favorable credit history to directly establish credit facility with the banks, the pursuance of a credit collateralization from guarantor was a financing solution of choice.
Interest expenses for the long-term bank loans were $84,794 for the three months ended March 31, 2010.
31
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
9. | OTHER PAYABLES |
Other payables consisted of the following at March 31, 2010 and December 31, 2009:
Ref. | 3/31/2010 | 12/31/2009 | ||||||||
(1) | Amount due to Employees | $ | 545,142 | $ | 1,219,131 | |||||
(2) | Tax Payable | 333,645 | 695,890 | |||||||
(3) | Payables to Subcontractors | 2,024,905 | 2,247,036 | |||||||
(4) | Payable outstanding for the acquisition of Baishan Weiye Gas | 1,986,234 | 2,177,514 | |||||||
Total | $ | 4,889,926 | $ | 6,339,571 |
1. | Amounts due to employees included accrued payroll, welfare payable, continued education training program cost and individual travel advance. They were all unsecured, interest free, and have no fixed repayment terms. |
2. | The tax payable consisted of value added tax, sales tax, income tax and local tax payables. |
3. | All the payables to subcontractors were unbilled liabilities. |
4. | The outstanding payment was related to the acquisition of Baishan Gas Co., Ltd.’s assets on July 9, 2007. |
32
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
10. | CONVERTIBLE BONDS AND BOND WARRANTS |
a. $5,349,982 Convertible Bond with 3,451,601 Detachable Warrants
On November 30, 2009, the Company completed a financing transaction with certain purchasers issuing (i) $5,349,982 of the 8% senior secured convertible notes (the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 8,629,003 shares of the Company’s common stock and (ii) 3,451,601 warrants to purchase an aggregate of 3,451,601 shares of the Company’s common stock, which will expire in November 30, 2012 (both the “Bonds” and “Warrants”)
b. $692,984 Convertible Bond with 447,086 Detachable Warrants
On December 23, 2009, the Company completed a financing transaction with certain purchasers issuing (i) $692,984 of the 8% senior secured convertible notes (the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 1,117,716 shares of the Company’s common stock and (ii) 447,086 warrants to purchase an aggregate of 447,086 shares of the Company’s common stock, which will expire in December 23, 2012 (both the “Bonds” and “Warrants”)
Pledge Agreement and Guaranty
The notes are secured by the pledge of 100% of the shares of the Company’s wholly owned subsidiary Gas Investment China Co., Ltd. and a guaranty from Mr. Liu Yuchan, the chairman of the board of directors and CEO of the Company.
Event of Default
Upon an event of default in any payment of interest or principal of the bonds, the principal, accrued and unpaid interest, and any additional amounts owing in respect of the bonds, will be due and payable at the option of the bondholders. In addition, the bondholders have the right to convert these notes and then all accrued and unpaid interest at any time.
Redemption
Bondholders may require the Company to repurchase the notes in whole or in part at an amount equal to 100% of the aggregate principal amount of the notes plus a premium such that the total cash yield to maturity of the note is 15% per annum, upon the occurrence of any change of control transaction or if the Company’s common stock ceases to be quoted for trading or listed for trading on either the OTC Bulletin Board or a subsequent market and such delisting is not cured within 30 days.
33
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
The Company has the right to redeem either 50% or 100% of the outstanding principal amount of these notes on or after one year from the issuance days.
The convertible bonds payable, net consisted of the followings:
3/31/2010 | ||||||||||||||
Ref. | 5.3M Bonds | 692K Bonds | Total | |||||||||||
(1) | Convertible Bonds Payable - principal | $ | 5,349,982 | $ | 692,984 | $ | 6,042,966 | |||||||
(2) | Less: Interest Discount - Warrants | (178,950 | ) | (44,417 | ) | (223,367 | ) | |||||||
(3) | Less: Interest Discount - Beneficial Conversion Feature | (869,270 | ) | (223,252 | ) | (1,092,522 | ) | |||||||
(4) | Less: Bond Discount - Issuance Cost | (503,766 | ) | (91,382 | ) | (595,148 | ) | |||||||
(5) | Accretion of Interest Discount - Warrants | 15,386 | 2,950 | 18,336 | ||||||||||
(6) | Accretion of Interest Discount - Beneficial Conversion Feature | 579,513 | 124,029 | 703,542 | ||||||||||
(7) | Accretion of Bond Discount - Issuance Cost | 43,314 | 6,070 | 49,384 | ||||||||||
(8) | Accretion of Interest Discount - Redemption | 96,599 | 9,667 | 106,266 | ||||||||||
Convertible Bonds Payable, net | $ | 4,532,808 | $ | 476,649 | $ | 5,009,457 |
12/31/2009 | ||||||||||||||
Ref. | 5.3M Bonds | 692K Bonds | Total | |||||||||||
(1) | Convertible Bonds Payable - principal | $ | 5,349,982 | $ | 692,984 | $ | 6,042,966 | |||||||
(2) | Less: Interest Discount - Warrants | (178,950 | ) | (44,417 | ) | (223,367 | ) | |||||||
(3) | Less: Interest Discount - Beneficial Conversion Feature | (869,270 | ) | (223,252 | ) | (1,092,522 | ) | |||||||
(4) | Less: Bond Discount - Issuance Cost | (503,766 | ) | (91,382 | ) | (595,148 | ) | |||||||
(5) | Accretion of Interest Discount - Warrants | 3,804 | 236 | 4,040 | ||||||||||
(6) | Accretion of Interest Discount - Beneficial Conversion Feature | 144,878 | 12,403 | 157,281 | ||||||||||
(7) | Accretion of Bond Discount - Issuance Cost | 10,709 | 485 | 11,194 | ||||||||||
(8) | Accretion of Interest Discount - Redemption | 23,884 | 773 | 24,656 | ||||||||||
Convertible Bonds Payable, net | $ | 3,981,271 | $ | 347,830 | $ | 4,329,101 |
(1). | The principal amounts listed above represent the face amount of the convertible notes. |
(2). | The proceeds were allocated between the convertible bonds and warrants based on their relative fair value. For more information pertaining the calculation of fair value of convertible bonds detachable warrants, see Note 11. |
(3). | Since the conversion price of bonds is $0.62, which was lower than the fair market value of common stock at issuance days. Therefore, beneficial conversion feature was applied. The Company has determined the allocation of beneficial conversion feature. |
34
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
(4). | The issuance cost consisted of commission to placement agent and legal expense. |
(5). | The interest discount of warrants was amortized over the whole period applying effective annual interest rate. |
(6). | The bonds were convertible at the option of the holders into shares of common stock. However, Rule 144 minimum of six months holding period requirement for a resale of securities was required, therefore, the beneficial conversion feature was amortized over six months period. |
(7). | The debt issuance cost was amortized over 36 months period applying effective annual interest rate. |
(8). | Based on 15% per annum redemption rate, the redemption values were determined to be $1,123,496 and $145,527 for the $5,349,982 and $692,984 convertible bonds respectively. |
Included in interest expense of $924,841, was $120,859 convertible bonds coupon expense and $680,356 presenting 73.56% non-cash flow amortization expense of convertible bonds interest discount.
35
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
11. | 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 are 26,769,313 shares of common stock issued and outstanding at March 31, 2010. 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.
36
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(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 March 31, 2010, 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.
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.
37
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
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.
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 |
38
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
The following table depicts the issued and outstanding shares of Common Stock, Preferred Stock, and Warrants at March 31, 2010.
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 |
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 | ||||||||
IR CCG Elite’s Option | $ | 3.00 | 48 Months | 11/1/2010 | 100,000 | $ | 0.92 | ||||||||
5.3 M Convertible Bonds Detachable Warrants | $ | 0.744 | 36 Months | 11/30/2012 | 3,451,601 | $ | 0.05 | ||||||||
692K Convertible Bonds Detachable Warrants | $ | 0.744 | 36 Months | 12/23/2012 | 447,086 | $ | 0.11 |
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 | CCG Elite’s Option | 5.3M CB Warrants | 692K CB Warrants | |||||||||||||||||||||||||
Weighted-average fair value of warrants | $ | 0.70 | $ | 0.81 | $ | 0.20 | $ | 0.44 | $ | 0.20 | $ | 0.92 | $ | 0.05 | $ | 0.11 | ||||||||||||||||
Strike price | $ | 3.84 | $ | 3.38 | $ | 4.84 | $ | 3.84 | $ | 4.84 | $ | 3.00 | $ | 0.744 | $ | 0.744 | ||||||||||||||||
Risk-free interest rate | 4.18 | % | 4.18 | % | 4.18 | % | 4.18 | % | 4.18 | % | 4.18 | % | 1.12 | % | 1.51 | % | ||||||||||||||||
Expected volatility | 40.00 | % | 40.00 | % | 40.00 | % | 40.00 | % | 40.00 | % | 40.00 | % | 12.84 | % | 12.84 | % | ||||||||||||||||
Years to maturity | 5.00 | 5.00 | 3.00 | 4.00 | 3.00 | 4.00 | 3.00 | 3.00 |
Since there is no net cash settlement arrangement for the warrants, they should be classified as equity instrument in accordance with EITF 00-19. Thus, subsequent changes in fair value should not be recognized.
39
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(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 March 31, 2010:
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 | 23,848,122 | 40 | % | |||||||||||||||||||||||
Beneficial Conversion Feature | - | - | - | - | - | - | 8,094,814 | - | ||||||||||||||||||||||||
4,579,839 | $ | 4,580 | 95,418 | $ | 95 | 26,769,313 | $ | 26,769 | 36,755,255 | 100 | % |
40
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(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 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 has refunded $229,527, (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 three-month and twelve-month periods ended March 31, 2010 and December 31, 2009 respectively.
3/31/2010 | 12/31/2009 | |||||||
Provision for Income Tax - PRC Subsidiaries | $ | 239,334 | $ | 1,324,184 | ||||
Tax Exemption - Granted by PRC Government | - | (229,527 | ) | |||||
Income Tax | $ | 239,334 | $ | 1,094,657 |
Income before taxes and provision for taxes consisted of the following for the three-month periods ended March 31, 2010 and 2009:-
3/31/2010 | 3/31/2009 | |||||||
Income (loss) before taxes: | ||||||||
US | $ | (954,050 | ) | $ | (55,318 | ) | ||
BVI | (118,054 | ) | (12,363 | ) | ||||
PRC | 1,102,854 | 571,472 | ||||||
Total income before tax | 30,750 | 503,791 | ||||||
Provision for taxes | ||||||||
US Federal | - | - | ||||||
State | - | - | ||||||
PRC | 239,334 | 158,155 | ||||||
Total provision for taxes | $ | 239,334 | $ | 158,155 | ||||
Effective tax rate | 21.70 | % | 27.69 | % |
41
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
The differences between the U.S. federal statutory income tax rates and the Company's effective tax rate for the three-month periods ended March 31, 2010 and 2009 are shown in the following table:
3/31/2010 | 3/31/2009 | |||||||
US statutory tax rate | 34.00 | % | 34.00 | % | ||||
Lower rates in the PRC | -9.00 | % | -9.00 | % | ||||
Tax holiday | -10.00 | % | -10.00 | % | ||||
Accrual and reconciling items | 6.70 | % | 12.68 | % | ||||
Effective tax rate | 21.70 | % | 27.68 | % |
42
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
13. | 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 March 31, 2010
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 12,941,833 | $ | 6,467,390 | $ | 1,712,289 | $ | 21,121,512 | ||||||||
Non-Current Assets | 23,870,862 | 47,767,755 | - | 71,638,616 | ||||||||||||
Total Assets | 36,812,695 | 54,235,145 | 1,712,289 | 92,760,129 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 1,105,499 | 14,628,403 | 160,154 | 15,894,056 | ||||||||||||
Non-current Liabilities | 968,663 | 12,817,728 | - | 13,786,391 | ||||||||||||
Total Liabilities | 2,074,162 | 27,446,131 | 160,154 | 29,680,447 | ||||||||||||
Net Assets | 34,738,533 | 26,789,014 | 1,552,135 | 63,079,682 | ||||||||||||
Liabilities & Equities | $ | 36,812,695 | $ | 54,235,145 | $ | 1,712,289 | $ | 92,760,129 |
43
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
Operation Result Segment Report
For the three months ended March 31, 2010
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Sales Revenue | $ | 6,157,019 | $ | 3,076,832 | $ | (2,276,190 | ) | $ | 6,957,661 | |||||||
Cost of Revenue | (6,007,746 | ) | (1,101,592 | ) | 2,276,190 | (4,833,148 | ) | |||||||||
Gross Profit | 149,273 | 1,975,240 | - | 2,124,513 | ||||||||||||
Operating Expense | (63,706 | ) | (842,989 | ) | (271,079 | ) | (1,177,774 | ) | ||||||||
Operating Income/(Loss) | 85,567 | 1,132,251 | (271,079 | ) | 946,739 | |||||||||||
Other Income/(Loss) | (64,359 | ) | (50,605 | ) | (801,025 | ) | (915,989 | ) | ||||||||
Earnings before tax | 21,207 | 1,081,647 | (1,072,104 | ) | 30,750 | |||||||||||
Income tax | (4,602 | ) | (234,732 | ) | - | (239,334 | ) | |||||||||
Net Income | $ | 16,605 | $ | 846,915 | $ | (1,072,104 | ) | $ | (208,586 | ) |
Financial Position Segment Report
As of December 31, 2009
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 12,361,628 | $ | 8,090,196 | $ | 2,247,402 | $ | 22,699,226 | ||||||||
Non-Current Assets | 27,839,832 | 42,538,606 | - | 70,378,438 | ||||||||||||
Total Assets | 40,201,460 | 50,628,802 | 2,247,402 | 93,077,664 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 1,695,239 | 16,762,395 | 441,426 | 18,899,060 | ||||||||||||
Non-current Liabilities | 1,002,095 | 9,908,647 | - | 10,910,742 | ||||||||||||
Total Liabilities | 2,697,334 | 26,671,042 | 441,426 | 29,809,802 | ||||||||||||
Net Assets | 37,504,126 | 23,957,760 | 1,805,976 | 63,267,862 | ||||||||||||
Liabilities & Equities | $ | 40,201,460 | $ | 50,628,802 | $ | 2,247,402 | $ | 93,077,664 |
44
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
Income Statement Segment Report
For the three months ended March 31, 2009
Gas Distribution | Gas pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Sales Revenue | $ | 4,903,116 | $ | 1,223,736 | $ | (1,089,160 | ) | $ | 5,037,692 | |||||||
Cost of Revenue | (4,732,385 | ) | (129,987 | ) | 1,089,160 | (3,773,212 | ) | |||||||||
Gross Profit | 170,731 | 1,093,749 | - | 1,264,480 | ||||||||||||
Operating Expense | (87,393 | ) | (559,866 | ) | (68,259 | ) | (715,519 | ) | ||||||||
Operating Income/(Loss) | 83,338 | |||||||||||||||
Other Income / Expense | (6,177 | ) | (39,571 | ) | 578 | (45,170 | ) | |||||||||
Earnings before tax | 77,161 | 494,311 | (67,681 | ) | 503,791 | |||||||||||
Income tax | (21,354 | ) | (136,800 | ) | - | (158,155 | ) | |||||||||
Net Income | $ | 55,807 | $ | 357,511 | $ | (67,681 | ) | $ | 345,637 |
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 natural 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.
45
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
14. | EARNINGS PER SHARE |
Components of basic and diluted earnings per share were as follows:
Ref | 3/31/2010 | 3/31/2009 | ||||||||||
Net Income | $ | (208,586 | ) | $ | 345,637 | |||||||
Preferred Dividends | - | - | ||||||||||
Constructive Preferred Dividends | - | - | ||||||||||
Income Available to Common Stockholders for Basic EPS | $ | (208,586 | ) | $ | 345,637 | |||||||
Interest Expense for Convertible Bonds, net of tax | - | - | ||||||||||
Income Available to Common Stockholders for Diluted EPS | $ | (208,586 | ) | $ | 345,637 | |||||||
Original Shares | 26,769,313 | 25,269,313 | ||||||||||
Addition to Common Stock | - | - | ||||||||||
Basic Weighted Average Shares Outstanding | 26,769,313 | 25,269,313 | ||||||||||
Potentially Dilutive Securities: | ||||||||||||
Addition to Common Stock from Conversion of Preferred Stock B | (1) | - | 4,579,839 | |||||||||
Addition to Common Stock from Conversion of Preferred Stock B-1 | (2) | - | 95,418 | |||||||||
Addition to Common Stock from Conversion of Convertible Bonds | (3) | - | N/A | |||||||||
Addition to Common Stock from Exercise of Warrants | (4) | - | - | |||||||||
Diluted Weighted Average Shares Outstanding | 26,769,313 | 29,944,570 | ||||||||||
Earnings Per Share | ||||||||||||
Basic | $ | (0.01 | ) | $ | 0.01 | |||||||
Diluted | $ | (0.01 | ) | $ | 0.01 | |||||||
Weighted Average Shares Outstanding | ||||||||||||
Basic | 26,769,313 | 25,269,313 | ||||||||||
Diluted | 26,769,313 | 29,944,570 |
(1). | The application of conversions’ of preferred stock B to common stock was anti-dilutive for the three-month periods ended March 31, 2010. |
(2). | The application of conversions of preferred stock B-1 to common stock was anti-dilutive for the three-month periods ended March 31, 2010. |
46
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of March 31, 2010 and December 31, 2009
And for the three-month periods ended March 31, 2010 and 2009
(Stated in US Dollars)
(3). | The average price of the Company’s common stock was $0.89 for the three-month periods ended March 31, 2010, which was higher than the conversion price $0.62 of the convertible bonds; however the conversion of the convertible bonds to common stock would have been anti-dilutive; therefore, theyhave been excluded from diluted earnings per share. |
(4). | The exercise of warrants to common stock was anti-dilutive for the three-month periods ended March 31, 2010 and 2009. |
15. | CONTINGENT LIABILITIES |
a. | 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 of 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 as compensation for 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.
b. | On September 14, 2009, the IRS of United States charged the Company $270,000 penalty for the failure to file timely Form 5471 on December 31, 2007 tax return. However, the Company did not believe it should be subject to this liability because of the fact that the Company was only a holding company. It did not have any tax liability for the year 2007. The Company appealed the penalty by filing protest letter to IRS office on February 12, 2010. As of April 30, 2010, the Company has not received any reply from IRS. |
47
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, who aim to promote the use of natural gas to improve local residents’ quality of life.
We have experienced high growth of our connection activities since inception of our business due to the Chinese real estate boom in the past years. However, in 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, has been affected in 2008. Starting from 2008, in response to a slowdown in its economy in that year, the Chinese government implemented a wide range of initiatives that prioritized the boosting of the overall economy。 The key components of the central government spending are infrastructure and clean energy. Those help the continuity of increase of both Connection fee and Gas sale in our business. We saw signs of recovery of the real estate market in China at the beginning of 2009, and experienced the increased activities in the 3rd quarter of 4th quarter of 2009. Starting in April 2010, the Chinese government issued new policies to curb the precipitous rise of housing prices in some cities and satisfy people's basic needs for housing.
Even with the up and down of the Chinese real estate market in the past two years, we believe that the future growth trend of the real estate market will not change because of the continuous urbanization in China. Moreover, Chinese government continues to strongly support the use of clean energy, particularly natural gas at both the national and local government levels.
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 year. In 2009, GDP growth rebounded to 7.9 per cent in the second quarter from 6.1 percent in the first, which represented a 10-year low. In the third quarter and fourth quarter, China’s economic growth accelerated to 9.1 per cent and 10.7 per cent respectively. China GDP grows by 8.7 percent in 2009, exceeding the target 8%. The GDP growth is expected to maintain strong in 2010.
Our gas users are composed of industrial and residential users. Gas sales from residential users are much less affected by economic and industrial factors and would maintain stable growth in the future, due to the increasing pool of our residential customers. Gas sales from industrial users are subject to the operating performance of the end industrial user. As we develop into more cities, we expect to add more industrial users in the coming year if capital requirements are available.
Material Opportunities
The gas distribution market is quite fragmented in the small (population less than 300,000)-to-medium (population between 300,000 to 1,000,000) sized cities. We are exploring potential project targets. The size of the projects varies from small cities to medium-sized cities. For small city markets, many of them are still untapped or undeveloped. The development of these markets is generally considered major growth components of the Company.
48
Regarding medium-sized or large cities, most of them have already been developed by large distributors or are still operated by state-owned companies. Acquisition opportunities exist for those still run by state-owned companies, as the central government encourages suppliers to turn them into privately-owned companies. The acquisition of these markets would have material impact on the Company, increasing the Company’s assets and revenues significantly. The Company intends to raise money for accretive acquisitions when they become available.
Material Challenges
There are vast number of small-to-medium sized cities left undeveloped, but the competition is -growing, as there are many small new players in the market attracted by the profitability and growth potential of the business. Meanwhile, from time to time, we are also facing competitions from stronger competitors, as large city markets are getting saturated and our competitors are beginning to expand into smaller cities.
We are facing limited opportunities in developing into first-tier cities in China, as most of them have already been taken by other large gas distributors, such as Xin’ao Gas Co. Ltd (largest in China) in the past decade.
Still, potential users in small and medium-sized cities need to be educated by the benefits of natural gas. It takes some time for them to get to know how natural gas can improve the quality of life. This is especially true for new markets, where there is no use of natural gas. Small cities tend to be more reluctant for use of new energies than large cities where residents depend more on coal, rather than natural gas.
China’s energy market is highly regulated by the government, with regard to purchase price and sale price of natural gas. Whenever there is an adjustment to purchase price by the government, gas distributors would increase the sale price correspondingly, subject to a public hearing and government approval. The increase of natural gas prices in China is lagging behind that in the international markets. The Chinese government has seldom adjusted natural gas and we cannot rule out the possibilities of an increase of natural gas prices by the government in the future. Even though we can adjust the sale price accordingly after the increase of purchase price, passing the increase to end users. However, it would make natural gas more expensive, as compared to other alternative energies. Thus this increase of price will deter our business development.
Risks in Short-Term and Long-Term 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 the new home buyers. If the real estate market turns downward, the demands for new homes would decrease, resulting in fewer natural gas connections, and thus negatively impacting our business.
To reduce the Company dependence on connection fees, the Company is looking at opportunities to diversify its business by expanding into related areas, such as pipeline and gas station business. However, we do not expect to develop into those areas in large scale any time soon and it may take some time for those businesses to become our major business.
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.
49
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
During the three months ended March 31, 2010, net revenues were $6,957,661, representing an increase of 38.11 % from the same period of 2009. Gross profit for the three months ended March 31, 2010 was $2,124,513, representing an increase of 68.01% from the same period of 2009. Our operating income for the three months ended March 31, 2010 was $946,739, representing an increase of 72.46% from the same period of 2009.
For the 3 months ended March 31, | ||||||||||||
2010 | 2009 | Change | ||||||||||
US$ | US$% | |||||||||||
Net Revenues | 6,957,661 | 5,037,692 | 38.11 | % | ||||||||
Gross Profit | 2,124,513 | 1,264,480 | 68.01 | % | ||||||||
Operating Income | 946,739 | 548,961 | 72.46 | % | ||||||||
Net Income | -208,586 | 345,637 | ||||||||||
Gross Margin | 30.53 | % | 25.10 | % | 21.65 | % | ||||||
Net Margin | -3.00 | % | 6.86 | % |
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 March 31, 2010 were $6,957,661, compared to $5,037,692 for the same period in 2009, representing an increase of 38.11%. The increase was due to the increase of both gas sales and connection fees. During this period, we connected 7,204 new residential households to our gas distribution network, resulting in total connection fees of $2,745,415. Gas sales during the same period were $4,212,246. In comparison, we connected 2,878 new residential households to our gas distribution network for the same period in 2009, resulting in total connection fees of $1,223,736. Gas sales during the period in 2009 were $3,813,956.
For the 3 months ended December 31, | ||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||
(In $ million) | US$ | % | US$ | % | % | |||||||||||||||
Net Revenues | 6.96 | 100 | % | 5.04 | 100 | % | 38.11 | % | ||||||||||||
Connection Fees | 2.75 | 40 | % | 1.22 | 24 | % | 124.35 | % | ||||||||||||
Gas Sales | 4.21 | 60 | % | 3.82 | 76 | % | 10.44 | % |
The increases in our net revenues for the three months ended March 31, 2010 largely resulted from the following factors:
1) | Increase of gas sales. With more customers added into our existing gas network system, the gas sales increased significantly compared to the same period of 2009. |
2) | Substantial increase of connection fees from residential customers. We were able to connect more residential households in this quarter compared to the same period of 2009. |
Connection Fees
Connection fees during the three months ended March 31, 2010 were $2.75 million, representing an increase of 124.35% over the same period of 2009, accounting for 40% of the total net revenue as compared with approximately 24% of the total net revenue for the same period in 2009. The source of connection fees was mainly from the development of new residential users.
For the 3 months ended March 31, | ||||||||||||||||||||
(in US$ millions) | 2010 | 2009 | Change | |||||||||||||||||
US$ | % | US$ | % | % | ||||||||||||||||
Connection Fees | 2.75 | 100 | % | 1.22 | 100 | % | 124.35 | % | ||||||||||||
Residential Users | 2.75 | 100 | % | 1.14 | 92.86 | % | 141.61 | % | ||||||||||||
Industrial Users | 0.00 | 0 | % | 0.09 | 7.14 | % | -100% |
Due to seasonality, the first quarter of each year usually generates less revenue for the Company with regards to connection fees.
50
Gas Sales
Gas sales were $4.21 million during the three months ended March 31, 2010, accounting for 60% of total net revenue for the three months ended March 31, 2010, representing an increase of 10.44% over the same period of 2009. Gas sales to residential users increased 106.46% to $2.15 million for the three months ended March 31, 2010 from $1.04 million in the same period of 2009. Gas sales to industrial and commercial users decreased 25.63% to $2.06 million for the three months ended March 31, 2010 from $2.77 million in the same period of 2009.
For the 3 months ended March 31, | ||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gas Sales | 4.21 | 100 | % | 3.81 | 100 | % | 10.44 | % | ||||||||||||
Residential Users | 2.15 | 51 | % | 1.04 | 27 | % | 106.46 | % | ||||||||||||
Industrial and Commercial Users | 2.06 | 49 | % | 2.77 | 73 | % | -25.63 | % |
Such increases were primarily due to the fact that our invested projects maintained steady development, and more users were added to our gas distribution network. The significant increase of gas sales from residential users was able to offset the decrease of gas sales from industrial and commercial users. The severe weather conditions in China affected the logistics of gas delivery. Chinese government prioritized the delivery gas to residential users during the severe weather.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2010, which includes cost of connection and cost of gas sales, was $4.83 million, representing an increase of 28.09% from $3.77 million in the same period of 2009.
For the 3 months ended March 31, | ||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Cost of Revenues | 4.83 | 100 | % | 3.77 | 100 | % | 28.09 | % | ||||||||||||
Connection Cost | 0.77 | 16 | % | 0.13 | 3 | % | 492.50 | % | ||||||||||||
Gas Cost | 4.06 | 84 | % | 3.64 | 97 | % | 11.52 | % |
Cost of Connection
Our cost of connection during the three months ended March 31, 2010 was $0.77 million, or 16% of our total cost of revenues. By comparison, the cost of connection during the same period of 2009 was $0.13 million, or 3% of our total cost of revenues. This increase is mainly due to the increase of connection service activities in 2010 as compared to the same period of 2009.
Cost of connection includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, and installation and maintenance fees.
Cost of Gas Sales
The cost of gas sales increased 11.52% to $4.06 million during the three months ended March 31, 2010 from $3.64 million for the same period in 2009. This increase, which outpaced the 10.44% increase in sales of natural gas during the same period, is largely due to the higher delivery cost caused by the severe weather conditions in this quarter.
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 Mar 31, 2010, gross profit was $2.12 million, representing an increase of approximately 68.01% from the same period of 2009. Gross profit from connection fees was $1.97 million for the three months ended March 31, 2010, accounting for 93% of total gross profit. In comparison, gross profit from connection fees was $1.09 million for the three months ended March 31, 2009, accounting for 87% of total gross profit. Gross profit from gas sales was $0.15 million for the three months ended March 31, 2010, accounting for 7% of total gross profit, compared to $0.17 million, accounting for 13% of total gross profit in the same period of 2009.
For the 3 months ended March 31, | ||||||||||||||||||||
2010 | 2009 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gross Profit | 2.12 | 100 | % | 1.26 | 100 | % | 68.01 | % | ||||||||||||
Connection | 1.97 | 93 | % | 1.09 | 87 | % | 80.59 | % | ||||||||||||
Gas | 0.15 | 7 | % | 0.17 | 13 | % | -12.57 | % |
51
Gross margin during the three months ended March 31, 2010 was 30.53%, compared to 25.10% during the same period in 2009.
Gross margin for connection fees for the three months ended Mar 31, 2010, was 71.95%, compared to 89.38% in the same period of 2009.
Gross margin for sales of natural gas was 3.54% for the three months ended March 31, 2010, compared to 4.48% during the same period of 2009.
Selling and Marketing Expenses
Our selling and marketing expenses in the three months ended March 31, 2010 were $0.27 million, approximately 3.90% of our net revenues, compared with $0.20 million or 4.03 % of our net revenues in the same period of 2009.
General and Administrative Expenses and Other Expenses
General and administrative expenses were $0.91 million for the three months ended March 31, 2010, approximately 13.03% of our net revenues, compared with $0.51 million, or approximately 10.17% of net revenues for the same period in 2009. Professional fee is higher than the same period of 2009, which includes approximately $60 thousand for engaging Ernst & Yong on Sox Compliance and internal control.
Operating Income
The operating income for the three months ended March 31, 2010 was $0.95 million, representing a significant increase of 72.46%, compared to the operating income of $0.55 million for the same period of 2009. This is largely driven by the sales increase.
Other Income (Expense)
Other expense was $0.92 million for the three months ended Mar 31, 2010, compared with Other Expense of $0.05 million for the same period of 2009. The significant increase was due to the amortization costs of convertible note interest discount and interest expense of convertible note. We closed a convertible debt financing in the last quarter of 2009, which resulted in costs associated with the financing, such as interest discount-warrants, beneficial conversion feature, debt issuance cost, etc. Included in interest expense of $924 thousand, was $121 thousand convertible bonds coupon expense and $680 thousand non-cash flow amortization expense of convertible bonds interest discount.
Income tax
Income tax was $0.24 million for the three months ended Mar 31, 2010, compared to $0.16 million for the same period of 2009.
Net Income (loss)
Net loss for the three months ended March 31, 2010 was $0.21 million, compared with net income of $0.35 million for the same period of 2009. Largely driven by the sales increase, operating income achieved significant improvement of 72.46% compared to the operating income of $0.55 million for the same period of 2009. However, that significant improvement of operating income was negated by the additions of amortization costs of convertible note interest discount. Excluding these non-operational items of amortization expense of convertible bonds interest discount in the total of $0.68 million, our adjusted net income in the first quarter of 2010 would have been $0.48 million.
Liquidity and Capital Resources
Cash and cash equivalents were 7.51 million as of March 31, 2010, a decrease of $2.31 million as compared to $9.82 million of cash and cash equivalents as of December 31, 2009.
Cash used in operating activities for the three months ended March 31, 2010 was $2.92 million, a decrease of $3.47 million from $0.55 million during the same period of 2009. Such decrease was mainly due to the decrease of net income, adjusted for non-cash expense items and changes in working capital.
Cash used in investing activities for the three months ended March 31, 2010 was $1.61 million, a slight decrease from $1.64 million during the same period of 2009.
Cash sourced in financing activities for the three months ended March 31, 2010 was $2.2 million. We borrowed $2.2 million from local bank in the first quarter of 2010.
Accounts Receivable
Accounts receivable during the three months as of March 31, 2010 were $6.50 million, an increase of $1.46 million from $5.04 million as of December 31, 2009.
52
Notes Receivable
There are notes receivable of $0.2 million as of March 31, 2010.
Inventory
Inventory of $0.58 million as of March 31, 2010 was comprised of spare parts and natural gas.
Fixed Assets
Fixed Assets as of March 31, 2010 were $53.69 million, representing an increase of $1.59 million from $52.10 million as of December 31, 2009. The table below is a breakdown of our fixed assets at cost:
2010 | 2009 | |||||||
At Cost | ||||||||
Gas Pipelines | $ | 39,208,530 | $ | 37,329,888 | ||||
Motor Vehicles | 5,775,811 | 5,775,903 | ||||||
Machinery & Equipment | 1,482,838 | 1,482,599 | ||||||
Buildings | 6,902,741 | 7,194,148 | ||||||
Leasehold Improvements | 81,557 | 80,133 | ||||||
Office Equipment | 240,155 | 238,673 | ||||||
Less Accumulated depreciation | (4,668,230 | ) | (4,329,313 | ) | ||||
$ | 49,023,402 | $ | 47,772,011 |
Bank Loans
Short-term Bank loans as of March 31, 2010 were $2.93 million, no change compared to that as of December 31, 2009.
Long-term Bank loans as of March 31, 2010 were $8.78 million, an increase of $2.2 million compared to $6.58 million as of December 31, 2009. We borrowed additional loan of $2.2 million in the first quarter of 2010.
Accounts Payables
Accounts payables as of March 31, 2010 was $7.22 million, a decrease of $1.34 million from $8.56 million as of December 31, 2009.
Other Payables
Other payables as of March 31, 2010 were $4.89 million, a decrease of $1.45 million from $6.34 million as of December 31, 2009.
We do not have any off-balance sheet arrangements.
53
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act”)) are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2010, 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.
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. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are hereby filed as part of this Quarterly Report on Form 10-Q.
54
Exhibit Number: | Description | |
23.1 | Consent of Samuel H. Wong & Co., LLP | |
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: May 14, 2010 | By: | /s/ Yuchuan Liu |
Yuchuan Liu | ||
Chairman and Chief Executive Officer |
SINO GAS INTERNATIONAL HOLDINGS, INC. | ||
Date: May 14, 2010 | By: | /s/ Yugang Zhang |
Yugang Zhang | ||
Chief Financial Officer |
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