Sino Gas International Holdings, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - Sino Gas International Holdings, Inc.	v229667_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Sino Gas International Holdings, Inc.	v229667_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Sino Gas International Holdings, Inc.	v229667_ex31-1.htm

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 June 30, 2011

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.

Yes x No o

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 o 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 June 30, 2011, the Registrant had 27,237,262 shares of common stock outstanding.

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	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	48

Item 4.	(Removed and Reserved)	48

Item 5.	Other Information	48

Item 6.	Exhibits	48

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 - 36

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 June 30, 2011 and December 31, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three months and six months periods ended June 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
August 9, 2011	Certified Public Accountants

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

ASSETS	Notes			6/30/2011		12/31/2010
Current Assets
Cash & cash equivalents		2	(e)	$	5,856,357	$	3,582,330
Notes receivable					197,246		226,867
Accounts receivable		2	(f),3		12,910,269		9,504,229
Other receivables					1,598,696		1,127,981
Related party receivable					417,698		408,361
Inventory					751,738		482,594
Advance to suppliers		2	(g)		3,158,862		3,621,147
Prepaid expenses and taxes					621,924		264,481
Total Current Assets					25,512,790		19,217,990

Non-Current Assets
Investment		2	(h),4		13,393,871		12,794,384
Property, plant & equipment, net		2	(j),6		49,488,462		49,928,482
Construction in progress		2	(m)		21,284,908		19,336,428
Intangible assets, net		2	(k),8		502,643		533,730
Goodwill		2	(l),7		1,677,975		1,677,975
Deposit					1,104,469		1,239,548
Total Non-current Assets					87,452,328		85,510,547

Total Assets				$	112,965,118	$	104,728,537

LIABILITIES & STOCKHOLDERS’ EQUITY

LIABILITIES
Current Liabilities
Bank loans		9		$	12,530,941	$	7,864,727
Accounts payable					12,087,544		11,105,790
Other payables - current portion		10	(a)		3,477,493		3,691,923
Accrued liabilities					117,859		1,635,217
Unearned revenue		2	(n)		2,505,334		106,868
Total Current Liabilities					30,719,171		24,404,525

Non-current Liabilities
Long-term bank loans		9			3,094,059		3,024,895
Convertible Bonds		11			5,923,276		5,641,117
Other payables - non-current portion		10	(b)		1,884,999		1,859,499
Total Non-current Liabilities					10,902,334		10,525,511

Total Liabilities				$	41,621,505	$	34,930,036

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

STOCKHOLDERS’ EQUITY	Notes			6/30/2011		12/31/2010

Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,590,094 shares issued and outstanding as of June 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 June 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; 27,237,262 and 27,156,617 shares issued and outstanding as of June 30, 2011 and December 31, 2010		10			27,237		27,156
Additional paid in capital - Common Stock					23,982,953		23,933,033

Additional paid in capital - Warrants Series: A, B, J, C, D					311,110		311,110
Additional paid in capital - Warrants Series: E, G					47,946		47,946
Additional paid in capital - Warrants Series: F, R					-		-
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)		5,514,032		4,819,762
Retained earnings					18,739,569		17,977,181
Minority Interest					968,768		1,004,500
Accumulated other comprehensive income		2	(x)		7,960,576		7,886,391
Total Stockholders’ Equity					71,343,613		69,798,501

Total Liabilities & Stockholders’ Equity				$	112,965,118	$	104,728,537

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Income

For the three months and six months ended June 30, 2011 and 2010

(Stated in US Dollars)

				Three Months Ended						Six Months Ended
	Note			6/30/2011			6/30/2010			6/30/2011			6/30/2010
Sales revenue		2	(p)	$	7,875,152		$	5,916,218		$	15,861,422		$	12,873,879
Cost of revenue					5,472,200			4,010,333			11,038,044			8,843,480
Gross Profit					2,402,952			1,905,885			4,823,378			4,030,399

Operating Expense
Selling expense					501,291			310,661			1,078,152			581,904
General and administrative expense					950,168			698,598			2,186,056			1,605,129
Total operating expense					1,451,459			1,009,259			3,264,208			2,187,033

Operating Income					951,493			896,626			1,559,170			1,843,366

Other Income/(Expense)
Gain on disposal of property and equipment					1,115,903			-			1,115,903			-
Other income					10			4,914			345			10,296
Other expense					(43,257	)		(20,197	)		(47,220	)		(21,497	)
Interest income					3,463			4,270			5,528			9,039
Interest expense					(501,687	)		(821,709	)		(963,409	)		(1,746,550	)
Total other income/(expense)					574,432			(832,722	)		111,147			(1,748,712	)

Income before tax					1,525,925			63,904			1,670,317			94,654

Income tax		2	(r),12		(316,646	)		(204,506	)		(354,483	)		(443,842	)

Gain/(Loss) from discontinued operations, net of tax					105,093			-			105,093			-

Net income				$	1,314,372		$	(140,602	)	$	1,420,927		$	(349,188	)

Net income (loss) attributable to:
- Common stockholders				$	1,336,138		$	(140,602	)	$	1,456,659		$	(349,188	)
- Non-controlling interest				$	(21,766	)	$	-		$	(35,732	)	$	-

Earnings per share		2	(z),13
Basic				$	0.05		$	(0.01	)	$	0.05		$	(0.01	)
Diluted				$	0.04		$	(0.01	)	$	0.05		$	(0.01	)

Weighted Average Shares Outstanding
Basic					27,157,513			26,839,657			27,157,065			26,804,485
Diluted					36,501,007			26,839,657			27,157,065			26,804,485

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of June 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		-			-			-			-		-		-		80,645			81			49,919
Appropriation of loss to minority interest		-			-			-			-		-		-		-			-			-
Appropriation of Retained Earnings		-			-			-			-		-		-		-			-			-
Foreign Currency Translation Adjustment		-			-			-			-		-		-		-			-			-
Balance at June 30, 2011		4,590,094			4,590			5,335,894			95,418		95		132,662		27,237,262			27,237			23,982,953

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of June 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 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		-		-		-			-		-		-		1,420,927			-			-		1,420,927
Conversion of Convertible Bonds		-		-		-			-		-		-		-			-			-		50,000
Appropriation of loss to minority interest		-		-		-			-		-		-		35,732			(35,732	)		-		-
Appropriation of Retained Earnings		-		-		-			-		-		694,270		(694,270	)		-			-		-
Foreign Currency Translation Adjustment		-		-		-			-		-		-		-			-			74,185		74,185
Balance at June 30, 2011		311,110		47,946		-			223,367		8,094,814		5,514,032		18,739,569			968,768			7,960,576		71,343,613

Comprehensive Income	12/31/2010		6/30/2011		Total
Net Income	$	4,041,663	$	1,420,926	$	5,462,589
Other Comprehensive Income
Foreign Currency Translation Adjustment		160,508		74,185		234,693
Total	$	4,202,171	$	1,495,111	$	5,697,282

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Cash Flows

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

	Three Months Ended						Six Months Ended
Cash Flows from Operating Activities	6/30/2011			6/30/2010			6/30/2011			6/30/2010
Net Income	$	1,314,371		$	(140,602	)	$	1,420,926		$	(349,188	)
Bad debt provision		25,347			-			34,404			-
Depreciation expense		349,957			383,177			707,167			722,094
Amortization expense of intangible assets		15,866			9,439			42,493			16,865
Amortization expense of convertible bonds		170,022			529,593			332,159			1,209,949
Loss/(gain) on disposal of property and equipment		1,115,903			-			1,115,903			-
Withdraw/(deposit) in restricted time deposits		-			95,425			-			126,400
Decrease/(increase) in accounts and other receivables		(2,073,677	)		791,824			(3,881,538	)		(560,158	)
Decrease/(increase) in inventory		(60,590	)		45,110			(269,144	)		(114,067	)
Decrease/(increase) in prepaid expenses		(736,914	)		(443,484	)		104,842			299,136
Decrease/(Increase) in related party receivable		(6,745	)		-			(9,337	)		-
Increase/(decrease) in accounts and other payables		1,849,302			(12,197	)		1,673,932			(3,017,201	)
Cash Sourced/(Used) in Operating Activities of Continued Operation		1,962,842			1,285,285			1,271,807			(1,666,170	)
Cash Sourced/(Used) in Operating Activities of Discontinued Operation		181,859			-			181,859			-
Cash Sourced/(Used) in Operating Activities		2,144,701			1,258,285			1,453,666			(1,666,170	)

Cash Flows from Investing Activities
Decrease in deposit		(12,085	)		-			135,079			-
Proceeds from disposal of discontinued operation		4,504,950			-			4,504,950			-
Increase of investment in equity		(312,130	)		(28,404	)		(599,486	)		(29,536	)
Purchase of property, plant & equipment		(3,836,495	)		(238,624	)		(5,762,152	)		(1,828,932	)
Purchase of other intangible assets		(9,957	)		(4,406	)		(11,406	)		(4,564	)
Increase in construction in progress		(1,943,522	)		(2,434,392	)		(1,948,480	)		(2,449,315	)
Cash Sourced/(Used) in Investing Activities of Continued Operation		(1,609,239	)		(2,705,826	)		(3,681,495	)		(4,312,347	)
Cash Sourced/(Used) in Investing Activities of Discontinued Operation		(307,707	)		-			(307,707	)		-
Cash Sourced/(Used) in Investing Activities		(1,916,946	)		(2,705,826	)		(3,989,202	)		(4,312,347	)

Cash Flows from Financing Activities
Increase/(decrease) of bank loans		3,144,216			47,738			4,735,378			2,243,030
Cash Sourced/(Used) in Financing Activities		3,144,216			47,738			4,735,378			2,243,030

Net increase in cash & cash equivalents for the periods		3,371,971			(1,399,805	)		2,199,842			(3,735,487	)
Effect of currency translation		101,299			254,902			74,185			275,307
Cash & cash equivalents at the beginning of periods		2,383,087			7,505,613			3,582,330			9,820,890
Cash & cash equivalents at the end of periods	$	5,856,357		$	6,360,710		$	5,856,357		$	6,360,710

Supplementary cash flows information
Interest received	$	3,463		$	4,269		$	5,528		$	9,039
Interest paid		409,781			290,787			952,418			536,601
Income tax paid		219,829			204,507			712,661			443,842

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES

Sino Gas International Holdings, Inc. (the “Company”) was incorporated under the laws of the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company changed its name to American Arms, Inc. on April 5, 1984, and then changed its name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to Sino Gas International Holdings, Inc. on November 17, 2006.

On September 7, 2006, the Company underwent a reverse-merger with Gas Investment China 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”.

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.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Method of Accounting

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.

(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.

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC, and by the general state of the PRC economy.

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to law and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

(d) Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries (the “Group”). Significant inter-company transactions have been eliminated in consolidation. Investments in which the company has a 20 percent to 50 percent voting interest and where the company exercises significant influence over the investor are accounted for using the equity method.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

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 June 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

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

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

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

(e) Cash and Cash Equivalents

The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.

(f) Accounts 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.

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 June 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 June 30, 2011.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

(j) Property, Plant and Equipment

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and impairment loss. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment are as follows:

Assets Class		Estimated Useful Life
Gas Pipelines (Up to December 31, 2007)		25 years
Gas Pipelines (Starting from January 1, 2008)		50 years
Buildings		25 years
Leasehold Improvements		25 years
Machinery & Equipment		20 years
Motor Vehicles		10 years
Office Equipment		8 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.

(k) Intangible Assets

Intangible assets are stated at cost less accumulated amortization and impairment loss. Amortization is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:

Asset Class		Estimated Useful Life
Land use rights		20 - 50 years
Franchises		30 years
Accounting software		3 years

(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.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

(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.

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.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

The following tables present the Company’s financial assets and liabilities at fair value in accordance to ASC 820-10:

At June 30, 2011:

	Quoted in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Financial assets:
Cash	$	5,856,357	$	-	$	-	$	5,856,357
Notes receivable		197,246		-		-		197,246
Total financial assets	$	6,053,603	$	-	$	-	$	6,053,603

Financial liabilities:
Notes payable	$	-	$	-	$	-	$	-
Total financial liabilities	$	-	$	-	$	-	$	-

At December 31, 2010:

	Quoted in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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	$	-	$	-	$	-	$	-

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 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.

	6/30/2011		12/31/2010
Years end RMB : US$ exchange rate		6.4640		6.6118
Average yearly RMB : US$ exchange rate		6.5482		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 (PRC) tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets, whether it is more likely than not that these items will expire either before the Company is able to realize that tax benefit, or that future realization is uncertain.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 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, standard 15% tax rate preference terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.

Since Sino Gas International Holdings, Inc. is primarily a holding company without any business activities in the United States, the Company shall not be subject to United States income tax for the six months ended June 30, 2011.

(u) Advertising

The Company expensed all advertising costs as incurred.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

(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.

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 damage to employees, equipment, and 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 the Company’s customers could adversely impact the Company’s results of operations.

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 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 (PRC) as applicable to Chinese companies with foreign ownership, net income after taxation can only be distributed as dividends after appropriation has been made for the following:

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.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

(x) Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.

(y) Recent Accounting Pronouncements

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 evaluated subsequent events, and based on this evaluation, the Company did not recognize subsequent event 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 of residential customers are settled by prepayments with debit cards, while industrial customers are billed and paid according to the contract terms from 10 days to one month.

For construction projects, connection fees are generally collected in installments. First deposits of 30% of total contract sum are received from client when the project commences. Second payment of 30% is received at milestone set out following the contracts. Third payment of 30% is received after the construction is completed. The final sum of the remaining portion normally acts as retention money for quality warranty to the developer. The retention money would be received by the company after the 1 year warranty period.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

The Company believes it has provided adequate provisions for doubtful accounts. Doubtful allowance accounts at June 30, 2011 and December 31 2010 were 1% of gross account receivables. In the situation, the Company uses all its efforts, such as having internal staff call for payment, filing legal pledges, or even hiring collecting 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 material balance against the allowance for doubtful accounts.

Accounts Receivable
	6/30/2011			12/31/2010
Accounts receivable	$	13,040,675		$	9,600,231
Less: Allowance for bad debt		(130,406	)		(96,002	)
Accounts receivable, net	$	12,910,269		$	9,504,229

Allowance for Bad Debt
	6/30/2011			12/31/2010
Beginning balance	$	(96,002	)	$	(50,875	)
Allowance provided		(34,404	)		(45,127	)
Charge against allowance		-			-
Reversals		-			-
Ending balance	$	(130,406	)	$	(96,002	)

Accounts Receivable Aging Analysis
	6/30/2011		12/31/2010
<30 Days	$	5,772,559	$	4,894,088
30-60 Days		1,018,878		1,050,245
60-90 Days		144,296		111,355
90-180 Days		228,299		2,265,088
180-360 Days		3,988,287		230,684
>360 Days		1,888,356		1,048,771
Total	$	13,040,675	$	9,600,231

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

The following are the ten most significant accounts receivable at June 30, 2011:

Hebei Zhonggang Steel Co., Ltd.	$	1,114,568
Tongshan Hengxin Jiaye Gas Co., Ltd.		781,900
Jiangsu Zhonghuang Real Estate Co., Ltd		657,478
Baishan Huixin Real Estate Co., Ltd		633,106
Lianyun Port Zhaolong Home Development Co., Ltd.		598,701
Baishan Xingda Real Estate Co., Ltd.		440,532
Hebei Dihua Longzhou New Town Development Co., Ltd.		389,233
Qinwan Island Yongsheng Qiangwang Real Estate Co., Ltd.		393,564
Baishan Yongsheng Real Estate Co., Ltd.		369,322
Xiahuayuan Mining District		278,465
	$	5,656,869

4.	RELATED PARTY RECEIVABLE

The related party receivable $417,698 was 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 securitized by the CEO’s personal home property, which carried a $408,361 (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.		6/30/2011		12/31/2010
(1)	Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.	$	6,192,659	$	6,054,228
(2)	Qujing City Fuel Gas Co., Ltd.		3,490,726		3,490,726
(3)	Tongshan Hengxin Jiaye Gas Co., Ltd.		3,679,545		3,219,181
(4)	China Construction Bank		30,941		30,249
	Total	$	13,393,871	$	12,794,384

(1)

The Company through its wholly owned subsidiary Beijing Gas invested $1,642,152 (RMB 13,465,648) on Xiangke Oil Gas in the acquisition of 40% equity position. The $6,192,659 investment as of June 30, 2011 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ operation results.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 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 the 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 has become 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 additional $1,525,000 into Qujing Gas. The $3,490,726 investment as of June 30, 2011 consisted of principal and accumulated post-acquisition investment income attributed to Qujin Gas’ operation results.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 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 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 June 30, 2011, the Company has not finished the registration of equity transfer with Tongshan City Industrial and Commercial Administration. Therefore, acquisition payments of $3,679,545 for Tongshan Gas was classified as investment as of date.

(4)

The investment of $30,941 (RMB 200,000) with China Construction Bank was a long-term investment fund.

6.	PROPERTY, PLANT AND EQUIPMENT

Property, Plant, and Equipment consisted of the follows at June 30, 2011 and December 31, 2010:

6/30/2011	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	44,557,695	$	2,913,722	$	41,643,973
Motor Vehicles		6,195,361		2,085,893		4,109,468
Machinery & Equipment		1,527,796		381,851		1,145,845
Buildings		2,331,987		362,305		1,969,682
Leasehold Improvements		556,866		74,424		482,442
Office Equipment		267,571		130,619		136,952
Total	$	55,437,276	$	5,948,814	$	49,488,462

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

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 years useful lives. Starting from 2008, the Company purchased new quality of pipelines under a 50 years warranty. The new gas pipelines were depreciated over their 50 years useful lives.

Depreciation expenses included in the consolidated statements of income for the six months ended June 30, 2011 and 2010 were $707,167 and $722,094 respectively.

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 reviewed the carrying value of goodwill using the sum of the discounted cash flows to determine if an impairment charge is necessary. The Company has determined no impairment to goodwill as of date.

	6/30/2011		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

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

8.	INTANGIBLE ASSETS

Intangible assets consisted of the follows at June 30, 2011 and December 31, 2010:

6/30/2011	At Cost		Accumulated Amortization		Net
Land Use rights	$	486,752	$	73,683	$	413,069
Franchises		425,433		395,137		30,296
Accounting Software		102,851		43,573		59,278
	$	1,015,036	$	512,393	$	502,643

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 in accordance to zoning laws granted by the local PRC government 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 PRC local government and entities in charge of gas utility, the Company operated as a local natural gas distributor in a city or county. Amortization expenses included in the consolidated statements of income for the six months ended June 30, 2011 and 2010 were $ 42,493 and $16,865 respectively.

LOANS

a. SHORT-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			6/30/2011		12/31/2010
China Minsheng Banking Corp., Ltd. - Pinganli Branch	11/15/2011		6.67	%	$	1,082,921	$	1,058,713
Bank of Dalian - Beijing Branch	12/14/2011		4.63	%		4,641,089		4,537,343
Bank of Communications - Zhongguancun Branch	12/14/2011		5.94	%		2,320,545		2,268,671
Bank of China - Huanghe Boulevard Branch	01/31/2012		6.391	%		1,547,030		-
China Construction Bank - Baishan Chengqu Branch	06/02/2012		8.20	%		1,392,326		-
China Merchants Bank- Beijing Shouti Branch	06/28/2011		7.57	%		1,547,030		-
Total					$	12,530,941	$	7,864,727

The loan provided by China Minsheng Bank Corp., Ltd. was guaranteed by the CEO Mr. Liu Yuchuan’s personal credit.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

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)

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 financial service to Hebei Desheng.

The loan provided by China Construction Bank was secured by the Company’s real estate and vehicles.

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 respectively.

b. LONG-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			6/30/2011		12/31/2010
China Development Bank - Beijing Branch	12/24/2012		5.40	%	$	3,094,059	$	3,024,895
Total					$	3,094,059	$	3,024,895

The Company obtained the loans from Bank of Communications and China Development Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd (“Guarantor”). Guarantor guaranteed to the Banks the entire principal and accrued interest. The Company pledged all Beijing 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 to the guarantor per annum. Because the Company lacked the favorable credit history to directly establish credit facility with the banks, the pursuance of a credit collateralization from guarantor was a financing solution of choice.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

10.	OTHER PAYABLES

a. Current other payables consisted of the following at June 30, 2011 and December 31, 2010:

Ref.		6/30/2011		12/31/2010
(1)	Amount due to Employees	$	491,281	$	954,455
(2)	Tax Payable		264,132		692,861
(3)	Payables to Subcontractors		2,722,080		2,044,607
	Total	$	3,477,493	$	3,691,923

Amounts due to employees included accrual payroll, welfare payable, continued education training program cost and individual travel advance. They were all unsecured, interest free, and have no fixed repayment terms.

The tax payable consisted of value added tax, sales tax, income tax and local tax payables.

Payables to subcontractors were unbilled liabilities.

b. Non-current other payables at June 30, 2011 and December 31, 2010:

Ref.		6/30/2011		12/31/2010
(1)	Payable for the acquisition of Baishan Gas Co., Ltd.	$	1,884,999	$	1,859,499
	Total	$	1,884,999	$	1,859,499

The outstanding payment was 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”)

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

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 Yuchuan, 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.

The Company has the right to redeem either 50% or 100% of the outstanding principal amount of these notes on or after one year from the issuance days.

The convertible bonds payable, net consisted of the followings:-

		6/30/2011
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		82,106			18,962			101,068
(6)	Accretion of Interest Discount - Beneficial Conversion Feature		869,270			223,252			1,092,522
(7)	Accretion of Bond Discount - Issuance Cost		231,138			39,012			270,150
(8)	Accretion of Interest Discount - Redemption		515,482			62,125			577,607
(9)	Conversion of Convertible Bonds into Common Stock		(250,000	)		-			(250,000	)
	Convertible Bonds Payable, net		5,245,992			677,284			5,923,276

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

		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

The principal amounts listed above represent the face amount of the convertible notes.

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.

Because the conversion price of bonds is $0.62, which was lower than the fair market value of common stock at issuance day, beneficial conversion feature was applied.

The issuance cost consisted of commission to placement agent and legal expense.

The interest discount of warrants was amortized over the whole period applying effective annual interest rate.

The bonds were convertible at the option of the holders into shares of common stock. However, Rule 144 minimum of six months holding period requirement for a resale of securities was required, therefore, the beneficial conversion feature was amortized over six months period.

The debt issuance cost was amortized over 36 months period applying effective annual interest rate.

Based on 15% per annum redemption rate, the redemption values were determined to be $1,123,496 and $145,527 for the $5,349,982 and $692,984 convertible bonds respectively.

Principal of $200,000 was converted into 322,581 shares common stock on August 24, 2010. Additional, $50,000 principal was converted into 80,645 shares common stock on June 29, 2011.

Included in interest expense of $963,409, was $241,719 convertible bonds coupon expense, $332,159 non-cash flow amortization expense of convertible bonds, and $389,531 bank loan interest expense.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

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 27,237,262 shares are issued and outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001 per share. The preferred stock consists of (a) series A convertible preferred stock, with 20,000,000 shares authorized and 0 share is issued and outstanding; (b) series B convertible preferred stock, with 5,000,000 shares authorized and 4,590,094 shares are issued and outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000 shares authorized and 95,418 shares are issued and outstanding.

The following is a summary of the material terms of its capital stock. This summary is subject to and qualified in its entirety by its Articles of Incorporation, as amended and corrected, certificates of designations for its series A, series B, and series B-1 convertible preferred stock, its by-laws and by the applicable provisions of Utah law.

Common Stock

The Company is authorized to issue 250,000,000 shares of common stock, with a par value of $0.001. There are 27,237,262 shares of common stock issued and outstanding at June 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.

Preferred Stock

In addition to the 250,000,000 shares of common stock, the Company is authorized to issue 100,000,000 shares of preferred stock, with a par value of $0.001 per share. Shares of the preferred stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the board of directors prior to the issuance.

On August 30, 2006, the Company’s board of directors designated 20,000,000 shares of its preferred stock as series A convertible preferred stock and 5,000,000 shares of its preferred stock as series B convertible preferred stock. On August 31, 2006, the Company filed certificates of designations for the series A and series B convertible preferred stock with the Office of the Secretary of State of Utah. On September 6, 2006, the board of directors amended the designations of the Series B convertible preferred stock and the Company filed an amended certificate of designations for the Series B convertible preferred stock with the Office of the Secretary of State of Utah. The board of directors created the series A convertible preferred stock to allow the Company to consummate the share exchange transaction with the Gas (BVI) Shareholders and the series B convertible preferred stock in connection with its private financing transactions. Each of the shares of series A convertible preferred stock was automatically converted into one share of its common stock upon the effectiveness of its reverse stock-split on November 17, 2006. 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 privilege as series B convertible preferred stock.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

Financing Transactions

The tabulation below presents the financial transactions occurred in the years 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 at June 30, 2011:

	Authorized Shares		Shares issued and outstanding
Common Stock		250,000,000		27,237,262
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

	Strike Price		Contractual Life	Expiration Date	Shares issued and outstanding		Weighted Average Fair Value
Series A Warrants	$	3.84	60 Months	9/6/2011		241,708	$	0.70
Series C Warrants	$	3.38	60 Months	9/6/2011		3,083,589	$	0.81
Series G Warrants	$	3.84	48 Months	9/6/2011		109,489	$	0.44
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

a. 271,074 and 271,074 shares Series F and R warrants have been expired on September 6, 2010.

b. 100,000 shares warrants to IR firm CCG Elite have been expired on November 1, 2010.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

The Company used the Black-Scholes model to calculate the values of Warrants. The following shows the assumptions that were employed in the model:

	Warrants A			Warrants C			Warrants G			5.3M CB Warrants			692K CB Warrants
Weighted average fair value	$	0.70		$	0.81		$	0.44		$	0.05		$	0.11
Strike price	$	3.84		$	3.38		$	3.84		$	0.744		$	0.744
Risk-free interest rate		4.18	%		4.18	%		4.18	%		1.12	%		1.51	%
Expected volatility		40.00	%		40.00	%		40.00	%		12.84	%		12.84	%
Years to maturity		5.00			5.00			4.00			3.00			3.00

Since there is no net cash settlement arrangement for the warrants, they should be classified as equity instrument in accordance with EITF 00-19. Thus, subsequent changes in fair value should not be recognized.

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 June 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		14,583,601		14,584		25,969,070		54	%
Beneficial Conversion Feature		-		-		-		-		-		-		8,094,814		-
		4,590,094	$	4,590		95,418	$	95		27,237,262	$	27,237	$	38,128,746		100	%

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 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 six months ended June 30, 2011 and 2010:

Description	June 30, 2011			June 30, 2010
Income (loss) before taxes:-
US Federal	$	(839,490	)	$	(1,712,477	)
State					-
BVI		(73,028	)		(135,341	)
PRC		2,582,835			1,942,472
Total income before taxes	$	1,670,317		$	94,654

Provision for taxes:-
Current:
U.S. Federal	$	-		$	-
State		-			-
HK		-			-
PRC		(354,483	)		(443,842	)
		(354,483	)		(443,842	)
Deferred:
U.S. Federal		-			-
State		-			-
HK		-			-
PRC		-			-
Valuation allowance		-			-
		-			-

Total provision for taxes	$	(354,483	)	$	(443,842	)

Effective tax rate		21.22	%		468.91	%

The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the six months ended June 30, 2011 and 2010 are shown in the following table:

	June 30, 2011			June 30, 2010
U.S. federal statutory income tax rate		34.00	%		34.00	%
Lower rates in PRC, net		(9.00	%)		(9.00	%)
Tax holiday		(3.78	%)		-
Accruals in foreign jurisdictions		-			443.91	%
Effective tax rate		21.22	%		468.91	%

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

14. SEGMENT INFORMATION

The Company has contracted with customers usually in two revenue segments altogether, one is for the construction and installation of gas facilities and another one is the subsequent sales of natural gas to the customers through the gas facilities the Company constructs. However, the respective gas facilities contracts and gas supply contracts have separately provided for the basis of revenue recognition and distinctive from each other for the relevant cost-and-revenue to be incurred and hence separate calculation and subsequent payment of fees for respective business without any interdependence on each other in this respect.

For management purposes, the company is currently organized into two major operating divisions: (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 June 30, 2011

	Gas Distribution		Gas Pipeline Installation		Shell, BVIs, & Eliminations		Total
Assets
Current Assets	$	16,896,266	$	8,105,143	$	511,381	$	25,512,790
Non-Current Assets		27,219,297		56,742,305		3,490,726		87,452,328
Total Assets		44,115,563		64,847,448		4,002,107		112,965,118

Liabilities
Current Liabilities		1,463,279		29,255,892		-		30,719,171
Non-current Liabilities		519,322		10,383,012		-		10,902,334
Total Liabilities		1,982,601		39,638,904		-		41,621,505

Net Assets		42,132,962		25,208,544		4,002,107		71,343,613

Liabilities & Equities	$	44,115,563	$	64,847,448	$	4,002,107	$	112,965,118

Operation Result Segment Report
For the three months ended June 30, 2011

	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total

Sales Revenue	$	15,674,732		$	7,519,172		$	(7,332,482	)	$	15,861,422
Cost of Revenue		15,444,975			2,925,551			(7,332,482	)		11,038,044
Gross Profit		229,757			4,593,621			-			4,823,378

Operating Expense		139,342			2,785,922			338,944			3,264,208
Operating Income/(Loss)		90,415			1,807,699			(338,944	)		1,559,170

Other Income/(Loss)		5,294			(436,476	)		542,329			111,147
Earnings before tax		95,709			1,371,223			203,385			1,670,317

Income tax		(23,128	)		(331,355	)		-			(354,483	)
Gain/(loss) from discontinued operation, net of tax		-			-			105,093			105,093

Net Income	$	72,581		$	1,039,868		$	308,478		$	1,420,927

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

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

Operation Result Segment Report
For the six months ended June 30, 2010

	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total
Sales Revenue	$	12,124,888		$	5,569,178		$	(4,820,187	)	$	12,873,879
Cost of Revenue		11,693,588			1,970,079			(4,820,187	)		8,843,480
Gross Profit		431,300			3,599,099			-			4,030,399

Operating Expense		191,614			1,598,973			396,446			2,187,033
Operating Income/(Loss)		239,686			2,000,126			(396,446	)		1,843,366

Other Income/(Loss)		(187,132	)		(110,208	)		(1,451,372	)		(1,748,712	)
Earnings before tax		52,554			1,889,918			(1,847,818	)		94,654

Income tax		(12,008	)		(431,834	)		-			(443,842	)

Net Income	$	40,546		$	1,458,084		$	(1,847,818	)	$	(349,188	)

The Company’s operations are located in the PRC. All revenue is from customers in the PRC. All of the Company’s assets are located in the PRC. Sales of natural gas and gas pipeline construction are carried out in the PRC. Accordingly, no analysis of the Company’s sales and assets by geographical market is presented. No other measures of segment profit or loss and assets have been provided or reviewed by the company’s chief operating decision maker.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 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:

	Ref		6/30/2011			6/30/2010
Net Income			$	1,420,927		$	(349,188	)
Preferred Dividends				-			-
Constructive Preferred Dividends				-			-
Net loss attributed to non-controlling interest				(35,732	)		-
Income Available to Common Stockholders for Basic EPS			$	1,456,659		$	(349,188	)

Interest Expense for Convertible Bonds, net of tax				573,878			-
Income Available to Common Stockholders for Diluted EPS			$	2,030,536		$	(349,188	)

Original Shares				27,156,617			26,769,313
Addition to Common Stock				448			35,172
Basic Weighted Average Shares Outstanding				27,157,065			26,804,485

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)		-			-
Addition to Common Stock from Exercise of Warrants		(4)		-			-
Diluted Weighted Average Shares Outstanding				27,157,065			26,804,485

Earnings Per Share
-Basic			$	0.05		$	(0.01	)
-Diluted			$	0.05		$	(0.01	)

Weighted Average Shares Outstanding
-Basic				27,157,065			26,804,485
-Diluted				27,157,065			26,804,485

The application of conversions’ of preferred stock B to common stock was anti-dilutive for the six months ended June 30, 2011.

The application of conversions of preferred stock B-1 to common stock was anti-dilutive for the six months ended June 30, 2011.

The average price of the Company’s common stock was $0.42 for the six-month periods ended June 30, 2011, which was lower than the conversion price $0.62 of the convertible bonds. Therefore, the conversion of convertible bonds have been excluded from diluted weighted average shares.

The exercise of warrants to common stock was anti-dilutive for the six-month periods ended June 30, 2011.

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2011 and December 31, 2010

(Stated in US Dollars)

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 investor relation firm for services rendered in connection with the investor relationship activities.

17. DISCONTINUED OPERATION

The Company through its indirectly wholly owned subsidiary Beijing Gas to execute 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 six months ended June 30, 2011.

The following tabulation summarized the financial positions and result of operations of disposal subsidiaries 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

	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

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 half 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, especially in second quarter.

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 by 8.7% in 2009, exceeding the targeted 8%. The GDP growth rate remained strong through the first two quarters of 2010. China’s GDP grew 11.9%, and 10.3% in the first and second quarters of 2010, respectively, from the same periods in 2009. Furthermore, China’s GDP increased by 9.6%, and 9.8% during the third and fourth quarters of 2010 respectively as compared to the same period of 2009. China’s GDP growth jumped 10.3% year-over-year in 2010. China’s GDP rose 9.6% and in the first half of 2011 as compared to the same period of 2010.

Our gas users are composed 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.

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.

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

During the three months ended June 30, 2011, net revenues were $7,875,152, representing an increase of 33.11% from the same period of last year. Gross profit for the three months ended June 30, 2011 was $2,402,952, representing an increase of 26.08% from the same period of last year. Our operating income for the three months ended June 30, 2011 was $951,493, representing an increase of 6.12% from the same period of 2010. Net income for the three months ended June 30, 2011 was $1,314,372, compared to net loss of $140,602 during the same period of 2010.

	For the 3 months ended June 30
	2011			2010			Change
	US$			US$
Net Revenues		7,875,152			5,916,218			33.11	%
Gross Profit		2,402,952			1,905,885			26.08	%
Operating Income		951,493			896,626			6.12	%
Net Income		1,314,372			-140,602			1034.82	%
Gross Margin		30.51	%		32.21	%		-5.28	%
Net Margin		16.69	%		-2.38	%

Net Revenues

We generate revenues from two sources: connection fees for constructing connections to our natural gas distribution network and sales of natural gas.

Total net revenues for the three months ended June 30, 2011 were $7,875,152, compared to $5,916,218 for the same period in 2010, representing an increase of 33.11 %. The increase was mainly due to the increased of both gas sales and connection fees. During this period, we connected 9,208 new residential households to our gas distribution network, resulting in total connection fees of $3,242,598. Gas sales during the three months ended June 30, 2011 were $4,632,554. In comparison, we connected 6,490 new residential households to our gas distribution network for the same period in 2010, resulting in total connection fees of $2,082,636. Gas sales during the same period in 2010 were $3,833,582.

	For the 3 months ended June 30,
	2011					2010					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		7.88		100	%		5.92		100	%		33.11	%
Connection Fees		3.24		41	%		2.08		35.2	%		55.7	%
Gas Sales		4.63		59	%		3.83		64.8	%		20.8	%

Connection Fees

Connection fees during the three months ended June 30, 2011 were $3.24 million, representing an increase of 55.7% from $2.08 million during the same period of 2010 and accounting for 41% of the total net revenue in the three months ended June 30, 2011 as compared to approximately 35.2% 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.

	For the 3 months ended June 30,
(in US$ millions)	2011					2010					Change
	US$		%			US$		%			%
Connection Fees		3.24		100	%		2.082		100	%		55.7	%
Residential Users		3.24		100	%		2.079		99.86	%
Industrial Users		0.00		0	%		0.003		0.14	%

Gas Sales

Gas sales were $4.63 million during the three months ended June 30, 2011, accounting for 59% of total net revenue for the three months ended June 30, 2011 and representing an increase of 20.8% over the same period of 2010. Gas sales to residential users increased 18.2% to $2.83 million for the three months ended June 30, 2011 from $2.40 million in the same period of 2010. Gas sales to industrial and commercial users increased 25.2% to $1.80 million for the three months ended June 30, 2011 from $1.44 million in the same period of 2010.

	For the 3 months ended June 30,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Gas Sales		4.63		100	%		3.83		100	%		20.8	%
Residential Users		2.83		61.10	%		2.40		62.48	%		18.2	%
Industrial and Commercial Users		1.80		38.90	%		1.44		37.52	%		25.2	%

Gas sales to residential users and industrial customers continued to grow healthily in the second quarter of 2011 compared to the same period of last year.

Cost of Revenues

Cost of revenues for the three months ended June 30, 2011, which includes cost of connections and cost of gas sales, was $5.47 million, representing an increase of 36.45% from $4.01 million in the same period of 2010.

	For the 3 months ended June 30,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		5.47		100	%		4.01		100	%		36.45	%
Connection Fee Cost		0.90		16.50	%		0.46		11.44	%		96.90	%
Gas Cost		4.57		83.50	%		3.55		88.56	%		28.60	%

Cost of Connection Fees

The cost of connection fees increased 96.90% to $0.90 million during the three months ended June 30, 2011 from $0.46 million for the same period in 2010. During the three months ended June 30, 2011, our revenue from the connection fees increased significantly compared to the same period of 2010, which means the total cost of connection fees also increased accordingly. In addition, we incurred higher costs of raw materials, parts, and installation and maintenance fees 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 fees.

Cost of Gas Sales

The cost of gas sales increased 28.60% to $4.57 million during the three months ended June 30, 2011 from $3.55 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 June 30, 2011, gross profit was $2.40 million, representing an increase of approximately 26.08% from the same period of 2010. Gross profit from connection fees was $2.34 million for the three months ended June 30, 2011, accounting for 97.36% of total gross profit. In comparison, gross profit from connection fees was $1.62 million for the three months ended June 30, 2010, accounting for 85.21% of total gross profit for the three months ended June 30, 2010. Gross profit from gas sales was $0.06 million for the three months ended June 30, 2011, accounting for 2.64% of total gross profit, compared to $0.28 million, accounting for 14.79% of total gross profit, in the same period of 2010.

	For the 3 months ended June 30,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Gross Profit		2.40		100	%		1.91		100	%		26.08	%
Connection		2.34		97.36	%		1.62		85.21	%		44.06	%
Gas		0.06		2.64	%		0.28		14.79	%		-77.49	%

Gross margin during the three months ended June 30, 2011 was 30.51%, compared to 32.21% during the same period in 2010.

Gross margin for connection fees for the three months ended June 30, 2011 was 72.10%, compared to 77.98% in the same period of 2010. The increase in the cost of connection fees contributed to the decrease of gross margin.

Gross margin for sales of natural gas was 1.4% for the three months ended June 30, 2011, compared to 7.35% during the same period of 2010. The decrease was primarily due to the increase of delivery costs for the three months ended June 30, 2011, compared with the same period of last year.

Selling, General and Administrative Expenses

Selling, General and Administrative (“SG&A”) expenses in the three months ended June 30, 2011 were $1. 45 million and approximately 18.43% of net revenues, compared with $1.01 million, or 17.06%, of net revenues in the same period of 2010. We incurred approximately $0.28 million in professional service fees, including legal, assessment, advisory and credit guarantee during the three months ended June 30, 2011.

Operating Income

The operating income for the three months ended June 30, 2011 was $0.95 million, representing an increase of 6.1%, compared to the operating income of $0.90 million for the same period of 2010. This increase was due to the increase in revenue during the three months ended June 30, 2011.

Other Income (Expense)

Other Income was $0.57 million for the three months ended June 30, 2011, compared with other expense of $0.83 million for the same period of 2010. Other income was mainly attributable to the $1.12 million gain on disposal of property and equipment of three discontinued operations, and also to the decrease of the non-cash flow amortization costs of convertible bonds.

Income tax

Income tax was $0.32 million for the three months ended June 30, 2011, compared to $0.20 million for the same period of 2010.

Net Income

Net income for the three months ended June 30, 2011 was $1.31 million, compared with net loss of $0.14 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 26.08% to $2.40 million compared to the gross profit of $1.91 million for the same period of 2010. Higher gross profit together with the gain on disposal of property and equipment were able to offset the increase of cost of revenue and the increase of SG&A expenses in this quarter.

Liquidity and Capital Resources

Cash and cash equivalents were $5.86 million as of June 30, 2011, representing an increase of $2.27 million as compared to $3.58 million of cash and cash equivalents as of December 31, 2010.

Cash used in operating activities for the three months ended June 30, 2011 was $2.14 million, representing an increase of $0.89 million from $1.26 million used 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 June 30, 2011 was $1.92 million, representing a decrease of $0.79 million from $2.71 million during the same period of 2010. Such decease was mainly due to the proceeds from disposal of discontinued operations that were able to offset the constructions in progress and purchases of property, plant and equipment.

Cash sourced in financing activities for the three months ended June 30, 2011 was $3.14 million, representing an increase of $3.10 million from $0.05 million during the same period of 2010.

Accounts Receivable

Accounts receivable as of June 30, 2011 were $12.91 million, representing an increase of $3.41 million from $9.50 million as of December 31, 2010.

Notes Receivable

Notes receivable as of June 30, 2011 were $0.20 million, representing a decrease of $0.03 million from $0.23 million as of December 31, 2010.

Inventory

Inventory of $0.75 million as of June 30, 2011 was comprised of spare parts and natural gas.

Fixed Assets

Fixed Assets as of June 30, 2011 were $55.44 million, representing an increase of $0.27 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	$	44,557,695		$	44,512,342
Motor Vehicles		6,195,361			6,067,524
Machinery & Equipment		1,527,796			1,542,016
Buildings		2,331,987			2,316,729
Leasehold Improvements		556,866			475,099
Office Equipment		267,571			256,419
Less Accumulated depreciation		(5,948,814	)		(5,241,647	)
	$	49,488,462		$	49,928,482

Bank Loans

Short-term bank loans as of June 30, 2011 were $12.53 million, an increase of $4.67 million compared to that as of December 31, 2010.

Long-term bank loans as of June 30, 2011 were $3.09 million.

Accounts Payables

Accounts payables as of June 30, 2011 was $12.09 million, representing an increase of $0.98 million from that as of December 31, 2010.

Other Payables

Other payables - current as of June 30, 2011 were $3.48 million, representing a decrease of $0.21 million from that as of December 31, 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

During the six months ended June 30, 2011, our net revenues were $15,861,422, representing an increase of 23.2% from the same period of last year, and gross profit was $4,823,378, representing an increase of 19.7% from the same period of last year. During the six months ended June 30, 2011, our operating income was $1,559,170, representing a decrease of 15.42% from the same period of 2010.

	For the 6 months ended June 30,
	2011			2010			Change
	US$			US$			%
Net Revenues		15,861,422			12,873,879			23.20	%
Gross Profit		4,823,378			4,030,399			19.67	%
Operating Income		1,559,170			1,843,366			-15.42	%
Net Income		1,420,927			-349,188			506.92	%
Gross Margin		30.4	%		31.31	%
Net Margin		8.96	%		-2.71	%

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 six months ended June 30, 2011 were $15,861,422, representing an increase of 23.2%, compared to $12,873,879, 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 16,333 new residential households to our gas distribution network, resulting in total connection fees of $6,040,409. Gas sales during the same period were $9,821,013. In comparison, we connected 13,694 new residential households to our gas distribution network in the same period of 2010, resulting in total connection fees of $4,828,051. Gas sales during the period were $8,045,828.

	For the 6 months ended June 30,
	2011					2010					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		15.86		100	%		12.87		100	%		23.2	%
Connection Fees		6.04		38	%		4.83		38	%		25.1	%
Gas Sales		9.82		62	%		8.05		62	%		22.1	%

Our net revenues for the six months ended June 30, 2011 increased by 23.2%, resulting from the following two factors:

1. The increase in connection fees from mostly residential customers. There was a 25.1% increase in connection fees during the first half of 2011, compared to the same period of last year.

2. The Increase in gas sales from both industrial and residential customers. There was a 22.1% increase in gas sales during the first half of 2011, compared to the same period of last year.

Connection Fees

Connection fees during the six months ended June 30, 2011 were $6.04 million, representing an increase of 25.1% over the same period of 2010, accounting for 38% of the total net revenue. With regard to the source of connection fees, all of the connection fees came from the development of new residential users.

	For the 6 months ended June 30,
(in US$ millions)	2011					2010					Change
	US$		%			US$		%			%
Connection Fees		6.04		100	%		4.83		100	%		25.1	%
Residential Users		6.04		100	%		4.83		99.94	%		25.2	%

Gas Sales

Gas sales were $9.82 million during the six months ended June 30, 2011, accounting for 62% of total net revenue in 2011, representing an increase of 22.1% over the same period of last year. During the six months ended June 30, 2011, gas sales to residential users increased 20.2% from $4.54 million in the same period of 2010 to $5.46 million in 2011. During the six months ended June 30, 2011, gas sales to industrial and commercial users increased 24.6%, from $3.50 million in the same period of 2010 to $4.36 million in 2011.

	For the 6 months ended June 30,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Gas Sales		9.82		100	%		8.05		100	%		22.1	%
Residential Users		5.46		56	%		4.54		56	%		20.2	%
Industrial and Commercial Users		4.36		44	%		3.50		44	%		24.6	%

Cost of Revenues

Cost of revenues for the six months ended June 30, 2011, which includes cost of connections and cost of gas sales, was $11.04 million, an increase of 24.8%, from $8.84 million in the same period of 2010.

	For the 6 months ended June 30
	2011					2010					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		11.04		100	%		8.84		100	%		24.8	%
Connection Cost		1.53		14	%		1.23		14	%		24.2	%
Gas Cost		9.51		86	%		7.61		86	%		24.9	%

Cost of Connections

Cost of connections increased 24.2% to $1.53 million during the six months ended June 30, 2011 from $1.23 million for the same period in 2010. During the first half of last year 2011, we incurred higher cost of raw materials, parts, and installation and maintenance fees.

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 24.9% to $9.51 million during the six months ended June 30, 2011 from the same period in 2010, when it was $7.61 million.

The cost of natural gas sales includes the purchase and transportation of natural gas and depreciation of delivery trucks.

Gross Profit

During the six months ended June 30, 2011, gross profit was $4.82 million, an increase of approximately 19.7% from the same period of 2010. Gross profit from connection fees was $4.51 million for the six months of 2011, accounting for 94% of total gross profit. In comparison, gross profit from connection fees was $3.60 million for the six months of 2010, accounting for 89% of total gross profit. Gross profit from gas sales was $0.31 million, accounting for 6% of total gross profit, compared to $0.43 million, 11% of total gross profit in the same period of 2010.

	For the 6 months ended June 30,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Gross Profit		4.82		100	%		4.03		100	%		19.7	%
Connection		4.51		94	%		3.60		89	%		25.4	%
Gas		0.31		6	%		0.43		11	%		-28.4	%

Gross margin during six months ended June 30, 2011 was 30.4%, compared to 31.31% during the same period in 2010.

Gross margin for connection fees for the six months ended June 30, 2011 was 74.7%, compared to 74.55% during the same period of 2010.

Gross margin for sales of natural gas was 3.1% for the six months ended June 30, 2011, compared to 5.36% during the same period of 2010. The decrease was due to the higher delivery cost for the natural gas for the six months ended June 30, 2011 compared to the same period of last year.

Selling and Marketing Expenses

Our selling and marketing expenses in the six months ended June 30, 2011 were $ 1. 08 million, or approximately 6.8% of our net revenues, compared with $ 0.58 million, or approximately 4.52 % of net revenues for the same period in 2010.

General and Administrative Expenses and other expenses

General and administrative expenses were $2.19 million for the six months ended June 30, 2011, or approximately 13.78% of our net revenues, compared with $1.61 million, or approximately 12.47% of net revenues for the same period in 2010.

Operating Income

The operating income for the six months ended June 30, 2011 was $1.56 million, representing a decrease of 15.42%, compared to the operating income of $1.84 million in 2010.

Other Income (Expense)

Other Income was $0.11 million for the six months ended June 30, 2011, compared with Other Expense of $1.75 million for the same period of 2010. The significant increase was due to gain on the disposal of property and equipment of 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.

Income tax

Income tax was $0.35 million for the six months ended June 30, 2011, compared to $0.44 million in 2010.

Net Income

Net income in the six months ended June 30, 2011 was $1.42 million, compared with net loss of $0.35 million in the same period in 2010. This result was driven by the increase in revenue, higher gross margin, and the gain on disposal of property and equipment of the Projects.

Liquidity and Capital Resources

Cash and cash equivalents were $5.86 million as of June 30, 2011, an increase of $2.27 million as compared to $3.58 million of cash and cash equivalents as of Dec. 31, 2010.

Cash sourced in operating activities for the six months ended June 30, 2011 was $1.45 million, compared with cash used in operating activities $1.67 million during the same period of 2010.

Cash used in investing activities for the six months ended June 30, 2011 was $3.99 million, a decrease of $0.32 million from $4.31 million during the same period of 2010. Such increase was mainly due to the increase of property, plant & equipment, and construction in progress, and, due to the proceeds from disposal of discontinued operations.

Cash sourced in financing activities for the six months ended June 30, 2011 was $4.74 million compared with $2.24 million in the same period of last year.

Accounts Receivable

Accounts receivable as of June 30, 2011 were $12.91 million, an increase of $3.41 million from $9.50 million as of December 31, 2010.

Notes Receivable

Notes receivable as of June 30, 2011 were 0.20 million.

Fixed Assets

	2011			2010
At Cost
Gas Pipelines	$	44,557,695		$	44,512,342
Motor Vehicles		6,195,361			6,067,524
Machinery & Equipment		1,527,796			1,542,016
Buildings		2,331,987			2,316,729
Leasehold Improvements		556,866			475,099
Office Equipment		267,571			256,419
Less Accumulated depreciation		(5,948,814	)		(5,241,647	)
	$	49,488,462		$	49,928,482

Bank Loans

Short-term Bank loans as of June 30, 2011 were $12.53 million, compared to $7.86 million as of December 31, 2010.

Long-term Bank loans as of June 30, 2011 were $3.09 million, an increase of $0.07 million compared to $3.02 million as of December 31, 2010.

For more information concerning bank loans see Note 9 to the financial statements of the Company included herein.

Accounts Payables

Accounts payables as of June 30, 2011 was $12.09 million, an increase of $0.98 million from that as of December 31, 2010.

Other Payables

Other payables - current as of June 30, 2011 were $3.48 million, a decrease of $0.21 million from that as of December 31, 2010.

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 June 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 June 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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not required.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are hereby filed as part of this Quarterly Report on Form 10-Q.

Exhibit Number:		Description
31.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing.

	SINO GAS INTERNATIONAL HOLDINGS, INC.

Date: August 15, 2011	By:	/s/ Yuchuan Liu
		Yuchuan Liu
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

	SINO GAS INTERNATIONAL HOLDINGS, INC.

Date: August 15, 2011	By:	/s/ Baoling Wang
		Baoling Wang
		(Principal Accounting Officer)

Attached files

Sino Gas International Holdings, Inc. Reports

Also read