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

Attached files

file	filename
EX-31.2 - Sino Gas International Holdings, Inc.	v222758_ex31-2.htm
EX-32.1 - Sino Gas International Holdings, Inc.	v222758_ex32-1.htm
EX-31.1 - Sino Gas International Holdings, Inc.	v222758_ex31-1.htm
EX-23.1 - Sino Gas International Holdings, Inc.	v222758_ex23-1.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 March 31, 2011

¨	Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-51364

SINO GAS INTERNATIONAL HOLDINGS, INC.

(Name of small business issuer in its charter)

Utah	90-0438712
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

No. 18 Zhong Guan Cun Dong St. Haidian District Beijing, P. R. China	100083
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number: 86-10-82600527

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes xNo ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

As of May 13, 2011, the Registrant had 27,156,617 shares of common stock outstanding.

Sino Gas International Holdings, Inc.

Table of Contents

		Page
PART I -	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (Unaudited)	3

	Notes to Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	41

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4.	Controls and Procedures	47

PART II -	OTHER INFORMATION	48

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Sino Gas International Holdings, Inc.

Content		Page

Report of Independent Registered Public Accounting Firm		4

Consolidated Balance Sheets		5

Consolidated Statements of Income		7

Consolidated Statements of Stockholders’ Equity		8

Consolidated Statements of Cash Flows		10

Notes to Consolidated Financial Statements		11

To:	The Board of Directors and Stockholders of
	Sino Gas International Holdings, Inc.

Report of Independent Registered Public Accounting Firm

We have reviewed the accompanying consolidated interim balance sheets of Sino Gas International Holdings, Inc. as of March 31, 2011 and December 31, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three months periods ended March 31, 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
May 12, 2011	Certified Public Accountants

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

			3/31/2011		12/31/2010
	Notes
ASSETS
Current Assets
Cash & cash equivalents		2(e)	$	2,383,087	$	3,582,330
Notes receivable				805,619		226,867
Accounts receivable		2(f),3		10,400,932		9,504,229
Other receivables				1,451,328		1,127,981
Related party receivable				410,953		408,361
Inventory				691,148		482,594
Advance to suppliers		2(g)		2,523,788		3,621,147
Prepaid expenses and taxes				520,083		264,481
Total Current Assets				19,186,938		19,217,990

Non-Current Assets
Investment		2(h),4		13,081,741		12,794,384
Property, plant & equipment, net		2(j),6		51,496,930		49,928,482
Construction in progress		2(m)		19,341,387		19,336,428
Intangible assets, net		2(k),8		508,553		533,730
Goodwill		2(l),7		1,677,975		1,677,975
Deposit				1,092,384		1,239,548
Total Non-current Assets				87,198,970		85,510,547

Total Assets			$	106,385,908	$	104,728,537

LIABILITIES & STOCKHOLDERS' EQUITY

LIABILITIES
Current Liabilities
Bank loans		9	$	9,436,690	$	7,864,727
Accounts payable				10,974,755		11,105,790
Other payables - current portion		10(a)		3,921,652		3,691,923
Accrued liabilities				114,858		1,635,217
Unearned revenue		2(n)		1,358,105		106,868
Total Current Liabilities				25,806,060		24,404,525

Non-current Liabilities
Long-term bank loans		9		3,044,094		3,024,895
Non-current Convertible Bonds		11		5,803,254		5,641,117
Other payables - non-current portion		10(b)		1,854,558		1,859,499
Total Non-current Liabilities				10,701,906		10,525,511

Total Liabilities			$	36,507,966	$	34,930,036

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

			3/31/2011		12/31/2010
	Notes
STOCKHOLDERS' EQUITY

Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,590,094 shares issued and outstanding as of March 31, 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 March 31, 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; 27,156,617 shares issued and outstanding as of March 31, 2011 and December 31, 2010		10		27,156		27,156

Additional paid in capital - Common Stock				23,933,033		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)		5,428,310		4,819,762
Retained earnings				17,489,154		17,977,181
Minority Interest				990,534		1,004,500
Accumulated other comprehensive income		2(x)		7,859,277		7,886,391
Total Stockholders' Equity				69,877,942		69,798,501

Total Liabilities & Stockholders' Equity			$	106,385,908	$	104,728,537

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Income

For the three-month periods ended March 31, 2011 and 2010

(Stated in US Dollars)


	Notes		3/31/2011			3/31/2010
Sales		2(r)	$	7,986,270		$	6,957,661
Cost of revenue		2(s)		5,565,844			4,833,148
Gross Profit				2,420,426			2,124,513

Operating Expenses
Selling expenses				576,861			271,243
General and administrative expenses				1,235,888			906,531
Total operating expenses				1,812,749			1,177,774

Operating Income				607,677			946,739

Other Income/(Expense)
Other income				335			5,382
Other expense				(3,963	)		(1,300	)
Interest income				2,066			4,770
Interest expense				(461,723	)		(924,841	)
Total other income/(expense)				(463,285	)		(915,989	)

Earnings from continued operation				144,392			30,750

Income tax		2(t),13		(37,837	)		(239,334	)

Net income			$	106,555		$	(208,586	)

Net income (loss) attributable to:
- Common stockholders			$	120,521		$	(208,586	)
- Non-controlling interest			$	(13,966	)		-

Income available to common stockholders for basic EPS			$	120,521		$	(208,586	)
Interest expense for convertible bonds, net of tax				282,996			801,216
Income available to common stockholders for diluted EPS			$	403,517		$	592,630

Earnings Per Share		2(z),15
- Basic			$	0.004		$	(0.01	)
- Diluted			$	0.004		$	(0.01	)

Weighted Average Shares Outstanding
- Basic				27,156,617			26,769,313
- Diluted				27,156,617			26,769,313

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of March 31, 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		-			-			-			-		-		-		-			-			-
Appropriation of loss to minority interest		-			-			-			-		-		-
Appropriation of Retained Earnings		-			-			-			-		-		-		-			-			-
Foreign Currency Translation Adjustment		-			-			-			-		-		-		-			-			-
Balance at March 31, 2011		4,590,094			4,590			5,335,894			95,418		95		132,662		27,156,617			27,156			23,933,033

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of March 31, 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		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		-		-		-			-		-		-		106,555			-			-			106,555
Appropriation of loss to minority interest		-		-		-			-		-		-		13,966			(13,966	)		-			-
Appropriation of Retained Earnings		-		-		-			-		-		608,548		(608,548	)		-			-			-
Foreign Currency Translation Adjustment		-		-		-			-		-		-		-			-			(27,114	)		(27,114	)
Balance at March 31, 2011		311,110		47,946		-			223,367		8,094,814		5,428,310		17,489,154			990,534			7,859,277			69,877,942

	12/31/2010		3/31/2011			Total
Comprehensive Income
Net Income	$	4,041,663	$	106,555		$	4,148,218
Other Comprehensive Income
Foreign Currency Translation Adjustment		160,508		(27,114	)		133,394
Total	$	4,202,171	$	79,441		$	4,281,612

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Consolidated Statements of Cash Flows

For the three-month periods ended March 31, 2011 and 2010

(Stated in US Dollars)

	3/31/2011			3/31/2010
Cash Flows from Operating Activities
Net Income	$	106,555		$	(208,586	)
Adjustments to reconcile net income to net cash from operations:
Bad debt provision		9,058			-
Depreciation expense		357,210			338,917
Amortization expense of intangible assets		26,627			7,427
Amortization expense of convertible bonds		162,137			680,356
Changes in operating assets and liabilities:
Withdraw/(deposit) in restricted time deposits		-			30,975
Decrease/(increase) in accounts and other receivables		(1,807,859	)		(1,351,982	)
Decrease/(increase) in inventory		(208,554	)		(159,177	)
Decrease/(increase) in prepayments		841,757			742,620
Decrease/(increase) in related party receivable		(2,592	)		-
Increase/(decrease) in accounts and other payables		(175,372	)		(3,005,004	)
Cash Sourced/(Used) in Operating Activities		(691,033	)		(2,924,453	)

Cash Flows from Investing Activities
Decrease in deposit		147,165			-
Increase of investment in equity		(287,357	)		(1,131	)
Purchase of property, plant & equipment		(1,925,658	)		(1,590,308	)
Purchase of intangible assets		(1,450	)		(158	)
Decrease/(increase) in construction in progress		(4,959	)		(14,924	)
Cash Sourced/(Used) in Investing Activities		(2,072,259	)		(1,606,521	)

Cash Flows from Financing Activities
Proceeds/(settlement) of bank loans		1,591,163			2,195,293
Cash Sourced/(Used) in Financing Activities		1,591,163			2,195,293

Net increase in cash & cash equivalents for the periods		(1,172,129	)		(2,335,681	)

Effect of currency translation		(27,114	)		20,404

Cash & cash equivalents at the beginning of periods		3,582,330			9,820,890

Cash & cash equivalents at the end of periods	$	2,383,087		$	7,505,613

Supplementary cash flows information
Interest received	$	2,066		$	4,770
Interest paid	$	299,081		$	245,814
Income tax paid	$	492,832		$	239,335

See Accompanying Notes to Financial Statements

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 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”.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

Basis of Presentation and Organization

The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the People’s Republic of China (“PRC”) or in the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company’s subsidiaries to present them in conformity with US GAAP.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Method of Accounting

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

(b) Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.

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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

(d) Principles of Consolidation

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

The Company owned its subsidiaries after inception and continued to acquire equity interest throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of March 31, 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

USD 10,000,000

Sino Gas Construction, Ltd.

The British Virgin Islands

1/9/2007

USD 98,039

Sino Gas Investment Development, Ltd.

The British Virgin Islands

1/9/2007

100

USD 50,000

Beijing Zhong Ran Weiye Gas Co., Ltd.

PRC

8/29/2001

100

RMB 206,000,000

Beijing Chenguang Gas Co., Ltd.

PRC

10/30/2002

100

RMB 35,239,600

Guannan Weiye Gas Co., Ltd.

PRC

6/19/2003

100

RMB 9,510,000

Ningjin Weiye Gas Co., Ltd

PRC

12/3/2003

100

RMB 3,000,000

Yutian Zhongran Weiye Gas Co., Ltd.

PRC

12/19/2003

100

RMB 3,000,000

Xingtang Weiye Gas Co., Ltd.

PRC

2/18/2004

100

RMB 3,000,000

Wuqiao Gas Co., Ltd.

PRC

6/30/2004

100

RMB 2,000,000

Jinzhou Weiye Gas Co., Ltd.

PRC

7/19/2004

100

RMB 13,659,877

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

Sihong Weiye Gas Co., Ltd.

PRC

12/3/2004

100

RMB 10,000,000

Sishui Weiye Gas Co., Ltd.

PRC

12/22/2004

100

RMB 3,000,000

Langfang Weiye Dangerous Goods Transportation Co., Ltd.

PRC

3/22/2005

100

RMB 1,000,000

Linzhang Weiye Gas Co., Ltd.

PRC

7/6/2005

100

RMB 1,000,000

Peixian Weiye Gas Co., Ltd.

PRC

8/22/2005

100

RMB 45,694,900

Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd.

PRC

9/30/2005

100

RMB 2,000,000

Longyao Zhongran Weiye Gas Co., Ltd.

PRC

10/13/2005

100

RMB 3,000,000

Yuxian Jinli Gas Co., Ltd.

PRC

11/8/2005

100

RMB 9,500,000

Hengshui Weiye Gas Co., Ltd.

PRC

12/20/2005

100

RMB 3,000,000

Shenzhou Weiye Gas Co., Ltd.

PRC

12/23/2005

100

RMB 6,638,035

Changli Weiye Gas Co., Ltd.

PRC

12/8/2006

100

RMB 3,000,000

Chenan Chenguang Gas Co., Ltd

PRC

1/23/2007

100

RMB 1,500,000

Wuhe Weiye Gas Co., Ltd.

PRC

1/30/2007

100

RMB 3,000,000

Xinji Zhongchen Gas Co., Ltd

PRC

2/7/2007

100

RMB 3,000,000

Gucheng Weiye Gas Co., Ltd.

PRC

3/21/2007

100

RMB 3,000,000

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

Luquan Chenguang Gas Co., Ltd.

PRC

4/27/2007

100

RMB 2,000,000

Shijiazhuang Chenguang Gas Co., Ltd.

PRC

6/14/2007

100

RMB 2,000,000

Nangong Weiye Gas Co., Ltd.

PRC

6/25/2007

100

RMB 3,000,000

Sixian Weiye Gas Co., Ltd.

PRC

9/3/2007

100

RMB 3,000,000

Baishan Weiye Gas Co., Ltd.

PRC

7/13/2007

100

RMB 15,000,000

Xinhe Weiye Gas Co., Ltd.

PRC

7/2/2009

100

RMB 300,000

Hebei Weiye Gas (Group) Co., Ltd.

PRC

12/18/2009

100

RMB 75,439,270

Gaocheng Weiye Gas Co., Ltd.

PRC

1/27/2010

100

RMB 200,000

(e) Cash and Cash Equivalents

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

(f) Accounts 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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

(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 March 31, 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 March 31, 2011.

(j) Property, Plant and Equipment

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

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.

(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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

(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, restricted cash, 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.

(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.

	3/31/2011		12/31/2010

Years end RMB : US$ exchange rate		6.5701		6.6118
Average yearly RMB : US$ exchange rate		6.5894		6.7788

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(r) 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.

(s) 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 Consolidated Financial Statements

As of March 31, 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 three months ended March 31, 2011.

(u) Advertising

The Company expensed all advertising costs as incurred.

(v) Risk

Concentration of Credit Risk

Concentration of credit risk is limited to accounts receivable and is subject to the financial conditions of major customers. The Company does not require collateral or other security to support accounts receivable. The Company conducts periodic reviews of its clients’ financial condition and customers’ payment practices to minimize collection risk on accounts receivable.

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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

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.

(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.

(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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

(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 identified a non-recognized 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.

The Company believes it has provided adequate provisions for doubtful accounts. Doubtful allowance accounts at March 31, 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

	3/31/2011			12/31/2010
Gross accounts receivable	$	10,505,992		$	9,600,231
Allowance for bad debt		(105,060	)		(96,002	)
Net accounts receivable	$	10,400,932		$	9,504,229

Allowance for Bad Debt

	3/31/2011			12/31/2010
Beginning balance	$	(96,002	)	$	(50,875	)
Addition		(9,058	)		(45,127	)
Written-off against allowance		-			-
Reversal		-			-
Ending balance	$	(105,060	)	$	(96,002	)

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

Accounts Receivable Aging Report

	3/31/2011		12/31/2010
<30 Days	$	2,988,383	$	4,894,088
30-60 Days		1,977,513		1,050,245
60-90 Days		1,740,247		111,355
90-180 Days		1,227,601		2,265,088
180-360 Days		1,578,371		230,684
>360 Days		993,877		1,048,771
Total	$	10,505,992	$	9,600,231

The following are the ten most significant accounts receivable at March 31, 2011:-

Hebei Zhonggang Steel Co., Ltd.	$	863,056
Jiangsu Zhonghuang Real Estate Co., Ltd		693,759
Baishan Huixin Real Estate Co., Ltd		652,685
Lianyun Port Zhaolong Home Development Co., Ltd.		617,215
Baishan Xingda Real Estate Co., Ltd.		454,155
Hebei Dihua Longzhou New Town Development Co., Ltd.		449,116
Qinwan Island Yongsheng Qiangwang Real Estate Co., Ltd.		405,735
Changli Golden Coast Real Estate Co., Ltd.		384,045
Baishan Yongsheng Real Estate Co., Ltd.		380,744
Jiangshu Zhengzhong Zhiye Co., Ltd.		282,930
	$	5,183,440

4.	RELATED PARTY RECEIVABLE

The related party receivable $410,953 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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

5.	INVESTMENT

Ref.		3/31/2011		12/31/2010
(1)	Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.	$	6,092,654	$	6,054,228
(2)	Qujing City Fuel Gas Co., Ltd.		3,490,726		3,490,726
(3)	Tongshan Hengxin Jiaye Gas Co., Ltd.		3,467,920		3,219,181
(4)	China Construction Bank		30,441		30,249
	Total	$	13,081,741	$	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 $6,092,654 investment as of March 31, 2011 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ operation results.

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
	12/31/2010			12/31/2010
Assets
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 P.R.C, 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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

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 March 31, 2011 consisted of principal and accumulated post-acquisition investment income attributed to Qujin Gas’ operation results.

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
	12/31/2010			12/31/2010
Assets
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 March 31, 2011, the Company has not finished the registration of equity transfer with Tongshan City Industrial and Commercial Administration. Therefore, acquisition payments of $3,467,920 for Tongshan Gas was classified as investment as of date.

(4).

The investment of $30,441 (RMB 200,000) with China Construction Bank was a long-term investment fund.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

6.	PROPERTY, PLANT AND EQUIPMENT

Property, Plant, and Equipment consisted of the follows at March 31, 2011 and December 31, 2010:-

3/31/2011	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	45,797,055	$	2,709,858	$	43,087,197
Motor Vehicles		6,271,808		1,974,331		4,297,477
Machinery & Equipment		1,658,907		368,091		1,290,816
Buildings		2,718,269		351,861		2,366,408
Leasehold Improvements		388,386		70,405		317,981
Office Equipment		261,362		124,311		137,051
Total	$	57,059,787	$	5,598,857	$	51,496,930

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 three months ended March 31, 2011 and 2010 were $357,210 and $338,917 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.

	3/31/2011		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 Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

8.	INTANGIBLE ASSETS

Intangible assets consisted of the follows at March 31, 2011 and December 31, 2010:-

3/31/2011	At Cost		Accumulated Amortization		Net
Land Use rights	$	564,505	$	122,809	$	441,696
Franchises		418,563		388,439		30,124
Accounting Software		91,888		55,155		36,733
	$	1,074,956	$	566,403	$	508,553

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 three months ended March 31, 2011 and December 31, 2010 were $26,627 and $7,427 respectively.

LOANS

a. SHORT-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			3/31/2011		12/31/2010
China Minsheng Banking Corp., Ltd. - Pinganli Branch	11/15/2011		6.67	%	$	1,065,433	$	1,058,713
Bank of Dalian - Beijing Branch	12/14/2011		4.63	%		4,566,141		4,537,343
Bank of Communications - Zhongguancun Branch	12/14/2011		5.94	%		2,283,070		2,268,671
Bank of China – Huanghe Boulevard Branch	01/31/2012		6.391	%		1,522,046		-
Total					$	9,436,690	$	7,864,727

The loan provided by China Minsheng Bank Corp., Ltd. was guaranteed by the shareholder and CEO Mr. Liu Yuchuan.

The loans provided by Bank of Dalian were secured by the Company’s subsidiary Chengguang Gas’ registered capital of $5,329,804 (RMB 35,239,600), 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)

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

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.

b. LONG-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			3/31/2011		12/31/2010
China Development Bank - Beijing Branch	12/24/2012		5.40	%	$	3,044,094	$	3,024,895
Total					$	3,044,094	$	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.

10.	OTHER PAYABLES

(a). Current other payables consisted of the following at March 31, 2011 and December 31, 2010:-

Ref.		3/31/2011		12/31/2010
(1)	Amount due to Employees	$	502,734	$	954,455
(2)	Tax Payable		167,315		692,861
(3)	Payables to Subcontractors		3,251,603		2,044,607
	Total	$	3,921,652	$	3,691,923

(1).

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.

(2).

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

(3).

Payables to subcontractors were unbilled liabilities.

(b). Non-current other payables at March 31, 2011 and December 31, 2010:-

Ref.		3/31/2011		12/31/2010
(1)	Payable for the acquisition of Baishan Gas Co., Ltd.	$	1,854,558	$	1,859,499
	Total	$	1,854,558	$	1,859,499

(1). The outstanding payment was related to the acquisition of Baishan Gas Co., Ltd.’s assets on July 9, 2007.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

11.	CONVERTIBLE BONDS AND BOND WARRANTS

a. $5,349,982 Convertible Bond with 3,451,601 Detachable Warrants

On November 30, 2009, the Company completed a financing transaction with certain purchasers issuing (i) $5,349,982 of the 8% senior secured convertible notes (the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 8,629,003 shares of the Company’s common stock and (ii) 3,451,601 warrants to purchase an aggregate of 3,451,601 shares of the Company’s common stock, which will expire in November 30, 2012 (both the “Bonds” and “Warrants”)

b. $692,984 Convertible Bond with 447,086 Detachable Warrants

On December 23, 2009, the Company completed a financing transaction with certain purchasers issuing (i) $692,984 of the 8% senior secured convertible notes (the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 1,117,716 shares of the Company’s common stock and (ii) 447,086 warrants to purchase an aggregate of 447,086 shares of the Company’s common stock, which will expire in December 23, 2012 (both the “Bonds” and “Warrants”)

Pledge Agreement and Guaranty

The notes are secured by the pledge of 100% of the shares of the Company’s wholly owned subsidiary Gas Investment China Co., Ltd. and a guaranty from Mr. Liu Yuchan, the chairman of the board of directors and CEO of the Company.

Event of Default

Upon an event of default in any payment of interest or principal of the bonds, the principal, accrued and unpaid interest, and any additional amounts owing in respect of the bonds, will be due and payable at the option of the bondholders. In addition, the bondholders have the right to convert these notes and then all accrued and unpaid interest at any time.

Redemption

Bondholders may require the Company to repurchase the notes in whole or in part at an amount equal to 100% of the aggregate principal amount of the notes plus a premium such that the total cash yield to maturity of the note is 15% per annum, upon the occurrence of any change of control transaction or if the Company’s common stock ceases to be quoted for trading or listed for trading on either the OTC Bulletin Board or a subsequent market and such delisting is not cured within 30 days.

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:-

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

		3/31/2011
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		67,493			15,404			82,898
(6)	Accretion of Interest Discount - Beneficial Conversion Feature		869,270			223,252			1,092,522
(7)	Accretion of Bond Discount - Issuance Cost		190,002			31,692			221,694
(8)	Accretion of Interest Discount - Redemption		423,742			50,470			474,212
(9)	Conversion of Convertible Bonds into Common Stock		(200,000	)		-			(200,000	)
	Convertible Bonds Payable, net	$	5,148,503		$	654,751		$	5,803,254

		12/31/2010
Ref.		5.3M Bonds			692K Bonds			Total
(1)	Convertible Bonds Payable - principal	$	5,349,982		$	692,984		$	6,042,966
(2)	Less: Interest Discount - Warrants		(178,950	)		(44,417	)		(223,367	)
(3)	Less: Interest Discount - Beneficial Conversion Feature		(869,270	)		(223,252	)		(1,092,522	)
(4)	Less: Bond Discount - Issuance Cost		(503,766	)		(91,382	)		(595,148	)
(5)	Accretion of Interest Discount - Warrants		53,545			12,034			65,579
(6)	Accretion of Interest Discount - Beneficial Conversion Feature		869,270			223,252			1,092,522
(7)	Accretion of Bond Discount - Issuance Cost		150,735			24,758			175,493
(8)	Accretion of Interest Discount - Redemption		336,168			39,426			375,594
(9)	Conversion of Convertible Bonds into Common Stock		(200,000	)		-			(200,000	)
	Convertible Bonds Payable, net	$	5,007,714		$	633,403		$	5,641,117

(1).

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

(2).

The proceeds were allocated between the convertible bonds and warrants based on their relative fair value. See Note 13 Capital Stock for the calculation of fair value of convertible bonds detachable warrants.

(3).

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

(4).

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

(5).

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

(6).

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

(7).

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

(8).

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

(9).

Principal of $200,000 was converted into 322,581 shares common stock on August 24, 2010

Included in interest expense of $461,723, was $120,859 convertible bonds coupon expense, $162,137 non-cash flow amortization expense of convertible bonds, and $178,727 bank loan interest expense.

12.	CAPITAL STOCK

The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 27,156,617 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 27,156,617 shares of common stock issued and outstanding at March 31, 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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

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

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 March 31, 2011:-

	Authorized Shares		Shares issued and outstanding
Common Stock		250,000,000		27,156,617
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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

(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.

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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

Total Capitalization

The following table depicts an analysis of total capitalization for the issuance of Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional Paid in Capital at March 31, 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		47	%
Investors		4,590,094		4,590		95,418		95		14,502,956		14,503		25,919,150		53	%
Beneficial Conversion Feature		-		-		-		-		-		-		8,094,814		-
		4,590,094	$	4,590		95,418	$	95		27,156,617	$	27,156	$	38,078,826		100	%

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 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 three months ended March 31, 2011 and 2010:-

Description	March 31, 2011			March 31, 2010
Income (loss) before taxes:-
US Federal	$	(462,165	)	$	(954,050	)
State		-			-
BVI		(28,551	)		(118,054	)
PRC		591,271			1,102,854
Total income before taxes	$	144,392		$	30,750

Provision for taxes:-
Current:
U.S. Federal	$	-		$	-
State		-			-
HK		-			-
PRC		(37,837	)		(239,334	)
		(37,837	)		(239,334	)
Deferred:
U.S. Federal		-			-
State		-			-
HK		-			-
PRC		-			-
Valuation allowance		-			-
		-			-

Total provision for taxes	$	(37,837	)	$	(239,334	)

Effective tax rate		26.20	%		21.70	%

The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the three months ended March 31, 2011 and 2010 are shown in the following table:-

	March 31, 2011			March 31, 2010
U.S. federal statutory income tax rate		34.00	%		34.00	%
Lower rates in PRC, net		(9.00	)%		(9.00	)%
Tax holiday		-			(10.00	)%
Accruals in foreign jurisdictions		1.20	%		6.70	%
Effective tax rate		26.20	%		21.70	%

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 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 March 31, 2011
	Gas Distribution		Gas Pipeline Installation		Shell, BVIs, & Eliminations		Total
Assets
Current Assets	$	13,193,025	$	5,233,753	$	760,160	$	19,186,938
Non-Current Assets		23,775,632		59,932,611		3,490,727		87,198,970
Total Assets		36,968,657		65,166,364		4,250,887		106,385,908

Liabilities
Current Liabilities		2,614,122		23,191,938		-		25,806,060
Non-current Liabilities		1,084,090		9,617,816		-		10,701,906
Total Liabilities		3,698,211		32,809,754		-		36,507,965

Net Assets		33,270,445		32,356,610		4,250,887		69,877,942

Liabilities & Equities	$	36,968,657	$	65,166,364	$	4,250,887	$	106,385,908

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

Operation Result Segment Report
For the three months ended March 31, 2011
	GasDistribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total

Sales Revenue	$	9,246,221		$	3,668,032		$	(4,927,983	)	$	7,986,270
Cost of Revenue		(9,001,034	)		(1,492,792	)		4,927,983			(5,565,844	)
Gross Profit		245,186			2,175,240			-			2,420,426

Operating Expense		(162,563	)		(1,442,227	)		(207,959	)		(1,812,749	)
Operating Income/(Loss)		82,623			733,013			(207,959	)		607,677

Other Income/(Loss)		(46,930	)		(133,598	)		(282,757	)		(463,285	)
Earnings before tax		35,693			599,415			(490,716	)		144,392

Income tax		(2,126	)		(35,711	)		-			(37,837	)
Gain/(loss) from discontinued operation, net of tax		-			-			-			-

Net Income	$	33,567		$	563,704		$	(490,716	)	$	106,555

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 2011 and December 31, 2010

(Stated in US Dollars)

Operation Result Segment Report
For the three months ended March 31, 2010
	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total

Sales Revenue	$	6,157,019		$	3,076,832		$	(2,276,190	)	$	6,957,661
Cost of Revenue		(6,007,746	)		(1,101,592	)		2,276,190			(4,833,148	)
Gross Profit		149,273			1,975,240			-			2,124,513

Operating Expense		(63,706	)		(842,989	)		(271,079	)		(1,177,774	)
Operating Income/(Loss)		85,567			1,132,251			(271,079	)		946,739

Other Income/(Loss)		(64,359	)		(50,605	)		(801,025	)		(915,989	)
Earnings before tax		21,207			1,081,647			(1,072,104	)		30,750

Income tax		(4,602	)		(234,732	)		-			(239,334	)

Net Income	$	16,605		$	846,915		$	(1,072,104	)	$	(208,586	)

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 Consolidated Financial Statements

As of March 31, 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		3/31/2011			3/31/2010
Net Income			$	106,555		$	(208,586	)
Preferred Dividends				-			-
Constructive Preferred Dividends				-			-
Net loss attributed to non-controlling interest				(13,966	)		-
Income Available to Common Stockholders for Basic EPS			$	120,521		$	(208,586	)

Interest Expense for Convertible Bonds, net of tax				282,996			801,216
Income Available to Common Stockholders for Diluted EPS			$	403,517		$	592,630

Original Shares				27,156,617			26,769,313
Addition to Common Stock				-			-
Basic Weighted Average Shares Outstanding				27,156,617			26,769,313

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				27,156,617			26,769,313

Earnings Per Share
- Basic			$	0.004		$	(0.01	)
- Diluted			$	0.004		$	(0.01	)

Weighted Average Shares Outstanding
- Basic				27,156,617			26,769,313
- Diluted				27,156,617			26,769,313

(1).

The application of conversions’ of preferred stock B to common stock was anti-dilutive for the three months ended March 31, 2011.

(2).

The application of conversions of preferred stock B-1 to common stock was anti-dilutive for the three months ended March 31, 2011.

(3).

The average price of the Company’s common stock was $0.45 for the three-month periods ended March 31, 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.

(4).

The exercise of warrants to common stock was anti-dilutive for the three-month periods ended March 31, 2011.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of March 31, 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. SUBSEQUENT EVENT

Pursuant to the Share Transfer Agreements and other related agreements (the "Agreements") with Hebei Natural Gas Co., Ltd. ("Hebei Gas"), the Company and its indirectly wholly owned subsidiary Beijing Gas agreed to sell assets and ownership of three of its subsidiaries, Xinji Zhongchen Gas Co., Ltd., Jinzhou Weiye Gas Co., Ltd., and Shenzhou Weiye Gas Co., Ltd. for total consideration of RMB 44.8 million (approximately USD $6.68 million) (the "Consideration"). Under the terms of the Agreements, Hebei Gas agreed to pay the Consideration in four installments.

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.

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 9.7% in the first quarter 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 March 31, 2011 Compared to Three Months Ended March 31, 2010

During the three months ended March 31, 2011, net revenues were $7,986,270, representing an increase of 14.78 % from the same period of last year. Gross profit for the three months ended March 31, 2011 was $2,420,426, representing an increase of 13.93% from the same period of last year. Our operating income for the three months ended March 31, 2011 was $607,677, representing a decrease of 35.81% from the same period of 2010. Net income for the three months ended March 31, 2011 was $106,555, compared to net loss of $208,586 during the same period of 2010.

	For the 3 months ended March 31,
	2011			2010			Change
	US$			US$
Net Revenues		7,986,270			6,957,661			14.78	%
Gross Profit		2,420,426			2,124,513			13.93	%
Operating Income		607,677			946,739			-35.81	%
Net Income		106,555			-208,586			151.08	%
Gross Margin		30.31	%		30.53	%		-0.75	%
Net Margin		1.33	%		-3.00	%

Net Revenues

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

Total net revenues for the three months ended March 31, 2011 were $7,986,270, compared to $6,957,661 for the same period in 2010, representing an increase of 14.78 %. The increase was mainly due to the increased gas sales. During this period, we connected 7,125 new residential households to our gas distribution network, resulting in total connection fees of $2,797,811. Gas sales during the three months ended March 31, 2011 were $5,188,459. In comparison, we connected 7,204 new residential households to our gas distribution network for the same period in 2010, resulting in total connection fees of $2,745,415. Gas sales during the same period in 2010 were $4,212,246.

	For the 3 months ended March 31,
	2011					2010					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		7.99		100	%		6.96		100	%		14.78	%
Connection Fees		2.80		3	5%		2.75		40	%		1.91	%
Gas Sales		5.19		65	%		4.21		60	%		23.18	%

Connection Fees

Connection fees during the three months ended March 31, 2011 were $2.80 million, representing a slight increase of 1.91% from $2.75 million during the same period of 2010 and accounting for 35% of the total net revenue in the three months ended March 31, 2011 as compared to approximately 40% 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 March 31,
(in US$ millions)	2011					2010					Change
	US$		%			US$		%			%
Connection Fees		2.80		100	%		2.75		100	%		1.91	%
Residential Users		2.80		100	%		2.75		100	%
Industrial Users		0.00		0	%		0.00		0	%

Gas Sales

Gas sales were $5.19 million during the three months ended March 31, 2011, accounting for 65% of total net revenue for the three months ended March 31, 2011 and representing an increase of 23.18% over the same period of 2010. Gas sales to residential users increased 22.41% to $2.63 million for the three months ended March 31, 2011 from $2.15 million in the same period of 2010. Gas sales to industrial and commercial users increased 24.27% to $2.56 million for the three months ended March 31, 2011 from $2.06 million in the same period of 2010.

	For the 3 months ended March 31,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Gas Sales		5.19		100	%		4.21		100	%		23.18	%
Residential Users		2.63		51	%		2.15		51	%		22.41	%
Industrial and Commercial Users		2.56		49	%		2.06		49	%		24.27	%

Gas sales to residential users continued to grow. Gas sales to industrial customers also increased in the first quarter of 2011 compared to the same period of last year. Lower sales to industrial customers in the first quarter of 2010 were due to the severe weather conditions in China, which affected the logistics of gas delivery. During that period the Chinese government prioritized the delivery gas to residential users.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2011, which includes cost of connections and cost of gas sales, was $5.57 million, representing an increase of 15.16% from $4.83 million in the same period of 2010.

	For the 3 months ended March 31,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		5.57		100	%		4.83		100	%		15.16	%
Connection Fee Cost		0.63		11	%		0.77		16	%		-19.16	%
Gas Cost		4.94		89	%		4.06		84	%		21.67	%

Cost of Connection Fees

The cost of connection fees decreased 19.16% to $0.63 million during the three months ended March31, 2011 from $0.77 million for the same period in 2010. During the three months ended March 31, 2011, we incurred lower 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 21.67% to $4.94 million during the three months ended March 31, 2011 from $4.06 million for the same period in 2010. This increase in cost of gas sales is largely due to the increase of gas sales 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 March 31, 2011, gross profit was $2.42 million, representing an increase of approximately 13.93% from the same period of 2010. Gross profit from connection fees was $2.17 million for the three months ended March 31, 2011, accounting for 90% of total gross profit. In comparison, gross profit from connection fees was $1.97 million for the three months ended March 31, 2010, accounting for 93% of total gross profit for the three months ended March 31, 2010. Gross profit from gas sales was $0.25 million for the three months ended March 31, 2011, accounting for 10% of total gross profit, compared to $0.15 million, accounting for 7% of total gross profit, in the same period of 2010.

	For the 3 months ended March 31,
	2011					2010					Change
($ million)	US$		%			US$		%			%
Gross Profit		2.42		100	%		2.12		100	%		13.93	%
Connection		2.17		90	%		1.97		93	%		10.13	%
Gas		0.25		10	%		0.15		7	%		64.25	%

Gross margin during the three months ended March 31, 2011 was 30.31%, compared to 30.53% during the same period in 2010.

Gross margin for connection fees for the three months ended March 31, 2011 was 77.75%, compared to 71.95% in the same period of 2010. The decrease in the cost of connection fees contributed to the improvement of gross margin.

Gross margin for sales of natural gas was 4.73% for the three months ended March 31, 2011, compared to3.54% during the same period of 2010. The increase was primarily due to improvement of delivery cost for the three months ended March 31, 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 March 31, 2011 were $1.81 million and approximately 22.7% of net revenues, compared with $1.18 million, or 16.93%, of net revenues in the same period of 2010. We incurred approximately $0.21 million in professional service fees, including legal, assessment, advisory and credit guarantee during the three months ended March 31, 2011.

Operating Income

The operating income for the three months ended March 31, 2011 was $0.61 million, representing a decrease of 35.81%, compared to the operating income of $0.95 million for the same period of 2010. This decrease was caused by the increase of SG&A expenses, which exceeded the increase of gross profit during the three months ended March 31, 2011.

Other Income (Expense)

Other expense was $0.46 million for the three months ended March 31, 2011, compared with other expense of $0.92 million for the same period of 2010. The decrease was mainly due to the decrease of the non-cash flow amortization costs of convertible bonds.

Income tax

Income tax was $0.04 million for the three months ended March 31, 2011, compared to $0.24 million for the same period of 2010.

Net Income

Net income for the three months ended March 31, 2011 was $0.11 million, compared with net loss of $0.21 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 13.93% to $2.42 million compared to the gross profit of $2.12 million for the same period of 2010. Higher gross profit together with lower non-cash flow amortization costs of convertible bonds and lower income tax were able to offset the increase of SG&A expenses in this quarter.

Liquidity and Capital Resources

Cash and cash equivalents were $2.38 million as of March 31, 2011, representing a decrease of $1.2 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 March 31, 2011 was $0.69 million, representing a decrease of $2.23 million from $2.92 million used during the same period of 2010. Such decrease was mainly due to the increase of net income, adjusted for non-cash expense items and changes in working capital.

Cash used in investing activities for the three months ended March 31, 2011 was $2.07 million, representing an increase of $0.46 million from $1.61 million during the same period of 2010. Such increase was mainly due to the increase of property, plant and equipment.

Cash sourced in financing activities for the three months ended March 31, 2011 was $1.59 million, representing a decrease of $0.61million from $2.20 million during the same period of 2010.

Accounts Receivable

Accounts receivable as of March 31, 2011 were $10.40 million, representing an increase of $0.90 million from $9.50 million as of December 31, 2010.

Notes Receivable

Notes receivable as of March 31, 2011 were $0.81million, representing an increase of $0.58 million from $0.23 million as of December 31, 2010.

Inventory

Inventory of $0.69 million as of March 31, 2011 was comprised of spare parts and natural gas.

Fixed Assets

Fixed Assets as of March 31, 2011 were $57.06 million, representing an increase of $1.89 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	$	45,797,055		$	44,512,342
Motor Vehicles		6,271,808			6,067,524
Machinery & Equipment		1,658,907			1,542,016
Buildings		2,718,269			2,316,729
Leasehold Improvements		388,386			475,099
Office Equipment		261,362			256,419
Less Accumulated depreciation		(5,598,857	)		(5,241,647	)
	$	51,496,930		$	49,928,482

Bank Loans

Short-term bank loans as of March 31, 2011 were $9.44 million, an increase of $1.58 million compared to that as of December 31, 2010.

Long-term bank loans as of March 31, 2011 were $3.04 million, no change compared to that as of December 31, 2010.

Accounts Payables

Accounts payables as of March 31, 2011 was $10.97 million, representing a decrease of $0.14 million from that as of December 31, 2010.

Other Payables

Other payables - current as of March 31, 2011 were $3.91 million, representing an increase of $0.22 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 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded as of the March 31, 2011 our disclosure controls and procedures were not effective due to the fact that the material weaknesses in the Company’s internal control over financial reporting described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 had not been remediated as of March 31, 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 March 31, 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
23.1		Consent of Samuel H. Wong & Co., LLP

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

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

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

SIGNATURES

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

	SINO GAS INTERNATIONAL HOLDINGS, INC.

Date: May 16, 2011	By:	/s/ Yuchuan Liu
		Yuchuan Liu
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

	SINO GAS INTERNATIONAL HOLDINGS, INC.

Date: May 16, 2011	By:	/s/ Yugang Zhang
		Yugang Zhang
		Chief Financial Officer
		(Principal Financial Officer)

Attached files

Sino Gas International Holdings, Inc. Reports

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