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EXCEL - IDEA: XBRL DOCUMENT - Sino Gas International Holdings, Inc. | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - Sino Gas International Holdings, Inc. | v394722_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - Sino Gas International Holdings, Inc. | v394722_ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - Sino Gas International Holdings, Inc. | v394722_ex32-1.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 September 30, 2014
or
¨ | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 000-51364
SINO GAS INTERNATIONAL HOLDINGS, INC.
(Name of small business issuer in its charter)
Utah | 90-0438712 |
(State or other jurisdiction |
(I.R.S. Employer |
No. 18 Zhong Guan Cun Dong St. |
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 (§32.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 September 30, 2014, the Registrant had 57,608,833 shares of common stock outstanding.
Sino Gas International Holdings, Inc.
Table of Contents
Page | ||
Special Note Regarding Forward-Looking Statements | ||
PART I | FINANCIAL INFORMATION | |
Item 1. | Financial Statements (Unaudited) | 7 |
Notes to Financial Statements (Unaudited) | 13 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 37 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 45 |
Item 4. | Controls and Procedures | 45 |
PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 46 |
Item 1A. | Risk Factors | 46 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 46 |
Item 3. | Defaults Upon Senior Securities | 46 |
Item 4. | Mining Safety Disclosure | 46 |
Item 5. | Other Information | 46 |
Item 6. | Exhibits | 46 |
Except as otherwise indicated by the context, references in this Form 10-Q to:
“SGAS”, the “Company”, “we”, “our”, or “us” are references to Sino Gas International Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.
“U.S. Dollar”, “$”, and “US$” mean the legal currency of the United States of America.
“RMB” means Renminbi, the legal currency of China.
“China” or the “PRC” are references to the People’s Republic of China.
“U.S.” is a reference to the United States of America.
“SEC” is a reference to the Securities & Exchange Commission of the United States of America.
This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement of us by such companies, or any relationship with any of these companies.
2 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and plans and objectives of management for future operations. When used in this filing, the words believe, may, will, estimate, continue, anticipate, intend, expect, and similar expressions are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (SEC). Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements.
In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.
3 |
Sino Gas International Holdings, Inc.
Consolidated Financial Statements
September 30, 2014 and December 31, 2013
(Stated in US Dollars)
4 |
Sino Gas International Holdings, Inc.
5 |
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 balance sheets of Sino Gas International Holdings, Inc. as of September 30, 2014 and December 31, 2013, and the related consolidated statements of income, stockholders' equity, and cash flows for the three and nine month periods ended September 30, 2014 and 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our review.
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.
We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Sino Gas International Holdings, Inc. as of December 31, 2013, and the related statements of income, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated April 3, 2014, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2013, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
/s/ WWC, P.C. | |
San Mateo, California | WWC, P.C. |
November 17, 2014 | Certified Public Accountants |
6 |
Sino Gas International Holdings, Inc.
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
(Audited) | ||||||||
(Unaudited) September 30, 2014 | December
31, | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash & cash equivalents | $ | 3,442,708 | $ | 5,093,408 | ||||
Notes receivable | 264,575 | 376,186 | ||||||
Accounts receivable | 14,263,008 | 11,421,671 | ||||||
Other receivables | 6,893,744 | 4,612,461 | ||||||
Related party receivable | 2,347,324 | 292,444 | ||||||
Inventory | 5,107,147 | 1,104,548 | ||||||
Advance to suppliers | 4,603,876 | 10,027,964 | ||||||
Prepaid expenses and taxes | 2,481,517 | 2,185,796 | ||||||
Total Current Assets | 39,403,899 | 35,114,478 | ||||||
Non-Current Assets | ||||||||
Investment | 27,546,754 | 27,673,587 | ||||||
Property, plant & equipment, net | 84,774,424 | 85,368,194 | ||||||
Construction in progress | 39,397,068 | 30,150,669 | ||||||
Intangible assets, net | 1,514,142 | 956,621 | ||||||
Goodwill | 4,498,540 | 4,481,507 | ||||||
Deposit | 170,564 | 855,597 | ||||||
Total Non-current Assets | 157,901,492 | 149,486,175 | ||||||
Total Assets | $ | 197,305,391 | $ | 184,600,653 | ||||
LIABILITIES & STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Bank loans | $ | 32,512,995 | $ | 29,898,593 | ||||
Accounts payable | 20,860,452 | 19,257,221 | ||||||
Other payables | 7,803,931 | 9,730,782 | ||||||
Accrued liabilities | 20,132 | - | ||||||
Unearned revenue | 6,936,124 | 5,454,519 | ||||||
Related party payable | 8,386,833 | 265,812 | ||||||
Total Current Liabilities | 76,520,467 | 64,606,927 | ||||||
Non-current Liabilities | ||||||||
Long-term bank loans | 11,371,020 | 11,808,963 | ||||||
Total Non-current Liabilities | 11,371,020 | 11,808,963 | ||||||
Total Liabilities | $ | 87,891,487 | $ | 76,415,890 |
See Accompanying Notes to Financial Statements and Accountant’s Report
7 |
Sino Gas International Holdings, Inc.
Consolidated Balance Sheets
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
(Unaudited) | (Audited) | |||||||
September 30, 2014 | December 31, 2013 | |||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock B US $0.001 par value; 5,000,000 shares authorized; 200,997 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively. | $ | 201 | $ | 201 | ||||
Additional paid in capital - Preferred Stock B | 233,655 | 233,655 | ||||||
Preferred stock B-1 US $0.001 par value; 3,000,000 shares authorized; no shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively. | - | - | ||||||
Additional paid in capital - Preferred Stock B-1 | - | - | ||||||
Common stock US$0.001 par value; 250,000,000 shares authorized; 57,608,833 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively. | 57,607 | 57,607 | ||||||
Additional paid in capital | 47,273,027 | 47,273,027 | ||||||
Statutory reserve | 8,099,998 | 7,553,112 | ||||||
Retained earnings | 37,642,819 | 37,379,816 | ||||||
Non-controlling Interest | 7,407,000 | 7,410,654 | ||||||
Accumulated other comprehensive income | 8,699,597 | 8,276,691 | ||||||
Total Stockholders' Equity | 109,413,904 | 108,184,763 | ||||||
Total Liabilities & Stockholders' Equity | $ | 197,305,391 | $ | 184,600,653 |
See Accompanying Notes to Financial Statements and Accountant’s Report
8 |
Sino Gas International Holdings, Inc.
Consolidated Statements of Income
For the three months and nine months ended September 30, 2014 and 2013
(Stated in US Dollars)
Three Months Ended | Nine Months Ended | |||||||||||||||
9/30/2014 | 9/30/2013 | 9/30/2014 | 9/30/2013 | |||||||||||||
Sales revenue | $ | 22,649,778 | $ | 13,878,779 | $ | 55,145,335 | $ | 42,171,537 | ||||||||
Cost of revenue | 17,964,200 | 8,260,261 | 42,929,140 | 27,861,037 | ||||||||||||
Gross Profit | 4,685,578 | 5,618,518 | 12,216,195 | 14,310,500 | ||||||||||||
Operating Expense | ||||||||||||||||
Selling expense | 1,500,412 | 1,340,699 | 4,481,393 | 3,739,652 | ||||||||||||
General and administrative expense | 1,742,829 | 1,260,485 | 4,375,687 | 4,131,962 | ||||||||||||
Total operating expense | 3,243,241 | 2,601,184 | 8,857,080 | 7,871,614 | ||||||||||||
Operating Income/(Loss) | 1,442,337 | 3,017,334 | 3,359,115 | 6,438,886 | ||||||||||||
Other Income/(Expense) | ||||||||||||||||
Investment Income/(Loss) | 72 | 198,121 | 24,865 | 196,009 | ||||||||||||
Other income | - | 154,703 | 526,318 | 186,144 | ||||||||||||
Other expense | (1,063,404 | ) | 14,425 | (370,817 | ) | (109,442 | ) | |||||||||
Interest income | 11,524 | 41,913 | 97,818 | 142,075 | ||||||||||||
Interest expense | (536,472 | ) | (933,705 | ) | (1,936,695 | ) | (2,802,258 | ) | ||||||||
Total other income/(expense) | (1,588,280 | ) | (524,543 | ) | (1,658,511 | ) | (2,387,472 | ) | ||||||||
Income before tax | (145,943 | ) | 2,492,791 | 1,700,604 | 4,051,414 | |||||||||||
Income tax | (401,160 | ) | (495,011 | ) | (894,369 | ) | (1,273,694 | ) | ||||||||
Net income/(loss) | (547,103 | ) | 1,997,780 | 806,235 | 2,777,720 | |||||||||||
Net income (loss) attributable to: | ||||||||||||||||
- Common stockholders | (546,812 | ) | 1,996,282 | 809,889 | 2,779,218 | |||||||||||
- Non-controlling interest | (291 | ) | (1,498 | ) | (3,654 | ) | (1,498 | ) | ||||||||
Other Comprehensive income | ||||||||||||||||
Foreign currency translation adjustment | 300,717 | 916,233 | 422,906 | 2,651,699 | ||||||||||||
Comprehensive income/(loss) | (246,386 | ) | 2,914,013 | 1,229,141 | 5,429,419 | |||||||||||
Comprehensive Income/(Loss) Attributable to: | ||||||||||||||||
-Common stockholders | (246,386 | ) | 2,914,013 | 1,229,141 | 5,429,419 | |||||||||||
-Non-controlling stockholders | - | - | - | - | ||||||||||||
(246,386 | ) | 2,914,013 | 1,229,141 | 5,429,419 | ||||||||||||
Earnings per share | ||||||||||||||||
Basic: -Net income | 0.00 | 0.06 | 0.01 | 0.08 | ||||||||||||
Diluted: -Net income | 0.00 | 0.06 | 0.01 | 0.08 | ||||||||||||
Weighted Average Shares Outstanding | ||||||||||||||||
Basic | 57,608,833 | 32,650,813 | 57,608,833 | 32,650,813 | ||||||||||||
Diluted | 57,608,833 | 32,650,813 | 57,608,833 | 32,650,813 |
See Accompanying Notes to Financial Statements and Accountant’s Report
9 |
Sino Gas International Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
As of September 30, 2014 and December 31, 2013
(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, 2013 | 200,997 | 201 | 233,655 | - | - | - | 31,802,382 | 31,801 | 38,069,322 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Conversion of Convertible Bonds to Common Stock | - | - | - | - | - | - | 25,806,451 | 25,806 | 9,203,705 | |||||||||||||||||||||||||||
Appropriation of Income to Non-controlling Interest | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Capital Gain on Sale of Investment from Headquarter to Jiangsu Energy | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance at December 31, 2013 | 200,997 | 201 | 233,655 | - | - | - | 57,608,833 | 57,607 | 47,273,027 | |||||||||||||||||||||||||||
Balance at January 1, 2014 | 200,997 | 201 | 233,655 | - | - | - | 57,608,833 | 57,607 | 47,273,027 | |||||||||||||||||||||||||||
Net Income | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Appropriation of Income to Non-controlling Interest | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Appropriation of Retained Earnings | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance at September 30, 2014 | 200,997 | 201 | 233,655 | - | - | - | 57,608,833 | 57,607 | 47,273,027 |
See Accompanying Notes to Financial Statements and Accountant’s Report
10 |
Sino Gas International Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
APIC - Beneficial Conversion Feature | Statutory Reserve | Retained Earnings | Non-Controlling Interest | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||
Balance at January 1, 2013 | 515,851 | 6,150,234 | 30,024,006 | 7,374,492 | 5,474,055 | 87,873,617 | ||||||||||||||||||
Net Income | - | - | 8,517,457 | - | - | 8,517,457 | ||||||||||||||||||
Conversion of Convertible Bonds to Common Stock | (515,851 | ) | - | - | - | - | 8,713,660 | |||||||||||||||||
- | - | - | - | - | ||||||||||||||||||||
Appropriation of Income to Non-controlling Interest | - | - | (36,162 | ) | 36,162 | - | - | |||||||||||||||||
Capital Gain on Sale of Investment from Headquarter to Jiangsu Energy | 277,393 | 277,393 | ||||||||||||||||||||||
Appropriation of Retained Earnings | - | 1,125,485 | (1,125,485 | ) | - | - | - | |||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | 2,802,636 | 2,802,636 | ||||||||||||||||||
Balance at December 31, 2013 | - | 7,553,112 | 37,379,816 | 7,410,654 | 8,276,691 | 108,184,763 | ||||||||||||||||||
- | ||||||||||||||||||||||||
Balance at January 1, 2014 | - | 7,553,112 | 37,379,816 | 7,410,654 | 8,276,691 | 108,184,763 | ||||||||||||||||||
Net Income | - | - | 806,235 | - | - | 806,235 | ||||||||||||||||||
Appropriation of Income to Non-controlling Interest | - | - | 3,654 | (3,654 | ) | - | - | |||||||||||||||||
Appropriation of Retained Earnings | - | 546,886 | (546,886 | ) | - | - | - | |||||||||||||||||
Foreign Currency Translation Adjustment | - | - | - | - | 422,906 | 422,906 | ||||||||||||||||||
Balance at September 30, 2014 | - | 8,099,998 | 37,642,819 | 7,407,000 | 8,699,597 | 109,413,904 |
See Accompanying Notes to Financial Statements and Accountant’s Report
11 |
Sino Gas International Holdings, Inc.
Consolidated Statements of Cash Flows
For the three months and nine months ended September 30, 2014 and 2013
(Stated in US Dollars)
Three Months Ended | Nine Months Ended | |||||||||||||||
9/30/2014 | 9/30/2013 | 9/30/2014 | 9/30/2013 | |||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
Net Income/(Loss) | (547,103 | ) | 1,997,780 | 806,235 | 2,777,720 | |||||||||||
Bad debt provision | 904 | 6,135 | 28,700 | (3,626 | ) | |||||||||||
Depreciation expense | 630,320 | 392,487 | 1,496,061 | 1,229,226 | ||||||||||||
Amortization expense of intangible assets | 10,571 | 18,718 | 27,332 | 48,512 | ||||||||||||
Amortization expense of convertible bonds | - | 200,155 | - | 585,009 | ||||||||||||
Loss/(gain) on disposal of property and equipment | - | - | - | 232,326 | ||||||||||||
Decrease/(increase) in accounts and other receivables | (389,145 | ) | (846,464 | ) | (5,039,709 | ) | (3,098,298 | ) | ||||||||
Decrease/(increase) in inventory | 245,203 | (341,566 | ) | (4,002,598 | ) | (1,632,913 | ) | |||||||||
Decrease/(increase) in prepaid expenses | 2,919,336 | (3,499,898 | ) | 5,128,367 | (2,731,569 | ) | ||||||||||
Decrease/(Increase) in related party receivable | (1,675,720 | ) | 54,238 | (2,054,880 | ) | 10,293 | ||||||||||
Increase/(decrease) in accounts and other payables | 3,357,723 | (3,993,927 | ) | 9,299,137 | (2,758,579 | ) | ||||||||||
Cash Sourced/(Used) in Operating Activities | 4,552,089 | (6,012,342 | ) | 5,688,645 | (5,341,899 | ) | ||||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Decrease/(Increase) in deposit | (47 | ) | (97,574 | ) | 685,032 | (140,355 | ) | |||||||||
Increase of investment in equity | (3,070 | ) | (85,872 | ) | 126,833 | (384,131 | ) | |||||||||
Purchase of property, plant & equipment | 342,709 | (2,259,415 | ) | (902,290 | ) | (3,490,599 | ) | |||||||||
Increase of goodwill | - | - | (17,033 | ) | (2,920,345 | ) | ||||||||||
Purchase of other intangible assets | (22,871 | ) | (54,587 | ) | (584,853 | ) | (54,587 | ) | ||||||||
Increase in construction in progress | (4,337,754 | ) | (3,344,421 | ) | (9,246,399 | ) | (9,380,274 | ) | ||||||||
Cash Sourced/(Used) in Investing Activities | (4,021,033 | ) | (5,841,869 | ) | (9,938,710 | ) | (16,370,291 | ) | ||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Increase/(decrease) of bank loans | (962,275 | ) | 5,586,563 | 2,176,459 | 9,483,689 | |||||||||||
Increase of statutory reserve | - | (954,799 | ) | - | 275,706 | |||||||||||
Increase of notes payable | (22,736 | ) | (113,119 | ) | - | - | ||||||||||
Cash Sourced/(Used) in Financing Activities | (985,011 | ) | 4,518,645 | 2,176,459 | 9,759,395 | |||||||||||
Net increase in cash & cash equivalents for the periods | (453,955 | ) | (7,335,566 | ) | (2,073,606 | ) | (11,952,795 | ) | ||||||||
Effect of currency translation | 300,717 | 957,667 | 422,906 | 2,651,699 | ||||||||||||
Cash & cash equivalents at the beginning of periods | 3,595,946 | 10,912,830 | 5,093,408 | 13,836,027 | ||||||||||||
Cash & cash equivalents at the end of periods | 3,442,708 | 4,534,931 | 3,442,708 | 4,534,931 | ||||||||||||
Supplementary cash flows information | ||||||||||||||||
Interest received | 11,524 | 41,913 | 97,818 | 142,075 | ||||||||||||
Interest paid | 279,358 | 493,324 | 1,531,257 | 2,219,411 | ||||||||||||
Income tax paid | 110,292 | 436,252 | 1,216,971 | 1,218,104 |
See Accompanying Notes to Financial Statements and Accountant’s Report
12 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(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 ultimately 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 primary 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 95% to 100% in its subsidiaries, and an individual shareholder nominally holds the remainder of the equity interest in such project companies. Each such individual shareholder has relinquished any and all rights, power and interest to 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 34 small and medium size cities serving approximately 293,758 residential and seven industrial customers. The Company’s facilities include approximately 2,039 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 156,000 cubic meters of natural gas.
The common stock of the Company is currently quoted on the National Association of Securities Dealers' Over-the-Counter Bulletin Board under the symbol “SGAS”.
Basis of Presentation and Organization
The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
13 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
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 of accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.
(b) | Use of estimates |
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.
(c) | Economic and political risks |
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to law and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
14 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(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 interests throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of September 30, 2014:
Name of Company | Place of Incorporation | Date of Incorporation | Beneficial Interest % | Equity Interest % | Registered Capital | |||||||||||
GAS Investment China Co., Ltd. | The British Virgin Islands | 6/19/2003 | 100 | 100 | USD | 10,000,000 | ||||||||||
Sino Gas Construction, Ltd. | The British Virgin Islands | 1/9/2007 | 51 | 51 | USD | 98,039 | ||||||||||
Sino Gas Investment Development, Ltd. | The British Virgin Islands | 1/9/2007 | 100 | 100 | USD | 50,000 | ||||||||||
Tongyuan International Holding Limited | Hong Kong | 12/20/2011 | 51 | 51 | HKD | 10,000 | ||||||||||
Beijing Zhong Ran Weiye Gas Co., Ltd. | PRC | 8/29/2001 | 100 | 100 | RMB | 206,000,000 | ||||||||||
Beijing Chenguang Gas Co., Ltd. | PRC | 10/30/2002 | 100 | 100 | RMB | 35,239,600 | ||||||||||
Guannan Weiye Gas Co., Ltd. | PRC | 6/19/2003 | 100 | 100 | RMB | 14,857,800 | ||||||||||
Ningjin Weiye Gas Co., Ltd. | PRC | 12/3/2003 | 100 | 100 | RMB | 3,000,000 | ||||||||||
Yutian Zhongran Weiye Gas Co., Ltd. | PRC | 12/19/2003 | 100 | 100 | RMB | 3,000,000 | ||||||||||
Xingtang Weiye Gas Co., Ltd. | PRC | 2/18/2004 | 100 | 100 | RMB | 7,135,000 | ||||||||||
Wuqiao Gas Co., Ltd. | PRC | 6/30/2004 | 100 | 100 | RMB | 8,800,000 | ||||||||||
Sihong Weiye Gas Co., Ltd. | PRC | 12/3/2004 | 100 | 95 | RMB | 10,000,000 | ||||||||||
Langfang Weiye Dangerous Goods Transportation Co., Ltd. | PRC | 3/22/2005 | 100 | 95 | RMB | 1,000,000 | ||||||||||
Linzhang Weiye Gas Co., Ltd. | PRC | 7/6/2005 | 100 | 100 | RMB | 7,700,000 | ||||||||||
Jiangsu Weiye Gas Co., Ltd. | PRC | 8/22/2005 | 100 | 98.9 | RMB | 45,694,900 | ||||||||||
Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd. | PRC | 9/30/2005 | 100 | 100 | RMB | 5,000,000 | ||||||||||
Longyao Zhongran Weiye Gas Co., Ltd. | PRC | 10/13/2005 | 100 | 100 | RMB | 5,825,000 | ||||||||||
Yuxian Jinli Gas Co., Ltd. | PRC | 11/8/2005 | 100 | 100 | RMB | 9,500,000 | ||||||||||
Hengshui Weiye Gas Co., Ltd. | PRC | 12/20/2005 | 100 | 100 | RMB | 6,927,000 | ||||||||||
Changli Weiye Gas Co., Ltd. | PRC | 12/8/2006 | 100 | 100 | RMB | 3,000,000 | ||||||||||
Chenan Chenguang Gas Co., Ltd. | PRC | 1/23/2007 | 100 | 100 | RMB | 1,500,000 | ||||||||||
Wuhe Weiye Gas Co., Ltd. | PRC | 1/30/2007 | 100 | 100 | RMB | 3,000,000 | ||||||||||
Gucheng Weiye Gas Co., Ltd. | PRC | 3/21/2007 | 100 | 100 | RMB | 14,500,000 | ||||||||||
Luquan Chenguang Gas Co., Ltd. | PRC | 4/27/2007 | 100 | 100 | RMB | 2,000,000 | ||||||||||
Nangong Weiye Gas Co., Ltd. | PRC | 6/25/2007 | 100 | 100 | RMB | 7,439,000 | ||||||||||
Sixian Weiye Gas Co., Ltd. | PRC | 9/3/2007 | 100 | 100 | RMB | 3,000,000 | ||||||||||
Baishan Weiye Gas Co., Ltd. | PRC | 7/13/2007 | 100 | 100 | RMB | 15,000,000 | ||||||||||
Xinhe Weiye Gas Co., Ltd. | PRC | 7/2/2009 | 100 | 100 | RMB | 5,000,000 | ||||||||||
Hebei Weiye Gas (Group) Co., Ltd. | PRC | 12/18/2009 | 100 | 100 | RMB | 95,579,270 | ||||||||||
Gaocheng Weiye Gas Co., Ltd. | PRC | 1/27/2010 | 100 | 100 | RMB | 200,000 | ||||||||||
Jiangsu Zhong Ran Weiye Energy Investment Co., Ltd. | PRC | 3/10/2011 | 100 | 99 | RMB | 200,000,000 | ||||||||||
Fusong Weiye Gas Co., Ltd. | PRC | 7/29/2011 | 100 | 90 | RMB | 10,000,000 | ||||||||||
Jize Weiye Gas Co., Ltd. | PRC | 9/20/2011 | 100 | 100 | RMB | 5,500,000 | ||||||||||
Baishan Weiye Cheyong Gas Co., Ltd. | PRC | 8/13/2012 | 100 | 100 | RMB | 1,000,000 | ||||||||||
Baishan Weiye Wuzi Co., Ltd. | PRC | 11/5/2012 | 100 | 100 | RMB | 1,000,000 |
15 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
(e) | Cash and Cash Equivalents |
The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.
(f) | Accounts Receivable |
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company extends unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable.
(g) | Advances to Suppliers |
Advances to suppliers represent the cash paid in advance for purchasing raw materials. The advances to suppliers are interest free and unsecured.
(h) | Investments in Equity Securities |
The equity method of accounting was used to account for the Company’s investment in equity securities for which the Company did not have controlling equity interest. A 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 positions 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 their equity securities.
(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 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 licenses, franchise, and land use rights. The Company makes its determinations based on various factors that impact those assets.
At September 30, 2014, 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 no impairment losses for the period then ended.
16 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
(j) | Property, Plant and Equipment |
Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and impairment loss. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment are as follows:
Assets Class | Estimated Useful Life | |
Gas Pipelines (Up to December 31, 2007) | 25 years | |
Gas Pipelines (Starting from January 1, 2008) | 50 years | |
Buildings | 25 years | |
Leasehold Improvements | 25 years | |
Machinery & Equipment | 20 years | |
Motor Vehicles | 10 years | |
Office Equipment | 8 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
(k) | Intangible Assets |
Intangible assets are stated at cost less accumulated amortization and impairment loss. Amortization is provided over their estimated useful lives using the straight-line method. Estimated useful lives of the intangibles are as follows:
Asset Class | Estimated Useful Life | |
Land use rights | 20 - 50 years | |
Franchises | 30 years | |
Accounting software | 3 years |
(l) | Goodwill |
Goodwill impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate goodwill carrying values exceed estimated reporting unit fair values. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations.
(m) | Construction in Progress |
Construction in progress represents the cost of constructing pipelines and is stated at cost. Costs are comprised 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 networks and branch pipeline networks to make gas connection to residential 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.
17 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(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 prepayments as unearned revenue when the payments are received.
(o) | Financial Instruments |
The Company adopted ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.
ASC 820-10 includes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
Level 1 – inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.
The Company’s financial instruments consist mainly of cash, bank notes receivable, and debt obligations. Based on the borrowing rates currently available to the Company for loans and similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
18 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
The following tables present the Company’s financial assets and liabilities at fair value in accordance with ASC 820-10:
At September 30, | Quoted in | Significant | ||||||||||||||
2014: | Active Markets | Other | Significant | |||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Financial assets: | ||||||||||||||||
Notes receivable | $ | 264,575 | $ | - | $ | - | $ | 264,575 | ||||||||
Total financial assets | $ | 264,575 | $ | - | $ | - | $ | 264,575 | ||||||||
Financial liabilities: | ||||||||||||||||
Notes payable | $ | - | $ | - | $ | - | $ | - | ||||||||
Total financial liabilities | $ | - | $ | - | $ | - | $ | - |
At December 31, | Quoted in | Significant | ||||||||||||||
2013: | Active Markets | Other | Significant | |||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Financial assets: | ||||||||||||||||
Restricted cash | $ | - | $ | - | $ | - | $ | - | ||||||||
Total financial assets | $ | - | $ | - | $ | - | $ | - | ||||||||
Financial liabilities: | ||||||||||||||||
Notes payable | $ | - | $ | - | $ | - | $ | - | ||||||||
Total financial liabilities | $ | - | $ | - | $ | - | $ | - |
(p) | Foreign Currency Translation |
The accompanying financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (“RMB”). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
9/30/2014 | 12/31/2013 | |||||||
Years end RMB : US$ exchange rate | 6.1560 | 6.1140 | ||||||
Average yearly RMB : US$ exchange rate | 6.1502 | 6.1982 |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
(q) | Revenue Recognition |
The Company has two sources of revenue: (a) sales of natural gas and (b) connection fees for constructing connections to the natural gas distribution network. In accordance with FASB ASC 605-10, the Company recognizes gas distribution revenue when natural gas is 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 fees are 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.
19 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
(r) | Cost of Revenue |
The cost for distribution of natural gas is comprised of raw materials, delivery cost, and other overhead. The cost of connection fees consists of construction materials, direct labor wages, and other overhead.
(s) | Investment Income |
Investment income represents the Company’s share of post-acquisition results of its investment in equity securities for the year.
(t) | Income Taxes |
The Company uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed according to the United States, and People’s Republic of China tax laws are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes primarily related to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets, whether it is more likely than not that these items will expire either before the Company is able to realize that tax benefit, or that future realization is uncertain.
In respect of the Company’s subsidiaries domiciled and operated in China and British Virgin Islands, the taxation of these entities is summarized below:-
· | All of the operating companies are located in the PRC; GAS Investment China Co., Ltd., Sino Gas Construction, Ltd., and Sino Gas Investment Development, Ltd. are located in the British Virgin Islands; and Tongyuan International Holdings Limited is located in Hong Kong. All of these entities are subject to the relevant tax laws and regulations of the PRC, Hong Kong, and the British Virgin Islands in which the related entities are domiciled. The maximum tax rates of the subsidiaries pursuant to the countries in which they are domiciled 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 | % | |||
iv. Tongyuan International Holdings Limited | Hong Kong | 16.5 | % |
· | Effective January 1, 2008, the PRC government implemented a new 25% tax rate for all enterprises regardless of whether it was a domestic or foreign enterprise, without any tax holiday, which is defined as "two-year exemption followed by three-year half exemption" hitherto enjoyed by tax payers. As a result of the new tax law, the standard 15% tax rate preference terminated as of December 31, 2007. However, the PRC government has established a set of transition rules to allow enterprises that utilized the tax holidays prior to January 1, 2008 to continue utilizing the tax preference. |
20 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
· | Since Sino Gas International Holdings, Inc. is primarily a holding company without any business activities in the United States, the Company shall not be subject to United States income tax for nine months ended September 30, 2014. |
(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 harm to employees, equipment, and the local environment.
· | Inflation Risk |
Management monitors changes in prices levels. Historically inflation has not materially impacted the Company’s financial statements; however, significant increases in the price of raw materials and labor that cannot be passed on to the Company’s customers could adversely impact the Company’s results of operations.
· | Economic and Political Risks |
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by changes in the political, economic, and legal environments in the PRC.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
21 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
(w) | Statutory Reserves |
As stipulated by the Company Law of the People's Republic of China as applicable to Chinese companies with foreign ownership, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
i. | Making up cumulative prior years’ losses, if any; |
ii. | Allocations to the “Statutory reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital; |
iii. | Allocations to the discretionary surplus reserve, if approved in the shareholders’ general meeting. |
(x) | Comprehensive Income |
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.
The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid-in capital and distributions to stockholders due to investments by stockholders. Comprehensive income for the nine months ended September 30, 2014 and 2013 included net income and foreign currency translation adjustments.
(y) | Recent Accounting Pronouncements |
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Some stakeholders told the Board that too many disposals of small groups of assets that are recurring in nature qualify for discontinued operations presentation under Subtopic 205-20, Presentation of Financial Statements—Discontinued Operations. That results in financial statements that are less decision useful for users. Other stakeholders noted that some of the guidance on reporting discontinued operations results in higher costs for preparers because it can be complex and difficult to apply. The amendments in this Update address those issues by changing the criteria for reporting discontinued operations and enhancing convergence of the FASB’s and the International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations. The amendment should apply to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years.
22 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” Entities commonly issue share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. Examples of performance targets include an entity attaining a specified profitability metric or selling shares in an initial public offering. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved.
Current U.S. generally accepted accounting principles do not contain explicit guidance on how to account for those share-based payments. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. This Update is intended to resolve the diverse accounting treatment of those awards in practice.
For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.
As of September 30, 2014, there are no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements.
(z) | Earnings per Share |
The Company computes earnings per share (“EPS”) in accordance with FASB ASC 260 “Earnings per share”. SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., contingent shares, convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
(aa) | Subsequent Events |
The Company evaluates subsequent events that have occurred after the consolidated balance sheet date but before the consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. The Company has identified no subsequent events that would require disclosure to the consolidated financial statements.
23 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
3. | ACCOUNTS RECEIVABLE |
For natural gas sales, revenue is due when the gas is sold. Most residential customers settle their accounts via prepayments with debit cards, while industrial customers are billed and pay according to the contract terms ranging from 10 days to one month.
For construction projects, connection fees are generally collected in installments. First deposits of 30% of the total contract sum are received from the client when the project commences. A second payment of 30% is received at a milestone set out in the contracts. A third payment of 30% is received after construction is completed. The remaining 10% is typically held back by the client and acts as a warranty on the quality of the project. The retained money is usually received by the company after the 1 year warranty period.
The Company believes it has provided adequate provisions for doubtful accounts. Doubtful allowance accounts at September 30, 2014 and December 31, 2013 were approximately 1% of gross account receivables. To collect on doubtful accounts, the Company uses all of its efforts, such as having internal staff call for payment, filing legal pledges, or even hiring collection agents to collect the outstanding balance. If the collection is no longer probable, the Company will write off the balance against the allowance for doubtful accounts.
The Company has not experienced any material delinquent accounts that were uncollectible and has not written off a material balance against the allowance for doubtful accounts.
Accounts Receivable
9/30/2014 | 12/31/2013 | |||||||
Accounts receivable | $ | 14,407,079 | $ | 11,537,041 | ||||
Less: Allowance for bad debt | (144,071 | ) | (115,370 | ) | ||||
Accounts receivable, net | $ | 14,263,008 | $ | 11,421,671 |
Allowance for Bad Debt
9/30/2014 | 12/31/2013 | |||||||
Beginning balance | $ | (115,370 | ) | $ | (120,727 | ) | ||
Allowance provided | - | - | ||||||
Charge against allowance | (28,701 | ) | - | |||||
Reversals | - | 5,357 | ||||||
Ending balance | $ | (144,071 | ) | $ | (115,370 | ) |
Accounts Receivable Aging Analysis
9/30/2014 | 12/31/2013 | |||||||
<30 Days | $ | 3,651,507 | $ | 6,516,988 | ||||
30-60 Days | 1,552,912 | 861,401 | ||||||
60-90 Days | 2,268,922 | 280,978 | ||||||
90-180 Days | 1,053,304 | 978,959 | ||||||
180-360 Days | 1,542,556 | 2,261,626 | ||||||
>360 Days | 4,337,796 | 637,089 | ||||||
Total | $ | 14,407,079 | $ | 11,537,041 |
24 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
Top ten customers accounted for 53.61% of the total accounts receivable as of September 30, 2014:
Xuzhou Lanyan Gas Co., Ltd. | $ | 1,308,177 | 9.08 | % | ||||
Hebei Zhonggang Steel Co., Ltd. | 1,124,362 | 7.80 | % | |||||
Beijing Jingtai Energy Technology Co., Ltd | 1,135,517 | 7.88 | % | |||||
Shanghai DaTun Energy Co., Ltd. (Jiangsu Branch) | 856,686 | 5.94 | % | |||||
Tongshan Hengxinjiaye Gas Co., Ltd | 849,863 | 5.90 | % | |||||
Beijing Langfa Gas Co., Ltd. | 596,253 | 4.14 | % | |||||
Lianyun Port Zhaolong Home Development Co., Ltd. | 515,715 | 3.58 | % | |||||
Jiangsu Zhonghuang Real Estate Co., Ltd. | 468,928 | 3.25 | % | |||||
Housangyuan Liquefied Gas Station | 456,670 | 3.17 | % | |||||
Hebei Dihua Real Estate Co., Ltd | 414,324 | 2.87 | % | |||||
$ | 7,726,956 | 53.61 | % |
4. | OTHER RECEIVABLES |
9/30/2014 | 12/31/2013 | |||||||
Employee travel advance | $ | 2,052,201 | $ | 230,152 | ||||
Advance for consultant service | 282,781 | 279,015 | ||||||
Short term security deposit for construction pipeline | 270,085 | 189,058 | ||||||
Others | 4,288,677 | 3,914,236 | ||||||
$ | 6,893,744 | $ | 4,612,461 |
5. | RELATED PARTY RECEIVABLE |
As of September 30, 2014, the Company’s related party receivable is $2,347,324, of which the $216,374 (RMB 1,332,000) is due from the Company’s founder and CEO Mr. Liu Yuchuan’s wife, Fengjun Lu. The Company borrowed $3,248,863 (RMB 20,000,000) from China Development Bank. The loan was secured by the Mrs. Liu’s personal home property, which carried a $327,485 (RMB 2,016,000) 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. |
25 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
6. | INVESTMENT |
Ref. | 9/30/2014 | 12/31/2013 | ||||||||
(1) | Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. | $ | 13,953,615 | $ | 14,051,432 | |||||
(2) | Qujing City Fuel Gas Co., Ltd. | 9,369,198 | 9,369,198 | |||||||
(3) | Tongshan Hengxin Jiaye Gas Co., Ltd. | 4,191,452 | 4,220,245 | |||||||
(4) | China Construction Bank | 32,489 | 32,712 | |||||||
Total | $ | 27,546,754 | $ | 27,673,587 |
(1) | The Company through its wholly owned subsidiary Beijing Gas invested $2,187,402 (RMB 13,465,648) in the acquisition of a 40% equity position in Xiangke Oil Gas. The $13,953,615 investment as of September 30, 2014 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ operation results. |
(2) | Along with two local partners in Qujing city, the second largest city in Yunnan province of PRC, Beijing Gas established Qujing City Fuel Gas Co., Ltd. with registered capital of $4,387,761 (RMB 30,000,000). Beijing Gas’ original investment of $1,746,764 (RMB 11,700,000) represented 39% equity ownership of Qujing Gas. |
On December 17, 2010, the Company, along 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 ordinary shares that represents 49% of the total issued capital of Gas Construction for consideration of US$2.0 million. In addition, pursuant to the Subscription Agreement, the equity interest in Qujing Gas held by Beijing Gas was transferred to Gas Construction so that Gas Construction became the beneficial holder of a 39% equity interest in Qujing Gas. After the close of the equity subscription, shareholders of Qujing Gas amended the Articles of Incorporation to raise the level of registered capital to $20,425,157 (RMB 130,000,000). The $9,369,198 investment as of September 30, 2014 consisted of principal and accumulated post-acquisition investment income attributed to Qujin Gas’ operational results.
Investment | Xiangke Oil Gas | Qujing Gas | ||||||
Investment Cost | $ | 2,187,402 | $ | 7,766,760 | ||||
Prior years investment income | 5,230,691 | 1,158,129 | ||||||
2012 investment income | 2,785,182 | 645,742 | ||||||
2013 investment income | 3,750,340 | 624,309 | ||||||
$ | 13,953,615 | $ | 9,369,198 |
(3) | On April 23, 2008, Beijing Gas entered into an agreement to acquire a 100% equity interest in Tongshan Hengxin Jiaye Natural Gas Co., Ltd. (“Tongshan Gas”), for a purchase price of $4,660,000 (RMB 32,600,000). Tongshan is a regional natural gas distributor and developer of natural gas distribution networks in Jiangsu province of the PRC. As of September 30, 2014, the Company has not finished the registration of the equity transfer with the Tongshan City Industrial and Commercial Administration. Therefore, acquisition payments of $4,191,452 for Tongshan Gas were classified as investment as of that date. |
(4) | The Company purchased a $32,489 (RMB 200,000) long-term fund with the Bank of Construction in an effort to maintain a favorable relationship and enhance further credit facility. |
26 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
7. | PROPERTY, PLANT AND EQUIPMENT |
Property, Plant, and Equipment consisted of the following as of September 30, 2014 and December 31, 2013:
9/30/2014 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 82,688,567 | $ | 5,973,208 | $ | 76,715,359 | ||||||
Motor Vehicles | 7,722,056 | 3,693,517 | 4,028,539 | |||||||||
Machinery & Equipment | 2,503,326 | 687,464 | 1,815,862 | |||||||||
Buildings | 2,468,885 | 504,006 | 1,964,879 | |||||||||
Leasehold Improvements | 157,188 | 83,950 | 73,238 | |||||||||
Office Equipment | 436,811 | 260,264 | 176,547 | |||||||||
Total | $ | 96,319,543 | $ | 10,572,090 | $ | 84,774,424 |
12/31/2013 | At Cost | Accumulated Depreciation | Net | |||||||||
Gas Pipelines | $ | 82,303,060 | $ | 5,002,669 | $ | 77,300,391 | ||||||
Motor Vehicles | 7,579,322 | 3,377,664 | 4,201,658 | |||||||||
Machinery & Equipment | 2,494,545 | 601,929 | 1,892,616 | |||||||||
Buildings | 2,177,529 | 450,595 | 1,726,934 | |||||||||
Leasehold Improvements | 99,918 | 75,962 | 23,956 | |||||||||
Office Equipment | 420,170 | 197,531 | 222,639 | |||||||||
Total | $ | 95,074,544 | $ | 9,706,350 | $ | 85,368,194 |
Gas pipelines purchased prior to 2008 were depreciated over their 25 year useful lives. Starting from 2008, the Company purchased a new quality of pipelines under a 50 year warranty. The new gas pipelines were depreciated over their 50 year useful lives.
Depreciation expenses included in the consolidated statements of income for the six months ended September 30, 2014 and 2013 were $865,741 and $836,739, respectively.
8. | GOODWILL |
Goodwill was related to the acquisitions of Beijing Chenguang Gas Co., Ltd. (“Chengguang Gas”), Yuxian Weiye Gas Co., Ltd. (“Yuxian Gas”), Guannan Weiye Gas Co., Ltd. (“Guannan Gas”) and Baishan Gas Co.(“Baishan Gas”), Ltd. Management annually reviews the carrying value of goodwill using the sum of the discounted cash flows to determine if an impairment charge is necessary. The Company has determined there were no impairments to goodwill as of September 30, 2014 and December 31, 2013.
9/30/2014 | 12/31/2013 | |||||||
Yuxian Gas | $ | 10,954 | $ | 10,954 | ||||
Guannan Gas | 409,963 | 409,963 | ||||||
Chengguang Gas | 1,257,058 | 1,257,058 | ||||||
Baishan Gas | 2,820,565 | 2,803,532 | ||||||
$ | 4,498,540 | $ | 4,481,507 |
27 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
9. | INTANGIBLE ASSETS |
Intangible assets consisted of the following as of September 30, 2014 and December 31, 2013:
9/30/2014 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use rights | $ | 1,701,882 | $ | 188,598 | $ | 1,513,284 | ||||||
Franchises | 406,108 | 406,108 | - | |||||||||
Accounting Software | 51,114 | 50,256 | 858 | |||||||||
$ | 2,159,104 | $ | 644,962 | $ | 1,514,142 |
12/31/2013 | At Cost | Accumulated Amortization | Net | |||||||||
Land Use Rights | $ | 1,113,889 | $ | 159,018 | $ | 954,871 | ||||||
Franchises | 408,898 | 408,898 | - | |||||||||
Accounting Software | 51,465 | 49,715 | 1,750 | |||||||||
$ | 1,574,251 | $ | 617,630 | $ | 956,621 |
Land use rights represent the right to use and develop land granted by the local PRC government in accordance with zoning laws less accumulated amortization. Under PRC law, the company is permitted to sell, transfer, or mortgage its land use rights.
Under exclusive franchises agreements between the Company and the applicable PRC local government and entities in charge of gas utility, the Company operates as a local natural gas distributor in a city or county. Amortization expenses included in the consolidated statements of income for the nine months ended September 30, 2014 and 2013 were $27,332 and $48,512 respectively.
28 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
10. | LOANS |
a. | SHORT-TERM BANK LOANS |
Name of Bank | Note | Due Date | Interest Rate | 9/30/2014 | 12/31/2013 | |||||||||||
Bank of China - Baishan Branch | 3 | 6/19/2014 | 6.650 | % | $ | 1,949,318 | $ | 1,962,709 | ||||||||
Bank of China - Baishan Branch | 3 | 1/30/2015 | 6.450 | % | 1,299,545 | - | ||||||||||
Bank of China - Shijiazhuang Branch | 06/06/2014 | 7.200 | % | - | 1,635,590 | |||||||||||
Wuhe Yongtai Bank | 06/20/2014 | 9.900 | % | - | 817,795 | |||||||||||
Bank of Beijing – Zhongguancun Haidian Park Branch | 08/29/2014 | 7.200 | % | 812,216 | 817,795 | |||||||||||
Dalian Bank - Beijing Branch | 1 | 11/28/2014 | 8.100 | % | 4,873,295 | - | ||||||||||
Pudong Development Bank - Shijiazhuang Branch | 1/7/2014 | 7.800 | % | - | 817,795 | |||||||||||
Pudong Development Bank - Shijiazhuang Branch | 1/8/2015 | 8.400 | % | 812,216 | ||||||||||||
Nanjing Bank | 2/21/2014 | 7.500 | % | - | 1,774,616 | |||||||||||
Industrial and Commercial Bank of China – Zhongguancun Branch | 6/25/2014 | 5.000 | % | - | 981,354 | |||||||||||
China Merchants Bank | 6/26/2014 | 8.100 | % | - | 1,635,590 | |||||||||||
Bank of China - Baishan Branch | 08/30/2014 | 6.450 | % | - | 327,118 | |||||||||||
Baishan Huida Investment Management Co, Ltd. | 09/05/2014 | 6.250 | % | 974,659 | 785,083 | |||||||||||
Peixuan Rural Credit Cooperation | 4 | 07/18/2014 | 11.674 | % | - | 4,906,771 | ||||||||||
Nanjing Bank | 2 | 11/20/2014 | 7.500 | % | 1,486,355 | 1,496,565 | ||||||||||
China Development Bank - Beijing Branch | 5 | 11/21/2014 | 7.200 | % | 8,122,157 | 8,177,952 | ||||||||||
Minsheng Bank | 11/7/2014 | 6.000 | % | 1,299,545 | 1,308,472 | |||||||||||
Pudong Development Bank - Shijiazhuang Bruanch | 10/23/2014 | 7.800 | % | 2,436,647 | 2,453,388 | |||||||||||
Bank of China – Baishan Branch | 3 | 12/17/2014 | 7.995 | % | 162,443 | - | ||||||||||
Nanjing Bank | 2 | 3/18/2015 | 7.500 | % | 1,624,431 | - | ||||||||||
Hangzhou Bank – Beijing Daxing Branch | 6/8/2015 | 6.500 | % | 1,624,431 | - | |||||||||||
Wuhe Yongtai Bank | 06/26/2015 | 9.900 | % | 812,216 | - | |||||||||||
Hangzhou Bank - Beijing Daxing Branch | 7/29/2015 | 6.50 | % | 1,624,431 | - | |||||||||||
ICBC-Datun Road Branch | 7/16/2015 | 6.00 | % | 974,659 | - | |||||||||||
Bank of China - Shijiazhuang Branch | 9/16/2015 | 7.80 | % | 1,624,431 | - | |||||||||||
Total | $ | 32,512,995 | $ | 29,898,593 |
Note:
1) | The loans provided by Bank of Dalian were secured by the Company’s subsidiary Chenguang Gas’ registered capital, CEO Mr. Liu Yuchuan and COO Mr. Zhou Zhicheng’s personal home properties, which have been appraised at total fair market value of $933,254 (RMB 6,380,854) | |
2) | The loan provided by Nanjing Bank was secured by Guoneng Financing Guarantee Co., Ltd. and CEO Mr. Liu Yuchuan |
3) | The loan provided by Bank of China – Baishan Branch was secured by the Company’s subsidiary Beijing Zhongran Weiye Gas Co., Ltd. with the authority of gas payment collection and Baishan Weiye Gas Co. Ltd. with liability. |
4) | The loan provided by Peixian Rural Credit Cooperation was secured by the Company’s subsidiary Beijing Zhongran Weiye Gas Co., Ltd. |
5) | The Company obtained the loans from China Development Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd. (the “Guarantor”). The Guarantor guaranteed to the Banks the entire principal and accrued interest. The Company pledged all of Beijing Gas’s subsidiaries and deposited $1,028,464 (RMB 6,800,000), which was classified as non-current asset deposits, with the Guarantor, and was required to pay 2% of the outstanding loans as a financial service fee to the Guarantor per annum. Because the Company lacked the favorable credit history to directly establish a credit facility with the banks, the credit collateralization from Guarantor was chosen as a financing solution. |
29 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
b. | LONG-TERM BANK LOANS |
Name of Bank | Due Date | Interest Rate | 9/30/2014 | 12/31/2013 | ||||||||||||
Bank of China - Baishan Branch | 6/24/2015 | 6.650 | % | $ | - | $ | 981,354 | |||||||||
Baishan Huida Investment Management Co, Ltd. | 12/31/2030 | 6.250 | % | 3,086,420 | 3,303,893 | |||||||||||
Bank of China - Baishan Branch | 8/30/2016 | 6.450 | % | 1,299,545 | 2,616,945 | |||||||||||
Bank of China - Baishan Branch | 6/17/2017 | 7.995 | % | 2,274,204 | - | |||||||||||
Pudong Development Bank - Shijiazhuang Branch | 7/25/2018 | 6.850 | % | 4,710,851 | 4,906,771 | |||||||||||
Total | $ | 11,371,020 | $ | 11,808,963 |
11. | OTHER PAYABLES |
(a) | Current other payables consisted of the following at September 30, 2014 and December 31, 2013: |
Ref. | 9/30/2014 | 12/31/2013 | ||||||||
(1) | Amount due to Employees | $ | 1,158,711 | $ | 2,675,923 | |||||
(2) | Tax Payable | 1,282,186 | 1,604,898 | |||||||
(3) | Payables to Subcontractors | 253,817 | 212,210 | |||||||
(4) | Others | 13,231,374 | 5,237,751 | |||||||
Total | $ | 15,926,088 | $ | 9,730,782 |
(1). | Amounts due to employees included accrual payroll, welfare payable, continued education training program cost and individual travel advance. All of these amounts were unsecured, interest free, and have no fixed repayment terms. |
(2). | The tax payable consists of value added tax, sales tax, income tax and local tax payables. |
(3). | Payables to subcontractors are unbilled liabilities. |
12. | RELATED PARTY PAYABLE |
On May 9, 2014, Beijing ZhongRan WeiYe Gas Co., Ltd. (the "Company"), a 100% owned PRC subsidiary of Sino Gas International Holdings, Inc., entered into a loan agreement with Zhongyu (Henan) Energy Holdings Limited (the "Lender") (the "Agreement") pursuant to which the Lender will grant a loan facility (permitting multiple one-year term drawdowns) to the Company in a total amount not exceeding RMB 50,000,000 (approximately USD $8.12 million based on the prevailing spot USD-RMB exchange rate) for the Company to use as working capital (the "Loan") and the Company will pay the Lender an interest on the outstanding loan amount computed at a rate equal to 8% per annum (the interest payment will be made monthly). To secure the Loan, pursuant to the Agreement, the Company will pledge its dividend right attached to the 40% equity interests of the Company in ZhongRan Xiangke Oil and Gas Technology Co., Ltd. (a 40% owned PRC joint venture entity of the Company) to the Lender.
30 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
13. | CAPITAL STOCK |
The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 57,608,833 shares are issued and outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001 per share. The preferred stock consists of (a) series A convertible preferred stock, with 20,000,000 shares authorized of which no shares are issued and outstanding; (b) series B convertible preferred stock, with 5,000,000 shares authorized of which 200,997 shares are issued and outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000 shares authorized of which no share are issued and outstanding.
The following table depicts the Company’s outstanding securities as of September 30, 2014:
Authorized Shares | Shares issued and outstanding | |||||||
Common Stock | 250,000,000 | 57,608,833 | ||||||
Convertible Preferred Stock A | 20,000,000 | - | ||||||
Convertible Preferred Stock B | 5,000,000 | 200,997 | ||||||
Convertible Preferred Stock B-1 | 3,000,000 | - |
There were 95,418 shares preferred stock B-1 and 4,380,413 shares preferred stock B converted into common stock in 2011. There was 8,684 shares preferred stock B converted into common stock in 2012.
14. | INCOME TAX |
The following tabulation presents the income tax and deferred tax of the Company and its individual subsidiaries for the nine months ended September 30, 2014 and 2013:
Description | September 30, 2014 | September 30, 2013 | ||||||
Income (loss) before taxes: | ||||||||
US | $ | (40,643 | ) | $ | (1,317,744 | ) | ||
BVI | (879,538 | ) | (1,129,454 | ) | ||||
PRC | 2,620,784 | 6,498,612 | ||||||
Total income before taxes | $ | 1,700,603 | $ | 4,051,414 | ||||
Provision for taxes:- | ||||||||
Current: | ||||||||
US | - | - | ||||||
BVI | - | - | ||||||
PRC | (894,369 | ) | (1,273,694 | ) | ||||
(894,369 | ) | (1,273,694 | ) | |||||
Deferred: | ||||||||
US | - | - | ||||||
BVI | - | - | ||||||
PRC | - | - | ||||||
Valuation allowance | - | - | ||||||
- | - | |||||||
Total provision for taxes | (894,369 | ) | (1,273,694 | ) | ||||
Effective tax rate | 52.59 | % | 31.44 | % |
31 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the nine months ended September 30, 2014 and 2013 are shown in the following table:
September 30, 2014 | September 30, 2013 | |||||||
U.S. federal statutory income tax rate | 34.00 | % | 34.00 | % | ||||
Lower rates in PRC, net | (9.00 | )% | (9.00 | )% | ||||
Tax holiday | 27.59 | % | 6.44 | % | ||||
Accruals in foreign jurisdictions | N/A | N/A | ||||||
Effective tax rate | 52.59 | % | 31.44 | % |
15. | SEGMENT INFORMATION |
The Company has contracted with customers usually in two revenue segments, one is for the construction and installation of gas facilities and the other is for the subsequent sales of natural gas to the customers through the gas facilities the Company constructs. However, construction and installation contracts and gas supply contracts have different terms for the basis of revenue recognition and differ from one another in terms of the relevant cost-and-revenue to be recognized and hence separate calculations and subsequent payments of fees for each segment occur without any interdependence on one another.
For management purposes, the company is currently organized into two major operating divisions: (a) sales of natural gas and (b) installation of gas facilities/construction. These principal operating activities are the basis on which the Company reports its primary segment information.
Financial Position Segment Report
As of September 30, 2014
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 29,400,662 | $ | 9,786,013 | $ | 217,224 | $ | 39,403,899 | ||||||||
Non-Current Assets | 38,149,408 | 114,614,387 | 5,137,698 | 157,901,493 | ||||||||||||
Total Assets | 67,550,070 | 124,400,399 | 5,354,923 | 197,305,392 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 29,930,550 | 46,569,785 | 20,132 | 76,520,467 | ||||||||||||
Non-current Liabilities | 4,448,881 | 6,922,139 | - | 11,371,020 | ||||||||||||
Total Liabilities | 34,379,431 | 53,491,924 | 20,132 | 87,891,487 | ||||||||||||
Net Assets | 33,170,640 | 70,908,475 | 5,334,791 | 109,413,906 | ||||||||||||
Liabilities & Equities | $ | 67,550,070 | $ | 124,400,399 | $ | 5,354,923 | $ | 197,305,392 |
32 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
Operation Result Segment Report
For the nine months ended September 30, 2014
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Sales Revenue | $ | 43,112,012 | $ | 16,331,705 | $ | (4,298,382 | ) | $ | 55,145,335 | |||||||
Cost of Revenue | (39,415,673 | ) | (7,676,792 | ) | 4,163,324 | (42,929,140 | ) | |||||||||
Gross Profit | 3,696,340 | 8,654,913 | (135,058 | ) | 12,216,195 | |||||||||||
Operating Expense | (2,375,259 | ) | (5,561,626 | ) | (920,196 | ) | (8,857,080 | ) | ||||||||
Operating Income/(Loss) | 1,321,081 | 3,093,288 | (1,055,254 | ) | 3,359,115 | |||||||||||
Other Income/(Loss) | ||||||||||||||||
Earnings before tax | (496,340 | ) | (1,187,050 | ) | 24,879 | (1,658,511 | ) | |||||||||
Income tax | 824,742 | 1,906,238 | (1,030,375 | ) | 1,700,603 | |||||||||||
Net Income | $ | 554,646 | $ | 1,281,963 | $ | (1,030,375 | ) | $ | 806,234 |
Financial Position Segment Report
As of September 30, 2013
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Assets | ||||||||||||||||
Current Assets | $ | 21,785,682 | $ | 12,421,010 | $ | 427,013 | $ | 34,633,705 | ||||||||
Non-Current Assets | 48,375,086 | 84,846,900 | 4,925,781 | 138,147,767 | ||||||||||||
Total Assets | 70,160,768 | 97,267,910 | 5,352,794 | 172,781,472 | ||||||||||||
Liabilities | ||||||||||||||||
Current Liabilities | 16,299,344 | 44,348,595 | - | 60,647,939 | ||||||||||||
Non-current Liabilities | 2,673,816 | 7,275,139 | - | 9,948,955 | ||||||||||||
Total Liabilities | 18,973,160 | 51,623,734 | - | 70,596,894 | ||||||||||||
Net Assets | 51,187,608 | 45,644,176 | 5,352,794 | 102,184,578 | ||||||||||||
Liabilities & Equities | $ | 70,160,768 | $ | 97,267,910 | $ | 5,352,794 | $ | 172,781,472 |
33 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
Operation Result Segment Report
For the nine months ended September 30, 2013
Gas Distribution | Gas Pipeline Installation | Shell, BVIs, & Eliminations | Total | |||||||||||||
Sales Revenue | $ | 36,831,797 | $ | 20,999,486 | $ | (15,659,746 | ) | $ | 42,171,537 | |||||||
Cost of Revenue | (32,985,800 | ) | (10,534,983 | ) | 15,659,746 | (27,861,037 | ) | |||||||||
Gross Profit | 3,845,997 | 10,464,503 | - | 14,310,500 | ||||||||||||
Operating Expense | (1,730,742 | ) | (4,709,146 | ) | (1,431,726 | ) | (7,871,614 | ) | ||||||||
Operating Income/(Loss) | 2,115,255 | 5,755,357 | (1,431,726 | ) | 6,438,886 | |||||||||||
Other Income/(Loss) | (641,641 | ) | (926,368 | ) | (819,463 | ) | (2,387,472 | ) | ||||||||
Earnings before tax | 1,473,614 | 4,828,989 | (2,251,189 | ) | 4,051,414 | |||||||||||
Income tax | (297,803 | ) | (975,891 | ) | - | (1,273,694 | ) | |||||||||
Net Income | $ | 1,175,811 | $ | 3,853,098 | $ | (2,251,189 | ) | $ | 2,777,720 |
The Company’s operations are located in the PRC. All revenue is from customers in the PRC. All of the Company’s assets are located in the PRC. Sales of natural gas and gas pipeline construction are carried out in the PRC. Accordingly, no analysis of the Company’s sales and assets by geographical market is presented. No other measures of segment profit or loss and assets have been provided or reviewed by the company’s officers.
34 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
16. | EARNINGS PER SHARE |
Nine months Ended | ||||||||||||
Ref | 6/30/2014 | 9/30/2013 | ||||||||||
Basic Earnings Per Share Numerator: | ||||||||||||
Net Income | $ | 806,234 | $ | 2,777,720 | ||||||||
Income from continued operations | 806,234 | 2,777,720 | ||||||||||
Less: | ||||||||||||
Preferred Dividends | - | |||||||||||
Constructive Preferred Dividends | - | |||||||||||
income attributed to non-controlling interest | (3,655 | ) | (1,498 | ) | ||||||||
Net income available to Common Stockholders | $ | 806,234 | $ | 781,439 | ||||||||
Income from continued operations available to Common Stockholders | $ | 806,234 | $ | 781,439 | ||||||||
Diluted Earnings Per Share Numerator: | ||||||||||||
Add: | ||||||||||||
Interest Expense for Convertible Bonds, net of tax | - | 704,853 | ||||||||||
Net income available to Common Stockholders | 806,234 | 1,481,834 | ||||||||||
Income from continued operations available to Common Stockholders | 806,234 | 1,486,292 | ||||||||||
Original Shares | 57,608,833 | 31,802,382 | ||||||||||
Addition to Common Stock | - | 848,431 | ||||||||||
Basic Weighted Average Shares Outstanding | 57,608,833 | 32,650,813 | ||||||||||
Potentially Dilutive Securities: | ||||||||||||
Addition to Common Stock from Conversion of Preferred Stock B | (1) | - | - | |||||||||
Diluted Weighted Average Shares Outstanding | 57,608,833 | 32,650,813 | ||||||||||
Earnings Per Share | ||||||||||||
Basic: - Net income | $ | 0.01 | $ | 0.08 | ||||||||
- Income from continued operation | 0.01 | 0.08 | ||||||||||
Diluted: - Net income | $ | 0.01 | $ | 0.08 | ||||||||
- Income from continued operation | 0.01 | 0.08 | ||||||||||
Weighted Average Shares Outstanding | ||||||||||||
- Basic | 57,608,833 | 32,650,813 | ||||||||||
- Diluted | 57,608,833 | 32,650,813 |
(1). | The applications of conversion of preferred stock B into common stock were anti-dilutive for the nine months ended September 30, 2014 and 2013. |
(2). | The applications of conversion of preferred stock B-1 into common stock were anti-dilutive for the nine months ended September 30, 2014 and 2013. |
(3). | The exercises of warrants to common stock were anti-dilutive for the nine months ended September 30, 2014 and 2013. |
(4). | The applications of conversion of convertible bonds into common stock were anti-dilutive for the nine months ended September 30, 2014 and 2013. |
35 |
Sino Gas International Holdings, Inc.
Notes to Consolidated Financial Statements
As of September 30, 2014 and December 31, 2013
(Stated in US Dollars)
18. | SUBSEQUENT EVENT |
Sino Gas International Holdings, Inc. (“Sino Gas” or the “Company”), Merger Sub Gas Holdings, Inc. (“Merger Sub”), and Mr. Robert Adler, Ms. Jennifer Li, and Mr. Chongjun Duan (each individual as an independent director of the Company) (collectively, the “Parties”) agreed on August 1, 2014 on a settlement in principle with the plaintiffs in the litigations captioned Berkowitz v. Sino Gas Int’l Holdings, Inc., et al., Case No. 140902517, and Porretti v. Liu, et al., Case No. 140902654, both currently pending in the Third Judicial District Court, in and for Salt Lake County, State of Utah. The settlement remains subject to appropriate documentation by the Parties and approval by the court.
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Item 2. Management’s Discussion and Analysis or Plan of Operation
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q.
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 in order to improve the quality of life of the local residents.
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. In order to address the slowdown in the real estate market, the Chinese government adopted new policies, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies. Also, to boost the overall economy, the Chinese government also decided to inject a stimulus package, which allocated funds for mass housing projects. 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. Since 2011 the overall housing market remained slow and such trend carried into 2014. We expect the tight control policies continue to spread from major cities to mid and small sized cities where we operate and it could affect our expansion in 2014 and 2015.
Even with the up and down nature of the Chinese real estate market over the past three 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.
In 2014, PM2.5 level and “Smog” in Beijing and other major cities in China had brought national and international attention to the air pollution issues in China. It is anticipated that clean energy like natural Gas in the energy consumption mix will increase and use of coal will reduce. The development and use of clean energy present a long term opportunity for the company.
China’s GDP grew 7.3% during the first three quarters of 2014 as compared to the same period of 2014. The Company has a presence in five regions. In Jiangsu province GDP grew 8.8%, in Hebei province GDP grew 6.2%, in Yunnan province GDP grew 8.8%, in Jilin province GDP grew 6.5% and in Beijing GDP grew 7.3% in the three quarters of 2014.
Our gas users are comprised of both industrial and residential users. Gas sales to residential users are much less affected by economic and industrial factors and should maintain stable growth in the future. Gas sales to industrial users, however, are subject to the operating performance of the industrial user. As we develop into more cities in the coming years, we expect to add more industrial users when the opportunities arise and we possess the necessary capital requirements.
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Material Opportunities
The gas distribution market is quite fragmented in small (population less than 300,000) to medium (population between 300,000 and 1,000,000) sized cities in China 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 privatization of these 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..
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, and such changes in price are subject to a public hearing and government approval. The natural gas prices in China lag 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.
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Pending Transaction
On August 6, 2014, Sino Gas International Holdings, Inc. held a special meeting of shareholders. The following proposals were submitted to the Company’s stockholders at the Special Meeting:
(1) | To approve the Agreement and Plan of Merger, dated April 3, 2014, as amended by the Amendment to the Agreement and Plan of Merger, dated April 16, 2014, and Amendment No. 2 to the Agreement and Plan of Merger, dated June 2, 2014, by and among Prosperity Gas Holdings Limited, Merger Sub Gas Holdings Inc. and the Company, providing for the merger of Merger Sub Gas Holdings Inc. with and into the Company with the Company surviving the merger as a wholly owned subsidiary of Prosperity Gas Holdings Limited (the “Going Private Transaction”). |
The votes regarding the approval of the merger transaction were as follows:
FOR | AGAINST | ABSTAIN | ||
48,258,716 | 38 | 511 |
(2) | To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement. |
The votes regarding the adjournment of the special meeting to solicit additional proxies if there are insufficient votes were as follows:
FOR | AGAINST | ABSTAIN | ||
48,257,719 | 1034 | 512 |
As demonstrated by the above results, the majority of the shareholders voted for the Going Private Transaction. Thus, the company will be delisted from OTCBB following the commencement of the Going Private Transaction. For more details, please reference to the company’s disclosures.
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CONSOLIDATED OPERATING RESULTS
Three and Nine Months Ended September 30, 2014 Compared to the Three and Nine Months Ended September 30, 2013
For the three months ended September 30 | ||||||||||||
2014 | 2013 | Change | ||||||||||
(inUS$millions) | US$ | US$ | % | |||||||||
Net Revenues | 22.6 | 13.9 | 63.2 | % | ||||||||
Gross Profit | 4.7 | 5.6 | -16.6 | % | ||||||||
Operating Income | 1.4 | 3.0 | -52.2 | % | ||||||||
Net Income | -0.5 | 2.0 | -127.4 | % | ||||||||
Gross Margin | 20.69 | % | 40.6 | % | -19.91 | % | ||||||
Net Margin | -2.42 | % | 14.4 | % | -16.82 | % |
During the three months ended September 30, 2014, net revenues increased 63.2% to $22.6 million as compared to the same period of 2013.Gross profit for the three months ended September 30, 2014 decreased 16.6% to $4.7 million from the same period of 2013. Our operating income for the three months ended September 30, 2014 decreased 127.4% to $1.4 million from the same period of 2013. Net income for the three months ended September 30, 2014 was negative $0.5 million, compared to a net income of $2.0 million during the same period of 2013.
For the nine months ended September 30 | ||||||||||||
2014 | 2013 | Change | ||||||||||
(inUS$millions) | US$ | US$ | % | |||||||||
%Net Revenues | 55.1 | 42.2 | 30.8 | % | ||||||||
Gross Profit | 12.2 | 14.3 | -14.6 | % | ||||||||
Operating Income | 3.4 | 6.4 | -47.8 | % | ||||||||
Net Income | 0.8 | 2.8 | -71.0 | % | ||||||||
Gross Margin | 22.15 | % | 33.9 | % | -11.75 | % | ||||||
Net Margin | 1.46 | % | 6.6 | % | 5.14 | % |
During the nine months ended September 30, 2014, net revenues increased 30.8% to $55.1 million as compared to the same period of 2013. Gross profit for the nine months ended September 30, 2014 decreased 14.6% to $12.2 million from the same period of 2013. Our operating income for the nine months ended September 30, 2014 was $3.4 million a decrease of 47.8% from the same period of 2013. Net income for the nine months ended September 30, 2014 was $0.8 million, compared to a net income of $2.8 million during the same period of 2013.
The significant decrease in gross profit and gross margin is mainly attributed to the natural gas pricing reform started in 2014. We are experiencing cost increase in gas purchasing however the adjustment of selling price requires hearing process with local government and re-negotiation of contract terms with industrial users.
Net Revenues
We generate revenues from two sources: connection fees for constructing connections to our natural gas distribution network and fees for sales of natural gas.
For the three months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(in US$ millions) | US$ | % | US$ | % | % | |||||||||||||||
Net Revenues | 22.6 | 100 | % | 13.9 | 100 | % | 63.2 | % | ||||||||||||
Connection Fees | 7.67 | 33.9 | % | 5.34 | 38.47 | % | 43.7 | % | ||||||||||||
Gas Sales | 14.98 | 66.1 | % | 7.60 | 54.78 | % | 97.0 | % | ||||||||||||
Other Sales | % | 0.94 | 6.76 |
40 |
Total net revenues for the three months ended September 30, 2014 increased 63.2% to $22.6 million from the same period in 2013. During the three months ended September 30, 2014, we connected 13,530 new residential households to our gas distribution network, resulting in total connection fees of $7.67 million. Gas sales during the three months ended September 30, 2014 were $14.98 million.
For the nine months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(inUS$millions) | US$ | % | US$ | % | % | |||||||||||||||
Net Revenues | 55.1 | 100 | % | 42.2 | 100 | % | 30.8 | % | ||||||||||||
Connection Fees | 16.3 | 29.6 | % | 15.7 | 37.2 | % | 4 | % | ||||||||||||
Gas Sales | 38.8 | 70.4 | % | 25.5 | 60.4 | % | 52.4 | % | ||||||||||||
Other Sales | % | 1.0 | 2.4 | % |
Total net revenues for the nine months ended September 30, 2014 increased 30.8% to $55.1 million from the same period in 2013. During the nine months ended September 30, 2014, we connected 40,244 new residential households to our gas distribution network, resulting in total connection fees of 16.3 million. Gas sales during the nine months ended September 30, 2014 were $38.8 million.
Connection Fees
For the three months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(inUS$millions) | US$ | % | US$ | % | % | |||||||||||||||
Connection Fees | 7.7 | 100 | % | 5.3 | 100 | % | 43.7 | % | ||||||||||||
Residential Users | 7.1 | 92.4 | % | 4.68 | 87.6 | % | 51.5 | % | ||||||||||||
Industrial and Commercial Users | 0.6 | 7.6 | % | 0.66 | 12.4 | % | -30.5 | % |
For the nine months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(inUS$millions) | US$ | % | US$ | % | % | |||||||||||||||
Connection Fees | 16.3 | 100 | % | 15.7 | 100 | % | 4 | % | ||||||||||||
Residential Users | 15.3 | 93.8 | % | 14.7 | 93.8 | % | 3.9 | % | ||||||||||||
Industrial and Commercial Users | 1.0 | 6.2 | % | 1.0 | 6.2 | % | % |
Gas Sales
For the three months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(in US$ millions) | US$ | % | US$ | % | % | |||||||||||||||
Gas Sales | 15.0 | 100 | % | 7.6 | 100 | % | 97 | % | ||||||||||||
Residential Users | 9.4 | 62.5 | % | 2.7 | 35.5 | % | 247 | % | ||||||||||||
Industrial and Commercial Users | 5.6 | 37.5 | % | 4.9 | 64.5 | % | 14 | % |
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For the nine months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(inUS$millions) | US$ | % | US$ | % | % | |||||||||||||||
Gas Sales | 38.8 | 100 | % | 25.5 | 100 | % | 52.4 | % | ||||||||||||
Residential Users | 18.1 | 46.6 | % | 10.8 | 42.3 | % | 67.8 | % | ||||||||||||
Industrial and Commercial Users | 20.7 | 53.4 | % | 14.7 | 57.7 | % | 41 | % |
Cost of Revenues
For the three months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(inUS$millions) | US$ | % | US$ | % | % | |||||||||||||||
Cost of Revenues | 18.0 | 100 | % | 8.3 | 100 | % | 117.5 | % | ||||||||||||
Connection Fee Cost | 1.7 | 9.4 | % | 1.7 | 20.3 | % | 1 | % | ||||||||||||
Gas Cost | 16.3 | 90.6 | % | 6.6 | 79.7 | % | 147.1 | % |
For the nine months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(inUS$millions) | US$ | % | US$ | % | % | |||||||||||||||
Cost of Revenues | 42.9 | 100 | % | 27.9 | 100 | % | 54.1 | % | ||||||||||||
Connection Fee Cost | 4.4 | 10.2 | % | 4.65 | 16.7 | % | -5.4 | % | ||||||||||||
Gas Cost | 38.5 | 89.8 | % | 23.21 | 83.3 | % | 66.0 | % |
Cost of Connection Fees
Cost of connection fees includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, installation and maintenance costs.
Cost of Gas Sales
The cost of natural gas sales includes the purchase and transportation of natural gas and depreciation of delivery equipment.
Gross Profit
For the three months ended September 30, | ||||||||||||||||||||
2014 | 2013 | Change | ||||||||||||||||||
(inUS$millions) | US$ | % | US$ | % | % | |||||||||||||||
Gross Profit | 4.7 | 100 | % | 5.6 | 100 | % | -16.6 | % | ||||||||||||
Connection Fees | 5.8 | 127 | % | 3.7 | 65.2 | % | 63.2 | % | ||||||||||||
Gas Sales | -1.3 | -27 | % | 1.0 | 18.1 | % | -227 | % | ||||||||||||
Others | % | 0.9 | 16.7 | % | % |
During the three months ended September 30, 2014, gross profit decreased 16.6% to $4.7 million from the same period of 2013. Gross profit from connection fees was $5.8 million for the three months ended September 30, 2014. Gross profit from gas sales was negative $1.3 million for the three months ended September 30, 2014.
Gross margin during the three months ended September 30, 2014 was 20.7%, compared to 40.5% during the same period in 2013.
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Gross margin for connection fees for the three months ended September 30, 2014 was 77.9%, compared to 68.6% in the same period of 2013.
Gross margin for sales of natural gas was negative 8.6% for the three months ended September 30, 2014, compared to 13.4% during the same period of 2013.
Gross margin during the nine months ended September 30, 2014 was 22.2%, compared to 33.9% during the same period in 2013.
Gross margin for connection fees for the nine months ended September 30, 2014 was 73.1%, compared to 70.4% in the same period of 2013.
Gross margin for sales of natural gas was 0.7% for the nine months ended September 30, 2014, compared to 8.8% during the same period of 2013.
Selling, General and Administrative Expenses
Selling, General and Administrative (“SG&A”) expenses in the three months ended September 30, 2014 were $3.2 million and approximately 14.3% of net revenues, compared with $2.6 million, or 18.7% of net revenues, in the same period of 2013.
Selling, General and Administrative (“SG&A”) expenses in the nine months ended September 30, 2014 were $8.9 million and approximately 16.1% of net revenues, compared with $7.9 million, or 18.7% of net revenues, in the same period of 2013.
Operating Income
Operating income for the three months ended September 30, 2014 decreased 52.2% to $1.4 million from $3.0 million for the same period of 2013.
Operating income for the nine months ended September 30, 2014 decreased 47.8% to $3.4 million compared with $6.4 million in the same period of 2013.
Income tax
Income tax was $0.4million for the three months ended September 30, 2014, compared to $0.5million for the same period of 2013.
Income tax was $0.9million for the nine months ended September 30, 2014, compared to $1.3million for the same period of 2013.
Net Income
Net income for the three months ended September 30, 2014 was negative $0.5 million, compared with net income of $2.0 million for the same period of 2013.
Net income for the nine months ended September 30, 2014 was $0.8million, compared with net income of $2.8 million for the same period of 2013.
Liquidity and Capital Resources
Cash and cash equivalents as of September 30, 2014 decreased $1.7 million to $3.4 million compared to $5.1 million as of December 31, 2013.
Cash sourced in operating activities for the nine months ended September 30, 2014 was $5.7 million, compared to $5.3 million cash used in operating activities during the same period of 2013。
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Cash used in investing activities for the nine months ended September 30, 2014 was $9.9 million compared to $16.4 million during the same period of 2013.
Cash sourced in financing activities for the nine months ended September 30, 2014 decreased $7.6 million to $2.2 million compared to $9.8 million during the same period of 2013.
Accounts Receivable
Accounts receivable as of September 30, 2014 increased $2.9 million to $14.3 compared to $11.4 million as of December 31, 2013.
Notes Receivable
Notes receivable as of September 30, 2014 were $0.3 million.
Inventory
Inventory of $5.1 million as of September 30, 2014 was comprised of spare parts and natural gas.
Fixed Assets
Net Fixed Assets including property, plants and equipment as of September 30, 2014 increased $2.2 million to $55.5 million compared to $53.3 million as of December 31, 2013.The table below is a breakdown of our fixed assets at cost:
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
At Cost | 95,976,834 | 95,074,544 | ||||||
Gas Pipelines | $ | 82,688,567 | $ | 82,303,060 | ||||
Motor Vehicles | 7,722,056 | 7,579,322 | ||||||
Machinery & Equipment | 2,503,326 | 2,494,545 | ||||||
Buildings | 2,468,886 | 2,177,529 | ||||||
Leasehold Improvements | 157,188 | 99,918 | ||||||
Office Equipment | 436,811 | 420,170 | ||||||
Less Accumulated depreciation | 11,202,410 | 9,706,350 | ||||||
Net | $ | 84,774,424 | $ | 85,368,194 |
Bank Loans
Short-term bank loans as of September 30, 2014 increased $2.6 million to $32.5 million compared to $29.9 million as of December 31, 2013. For more information concerning our Bank loans, please see the applicable note to our financial statements.
Long-term bank loans as of September 30, 2014 decreased $0.4 million to $11.4 million compared to $11.8 million as of December 31, 2013.
Accounts Payable
Accounts payable as of September 30, 2014 increased $1.6 million to $20.9 million compared to $19.3 million as of December 31, 2013.
Other Payables
Other payables – current as of September 30, 2014 was $7.8 million compared to $9.7 million as of December 31, 2013
44 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This information is accumulated and communicated to management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our Chief Executive Officer and Principal Accounting Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2014, 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.
45 |
None.
Not required.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mining Safety Disclosure
Not Applicable.
None.
The following exhibits are hereby filed as part of this Quarterly Report on Form 10-Q.
Exhibit |
Description | |
31.1* | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
32* | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 | |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
*Filed herewith.
46 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing.
SINO GAS INTERNATIONAL HOLDINGS, INC. | |||
Date: November 19, 2014 | By: | /s/ Yuchuan Liu | |
Yuchuan Liu | |||
Chairman and Chief Executive Officer | |||
(Principal Executive Officer) |
SINO GAS INTERNATIONAL HOLDINGS, INC. | |||
Date: November 19, 2014 | By: | /s/ Baoling Wang | |
Baoling Wang | |||
(Principal Accounting Officer) |
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