United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 2011
or
o | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 000-51364
SINO GAS INTERNATIONAL HOLDINGS, INC.
(Name of small business issuer in its charter)
Utah | 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.
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
As of September 30, 2011, the Registrant had 27,317,867 shares of common stock outstanding.
Except as otherwise indicated by the context, references in this Form 10-Q to:
“SGAS,” the “Company,” “we,” “our,” or “us” are references to Sino Gas International Holdings, Inc and its subsidiaries, unless the context indicates otherwise.
“U.S. Dollar,” “$” and “US$” mean the legal currency of the United States of America.
“RMB” means Renminbi, the legal currency of China.
“China” or the “PRC” are references to the People’s Republic of China.
“U.S.” is a reference to the United States of America.
“SEC” is a reference to the Securities & Exchange Commission of the United States of America.
Sino Gas International Holdings, Inc.
Table of Contents
Page | |||
PART I - | FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited) | 1 | |
Notes to Financial Statements (Unaudited) | 8 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 4 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | |
Item 4. | Controls and Procedures | 15 | |
PART II - | OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 16 | |
Item 1A. | Risk Factors | 16 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 | |
Item 3. | Defaults Upon Senior Securities | 16 | |
Item 4. | (Removed and Reserved) | 16 | |
Item 5. | Other Information | 16 | |
Item 6. | Exhibits | 16 |
2
Sino Gas International Holdings, Inc.
Content | Page | |
Report of Independent Registered Public Accounting Firm | 1 | |
Consolidated Balance Sheets | 2 - 3 | |
Consolidated Statements of Income | 4 | |
Consolidated Statements of Stockholders’ Equity | 5 - 6 | |
Consolidated Statements of Cash Flows | 7 | |
Notes to Financial Statements | 8 - 38 |
3
Sino Gas International Holdings, Inc.
Consolidated Financial Statements
September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Sino Gas International Holdings, Inc.
Content | Page | |
Report of Independent Registered Public Accounting Firm | 1 | |
Consolidated Balance Sheets | 2 - 3 | |
Consolidated Statements of Income | 4 | |
Consolidated Statements of Stockholders’ Equity | 5 - 6 | |
Consolidated Statements of Cash Flows | 7 | |
Notes to Financial Statements | 8 - 38 |
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 September 30, 2011 and December 31, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three months and nine months periods ended September 30, 2011 and 2010. 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.
San Mateo, California | Samuel H. Wong & Co., LLP |
November 10, 2011 | Certified Public Accountants |
1
Sino Gas International Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Notes | 9/30/2011 | 12/31/2010 | ||||||||
ASSETS | ||||||||||
Current Assets | ||||||||||
Cash & cash equivalents | 2(e) | $ | 6,097,173 | $ | 3,582,330 | |||||
Notes receivable | 899,778 | 226,867 | ||||||||
Accounts receivable | 2(f),3 | 13,469,334 | 9,504,229 | |||||||
Other receivables | 2,568,838 | 1,127,981 | ||||||||
Related party receivable | 4 | 421,755 | 408,361 | |||||||
Inventory | 710,083 | 482,594 | ||||||||
Advance to suppliers | 2(g) | 3,717,460 | 3,621,147 | |||||||
Prepaid expenses and taxes | 540,985 | 264,481 | ||||||||
Total Current Assets | 28,425,406 | 19,217,990 | ||||||||
Non-Current Assets | ||||||||||
Investment | 2(h),4 | 16,142,307 | 12,794,384 | |||||||
Property, plant & equipment, net | 2(j),6 | 49,025,750 | 49,928,482 | |||||||
Construction in progress | 2(m) | 24,311,545 | 19,336,428 | |||||||
Intangible assets, net | 2(k),8 | 467,229 | 533,730 | |||||||
Goodwill | 2(l),7 | 1,677,975 | 1,677,975 | |||||||
Deposit | 855,509 | 1,239,548 | ||||||||
Total Non-current Assets | 92,480,315 | 85,510,547 | ||||||||
Total Assets | $ | 120,905,721 | $ | 104,728,537 | ||||||
LIABILITIES & STOCKHOLDERS' EQUITY | ||||||||||
LIABILITIES | ||||||||||
Current Liabilities | ||||||||||
Bank loans | 9 | $ | 17,338,873 | $ | 7,864,727 | |||||
Accounts payable | 11,404,646 | 11,105,790 | ||||||||
Other payables - current portion | 10(a) | 4,585,193 | 3,691,923 | |||||||
Accrued liabilities | 2,912,916 | 1,635,217 | ||||||||
Unearned revenue | 2(n) | - | 106,868 | |||||||
Total Current Liabilities | 36,241,628 | 24,404,525 | ||||||||
Non-current Liabilities | ||||||||||
Long-term bank loans | 9 | 3,124,121 | 3,024,895 | |||||||
Convertible Bonds | 11 | 6,051,594 | 5,641,117 | |||||||
Other payables - non-current portion | 10(b) | 1,920,496 | 1,859,499 | |||||||
Total Non-current Liabilities | 11,096,211 | 10,525,511 | ||||||||
Total Liabilities | $ | 47,337,839 | $ | 34,930,036 |
See Accompanying Notes to Financial Statements
2
Sino Gas International Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Notes | 9/30/2011 | 12/31/2010 | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||||
Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,590,094 shares issued and outstanding as of September 30, 2011 and December 31, 2010 | 10 | $ | 4,590 | $ | 4,590 | |||||
Additional paid in capital - Preferred Stock B | 5,335,894 | 5,335,894 | ||||||||
Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares issued and outstanding as of September 30, 2011 and December 31, 2010 | 10 | 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; 27,317,867 and 27,156,617 shares issued and outstanding as of September 30, 2011 and December 31, 2010 | 10 | 27,317 | 27,156 | |||||||
Additional paid in capital - Common Stock | 24,391,903 | 23,933,033 | ||||||||
Additional paid in capital - Warrants Series: A, B, J, C, D | - | 311,110 | ||||||||
Additional paid in capital - Warrants Series: E, G | - | 47,946 | ||||||||
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(w) | 5,567,606 | 4,819,762 | |||||||
Retained earnings | 20,975,984 | 17,977,181 | ||||||||
Minority Interest | 889,530 | 1,004,500 | ||||||||
Accumulated other comprehensive income | 2(x) | 7,924,120 | 7,886,391 | |||||||
Total Stockholders’ Equity | 73,567,882 | 69,798,501 | ||||||||
Total Liabilities & Stockholders’ Equity | $ | 120,905,721 | $ | 104,728,537 |
See Accompanying Notes to Financial Statements
3
Sino Gas International Holdings, Inc.
Consolidated Statements of Income
For the three months and nine months ended September 30, 2011 and 2010
(Stated in US Dollars)
Three Months Ended | Nine Months Ended | |||||||||||||||||
Note | 9/30/2011 | 9/30/2010 | 9/30/2011 | 9/30/2010 | ||||||||||||||
Sales revenue | 2(p) | $ | 13,603,978 | $ | 8,097,341 | $ | 29,465,400 | $ | 20,971,220 | |||||||||
Cost of revenue | 7,106,537 | 4,923,438 | 18,144,581 | 13,766,918 | ||||||||||||||
Gross Profit | 6,497,441 | 3,173,903 | 11,320,819 | 7,204,302 | ||||||||||||||
Operating Expense | ||||||||||||||||||
Selling expense | 612,231 | 567,781 | 1,690,383 | 1,149,685 | ||||||||||||||
General and administrative expense | 1,225,660 | 749,396 | 3,411,716 | 2,354,525 | ||||||||||||||
Total operating expense | 1,837,891 | 1,317,177 | 5,102,099 | 3,504,210 | ||||||||||||||
Operating Income | 4,659,550 | 1,856,726 | 6,218,720 | 3,700,092 | ||||||||||||||
Other Income/(Expense) | ||||||||||||||||||
Gain on disposal of property and equipment | - | - | 1,115,903 | - | ||||||||||||||
Other income | 108,353 | 2,099 | 108,697 | 12,394 | ||||||||||||||
Other expense | (178,031 | ) | (4,589 | ) | (225,251 | ) | (26,087 | ) | ||||||||||
Impairment loss | (787,255 | ) | - | (787,255 | ) | - | ||||||||||||
Interest income | 12,567 | 3,011 | 18,095 | 12,050 | ||||||||||||||
Interest expense | (654,552 | ) | (436,223 | ) | (1,617,961 | ) | (2,182,773 | ) | ||||||||||
Total other income/(expense) | (1,498,918 | ) | (435,702 | ) | (1,387,772 | ) | (2,184,416 | ) | ||||||||||
Income before tax | 3,160,632 | 1,421,024 | 4,830,948 | 1,515,676 | ||||||||||||||
Income tax | 2(r),12 | (949,881 | ) | (395,166 | ) | (1,304,364 | ) | (839,007 | ) | |||||||||
Gain/(Loss) from discontinued operations, net of tax | - | (439 | ) | 105,093 | (439 | ) | ||||||||||||
Net income | $ | 2,210,751 | $ | 1,025,418 | $ | 3,631,677 | $ | 676,230 | ||||||||||
Net income (loss) attributable to: | ||||||||||||||||||
- Common stockholders | $ | 2,289,990 | $ | 1,025,418 | $ | 3,746,647 | $ | 676,230 | ||||||||||
- Non-controlling interest | $ | (79,239 | ) | $ | - | $ | (114,970 | ) | $ | - | ||||||||
Earnings per share | 2(z),13 | |||||||||||||||||
Basic | $ | 0.08 | $ | 0.04 | $ | 0.14 | $ | 0.03 | ||||||||||
Diluted | $ | 0.06 | $ | 0.04 | $ | 0.13 | $ | 0.03 | ||||||||||
Weighted Average Shares Outstanding | ||||||||||||||||||
Basic | 27,295,477 | 27,090,770 | 27,203,800 | 26,899,913 | ||||||||||||||
Diluted | 41,229,064 | 36,514,909 | 36,466,688 | 26,899,913 |
See Accompanying Notes to Financial Statements
4
Sino Gas International Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Preferred Stock B | Preferred Stock B-1 | Common Stock | ||||||||||||||||||||||||||||||||||
Shares Outstanding | Amount | APIC - Preferred Stock B | Shares Outstanding | Amount | APIC - Preferred Stock B-1 | Shares Outstanding | Amount | APIC - Common Stock | ||||||||||||||||||||||||||||
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 | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Conversion of Preferred Stock B | (170,742 | ) | (171 | ) | (198,484 | ) | - | - | - | 170,742 | 171 | 198,484 | ||||||||||||||||||||||||
Reversal of conversion | 180,997 | 181 | 210,406 | - | - | - | (180,997 | ) | (181 | ) | (210,406 | ) | ||||||||||||||||||||||||
Conversion of Convertible Bonds | - | - | - | - | - | - | 322,581 | 322 | 199,678 | |||||||||||||||||||||||||||
Shares Based Compensation | - | - | - | - | - | - | 75,000 | 75 | 35,925 | |||||||||||||||||||||||||||
Cancellation of Common Stock | - | - | - | - | - | - | (22 | ) | - | - | ||||||||||||||||||||||||||
Expiration of IR Firm’s Warrants | - | - | - | - | - | - | - | - | 92,468 | |||||||||||||||||||||||||||
Expiration of Warrants F&R | - | - | - | - | - | - | - | - | 107,652 | |||||||||||||||||||||||||||
Issuance of Subsidiary’s 49% Equity | - | - | - | - | - | - | - | - | 995,500 | |||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance at December 31, 2010 | 4,590,094 | 4,590 | 5,335,894 | 95,418 | 95 | 132,662 | 27,156,617 | 27,156 | 23,933,033 | |||||||||||||||||||||||||||
Balance at January 1, 2011 | 4,590,094 | 4,590 | 5,335,894 | 95,418 | 95 | 132,662 | 27,156,617 | 27,156 | 23,933,033 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Conversion of Convertible Bonds | - | - | - | - | - | - | 161,250 | 161 | 99,814 | |||||||||||||||||||||||||||
Appropriation of loss to minority interest | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Expiration of Warrants | - | - | - | - | - | - | - | - | 359,056 | |||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance at September 30, 2011 | 4,590,094 | 4,590 | 5,335,894 | 95,418 | 95 | 132,662 | 27,317,867 | 27,317 | 24,391,903 |
See Accompanying Notes to Financial Statements
5
Sino Gas International Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Common Stock | ||||||||||||||||||||||||||||||||||||||||
APIC - Warrants Series: A,B,J,C,D | APIC - Warrants Series: E,G | APIC - Warrants Series: F,R | APIC - Convertible Bonds Detachable Warrants | APIC - Beneficial Conversion Feature | Statutory Reserve | Retained Earnings | Minority Interest | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||||||||
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 | - | - | - | - | - | - | 4,041,663 | - | - | 4,041,663 | ||||||||||||||||||||||||||||||
Conversion of Preferred Stock B | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Reversal of Common Stock | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Conversion of Convertible Bonds | - | - | - | - | - | - | - | - | - | 200,000 | ||||||||||||||||||||||||||||||
Shares Based Compensation | - | - | - | - | - | - | - | - | - | 36,000 | ||||||||||||||||||||||||||||||
Cancellation of Common Stock | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Expiration of IR Firm’s Warrants | - | - | - | - | - | - | - | - | - | 92,468 | ||||||||||||||||||||||||||||||
Expiration of Warrants F&R | - | - | (107,652 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Issuance of Subsidiary’s 49% Equity | - | - | - | - | - | - | - | 1,004,500 | - | 2,000,000 | ||||||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | 207,571 | (207,571 | ) | - | - | - | |||||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | 160,508 | 160,508 | ||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 311,110 | 47,946 | - | 223,367 | 8,094,814 | 4,819,762 | 17,977,181 | 1,004,500 | 7,886,391 | 69,798,501 | ||||||||||||||||||||||||||||||
Balance at January 1, 2011 | 311,110 | 47,946 | - | 223,367 | 8,094,814 | 4,819,762 | 17,977,181 | 1,004,500 | 7,886,391 | 69,798,501 | ||||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | 3,631,677 | - | - | 3,631,677 | ||||||||||||||||||||||||||||||
Conversion of Convertible Bonds | - | - | - | - | - | - | - | - | - | 99,975 | ||||||||||||||||||||||||||||||
Appropriation of loss to minority interest | - | - | - | - | - | - | 114,970 | (114,970 | ) | - | - | |||||||||||||||||||||||||||||
Expiration of Warrants | (311,110 | ) | (47,946 | ) | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | 747,844 | (747,844 | ) | - | - | - | |||||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | 37,729 | 37,729 | ||||||||||||||||||||||||||||||
Balance at September 30, 2011 | - | - | - | 223,367 | 8,094,814 | 5,567,606 | 20,975,984 | 889,530 | 7,924,120 | 73,567,882 |
12/31/2010 | 9/30/2011 | Total | ||||||||||
Comprehensive Income | ||||||||||||
Net Income | $ | 4,041,663 | $ | 3,631,677 | $ | 7,673,340 | ||||||
Other Comprehensive Income | ||||||||||||
Foreign Currency Translation Adjustment | 160,508 | 37,729 | 198,237 | |||||||||
Total | $ | 4,202,171 | $ | 3,669,406 | $ | 7,871,577 |
See Accompanying Notes to Financial Statements
6
Sino Gas International Holdings, Inc.
Consolidated Statements of Cash Flows
For the three months and nine months ended September 30, 2011 and 2010
(Stated in US Dollars)
Three Months Ended | Nine Months Ended | |||||||||||||||
9/30/2011 | 9/30/2010 | 9/30/2011 | 9/30/2010 | |||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
Net Income | $ | 2,210,751 | $ | 1,025,418 | $ | 3,631,677 | $ | 676,230 | ||||||||
Shares base compensation | - | 26,000 | - | 26,000 | ||||||||||||
Bad debt provision | 5,648 | - | 40,052 | - | ||||||||||||
Depreciation expense | 306,739 | 482,168 | 1,013,906 | 1,204,262 | ||||||||||||
Amortization expense of intangible assets | 6,225 | 12,468 | 48,718 | 29,333 | ||||||||||||
Amortization expense of convertible bonds | 178,293 | 147,449 | 510,452 | 1,357,398 | ||||||||||||
Loss/(gain) from discontinued operation | - | 439 | - | 439 | ||||||||||||
Loss/(gain) on disposal of property and equipment | - | - | (1,115,903 | ) | - | |||||||||||
Impairment loss | 787,255 | - | 787,255 | - | ||||||||||||
Withdraw/(deposit) in restricted time deposits | - | - | - | 126,400 | ||||||||||||
Decrease/(increase) in accounts and other receivables | (2,237,386 | ) | (1,086,267 | ) | (6,118,924 | ) | (1,646,425 | ) | ||||||||
Decrease/(increase) in inventory | 41,654 | (584,044 | ) | (227,490 | ) | (698,110 | ) | |||||||||
Decrease/(increase) in prepaid expenses | (477,658 | ) | (860,233 | ) | (372,816 | ) | (561,098 | ) | ||||||||
Decrease/(increase) in related party receivable | (4,059 | ) | - | (13,396 | ) | - | ||||||||||
Increase/(decrease) in accounts and other payables | 750,023 | 609,493 | 2,423,955 | (2,407,708 | ) | |||||||||||
Cash Sourced/(Used) in Operating Activities of Continued Operation | 1,567,485 | (227,111 | ) | 607,486 | (1,893,279 | ) | ||||||||||
Cash Sourced/(Used) in Operating Activities of Discontinued Operation | - | - | 181,859 | - | ||||||||||||
Cash Sourced/(Used) in Operating Activities | 1,567,485 | (227,111 | ) | 789,345 | (1,893,279 | ) | ||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Decrease in deposit | 248,959 | - | 384,038 | - | ||||||||||||
Proceeds from disposal of discontinued operation | - | 74 | 4,504,950 | 74 | ||||||||||||
Increase of investment in equity | (2,748,437 | ) | (116,998 | ) | (3,347,923 | ) | (146,534 | ) | ||||||||
Purchase of property, plant & equipment | (631,282 | ) | (921,616 | ) | (4,161,628 | ) | (2,750,548 | ) | ||||||||
Increase of goodwill | (39,105 | ) | - | (39,105 | ) | |||||||||||
Decrease/(increase) in intangible assets | 29,189 | (16,312 | ) | 17,783 | (20,876 | ) | ||||||||||
Increase in construction in progress | (3,026,637 | ) | (2,623,722 | ) | (4,975,117 | ) | (5,073,038 | ) | ||||||||
Cash Sourced/(Used) in Investing Activities of Continued Operation | (6,128,208 | ) | (3,717,679 | ) | (7,577,897 | ) | (8,030,027 | ) | ||||||||
Cash Sourced/(Used) in Investing Activities of Discontinued Operation | - | - | (307,707 | ) | - | |||||||||||
Cash Sourced/(Used) in Investing Activities | (6,128,208 | ) | (3,717,679 | ) | (7,885,604 | ) | (8,030,027 | ) | ||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Increase/(decrease) of bank loans | 4,837,995 | 193,840 | 9,573,373 | 2,436,870 | ||||||||||||
Cash Sourced/(Used) in Financing Activities | 4,837,995 | 193,840 | 9,573,373 | 2,436,870 | ||||||||||||
Net increase in cash & cash equivalents for the periods | 277,272 | (3,750,950 | ) | 2,477,114 | (7,486,436 | ) | ||||||||||
Effect of currency translation | (36,456 | ) | 1,098,954 | 37,729 | 1,374,260 | |||||||||||
Cash & cash equivalents at the beginning of periods | 5,856,357 | 6,360,710 | 3,582,330 | 9,820,890 | ||||||||||||
Cash & cash equivalents at the end of periods | $ | 6,097,173 | $ | 3,708,714 | $ | 6,097,173 | $ | 3,708,714 | ||||||||
Supplementary cash flows information | ||||||||||||||||
Interest received | $ | 12,567 | $ | 3,011 | $ | 18,095 | $ | 12,050 | ||||||||
Interest paid | 772,411 | 290,107 | 1,724,829 | 826,708 | ||||||||||||
Income tax paid | $ | 282,695 | $ | 395,166 | $ | 995,356 | $ | 839,007 |
7
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
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 Co., Ltd. (“Gas (BVI)”), an International Business Company incorporated in the British Virgin Islands, and its wholly owned subsidiary Beijing Zhong Ran Weiye Gas Co., Ltd. (“Beijing Gas”), involving an exchange of shares whereby the Company issued an aggregate of 14,361,646 shares to the shareholders of Gas (BVI) in exchange for all of the issued and outstanding shares of Gas (BVI). 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’s primarily business operations are conducted through Beijing Gas. Beijing Gas 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. Beijing Gas develops its operating subsidiaries, known as project companies. Each project company operates as a local natural gas distributor in a city or county. Pursuant to an exclusive franchise agreement with the local government or entities responsible for administering and/or regulating gas utilities, each project company is granted the exclusive right to develop and operate natural gas distribution systems and distribute natural gas at the operational location.
Beijing Gas holds an equity interest of 85% to 100% on its subsidiaries, and an individual shareholder nominally holds the remainder of the equity interest in such project company. Each such individual shareholder has relinquished any and all rights, power and interest of Beijing Gas in the respective project companies under enforceable contracts. This structure was intended to comply with a PRC law that required a limited liability company to have at least two shareholders.
The Company owns and operates natural gas distribution systems in 35 small and medium size cities serving approximately 190,500 residential and seven industrial customers. The Company’s facilities include approximately 1,525 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 120,000 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”.
8
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
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 People’s Republic of China (“PRC”) 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.
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.
(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.
9
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(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 after inception and continued to acquire equity interest throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of September 30, 2011:
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 | 51 | 51 | USD 98,039 | |||||
Sino Gas Investment Development, Ltd. | The British Virgin Islands | 1/9/2007 | 100 | 100 | USD 50,000 | |||||
Beijing Zhong Ran Weiye Gas Co., Ltd. | PRC | 8/29/2001 | 100 | 100 | RMB 206,000,000 | |||||
Beijing Chenguang Gas Co., Ltd. | PRC | 10/30/2002 | 100 | 100 | RMB 35,239,600 | |||||
Guannan Weiye Gas Co., Ltd. | PRC | 6/19/2003 | 100 | 100 | RMB 9,510,000 | |||||
Ningjin Weiye Gas Co., Ltd. | PRC | 12/3/2003 | 100 | 95 | RMB 3,000,000 | |||||
Yutian Zhongran Weiye Gas Co., Ltd. | PRC | 12/19/2003 | 100 | 90 | RMB 3,000,000 | |||||
Xingtang Weiye Gas Co., Ltd. | PRC | 2/18/2004 | 100 | 95 | RMB 3,000,000 | |||||
Wuqiao Gas Co., Ltd. | PRC | 6/30/2004 | 100 | 95 | RMB 2,000,000 | |||||
Sihong Weiye Gas Co., Ltd. | PRC | 12/3/2004 | 100 | 95 | RMB 10,000,000 |
10
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Sishui Weiye Gas Co., Ltd. | PRC | 12/22/2004 | 100 | 95 | RMB 3,000,000 | |||||
Langfang Weiye Dangerous Goods Transportation Co., Ltd. | PRC | 3/22/2005 | 100 | 95 | RMB 1,000,000 | |||||
Linzhang Weiye Gas Co., Ltd. | PRC | 7/6/2005 | 100 | 85 | RMB 1,000,000 | |||||
Peixian Weiye Gas Co., Ltd. | PRC | 8/22/2005 | 100 | 90 | RMB 45,694,900 | |||||
Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd. | PRC | 9/30/2005 | 100 | 100 | RMB 2,000,000 | |||||
Longyao Zhongran Weiye Gas Co., Ltd. | PRC | 10/13/2005 | 100 | 95 | RMB 3,000,000 | |||||
Yuxian Jinli Gas Co., Ltd. | PRC | 11/8/2005 | 100 | 100 | RMB 9,500,000 | |||||
Hengshui Weiye Gas Co., Ltd. | PRC | 12/20/2005 | 100 | 100 | RMB 3,000,000 | |||||
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 | |||||
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 |
11
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Sixian Weiye Gas Co., Ltd. | PRC | 9/3/2007 | 100 | 100 | RMB 3,000,000 | |||||
Baishan Weiye Gas Co., Ltd. | PRC | 7/13/2007 | 100 | 100 | RMB 15,000,000 | |||||
Xinhe Weiye Gas Co., Ltd. | PRC | 7/2/2009 | 100 | 100 | RMB 1,000,000 | |||||
Hebei Weiye Gas (Group) 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 | |||||
Jiangsu Zhong Ran Weiye Energy Investment Co., Ltd. | PRC | 3/10/2011 | 100 | 99 | RMB 200,000,000 | |||||
Jize Weiye Gas Co., Ltd. | PRC | 9/20/2011 | 100 | 100 | RMB 1,000,000 |
(e) | Cash and Cash Equivalents |
The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.
(f) | Accounts Receivable |
Accounts 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.
12
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
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 stakes in equity security.
(i) | Accounting for the Impairment of Long-Lived Assets |
The Company has adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), ASC 360-10-35. The Company evaluates its long lived assets for impairment when indicators of impairment are present or annually, whichever occurs sooner. In the event that there are indications of impairment, the Company will record a loss to statements of income equal to the difference between the carrying value and the fair value of the long lived asset. The Company typically, but not exclusively uses the expected future discounted flows method to determine fair value of long lived asset subject to impairment. The fair value of long lived assets that held for disposition will include the cost of disposal.
The Company’s long-lived assets are grouped by their presentation on the consolidated balance sheets, and further segregated by their operating and asset type. Long-lived assets subject to impairment include buildings, equipment, vehicles, accounting software license, franchise and land use rights. The Company makes its determinations based on various factors that impact those assets.
At September 30, 2011, the Company assessed its buildings, equipment, vehicles, accounting software licenses, franchise and land use rights for production and has concluded its long-lived assets have not experienced any impairment losses because the Company’s long lived assets have enabled the Company to experience significant profit growth during the three months ended September 30, 2011.
(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.
13
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
(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 |
(l) | Goodwill |
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.
(m) | Construction in Progress |
Construction in progress represents the cost of constructing pipelines and is stated at cost. Costs comprise of 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.
(n) | 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.
(o) | Financial Instruments |
The Company adopted ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.
ASC 820-10 includes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 – inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
14
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Level 2 – observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.
The Company’s financial instruments consist mainly of cash, bank notes receivable, and debt obligations. Based on the borrowing rates currently available to the Company for loans and similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following tables present the Company’s financial assets and liabilities at fair value in accordance to ASC 820-10:
At September 30, | Quoted in | Significant | ||||||||||||||
2011: | Active Markets | Other | Significant | |||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Financial assets: | ||||||||||||||||
Cash | $ | 6,097,173 | $ | - | $ | - | $ | 6,097,173 | ||||||||
Notes receivable | 899,778 | - | - | 899,778 | ||||||||||||
Total financial assets | $ | 6,996,951 | $ | - | $ | - | $ | 6,996,951 | ||||||||
Financial liabilities: | ||||||||||||||||
Notes payable | $ | - | $ | - | $ | - | $ | - | ||||||||
Total financial liabilities | $ | - | $ | - | $ | - | $ | - |
At December 31, | Quoted in | Significant | ||||||||||||||
2010: | Active Markets | Other | Significant | |||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Financial assets: | ||||||||||||||||
Cash | $ | 3,582,330 | $ | - | $ | - | $ | 3,582,330 | ||||||||
Restricted cash | 226,867 | - | - | 226,867 | ||||||||||||
Total financial assets | $ | 3,809,197 | $ | - | $ | - | $ | 3,809,197 | ||||||||
Financial liabilities: | ||||||||||||||||
Notes payable | $ | - | $ | - | $ | - | $ | - | ||||||||
Total financial liabilities | $ | - | $ | - | $ | - | $ | - |
15
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
(p) | Foreign Currency Translation |
The accompanying financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (“RMB”). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
9/30/2011 | 12/31/2010 | |||||||
Years end RMB : US$ exchange rate | 6.4018 | 6.6118 | ||||||
Average yearly RMB : US$ exchange rate | 6.5060 | 6.7788 |
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.
(q) | Revenue Recognition |
The Company has two sources of revenue: (a) sales of natural gas and (b) connection fees for constructing connections of natural gas distribution network. In accordance to FASB ASC 605-10, the Company recognizes gas distribution revenue when natural gas are rendered to customers, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Connection fee 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.
Payments received before all of the relevant criteria for revenue recognition satisfied are recorded as unearned revenue.
(r) | Cost of Revenue |
The cost for distribution of natural gas is comprised of raw materials, delivery cost, and other overhead. The cost of connection fees consists of construction materials, direct labor wages, and other overhead.
(s) | Investment Income |
Investment income represents the Company’s share of post-acquisition results of its investment in equity securities for the year.
(t) | 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 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.
16
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(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 is 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. | BVI | 0.00% | |||
ii. Sino Gas Construction, Ltd. | BVI | 0.00% | |||
iii. Sino Gas Investment Development, Ltd. | BVI | 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, the standard 15% tax rate preference terminated as of December 31, 2007. However, the PRC government has established a set of transition rules to allow enterprises that utilized the tax holidays prior to January 1, 2008 to continue utilizing the tax preference. |
· | Since Sino Gas International Holdings, Inc. is primarily a holding company without any business activities in the United States, the Company shall not be subject to United States income tax for the nine months ended September 30, 2011. |
(u) | Advertising |
The Company expensed all advertising costs as incurred.
(v) | Risk |
· | 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.
17
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
· | Environmental risks |
The Company has procured environmental licenses required by the PRC government. The Company has both a water treatment facility for water used in its production process and secure transportation to remove waste off site. In the event of an accident, the Company has purchased insurance to cover potential harm to employees, equipment, and the local environment.
· | Inflation Risk |
Management monitors changes in prices levels. Historically inflation has not materially impacted the company’s financial statements; however, significant increases in the price of raw materials and labor that cannot be passed on to the Company’s customers could adversely impact the Company’s results of operations.
· | Environmental 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 changes in the political, economic, and legal environments in the PRC.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
(w) | Statutory Reserves |
As stipulated by the Company Law of the People's Republic of China 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. |
(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.
18
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
(y) | Recent Accounting Pronouncements |
No New Pronouncement issued since FASB issued in October 2009 ASU No. 2009-13 “Revenue Recognition (Topic 605)” that management adopted on January 1, 2011.
(z) | Earnings per Share |
The Company computes earnings per share (“EPS”) in accordance with FASB ASC 260 “Earnings per share”. SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., contingent shares, convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
(aa) | Subsequent Events |
The Company evaluates subsequent events that have occurred after the consolidated balance sheet date but before the consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. The Company has identified no subsequent events that would require disclosure to the consolidated financial statements.
3. | ACCOUNTS RECEIVABLE |
For natural gas sales, it is due when the gas is sold. Most residential customers settle their accounts via prepayments with debit cards, while industrial customers are billed and pay according to the contract terms ranging from 10 days to one month.
For construction projects, connection fees are generally collected in installments. First deposits of 30% of the total contract sum are received from the client when the project commences. A second payment of 30% is received at a milestone set out in the contracts. A third payment of 30% is received after construction is completed. The remaining 10% is typically held back by the client and acts as a warranty on the quality of the project. The retained money is usually received by the company after the 1 year warranty period.
The Company believes it has provided adequate provisions for doubtful accounts. Doubtful allowance accounts at September 30, 2011 and December 31 2010 were 1% of gross account receivables. To collect on doubtful accounts, the Company uses all of its efforts, such as having internal staff call for payment, filing legal pledges, or even hiring collection agents to collect the outstanding balance. If the collection is no longer probable, the Company will write off the balance against the allowance for doubtful accounts.
The Company has not experienced any material delinquent accounts that were uncollectible and has not written off a material balance against the allowance for doubtful accounts.
Accounts Receivable | ||||||||
9/30/2011 | 12/31/2010 | |||||||
Accounts receivable | $ | 13,605,388 | $ | 9,600,231 | ||||
Less: Allowance for bad debt | (136,054 | ) | (96,002 | ) | ||||
Accounts receivable, net | $ | 13,469,334 | $ | 9,504,229 |
19
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Allowance for Bad Debt | ||||||||
9/30/2011 | 12/31/2010 | |||||||
Beginning balance | $ | (96,002 | ) | $ | (50,875 | ) | ||
Allowance provided | (40,052 | ) | (45,127 | ) | ||||
Charge against allowance | - | - | ||||||
Reversals | - | - | ||||||
Ending balance | $ | (136,054 | ) | $ | (96,002 | ) |
Accounts Receivable Aging Analysis | ||||||||
9/30/2011 | 12/31/2010 | |||||||
<30 Days | $ | 4,913,110 | $ | 4,894,088 | ||||
30-60 Days | 1,341,416 | 1,050,245 | ||||||
60-90 Days | 1,841,646 | 111,355 | ||||||
90-180 Days | 796,432 | 2,265,088 | ||||||
180-360 Days | 1,359,767 | 230,684 | ||||||
>360 Days | 3,353,016 | 1,048,771 | ||||||
Total | $ | 13,605,388 | $ | 9,600,231 |
4. | RELATED PARTY RECEIVABLE |
A related party receivable of $421,755 is due from the Company’s founder and CEO Mr. Liu Yuchuan. The Company borrowed $3,024,895 (RMB 20,000,000) from China Development Bank. The loan was secured by the CEO’s personal home property, which carried a $421,755 (RMB 2,700,000) mortgage. Because the Bank required the mortgage loan to be settled before it would collateralize on it, the Company paid the entire mortgage on behalf of the CEO. This payment was interest free.
5. | INVESTMENT |
Ref. | 9/30/2011 | 12/31/2010 | |||||||||
(1) | Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. | $ | 6,252,827 | $ | 6,054,228 | ||||||
(2) | Qujing City Fuel Gas Co., Ltd. | 5,830,531 | 3,490,726 | ||||||||
(3) | Tongshan Hengxin Jiaye Gas Co., Ltd. | 4,027,708 | 3,219,181 | ||||||||
(4) | China Construction Bank | 31,241 | 30,249 | ||||||||
Total | $ | 16,142,307 | $ | 12,794,384 |
(1) | The Company through its wholly owned subsidiary Beijing Gas invested $1,642,152 (RMB 13,465,648) in the acquisition of a 40% equity position in Xiangke Oil Gas. The $6,192,659 investment as of September 30, 2011 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ operation results. |
20
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
The following tabulation presented the condensed balance sheet and statement of income of Xiangke Oil Gas as of and for the year ended December 31, 2010:
Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. | |||||||||
Condensed Balance Sheets | Condensed Statements of Income | ||||||||
Assets | 12/31/2010 | 12/31/2010 | |||||||
Current assets | $ | 11,185,589 | Revenue | $ | 15,534,241 | ||||
Non-current assets | 20,708,416 | Cost of revenue | 10,946,208 | ||||||
Total assets | 31,894,004 | Gross profit | 4,588,033 | ||||||
Liabilities | Operating expenses | 2,404,563 | |||||||
Current liabilities | 12,667,599 | Operating income | 2,183,470 | ||||||
Non-current liabilities | 4,537,342 | Other income/(expenses) | (357,745 | ) | |||||
Total liabilities | 17,204,941 | Earnings before tax | 1,825,725 | ||||||
Net Assets | 14,689,063 | Income tax | (404,846 | ) | |||||
Total Liabilities & Net Assets | $ | 31,894,004 | Net income | $ | 1,420,879 |
(2) | Along with two local partners in Qujing city, the second largest city in Yunnan province of PRC, Beijing Gas established Qujing City Fuel Gas Co., Ltd. with registered capital of $4,387,761 (RMB 30,000,000). Beijing Gas’ original investment of $1,746,764 (RMB 11,700,000) presented 39% equity ownership of Qujing Gas. |
On December 17, 2010, the Company, among with its wholly owned subsidiaries Gas Construction and Beijing Gas, entered into a Subscription Agreement with AMP Capital Asian Giants Infrastructure Fund (“AGIF”), under the terms of which Gas Construction issued to AGIF 48,039 number of ordinary shares that represents 49% of the total issued capital of Gas Construction for a consideration of US$2.0 million. In addition, pursuant to the Subscription Agreement, the equity interest in Qujing Gas held by Beijing Gas was transferred to Gas Construction so that Gas Construction became the beneficial holder of 39% equity interest in Qujing Gas.
After the close of the equity subscription, shareholders of Qujing Gas amended the Articles of Incorporation to raise the level of registered capital. On December 28, 2010, Gas Construction invested an additional $1,525,000 into Qujing Gas. The $5,830,531 investment as of September 30, 2011 consisted of principal and accumulated post-acquisition investment income attributed to Qujin Gas’ operation results.
21
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
The following tabulation presented the condensed balance sheet and statement of income of Qujing Gas as of and for the year ended December 31, 2010:
Qujing City Fuel Gas Co., Ltd. | |||||||||
Condensed Balance Sheets | Condensed Statements of Income | ||||||||
Assets | 12/31/2010 | 12/31/2010 | |||||||
Current assets | $ | 17,792,452 | Revenue | $ | 4,529,481 | ||||
Non-current assets | 9,846,526 | Cost of revenue | 3,548,119 | ||||||
Total assets | 27,638,978 | Gross profit | 981,362 | ||||||
Liabilities | Operating expenses | 149,119 | |||||||
Current liabilities | 10,617,997 | Operating income | 832,243 | ||||||
Non-current liabilities | 11,343,356 | Other income/(expenses) | 5 | ||||||
Total liabilities | 21,961,353 | Earnings before tax | 832,248 | ||||||
Net Assets | 5,677,625 | Income tax | 236,369 | ||||||
Total Liabilities & Net Assets | $ | 27,638,978 | Net income | $ | 595,880 |
(3) | On April 23, 2008, Beijing Gas entered into an agreement to acquire a 100% equity interest in Tongshan Hengxin Jiaye Natural Gas Co., Ltd. (“Tongshan Gas”), for a purchase price of $4,660,000 (RMB 32,600,000). Tongshan is a regional natural gas distributor and developer of natural gas distribution networks in Jiangsu province of PRC. As of September 30, 2011, the Company has not finished the registration of the equity transfer with the Tongshan City Industrial and Commercial Administration. Therefore, acquisition payments of $4,027,708 for Tongshan Gas were classified as investment as of that date. |
(4) | The Company purchased $31,241 (RMB 200,000) long-term fund with China Construction Bank in the effort to maintain favorable relationship and enhance further credit facility. (Refer to Note 9 for disclosure of bank loans with China Construction Bank) |
22
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
6. | PROPERTY, PLANT AND EQUIPMENT |
Property, Plant, and Equipment consisted of the following as of September 30, 2011 and December 31, 2010:
9/30/2011 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 44,398,037 | $ | 3,070,592 | $ | 41,327,445 | ||||||
Motor Vehicles | 5,974,133 | 2,029,160 | 3,944,973 | |||||||||
Machinery & Equipment | 1,530,990 | 399,965 | 1,131,025 | |||||||||
Buildings | 2,331,684 | 381,535 | 1,950,149 | |||||||||
Leasehold Improvements | 557,526 | 78,087 | 479,439 | |||||||||
Office Equipment | 488,933 | 296,214 | 192,719 | |||||||||
Total | $ | 55,281,303 | $ | 6,255,553 | $ | 49,025,750 |
12/31/2010 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 44,512,342 | $ | 2,563,156 | $ | 41,949,186 | ||||||
Motor Vehicles | 6,067,524 | 1,873,107 | 4,194,417 | |||||||||
Machinery & Equipment | 1,542,016 | 347,088 | 1,194,928 | |||||||||
Buildings | 2,316,729 | 271,630 | 2,045,099 | |||||||||
Leasehold Improvements | 475,099 | 69,242 | 405,857 | |||||||||
Office Equipment | 256,419 | 117,424 | 138,995 | |||||||||
Total | $ | 55,170,129 | $ | 5,241,647 | $ | 49,928,482 |
Gas pipelines purchased prior to 2008 were depreciated over their 25 year useful lives. Starting from 2008, the Company purchased a new quality of pipelines under a 50 year warranty. The new gas pipelines were depreciated over their 50 year useful lives.
Depreciation expenses included in the consolidated statements of income for the nine months ended September 30, 2011 and 2010 were $1,013,906 and $1,204,262, respectively.
7. | GOODWILL |
Goodwill was related to the acquisitions of Beijing Chenguang Gas Co., Ltd. (“Chengguang Gas”), Yuxian Weiye Gas Co., Ltd. (“Yuxian Gas”) and Guannan Weiye Gas Co., Ltd. (“Guannan Gas”). Management annually reviews the carrying value of goodwill using the sum of the discounted cash flows to determine if an impairment charge is necessary. The Company has determined there were no impairments to goodwill as of September 30, 2011 and December 31, 2010.
9/30/2011 | 12/31/2010 | |||||||
Yuxian Gas | $ | 10,954 | $ | 10,954 | ||||
Guannan Gas | 409,963 | 409,963 | ||||||
Chengguang Gas | 1,257,058 | 1,257,058 | ||||||
$ | 1,677,975 | $ | 1,677,975 |
23
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
8. | INTANGIBLE ASSETS |
Intangible assets consisted of the following as of September 30, 2011 and December 31, 2010:
9/30/2011 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use rights | $ | 491,481 | $ | 81,267 | $ | 410,214 | ||||||
Franchises | 390,515 | 390,515 | - | |||||||||
Accounting Software | 103,851 | 46,836 | 57,015 | |||||||||
$ | 985,847 | $ | 518,618 | $ | 467,229 |
12/31/2010 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use Rights | $ | 559,082 | $ | 69,649 | $ | 489,433 | ||||||
Franchises | 405,214 | 372,035 | 33,179 | |||||||||
Accounting Software | 39,334 | 28,216 | 11,118 | |||||||||
$ | 1,003,630 | $ | 469,900 | $ | 533,730 |
Land use rights represent the right to use and develop land granted by the local PRC government in accordance with zoning laws less accumulated amortization. Under PRC law, the company is permitted to sell, transfer, or mortgage its land use rights.
Under exclusive franchises agreements between the Company and the applicable PRC local government and entities in charge of gas utility, the Company operates as a local natural gas distributor in a city or county. Amortization expenses included in the consolidated statements of income for the nine months ended September 30, 2011 and 2010 were $48,718 and $29,333 respectively.
9. | LOANS |
a. | SHORT-TERM BANK LOANS |
Name of Bank | Due Date | Interest Rate | 9/30/2011 | 12/31/2010 | ||||||||||
China Minsheng Banking Corp., Ltd. - Pinganli Branch | 11/15/2011 | 6.67 | % | $ | 1,093,442 | $ | 1,058,713 | |||||||
Bank of Dalian - Beijing Branch | 12/14/2011 | 4.63 | % | 4,686,182 | 4,537,343 | |||||||||
Bank of Communications - Zhongguancun Branch | 12/14/2011 | 5.94 | % | 2,343,091 | 2,268,671 | |||||||||
Bank of China - Huanghe Boulevard Branch | 01/31/2012 | 6.391 | % | 1,562,061 | - | |||||||||
China Construction Bank - Baishan Chengqu Branch | 06/02/2012 | 8.20 | % | 1,405,855 | - | |||||||||
China Merchants Bank - Beijing Shouti Branch | 06/28/2011 | 7.57 | % | 1,562,061 | - | |||||||||
Peixian Rural Credit Union | 07/21/2012 | 10.08 | % | 4,686,182 | - | |||||||||
Total | $ | 17,338,873 | $ | 7,864,727 |
1) | The loan provided by China Minsheng Bank Corp., Ltd. was guaranteed by the CEO Mr. Liu Yuchuan’s personal credit. |
24
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
2) | The loans provided by Bank of Dalian were secured by the Company’s subsidiary Chengguang Gas’ registered capital, CEO Mr. Liu Yuchuan and COO Mr. Zhou Zhicheng’s personal home properties, which have been appraised at total fair market value of $933,254 (RMB 6,380,854) |
3) | The loan provided by Bank of China was guaranteed by Hebei Desheng Guarantee Co., Ltd. (“Hebei Desheng”). In connection with this collateralization, the Company was required to pay approximately $45,000 (RMB 300,000) as a financial service fee to Hebei Desheng. |
4) | The loan provided by China Construction Bank was secured by the Company’s real estate and vehicles. |
5) | The loan provided by China Merchants Bank was guaranteed by the CEO Mr. Liu Yuchuan with unlimited liability, and the management Mr. Wang Weidong and Ms. Song Erxin with $154,703 (RMB 1,000,000) liabilities each. |
6) | The loan provided by Peixian Rural Credit Union was secured by Beijing Zhong Ran Weiye Gas Co., Ltd. |
b. | LONG-TERM BANK LOANS |
Name of Bank | Due Date | Interest Rate | 9/30/2011 | 12/31/2010 | ||||||||||
China Development Bank - Beijing Branch | 12/24/2012 | 5.40 | % | $ | 3,124,121 | $ | 3,024,895 | |||||||
Total | $ | 3,124,121 | $ | 3,024,895 |
1) | The Company obtained the loans from 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 Gas’ subsidiaries and deposited $1,028,464 (RMB 6,800,000), which was classified as non-current asset deposits, to the guarantor, and was required to pay 2% of the outstanding loans as financial service fee to the guarantor per annum. Because the Company lacked the favorable credit history to directly establish a credit facility with the banks, the credit collateralization from guarantor was chosen as a financing solution. |
10. | OTHER PAYABLES |
(a). | Current other payables consisted of the following at September 30, 2011 and December 31, 2010:- |
Ref. | 9/30/2011 | 12/31/2010 | |||||||||
(1) | Amount due to Employees | $ | 439,480 | $ | 954,455 | ||||||
(2) | Tax Payable | 931,319 | 692,861 | ||||||||
(3) | Payables to Subcontractors | 3,214,394 | 2,044,607 | ||||||||
Total | $ | 4,585,193 | $ | 3,691,923 |
(1). | Amounts due to employees included accrual payroll, welfare payable, continued education training program cost and individual travel advance. All of these amounts were unsecured, interest free, and have no fixed repayment terms. |
(2). | The tax payable consists of value added tax, sales tax, income tax and local tax payables. |
25
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
(3). | Payables to subcontractors are unbilled liabilities. |
(b) | Non-current other payables at September 30, 2011 and December 31, 2010: |
Ref. | 9/30/2011 | 12/31/2010 | |||||||||
(1) | Payable for the acquisition of Baishan Gas Co., Ltd. | $ | 1,920,496 | $ | 1,859,499 | ||||||
Total | $ | 1,920,496 | $ | 1,859,499 |
(1). | The outstanding payable is related to the acquisition of Baishan Gas Co., Ltd.’s assets on July 9, 2007. |
11. | 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.
26
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(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 date.
The convertible bonds payable, net consisted of the followings:-
9/30/2011 | |||||||||||||||
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 | 97,413 | 22,718 | 120,131 | |||||||||||
(6) | Accretion of Interest Discount - Beneficial Conversion Feature | 869,270 | 223,252 | 1,092,522 | |||||||||||
(7) | Accretion of Bond Discount - Issuance Cost | 274,231 | 46,738 | 320,969 | |||||||||||
(8) | Accretion of Interest Discount - Redemption | 611,587 | 74,431 | 686,018 | |||||||||||
(9) | Conversion of Convertible Bonds into Common Stock | (299,975 | ) | - | (299,975 | ) | |||||||||
Convertible Bonds Payable, net | $ | 5,350,522 | $ | 701,072 | $ | 6,051,594 |
12/31/2010 | |||||||||||||||
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 | 53,545 | 12,034 | 65,579 | |||||||||||
(6) | Accretion of Interest Discount - Beneficial Conversion Feature | 869,270 | 223,252 | 1,092,522 | |||||||||||
(7) | Accretion of Bond Discount - Issuance Cost | 150,735 | 24,758 | 175,493 | |||||||||||
(8) | Accretion of Interest Discount - Redemption | 336,168 | 39,426 | 375,594 | |||||||||||
(9) | Conversion of Convertible Bonds into Common Stock | (200,000 | ) | - | (200,000 | ) | |||||||||
Convertible Bonds Payable, net | $ | 5,007,714 | $ | 633,403 | $ | 5,641,117 |
(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. See Note 13 Capital Stock for the calculation of fair value of convertible bonds detachable warrants. |
(3) | Because the conversion price of bonds is $0.62, which is lower than the fair market value of common stock on the date of issuance, the beneficial conversion feature was applied. |
(4) | The issuance cost consisted of a commission to the placement agent and legal expenses. |
27
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
(5) | The interest discount of warrants was amortized over the whole period applying the effective annual interest rate. |
(6) | The bonds were convertible at the option of the holders into shares of common stock. However, because Rule 144 of the Securities Act of 1933, as amended, requires a minimum holding period of six months before resale, the beneficial conversion feature was amortized over a six month period. |
(7) | The debt issuance cost was amortized over a 36 month period applying the effective annual interest rate. |
(8) | Based on a 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. |
(9) | Principal of $299,975 has been converted into 483,831 shares common stock. |
Included in interest expense of $1,617,961, was $362,578 of convertible bonds coupon expense, $510,451 of non-cash flow amortization expense of convertible bonds, and $744,931 of bank loan interest expense.
12. | CAPITAL STOCK |
The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 27,317,867 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 of which no shares is issued and outstanding; (b) series B convertible preferred stock, with 5,000,000 shares authorized of which 4,590,094 shares are issued and outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000 shares authorized of which 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 the 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 27,317,867 shares of common stock issued and outstanding at September 30, 2011. 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.
28
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
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 preferred stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the board of directors prior to the issuance.
On August 30, 2006, the Company’s board of directors designated 20,000,000 shares of its 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 were automatically converted into one share of the Company’s common stock upon the effectiveness of its reverse stock-split on November 17, 2006. Each share of the series B convertible preferred stock became 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 was initially one share of series B convertible preferred stock for one share of common stock.
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 privileges as the series B convertible preferred stock.
Financing Transactions
The tabulation below presents the financial transactions that occurred in 2006 and 2007:
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 & Related Expenses | (426,978 | ) | (10,000 | ) | (146,374 | ) | (232,028 | ) | ||||||||
Used to Purchase Back Warrants A & B | - | - | - | (3,500,000 | ) | |||||||||||
Net proceeds | $ | 5,101,036 | $ | 2,159,800 | $ | 2,587,759 | $ | 13,792,867 |
The following table depicts the Company’s outstanding securities as of September 30, 2011:
Authorized Shares | Shares issued and outstanding | |||||||
Common Stock | 250,000,000 | 27,317,867 | ||||||
Convertible Preferred Stock A | �� | 20,000,000 | - | |||||
Convertible Preferred Stock B | 5,000,000 | 4,590,094 | ||||||
Convertible Preferred Stock B-1 | 3,000,000 | 95,418 |
29
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Strike Price | Contractual Life | Expiration Date | Shares issued and outstanding | Weighted Average Fair Value | |||||||||||
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:
5.3M CB Warrants | 692K CB Warrants | |||||||
Weighted average fair value | $ | 0.05 | $ | 0.11 | ||||
Strike price | $ | 0.744 | $ | 0.744 | ||||
Risk-free interest rate | 1.12 | % | 1.51 | % | ||||
Expected volatility | 12.84 | % | 12.84 | % | ||||
Years to maturity | 3.00 | 3.00 |
Since there is no net cash settlement arrangement for the warrants, they should be classified as an equity instrument in accordance with EITF 00-19. Thus, subsequent changes in fair value should not be recognized.
30
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Total Capitalization
The following table depicts an analysis of total capitalization for the issuance of Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional Paid in Capital at September 30, 2011:
Preferred Stock B | Preferred Stock B-1 | Common Stock | ||||||||||||||||||||||||||||||
Name of Shareholders | Number of Shares outstanding | Capital | Number of Shares outstanding | Capital | Number of Shares outstanding | Capital | Additional Paid in Capital | % of Equity Holdings | ||||||||||||||||||||||||
Manager / Insider | - | $ | - | - | $ | - | 12,653,661 | $ | 12,653 | $ | 4,064,862 | 46 | % | |||||||||||||||||||
Investors | 4,590,094 | 4,590 | 95,418 | 95 | 14,664,206 | 14,664 | 26,018,964 | 54 | % | |||||||||||||||||||||||
Beneficial Conversion Feature | - | - | - | - | - | - | 8,094,814 | - | ||||||||||||||||||||||||
4,590,094 | $ | 4,590 | 95,418 | $ | 95 | 27,317,867 | $ | 27,317 | $ | 38,178,640 | 100 | % |
31
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
13. | INCOME TAX |
The following tabulation presents the income tax and deferred tax of the Company and its individual subsidiaries for the nine months ended September 30, 2011 and 2010:
Description | September 30, 2011 | September 30, 2010 | ||||||
Income (loss) before taxes:- | ||||||||
US Federal | $ | (1,166,775 | ) | $ | (2,051,379 | ) | ||
State | - | - | ||||||
BVI | (234,774 | ) | (214,268 | ) | ||||
PRC | 6,232,497 | 3,781,323 | ||||||
Total income before taxes | $ | 4,830,948 | 1,515,676 | |||||
Provision for taxes:- | ||||||||
Current: | ||||||||
U.S. Federal | $ | - | $ | - | ||||
State | - | - | ||||||
HK | - | - | ||||||
PRC | 1,304,364 | 839,007 | ||||||
$ | 1,304,364 | $ | 839,007 | |||||
Deferred: | ||||||||
U.S. Federal | - | - | ||||||
State | - | - | ||||||
HK | - | - | ||||||
PRC | - | - | ||||||
Valuation allowance | - | - | ||||||
- | - | |||||||
Total provision for taxes | $ | 1,304,364 | $ | 839,007 | ||||
Effective tax rate | 27.00 | % | 55.36 | % |
The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the nine months ended September 30, 2011 and 2010 are shown in the following table:
September 30, 2011 | September 30, 2010 | |||||||
U.S. federal statutory income tax rate | 34.00 | % | 34.00 | % | ||||
Lower rates in PRC, net | (9.00 | %) | (9.00 | %) | ||||
Tax holiday | - | - | ||||||
Accruals in foreign jurisdictions | 2.00 | % | 30.36 | % | ||||
Effective tax rate | 27.00 | % | 55.36 | % |
32
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
14. | SEGMENT INFORMATION |
The Company has contracted with customers usually in two revenue segments, one is for the construction and installation of gas facilities and the other is for the subsequent sales of natural gas to the customers through the gas facilities the Company constructs. However, construction and installation contracts and gas supply contracts have different terms for the basis of revenue recognition and differ from one another in terms of the relevant cost-and-revenue to be recognized and hence separate calculations and subsequent payments of fees for each segment occur without any interdependence on one another.
For management purposes, the company is currently organized into two major operating divisions: (a) sales of natural gas and (b) installation of gas facilities/construction. These principal operating activities are the basis on which the Company reports its primary segment information.
Financial Position Segment Report
As of September 30, 2011
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 16,410,193 | $ | 11,732,247 | $ | 282,966 | $ | 28,425,406 | ||||||||
Non-Current Assets | 36,123,259 | 50,526,526 | 5,830,530 | 92,480,315 | ||||||||||||
Total Assets | 52,533,452 | 62,258,773 | 6,113,496 | 120,905,721 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 1,993,847 | 34,247,781 | - | 36,241,628 | ||||||||||||
Non-current Liabilities | 610,462 | 10,485,749 | - | 11,096,211 | ||||||||||||
Total Liabilities | 2,604,309 | 44,733,530 | - | 47,337,839 | ||||||||||||
Net Assets | 49,929,143 | 17,525,243 | 6,113,496 | 73,567,882 | ||||||||||||
Liabilities & Equities | $ | 52,533,452 | $ | 62,258,773 | $ | 6,113,496 | 120,905,721 |
33
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Operation Result Segment Report
For the nine months ended September 30, 2011
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Sales Revenue | $ | 24,259,659 | $ | 17,344,117 | $ | (12,138,376 | ) | $ | 29,465,400 | |||||||
Cost of Revenue | (23,636,840 | ) | (6,646,117 | ) | 12,138,376 | (18,144,581 | ) | |||||||||
Gross Profit | 622,819 | 10,698,000 | - | 11,320,819 | ||||||||||||
Operating Expense | (251,493 | ) | (4,319,833 | ) | (530,773 | ) | (5,102,099 | ) | ||||||||
Operating Income/(Loss) | 371,326 | 6,378,167 | (530,773 | ) | 6,218,720 | |||||||||||
Other Income/(Loss) | (76,349 | ) | (1,556,548 | ) | 245,125 | (1,387,772 | ) | |||||||||
Earnings before tax | 294,977 | 4,821,619 | (285,648 | ) | 4,830,948 | |||||||||||
Income tax | (75,198 | ) | (1,229,166 | ) | - | (1,304,364 | ) | |||||||||
Gain/(loss) from discontinued operation, net of tax | - | - | 105,093 | 105,093 | ||||||||||||
Net Income | $ | 219,779 | $ | 3,592,453 | $ | (180,555 | ) | $ | 3,631,677 |
Financial Position Segment Report
As of December 31, 2010
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 10,911,426 | $ | 6,825,815 | $ | 1,480,749 | $ | 19,217,990 | ||||||||
Non-Current Assets | 31,563,653 | 50,456,168 | 3,490,726 | 85,510,547 | ||||||||||||
Total Assets | 42,475,079 | 57,281,983 | 4,971,475 | 104,728,537 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 3,202,219 | 21,202,306 | - | 24,404,525 | ||||||||||||
Non-current Liabilities | 1,381,096 | 9,144,415 | - | 10,525,511 | ||||||||||||
Total Liabilities | 4,583,315 | 30,346,721 | - | 34,930,036 | ||||||||||||
Net Assets | 37,891,764 | 26,935,262 | 4,971,475 | 69,798,501 | ||||||||||||
Liabilities & Equities | $ | 42,475,079 | $ | 57,281,983 | $ | 4,971,475 | $ | 104,728,537 |
34
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Operation Result Segment Report
For the nine months ended September 30, 2010
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Sales Revenue | $ | 17,798,043 | $ | 9,700,002 | $ | (6,526,825 | ) | $ | 20,971,220 | |||||||
Cost of Revenue | (16,908,410 | ) | (3,385,333 | ) | 6,526,825 | (13,766,918 | ) | |||||||||
Gross Profit | 889,633 | 6,314,669 | - | 7,204,302 | ||||||||||||
Operating Expense | (365,303 | ) | (2,592,941 | ) | (545,966 | ) | (3,504,210 | ) | ||||||||
Operating Income/(Loss) | 524,330 | 3,721,728 | (545,966 | ) | 3,700,092 | |||||||||||
Other Income/(Loss) | (269,746 | ) | (194,990 | ) | (1,719,680 | ) | (2,184,416 | ) | ||||||||
Earnings before tax | 254,584 | 3,526,738 | (2,265,646 | ) | 1,515,676 | |||||||||||
Income tax | (56,488 | ) | (782,520 | ) | - | (839,007 | ) | |||||||||
Gain/(loss) from discontinued operation, net of tax | - | - | (439 | ) | (439 | ) | ||||||||||
Net Income | $ | 198,097 | $ | 2,744,218 | $ | (2,266,085 | ) | $ | 676,230 |
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 officers.
35
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
15. | EARNINGS PER SHARE |
Components of basic and diluted earnings per share were as follows:
Nine Months Ended | ||||||||||||
Ref | 9/30/2011 | 9/30/2010 | ||||||||||
Net Income | $ | 3,631,677 | $ | 676,230 | ||||||||
Preferred Dividends | - | - | ||||||||||
Constructive Preferred Dividends | - | - | ||||||||||
Net loss attributed to non-controlling interest | 114,948 | - | ||||||||||
Income Available to Common Stockholders for Basic EPS | 3,746,648 | 676,230 | ||||||||||
Interest Expense for Convertible Bonds, net of tax | 873,029 | - | ||||||||||
Income Available to Common Stockholders for Diluted EPS | 4,619,699 | 676,230 | ||||||||||
Original Shares | 27,156,617 | 26,769,313 | ||||||||||
Addition to Common Stock | 47,183 | 130,600 | ||||||||||
Basic Weighted Average Shares Outstanding | 27,203,800 | 26,899,913 | ||||||||||
Potentially Dilutive Securities: | ||||||||||||
Addition to Common Stock from Conversion of Preferred Stock B | (1) | - | - | |||||||||
Addition to Common Stock from Conversion of Preferred Stock B-1 | (2) | - | - | |||||||||
Addition to Common Stock from Conversion of Convertible Bonds | (3) | 9,262,889 | - | |||||||||
Addition to Common Stock from Exercise of Warrants | (4) | - | - | |||||||||
Diluted Weighted Average Shares Outstanding | 36,466,688 | 26,899,913 | ||||||||||
Earnings Per Share | ||||||||||||
- Basic | $ | 0.14 | $ | 0.03 | ||||||||
- Diluted | $ | 0.13 | $ | 0.03 | ||||||||
Weighted Average Shares Outstanding | ||||||||||||
- Basic | 27,203,800 | 26,899,913 | ||||||||||
- Diluted | 36,466,688 | 26,899,913 |
(1). | The application of conversions’ of preferred stock B into common stock was anti-dilutive for the nine months ended September 30, 2011. |
(2). | The application of conversions of preferred stock B-1 into common stock was anti-dilutive for the nine months ended September 30, 2011. |
(3). | The average price of the Company’s common stock was $0.42 for the nine-month period ended September 30, 2011, which was lower than the conversion price $0.62 of the convertible bonds. Therefore, the conversions of convertible bonds have been excluded from the diluted weighted average shares. |
36
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
(4). | The exercise of warrants to common stock was anti-dilutive for the nine-month period ended September 30, 2011. |
16. | SHARE COMPENSATION |
For the year ended December 31, 2010, the Company recorded an expense of $36,000 under the general and administrative account for the issuance of 50,000 and 25,000 shares common stock at $0.52 and $0.40 per share on July 7, 2010 and October 15, 2010, respectively. The shares were issued to an investor relations firm for services rendered in connection with investor relationship activities.
17. | DISCONTINUED OPERATION |
The Company through its indirectly wholly owned subsidiary Beijing Gas executed share transfer agreements and other related agreements (the “Agreements”) with Hebei Natural Gas Co., Ltd. (“Hebei Gas”) to sell assets and ownership of three of its subsidiaries, a) Xinji Zhongchen Gas Co., Ltd., (“Xinji Gas”) b) Jinzhou Weiye Gas Co., Ltd., (“Jinzhou Gas”) and c) Shenzhou Weiye Gas Co., Ltd. (“Shenzhou Gas”) for total consideration of RMB 44.8 million (approximately USD $6.84 million). Upon the completion of registered capital transfer filed with local government’s industrial and commercial administration, the disposition took effect on June 8, 2011. The Company has accounted for the disposition of the assets of discontinued operation in accordance with SFAS 144 (“FASB ASC 360”), “Accounting for the Impairment or Disposal of Long-Lived Assets”. A total gain of $1,115,903 was recorded in the Company’s statement of income for the nine months ended September 30, 2011.
The following tabulation summarizes the financial positions and result of operations of the subsidiaries that were disposed of as of and for the period ended June 8, 2011:
Condensed Balance Sheets | ||||||||||||||||
Jinzhou Gas | Shenzhou Gas | Xinji Gas | Total | |||||||||||||
Current assets | $ | 318,870 | $ | 309,043 | $ | 434,016 | $ | 1,061,929 | ||||||||
Non-current assets | 2,946,728 | 1,068,812 | 1,221,403 | 5,236,943 | ||||||||||||
Total assets | 3,265,598 | 1,377,855 | 1,655,419 | 6,298,872 | ||||||||||||
Current liabilities | 1,202,229 | 485,274 | 215,890 | 1,903,393 | ||||||||||||
Non-current liabilities | - | - | - | - | ||||||||||||
Total liabilities | 1,202,229 | 485,274 | 215,890 | 1,903,393 | ||||||||||||
Net assets | 2,063,369 | 892,581 | 1,439,529 | 4,395,479 | ||||||||||||
Total liabilities & net assets | $ | 3,265,598 | $ | 1,377,855 | $ | 1,655,419 | $ | 6,298,872 |
37
Sino Gas International Holdings, Inc.
Notes to Financial Statements
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)
Condensed Income Statements | ||||||||||||||||
Jinzhou Gas | Shenzhou Gas | Xinji Gas | Total | |||||||||||||
Revenue | $ | 355,684 | $ | 274,289 | $ | 9,460 | $ | 639,433 | ||||||||
Cost of revenue | 214,835 | 221,852 | 8,130 | 444,817 | ||||||||||||
Gross profit | 140,849 | 52,437 | 1,330 | 194,616 | ||||||||||||
Operating expenses | 18,039 | 15,826 | 34,737 | 68,602 | ||||||||||||
Operating income | 122,810 | 36,611 | (33,407 | ) | 126,014 | |||||||||||
Other income/(expenses) | (239 | ) | (223 | ) | (3,181 | ) | (3,643 | ) | ||||||||
Earnings before tax | 122,571 | 36,388 | (36,588 | ) | 122,371 | |||||||||||
Income tax | (6,127 | ) | (11,039 | ) | (112 | ) | (17,278 | ) | ||||||||
Net income | $ | 116,444 | $ | 25,349 | $ | (36,700 | ) | $ | 105,093 |
The follows presented the calculation of gain from the disposal of property and equipment:
Valuation of Disposition | Acquisition Price | Gain/(Loss) | ||||||||||
Jinzhou Gas | $ | 3,130,470 | $ | 2,958,639 | $ | (171,831 | ) | |||||
Shenzhou Gas | 1,320,031 | 1,276,126 | (43,905 | ) | ||||||||
Xinji Gas | 1,275,192 | 2,606,831 | 1,331,639 | |||||||||
$ | 5,725,693 | $ | 6,841,596 | $ | 1,115,903 |
38
Item 2. Management’s Discussion and Analysis or Plan of Operation
The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believe,” “anticipate,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be place on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements, except to the extent required by law.
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.
Economic & Industrial Trends
We generate revenue from two sources: (i) connection fees for constructing connections to our natural gas distribution network and (ii) sales of natural gas. Given the fact that almost all of our connection fees are from new residential apartments, our connection activities are closely related to the development of the real estate industry in our targeted cities in China. Natural gas facilities in new apartments are often required by local governments, who aim to promote the use of natural gas to improve the local residents’ quality of life.
Due to the Chinese real estate boom in recent years, we experienced high growth in our connection activities. However, in 2007, the Chinese government implemented a series of policies and regulations to curb inflation and to slow the growth of the property market. These policies, together with the worldwide financial crisis in 2008, resulted in a slowdown of the real estate market in China and our business, in turn, was affected. In 2008, the Chinese government changed its policies and prioritized working to boost the economy. The Chinese government adopted new policies, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies, to address the slowdown in the real estate market. The Chinese government also decided to inject a stimulus package, which allocated funds for mass housing projects, to boost the overall economy. We saw signs of recovery of the real estate market in China at the beginning of 2009, and we experienced increased business activities in the third and fourth quarters of 2009. Starting in April 2010, the Chinese government issued new policies to curb the rise of housing prices in certain cities. These new initiatives resulted in lower transaction volumes during the second and third quarters of 2010. However, our transaction volumes started to pick up again in the fourth quarter of 2010. Although in the first three quarters of 2011 the overall housing market remained slow, in the 2nd and 3rd tier cities where we operate, housing development is still solid. As a result, new installations for residential customers have increased. We experienced strong growth in third quarter of 2011. However, we expect the housing market slow down to affect our expansion in 2012 to 2013.
Even with the up and down nature of the Chinese real estate market over the past two years, we believe that the growth trend of the real estate market will continue because of the ongoing urbanization in China. Moreover, the Chinese government, at both the national and the local levels, continues to strongly support the use of clean energy, particularly natural gas.
There are three pillars in the Chinese economy: (i) domestic consumption (both private and public), (ii) net exports, and (iii) domestic investment. China’s GDP grew 9.7%, 9.5% and 9.1% during the first, second and third quarter of 2011, respectively, from the same periods of 2010. For the first 3 quarters in 2011, China’s GDP rose 9.4% on average as compared to the same period of 2010.
Our gas users are comprised of both industrial and residential users. Gas sales to residential users are much less affected by economic and industrial factors and should maintain stable growth in the future. Gas sales to industrial users, however, are subject to the operating performance of the industrial user. As we develop into more cities in the coming years, we expect to add more industrial users when the opportunities arise and we possess the necessary capital requirements.
4
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 and it is primarily in these markets that we are exploring potential project targets. Many small-sized city markets are still untapped or undeveloped. The development of these markets is generally considered one of the Company’s major growth opportunities.
The natural gas distribution markets of most medium-sized or large cities 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. Acquisitions in these markets would have a material impact on the Company, potentially increasing the Company’s assets and revenues significantly.
Material Challenges
There are many small-to-medium sized cities whose natural gas infrastructure is still undeveloped or underdeveloped and these markets present growth opportunities for the Company. However, competition is growing, as many small new players have been attracted by the profitability and growth potential of the business. In addition, we are also facing competition from stronger competitors, as large city markets are becoming saturated and our competitors from those markets are beginning to expand into smaller cities.
We face limited opportunities in developing into first-tier cities in China, as most of those opportunities have already been assumed by other large gas distributors, such as Xin’ao Gas Co. Ltd. (the largest distributor in China).
Furthermore, potential users in small and medium-sized cities need to be educated about the benefits of natural gas. It takes some time for them to realize how natural gas can improve their quality of life. This is especially true for new markets, where there is no use of natural gas. Correspondingly, small cities tend to be more reluctant to use new energies than large cities and residents of small cities tend to depend more on coal than natural gas.
With respect to purchase price and sale price of natural gas, China’s energy market is highly regulated by the government. Whenever there is an adjustment to the purchase price set by the government, gas distributors increase or decrease the sale price accordingly, subject to a public hearing and government approval. The natural gas prices in China are lagging behind those in other international markets. The Chinese government has seldom adjusted the price of natural gas and we cannot rule out the possibility of an increase in natural gas prices by the government in the future. Even though we could adjust our sale price accordingly after the increase in purchase price, thereby passing the increase onto the end users, the fact remains that such price increases would make natural gas more expensive, as compared to other alternative energies, and in turn could hinder our business development.
Risks in Short-Term and Long-Term
In each of the cities we are developing and aiming to develop, the real estate market is the major factor that impacts us. Most of our residential customers are new home buyers. If the real estate market turns downward, the demand for new homes could decrease, resulting in fewer natural gas connections, which would negatively impact our business.
To reduce the Company’s dependence on connection fees, the Company is looking at opportunities to diversify its business by expanding into related industries, such as pipelines and gas stations. However, we do not expect to develop into those areas in full in the near future.
Liquidity and Capital Resources
Natural gas distribution is a capital-intensive industry that requires large amounts of capital for the construction of pipelines and gas stations and the purchase of transportation vehicles. Without the necessary capital, the Company would be constrained by inadequate capital when developing into larger cities or engaging in merger and acquisition activities, and would require additional fundraising to finance such business activities.
5
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
During the three months ended September 30, 2011, net revenues were $13,603,978, representing an increase of 68.01% from the same period of 2010. Gross profit for the three months ended September 30, 2011 was $6,497,441, representing an increase of 104.71% from the same period of 2010. Our operating income for the three months ended September 30, 2011 was $4,659,550, representing an increase of 152.89% from the same period of 2010. Net income for the three months ended September 30, 2011 was $2,210,751, compared to $1,025,418 during the same period of 2010.
For the 3 months ended September 30 | ||||||||||||
2011 | 2010 | Change | ||||||||||
US$ | US$ | |||||||||||
Net Revenues | 13,603,978 | 8,097,341 | 68.01 | % | ||||||||
Gross Profit | 6,497,441 | 3,173,903 | 104.71 | % | ||||||||
Operating Income | 4,695,550 | 1,856,726 | 152.89 | % | ||||||||
Net Income | 2,210,751 | 1,025,418 | 115.60 | % | ||||||||
Gross Margin | 47.76 | % | 39.20 | % | 21.85 | % | ||||||
Net Margin | 16.25 | % | 12.66 | % | 28.36 | % |
Net Revenues
We generate revenues from two sources: connection fees for constructing connections to our natural gas distribution network and fees for sales of natural gas.
Total net revenues for the three months ended September 30, 2011 were $13,603,978, compared to $8,097,341 for the same period in 2010, representing an increase of 68.01 %. The increase was mainly due to the increased of both gas sales and connection fees, especially due to the significant increase of connection fees. During this period, we connected 23,851 new residential households and 17 new industrial and commercial customerse to our gas distribution network, resulting in total connection fees of $7,858,015. In comparison, we connected 9,878 new residential households to our gas distribution network for the same period in 2010, resulting in total connection fees of $3,478,985. Gas sales during the three months ended September 30, 2011 were $5,745,963. Gas sales during the same period in 2010 were $4,618,355.
For the 3 months ended September 30, | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
(In $ million) | US$ | % | US$ | % | % | |||||||||||||||
Net Revenues | 13,60 | 100 | % | 8.10 | 100 | % | 68.01 | % | ||||||||||||
Connection Fees | 7.86 | 58 | % | 3.48 | 43 | % | 125.87 | % | ||||||||||||
Gas Sales | 5.75 | 42 | % | 4.62 | 57 | % | 24.42 | % |
6
Connection Fees
Connection fees during the three months ended September 30, 2011 were $7.86 million, representing an increase of 125.87% from $3.48 million during the same period of 2010 and accounting for 58% of the total net revenue in the three months ended September 30, 2011 as compared to approximately 43% of the total net revenue for the same period in 2010. The source of connection fees was mainly from the development of new residential users. In the quarter ended September 30, 2011, our Baishan Weiye Gas subsidiary started to ramp up the connections in the Fusong area of Jilin provinces. The new customers in Fusong area contributed more than $3 million in connection fees. We also saw strong growth in the Suwan area of Jiangsu province in the third quarter of 2011.
For the 3 months ended September 30, | ||||||||||||||||||||
(in US$ millions) | 2011 | 2010 | Change | |||||||||||||||||
US$ | % | US$ | % | % | ||||||||||||||||
Connection Fees | 7.86 | 100 | % | 3.48 | 100 | % | 125.87 | % | ||||||||||||
Residential Users | 7.52 | 96 | % | 3.48 | 100 | % | 116.15 | % | ||||||||||||
Industrial and Commercial Users | 0.34 | 4 | % | 0 | 0 | % |
Gas Sales
Gas sales were $5.75 million during the three months ended September 30, 2011, accounting for 42% of total net revenue for the three months ended September 30, 2011 and representing an increase of 24.42% over the same period of 2010. Gas sales to residential users increased 121.39% to $4.95 million for the three months ended September 30, 2011 from $2.23 million in the same period of 2010. Gas sales to industrial and commercial users decreased 66.53% to $0.80 million for the three months ended September 30, 2011 from $2.39 million in the same period of 2010.
For the 3 months ended September 30, | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gas Sales | 5.75 | 100 | % | 4.62 | 100 | % | 24.42 | % | ||||||||||||
Residential Users | 4.95 | 86 | % | 2.23 | 48 | % | 121.39 | % | ||||||||||||
Industrial and Commercial Users | 0.8 | 14 | % | 2.39 | 52 | % | -66.53 | % |
Gas sales increase has shifted to mainly from residential users, which account for 86% of total gas sales as compared to 48% of the same period of last year. In this quarter, the industrial and commercial customers account for 14% of the total gas sales instead of 52% of the total gas sales in the third quarter of 2010.
Cost of Revenues
Cost of revenues for the three months ended September 30, 2011, which includes cost of connections and cost of gas sales, was $7.11 million, representing an increase of 44.34% from $4.92 million in the same period of 2010.
For the 3 months ended September 30, | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Cost of Revenues | 7.11 | 100 | % | 4.92 | 100 | % | 44.34 | % | ||||||||||||
Connection Fee Cost | 1.68 | 24 | % | 0.76 | 16 | % | 119.34 | % | ||||||||||||
Gas Cost | 5.43 | 76 | % | 4.16 | 84 | % | 30.58 | % |
Cost of Connection Fees
The cost of connection fees increased 119.34% to $1.68 million during the three months ended September 30, 2011 from $0.76 million for the same period in 2010. During the three months ended September 30, 2011, our revenue from the connection fees increased significantly compared to the same period of 2010, which resulted in the total cost of connection fees also increasing significantly. In addition, we incurred higher costs for raw materials, parts, and installation and maintenance as compared to the same period of 2010.
Cost of connection fees includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, and installation and maintenance costs.
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Cost of Gas Sales
The cost of gas sales increased 30.58% to $5.43 million during the three months ended September 30, 2011 from $4.16 million for the same period in 2010. This increase in cost of gas sales is largely due to the increase of gas sales and also the higher transportation costs during 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 September 30, 2011, gross profit was $6.50 million, representing an increase of approximately 104.71% from the same period of 2010. Gross profit from connection fees was $6.18 million for the three months ended September 30, 2011, accounting for 95% of total gross profit. In comparison, gross profit from connection fees was $2.71 million for the three months ended September 30, 2010, accounting for 86% of total gross profit for the three months ended September 30, 2010. Gross profit from gas sales was $0.32 million for the three months ended September 30, 2011, accounting for 5% of total gross profit, compared to $0.46 million, accounting for 14% of total gross profit, in the same period of 2010.
For the 3 months ended September 30, | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gross Profit | 6.50 | 100 | % | 3.17 | 100 | % | 104.71 | % | ||||||||||||
Connection | 6.18 | 95 | % | 2.71 | 86 | % | 127.71 | % | ||||||||||||
Gas | 0.32 | 5 | % | 0.46 | 14 | % | -31.47 | % |
Gross margin during the three months ended September 30, 2011 was 47.76%, compared to 39.20% during the same period in 2010.
Gross margin for connection fees for the three months ended September 30, 2011 was 78.69%, compared to 78.05% in the same period of 2010. The increase in the total sales of connection fees contributed to the increase of gross margin.
Gross margin for sales of natural gas was 5.47% for the three months ended September 30, 2011, compared to 9.93% during the same period of 2010. The decrease was primarily due to the increase in delivery costs for the three months ended September 30, 2011, compared with the same period of 2010.
Selling, General and Administrative Expenses
Selling, General and Administrative (“SG&A”) expenses in the three months ended September 30, 2011 were $1. 84 million and approximately 13.51% of net revenues, compared with $1.32 million, or 16.27%, of net revenues in the same period of 2010.
Operating Income
The operating income for the three months ended September 30, 2011 was $4.66 million, representing an increase of 151%, compared to the operating income of $1.86 million for the same period of 2010. This increase was due to the increase in revenue during the three months ended September 30, 2011.
Other Income (Expense)
Other expense was $1.50 million for the three months ended September 30, 2011, compared with other expense of $0.44 million for the same period of 2010. Other expense was mainly attributable to the $0.8 million loss on impairment loss, and also to the increase in interest expense.
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Income tax
Income tax was $0.95 million for the three months ended September 30, 2011, compared to $0.40 million for the same period of 2010.
Net Income
Net income for the three months ended September 30, 2011 was $2.21 million, compared with net income of $1.03 million for the same period of 2010. Due to the increase in sales and improvement of gross margin from both connection fee revenue and gas sales, gross profit improved 104.71% to $6.5 million compared to the gross profit of $3.2 million for the same period of 2010. Higher gross profit offset the increase in cost of revenue, the increase in SG&A expenses and the increase in interest expense in the quarter ended September 30, 2011.
Liquidity and Capital Resources
Cash and cash equivalents were $6.10 million as of September 30, 2011, representing an increase of $2.39 million as compared to $3.71 million of cash and cash equivalents as of September 30, 2010.
Cash sourced in operating activities for the three months ended September 30, 2011 was $1.57 million, comparing with cash used in operating activities of $0.23 million during the same period of 2010. Such increase was mainly due to the increase in net income, adjusted for non-cash expense items and changes in working capital.
Cash used in investing activities for the three months ended September 30, 2011 was $6.13 million, representing an increase of $2.41 million from $3.72 million during the same period of 2010. This increase reflected the registration capital increase contribution made to Qujing Gas in Yunnan province.
Cash sourced in financing activities for the three months ended September 30, 2011 was $4.84 million, representing an increase of $4.65 million from $0.19 million during the same period of 2010. This increase was mainly due to the increase in short term bank loans.
Accounts Receivable
Accounts receivable as of September 30, 2011 were $13.47 million, representing an increase of $3.97 million from $9.50 million as of December 31, 2010.
Notes Receivable
Notes receivable as of September 30, 2011 were $0.90 million, representing an increase of $0.67 million from $0.23 million as of December 31, 2010.
Inventory
Inventory of $0.71 million as of September 30, 2011 was comprised of spare parts and natural gas.
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Fixed Assets
Fixed Assets as of September 30, 2011 were $55.28 million, representing an increase of $0.11 million from $55.17 million as of December 31, 2010. The table below is a breakdown of our fixed assets at cost:
2011 | 2010 | |||||||
At Cost | ||||||||
Gas Pipelines | $ | 44,398,037 | $ | 44,512,342 | ||||
Motor Vehicles | 5,974,133 | 6,067,524 | ||||||
Machinery & Equipment | 1,530,990 | 1,542,016 | ||||||
Buildings | 2,331,684 | 2,316,729 | ||||||
Leasehold Improvements | 557,526 | 475,099 | ||||||
Office Equipment | 488,933 | 256,419 | ||||||
Less Accumulated depreciation | (6,255,553 | ) | (5,241,647 | ) | ||||
$ | 49,025,750 | $ | 49,928,482 |
Bank Loans
Short-term bank loans as of September 30, 2011 were $17.34 million, an increase of $9.48 million compared to that as of December 31, 2010. Peixian Rural Credit Union provided a $4.7 million one year loan in the third quarter of 2011.
Long-term bank loans as of September 30, 2011 were $3.12 million.
For more information concerning our Bank loans, please see the applicable note to our financial statements.
Accounts Payable
Accounts payable as of September 30, 2011 was $11.40 million, representing an increase of $0.29 million from that as of December 31, 2010.
Other Payables
Other payables - current as of September 30, 2011 were $4.59 million, representing an increase of $0.89 million from that as of December 31, 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
During the nine months ended September 30, 2011, our net revenues were $29,465,400, representing an increase of 40.5% from the same period of 2010, and gross profit was $11,320,819, representing an increase of 57.14% from the same period of 2010. During the nine months ended September 30, 2011, our operating income was $6,218,720, representing an increase of 68.07% from the same period of 2010.
For the 9 months ended September 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
US$ | US$ | % | ||||||||||
Net Revenues | 29,465,400 | 20,971,220 | 40.50 | % | ||||||||
Gross Profit | 11,320,819 | 7,204,302 | 57.14 | % | ||||||||
Operating Income | 6,218,720 | 3,700,092 | 68.07 | % | ||||||||
Net Income | 3,631,677 | 676,230 | 437.05 | % | ||||||||
Gross Margin | 38.42 | % | 34.35 | % | 11.85 | % | ||||||
Net Margin | 12.33 | % | 3.22 | % | 282.92 | % |
Net Revenues
We generate revenues from two sources: connection fees for constructing connections to our natural gas distribution network and sales of natural gas.
Total net revenues for the nine months ended September 30, 2011 were $29,465,400, representing an increase of 40.50% over the $20,971,220 for the same period in 2010. The increase was due to the healthy growth in both connection fees and gas sales. During this period, we connected 40,184 new residential households and 17 new industrial and commercial customers to our gas distribution network, resulting in total connection fees of $13,898,424. Gas sales during the same period were $15,566,976. In comparison, we connected 23,572 new residential households to our gas distribution network in the same period of 2010, resulting in total connection fees of $8,307,036. Gas sales during the period were $12,664,183.
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The new project roll out in the Baishan Fusong area contributed significantly in the third quarter generating more than 3 million dollars in revenue. The Suwan region in Jiangsu province continued to show strong growth in both new customers and increased gas sales during the first three quarters of 2011.
For the 9 months ended September 30, | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
(In $ million) | US$ | % | US$ | % | % | |||||||||||||||
Net Revenues | 29.47 | 100 | % | 20.97 | 100 | % | 40.50 | % | ||||||||||||
Connection Fees | 13.90 | 47 | % | 8.31 | 40 | % | 67.31 | % | ||||||||||||
Gas Sales | 15.57 | 53 | % | 12.66 | 60 | % | 22.92 | % |
Our net revenues for the nine months ended September 30, 2011 increased by 40.50% over the same period of 2010 due primarily to the following two factors:
1. The increase in connection fees from mostly residential customers. There was a 67.31% increase in connection fees during the first nine months of 2011, compared to the same period of 2010.
2. The Increase in gas sales to both industrial and residential customers. There was a 22.92% increase in gas sales during the first nine months of 2011, compared to the same period of 2010.
Connection Fees
Connection fees during the nine months ended September 30, 2011 were $13.90 million, representing an increase of 67.31% over the same period of 2010, accounting for 47% of the total net revenue during the first nine months of 2011. The increase in connection fees came from both the continuing development of residential and industrial and commercial users.
For the 9 months ended September 30, | ||||||||||||||||||||
(in US$ millions) | 2011 | 2010 | Change | |||||||||||||||||
US$ | % | US$ | % | % | ||||||||||||||||
Connection Fees | 13.90 | 100 | % | 8.31 | 100 | % | 67.31 | % | ||||||||||||
Residential Users | 13.56 | 98 | % | 8.31 | 100 | % | 63.29 | % | ||||||||||||
Industrial and Commercial Users | 0.34 | 2 | % | 0 | 0 | % | % |
Gas Sales
Gas sales were $15.57 million during the nine months ended September 30, 2011, accounting for 53% of total net revenue in the first nine months 2011, an increase of 22.92% over the same period of 2010. During the nine months ended September 30, 2011, gas sales to residential users increased 53.57% to $10.41 million from $6.78 million in the same period of 2010. During the nine months ended September 30, 2011, gas sales to industrial and commercial users decreased 12.24% to $5.16 million from $5.88 million in the same period of 2010.
For the 9 months ended September 30, | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gas Sales | 15.57 | 100 | % | 12.66 | 100 | % | 22.92 | % | ||||||||||||
Residential Users | 10.41 | 67 | % | 6.78 | 54 | % | 53.57 | % | ||||||||||||
Industrial and Commercial Users | 5.16 | 33 | % | 5.88 | 46 | % | -12.24 | % |
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Cost of Revenues
Cost of revenues for the nine months ended September 30, 2011, which includes cost of connections and cost of gas sales, was $18.14 million, an increase of 31.80%, from $13.77 million in the same period of 2010.
For the 9 months ended September 30 | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Cost of Revenues | 18.14 | 100 | % | 13.77 | 100 | % | 31.80 | % | ||||||||||||
Connection Cost | 3.20 | 18 | % | 1.99 | 14 | % | 60.63 | % | ||||||||||||
Gas Cost | 14.94 | 82 | % | 11.77 | 86 | % | 26.92 | % |
Cost of Connections
Cost of connections increased 60.63% to $3.20 million during the nine months ended September 30, 2011 from $1.99 million for the same period in 2010. During the first nine months of 2011, we incurred higher cost for raw materials, parts, and installation and maintenance fees. There were also cost increase resulting from the higher sales revenue, especially in light of the significant sales increases during the third quarter of 2011.
Cost of connections 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 26.92% to $14.94 million during the nine months ended September 30, 2011 from the same period in 2010, when it was $11.77 million.
The cost of natural gas sales includes the purchase and transportation of natural gas and the depreciation of delivery trucks.
Gross Profit
During the nine months ended September 30, 2011, gross profit was $11.32 million, an increase of approximately 57.14% from the same period of 2010. Gross profit from connection fees was $10.70 million for the first nine months of 2011, accounting for 95% of total gross profit. In comparison, gross profit from connection fees was $6.31 million for the first nine months of 2010, accounting for 88% of total gross profit. Gross profit from gas sales was $0.62 million, accounting for 5% of total gross profit, compared to $0.89 million, 12% of total gross profit in the same period of 2010.
For the 9 months ended September 30, | ||||||||||||||||||||
2011 | 2010 | Change | ||||||||||||||||||
($ million) | US$ | % | US$ | % | % | |||||||||||||||
Gross Profit | 11.32 | 100 | % | 7.20 | 100 | % | 57.14 | % | ||||||||||||
Connection | 10.70 | 95 | % | 6.31 | 88 | % | 69.42 | % | ||||||||||||
Gas | 0.62 | 5 | % | 0.89 | 12 | % | -29.99 | % |
Gross margin during nine months ended September 30, 2011 was 38.42%, compared to 34.35% during the same period in 2010.
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Gross margin for connection fees for the nine months ended September 30, 2011 was 76.97%, compared to 76.02% during the same period of 2010.
Gross margin for sales of natural gas was 4.0% for the nine months ended September 30, 2011, compared to 7.02% during the same period of 2010. The decrease was due to the higher delivery cost for the natural gas for the nine months ended September 30, 2011 compared to the same period of 2010.
Selling and Marketing Expenses
Our selling and marketing expenses in the nine months ended September 30, 2011 were $ 1. 69 million, or approximately 5.74% of our net revenues, compared with $ 1.15 million, or approximately 5.48 % of net revenues for the same period in 2010.
General and Administrative Expenses and other expenses
General and administrative expenses were $3.41 million for the nine months ended September 30, 2011, or approximately 11.58% of our net revenues, compared with $2.35 million, or approximately 11.23% of net revenues for the same period in 2010.
Operating Income
The operating income for the nine months ended September 30, 2011 was $6.22 million, representing an increase of 68.11%, compared to the operating income of $3.70 million in 2010.
Other Income (Expense)
Other Expense was $1.39 million for the nine months ended September 30, 2011, compared with Other Expense of $2.18 million for the same period of 2010. The decrease in the expense was due to gain in second quarter of 2011 from the disposal of property and equipment from three of our projects, Jinzhou Gas, Shenzhou Gas and Xinji Gas respectively (the “Projects”), and also to the lower non-cash flow amortization costs of convertible bonds and interest expense of convertible bonds, which offset the impairment loss and the interest expense from short term bank loans in the third quarter of 2011.
Income tax
Income tax was $1.30 million for the nine months ended September 30, 2011, compared to $0.84 million in 2010.
Net Income
Net income in the nine months ended September 30, 2011 was $3.63 million, compared with net income of $0.68 million in the same period in 2010. This result was driven by the increase in revenue, higher gross margin, the gain on disposal of property and equipment from the Projects, and the revenue increase from the new customers of Baishan Fusong in the third quarter of 2011.
Liquidity and Capital Resources
Cash and cash equivalents were $6.10 million as of September 30, 2011, an increase of $2.39 million as compared to $3.71 million of cash and cash equivalents as of September 30, 2010.
Cash sourced in operating activities for the nine months ended September 30, 2011 was $0.79 million, compared with cash used in operating activities $1.89 million during the same period of 2010.
Cash used in investing activities for the nine months ended September 30, 2011 was $7.89 million, a decrease of $0.14 million from $8.03 million during the same period of 2010. Such decrease is the result of the aggregation of the following: the increase in property, plant & equipment and construction in progress, the proceeds from the disposal of discontinued operations in the second quarter of 2011, and the increase of the investment in the equity for registration capital increase in Qujing Gas in the third quarter of 2011.
13
Cash sourced in financing activities for the nine months ended September 30, 2011 was $9.57 million compared with $2.44 million in the same period of last year.
Accounts Receivable
Accounts receivable as of September 30, 2011 were $13.47 million, an increase of $3.97 million from $9.50 million as of December 31, 2010.
Notes Receivable
Notes receivable as of September 30, 2011 were 0.90 million.
Fixed Assets
Fixed Assets as of September 30, 2011 were $55.28 million, representing an increase of $0.11 million from $55.17 million as of December 31, 2010. The table below is a breakdown of our fixed assets at cost:
2011 | 2010 | |||||||
At Cost | ||||||||
Gas Pipelines | $ | 44,398,037 | $ | 44,512,342 | ||||
Motor Vehicles | 5,974,133 | 6,067,524 | ||||||
Machinery & Equipment | 1,530,990 | 1,542,016 | ||||||
Buildings | 2,331,684 | 2,316,729 | ||||||
Leasehold Improvements | 557,526 | 475,099 | ||||||
Office Equipment | 488,933 | 256,419 | ||||||
Less Accumulated depreciation | (6,255,553 | ) | (5,241,647 | ) | ||||
$ | 49,025,750 | $ | 49,928,482 |
Bank Loans
Short-term bank loans as of September 30, 2011 were $17.34 million, an increase of $9.48 million compared to that as of December 31, 2010. Peixian Rural Credit Union provided a $4.7 million one year loan in the third quarter of 2011.
Long-term bank loans as of September 30, 2011 were $3.12 million.
For more information concerning our Bank loans, please see the applicable note to our financial statements.
Accounts Payables
Accounts payables as of September 30, 2011 was $11.40 million, representing an increase of $0.29 million from that as of December 31, 2010.
Other Payables
Other payables - current as of September 30, 2011 were $4.59 million, representing an increase of $0.89 million from that as of December 31, 2010.
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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 Principal Accounting 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 Principal Accounting 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 Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30, 2011.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2011, there was no change in our internal controls over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are hereby filed as part of or furnished with this Quarterly Report on Form 10-Q.
Exhibit Number: | Description | |
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 | |
101 | The following materials from Sino Gas International Holdings, Inc.’s Quarterly Report on Form 10-Q for the three months ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language), are furnished herewith: (i) Consolidated Balance Sheets (unaudited) as of September 30, 2011 and December 31, 2010; (ii) Statements of Operations (unaudited) for the three and six months ended September 30, 2011 and September 30, 2010; (iii) Consolidated Statements of Changes in Shareholders’ Equity (unaudited); (iv) Consolidated Statements of Cash Flows (unaudited) for the three and six months ended September 30, 2011 and September 30, 2010 and (v) Notes to the Unaudited Consolidated Financial Statements (unaudited). |
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing.
SINO GAS INTERNATIONAL HOLDINGS, INC. | |||
Date: November 14, 2011 | By: | /s/ Yuchuan Liu | |
Yuchuan Liu | |||
Chairman and Chief Executive Officer | |||
(Principal Executive Officer) |
SINO GAS INTERNATIONAL HOLDINGS, INC. | |||
Date: November 14, 2011 | By: | /s/ Baoling Wang | |
Baoling Wang | |||
(Principal Accounting Officer) |
17