United
States
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 FORM
10-Q
  (Mark
one)
  x
              Quarterly
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934
  For
the Quarterly Period Ended March 31, 2009
  or
  o
              Transition
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934
  Commission
File Number 000-51364
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 (Name of
small business issuer in its charter)
  Utah
                32-0028823(State
      or other jurisdiction
                  of
      incorporation or organization)
                (I.R.S.
      Employer
                  Identification
      No.)
 
 No.18
      Zhong Guan Cun Dong St.
                  Haidian
      District
                  Beijing,
      P. R. China
                100083(Address
      of principal executive offices)
                (Zip
      Code)
  Issuer’s
telephone number: 86-10-82600527
  
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes xNo  ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈No  ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer o
                Accelerated
      filer oNon-accelerated
      filer o
                  (Do
      not check if a smaller reporting company)
                Smaller
      reporting companyx
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)    Yes o
No x
  As of May
18, 2009, the Registrant had 25,269,313 shares of common stock
outstanding.
  
  Sino Gas
International Holdings, Inc.
  Table of
Contents
  PagePART
      I -
                        FINANCIAL
      INFORMATION
                        2Item
      1.
                        Financial
      Statements
                        2Notes
      to Financial Statements (Unaudited)
                        8Item
      2.
                        Management's
      Discussion and Analysis or Plan of Operation
                        37Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        42Item
      4.
                        Controls
      and Procedures
                        43PART
      II -
                        OTHER
      INFORMATION
                        44Item
      1.
                        Legal
      Proceedings
                        44Item
      1A.
                        Risk
      Factors
                        44Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        44Item
      3.
                        Defaults
      Upon Senior Securities
                        44Item
      4.
                        Submission
      of Matters to a Vote of Security Holders.
                        44Item
      5.
                        Other
      Information
                        44Item
      6.
                        Exhibits
                        44
  1
  PART
I - FINANCIAL INFORMATION
  Item
1. Financial Statements
 
 SINO
GAS INTERNATIONAL HOLDINGS, INC
 
 CONSOLIDATED
REVIEWED FINANCIAL STATEMENTS
 
 MARCH
31, 2009 AND DECEMBER 31, 2008
 
 (Stated
in US dollars)
  2
 
 Sino Gas International
Holdings, Inc.
 
 CONTENTS
                            
                            PAGESREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                            
                            
                            1CONSOLIDATED
      BALANCE SHEETS
                            
                            
                            2 –
      3CONSOLIDATED
      STATEMENTS OF INCOME
                            
                            
                            4CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                            
                            
                            5 –
      6CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                            
                            
                            7NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                            
                            
                            8 –
      36
  
 
 To:
                  The
      Board of Directors and Stockholders
of
 Sino Gas
International Holdings, Inc.
  Report of Independent
Registered Public Accounting Firm
 
 We have
reviewed the accompanying consolidated interim balance sheets of Sino Gas
International Holdings, Inc. as of March 31, 2009 and December 31, 2008, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for the three-month periods ended March 31, 2009 and 2008. These consolidated
interim financial statements are the responsibility of the Company's
management.
 
 We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
statements consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
  South
      San Francisco, California
                  Samuel
      H. Wong & Co., LLPMay
      2, 2009
                  Certified
      Public Accountants
  1
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
BALANCE SHEETS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 3/31/2009
                                        
                                        
                                        12/31/2008ASSETSCurrent Assets
                                        
                                        NotesCash
      & cash equivalents
                                        
                                        2(e)
                                        
                                        $
                                        1,979,435
                                        
                                        
                                        $
                                        3,027,543Restricted
      cash
                                        
                                        3
                                        
                                        
                                        229,937
                                        
                                        
                                        
                                        234,279Notes
      receivable
                                        
                                        
                                        
                                        
                                        50,676
                                        
                                        
                                        
                                        109,422Accounts
      receivable
                                        
                                        2(f),4
                                        
                                        
                                        5,936,238
                                        
                                        
                                        
                                        6,013,621Advance
      to suppliers
                                        
                                        2(g)
                                        
                                        
                                        3,951,591
                                        
                                        
                                        
                                        3,024,518Other
      receivables
                                        
                                        2(f)
                                        
                                        
                                        3,107,162
                                        
                                        
                                        
                                        3,028,368Inventory
                                        
                                        
                                        
                                        
                                        311,620
                                        
                                        
                                        
                                        347,341Prepayment
      and others
                                        
                                        
                                        
                                        
                                        305,882
                                        
                                        
                                        
                                        370,593Total
      Current Assets
                                        
                                        
                                        
                                        
                                        15,872,542
                                        
                                        
                                        
                                        16,155,686Non-Current AssetsInvestment
                                        
                                        2(h),5
                                        
                                        
                                        5,165,490
                                        
                                        
                                        
                                        5,159,009Property,
      plant & equipment, net
                                        
                                        2(j),6
                                        
                                        
                                        32,754,404
                                        
                                        
                                        
                                        33,033,118Construction
      in progress
                                        
                                        2(l)
                                        
                                        
                                        18,735,603
                                        
                                        
                                        
                                        17,155,473Intangible
      assets, net
                                        
                                        2(k),7
                                        
                                        
                                        2,194,260
                                        
                                        
                                        
                                        2,193,252Total
      Non-current Assets
                                        
                                        
                                        
                                        
                                        58,849,757
                                        
                                        
                                        
                                        57,540,852Total
      Assets
                                        
                                        
                                        
                                        $
                                        74,722,299
                                        
                                        
                                        $
                                        73,696,538LIABILITIES
      & STOCKHOLDERS' EQUITYLIABILITIESCurrent LiabilitiesBank
      loans
                                        
                                        8
                                        
                                        $
                                        2,191,189
                                        
                                        
                                        $
                                        2,188,439Accounts
      payable
                                        
                                        
                                        
                                        
                                        6,443,994
                                        
                                        
                                        
                                        6,350,092Other
      payables
                                        
                                        9
                                        
                                        
                                        5,911,487
                                        
                                        
                                        
                                        6,174,871Accrued
      liabilities
                                        
                                        
                                        
                                        
                                        188,552
                                        
                                        
                                        
                                        189,090Unearned
      revenue
                                        
                                        2(m)
                                        
                                        
                                        1,741,741
                                        
                                        
                                        
                                        938,696Total
      Current Liabilities
                                        
                                        
                                        
                                        
                                        16,476,962
                                        
                                        
                                        
                                        15,841,188Total
      Liabilities
                                        
                                        
                                        
                                        $
                                        16,476,962
                                        
                                        
                                        $
                                        15,841,188
 
 See Accompanying Notes to Financial
Statements and
Accountant’s Report
  2
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
BALANCE SHEETS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Notes
                                        
                                        3/31/2009
                                        
                                        
                                        12/31/2008STOCKHOLDERS'
      EQUITYPreferred
      Stock B US$0.001 par value; 5,000,000 shares authorized; 4,579,839 shares
      issued and outstanding as of March 31, 2009 and December 31,
      2008
                                        
                                        10
                                        
                                        $
                                        4,580
                                        
                                        
                                        $
                                        4,580Additional
      paid in capital - Preferred Stock B
                                        
                                        
                                        
                                        
                                        5,323,972
                                        
                                        
                                        
                                        5,323,972Additional
      paid in capital - Warrants Series: A, B, J, C, D
                                        
                                        
                                        
                                        
                                        311,110
                                        
                                        
                                        
                                        311,110Preferred
      Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares
      issued and outstanding as of March 31, 2009 and December 31,
      2008
                                        
                                        10
                                        
                                        
                                        95
                                        
                                        
                                        
                                        95Additional
      paid in capital - Preferred Stock B-1
                                        
                                        
                                        
                                        
                                        132,662
                                        
                                        
                                        
                                        132,662Additional
      paid in capital - Beneficial Conversion Feature
                                        
                                        
                                        
                                        
                                        7,002,292
                                        
                                        
                                        
                                        7,002,292Common
      Stock US$0.001 par value; 250,000,000 shares authorized; 25,269,313 shares
      issued and outstanding as of March 31, 2009 and December 31,
      2008
                                        
                                        10
                                        
                                        
                                        25,269
                                        
                                        
                                        
                                        25,269Additional
      paid in capital - Common Stock
                                        
                                        
                                        
                                        
                                        23,196,304
                                        
                                        
                                        
                                        23,196,304Additional
      paid in capital - Warrants Series: E, G
                                        
                                        
                                        
                                        
                                        47,946
                                        
                                        
                                        
                                        47,946Additional
      paid in capital - Warrants Series: F, R
                                        
                                        
                                        
                                        
                                        107,652
                                        
                                        
                                        
                                        107,652Statutory
      reserve
                                        
                                        2(v)
                                        
                                        
                                        3,956,728
                                        
                                        
                                        
                                        3,956,728Retained
      earnings
                                        
                                        
                                        
                                        
                                        10,415,533
                                        
                                        
                                        
                                        10,069,896Accumulated
      other comprehensive income
                                        
                                        2(x)
                                        
                                        
                                        7,721,194
                                        
                                        
                                        
                                        7,676,844Total
      Stockholders' Equity
                                        
                                        
                                        
                                        
                                        58,245,337
                                        
                                        
                                        
                                        57,855,350Total
      Liabilities & Stockholders' Equity
                                        
                                        
                                        
                                        $
                                        74,722,299
                                        
                                        
                                        $
                                        73,696,538
  See Accompanying Notes to Financial
Statements and
Accountant’s Report
  3
 
 SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Stated
in U.S. Dollars)
 
 Notes
                                  
                                  3/31/2009
                                  
                                  
                                  3/31/2008Sales
      revenues
                                  
                                  
                                  
                                  $
                                  5,037,692
                                  
                                  
                                  $
                                  4,342,116Cost
      of revenues
                                  
                                  
                                  
                                  
                                  (3,773,212
                                  )
                                  
                                  
                                  (2,975,472
                                  )Gross
      Profit
                                  
                                  
                                  
                                  
                                  1,264,480
                                  
                                  
                                  
                                  1,366,645Operating ExpenseSelling
      and marketing expenses
                                  
                                  
                                  
                                  
                                  203,072
                                  
                                  
                                  
                                  181,704General
      and administrative expenses
                                  
                                  
                                  
                                  
                                  512,447
                                  
                                  
                                  
                                  833,451Total
      operating expense
                                  
                                  
                                  
                                  
                                  715,519
                                  
                                  
                                  
                                  1,015,154Operating
      Income
                                  
                                  
                                  
                                  
                                  548,961
                                  
                                  
                                  
                                  351,490Other Income/(Expense)Investment
      income
                                  
                                  2(q)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Other
      income
                                  
                                  
                                  
                                  
                                  161
                                  
                                  
                                  
                                  -Other
      expense
                                  
                                  17
                                  
                                  
                                  (5,729
                                  )
                                  
                                  
                                  (845
                                  )Interest
      income
                                  
                                  
                                  
                                  
                                  1,850
                                  
                                  
                                  
                                  33,166Interest
      expense
                                  
                                  
                                  
                                  
                                  (41,452
                                  )
                                  
                                  
                                  (60,467
                                  )Total
      other income/(expense)
                                  
                                  
                                  
                                  
                                  (45,170
                                  )
                                  
                                  
                                  (28,146
                                  )Earnings
      from continued operation
                                  
                                  
                                  
                                  
                                  503,791
                                  
                                  
                                  
                                  323,344Income
      tax
                                  
                                  2(r),11
                                  
                                  
                                  (158,155
                                  )
                                  
                                  
                                  (174,017
                                  )Gain/(Loss)
      from discontinued operation, net of
    tax
                                  
                                  15
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net
      income
                                  
                                  
                                  
                                  $
                                  345,637
                                  
                                  
                                  $
                                  149,327Constructive
      Preferred Dividend - Amortization of Beneficial Conversion
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Income
      Available to Common Stockholders
                                  
                                  
                                  
                                  $
                                  345,637
                                  
                                  
                                  $
                                  149,327Earnings
      per share
                                  
                                  2(z),16Basic
                                  
                                  
                                  
                                  $
                                  0.014
                                  
                                  
                                  $
                                  0.009Diluted
                                  
                                  
                                  
                                  $
                                  0.012
                                  
                                  
                                  $
                                  0.007Weighted
      Average Shares Outstanding
                                  
                                  16Basic
                                  
                                  
                                  
                                  
                                  25,269,313
                                  
                                  
                                  
                                  17,165,894Diluted
                                  
                                  
                                  
                                  
                                  29,944,570
                                  
                                  
                                  
                                  22,017,096
 
 See Accompanying Notes to Financial
Statements and
Accountant’s Report
  4
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Preferred Stock B
                        
                        
                        Preferred Stock B-1Shares
                          Outstanding
                        
                        
                        Amount
                        
                        
                        Additional Paid In
                          Capital-Preferred
                          Stock B
                        
                        
                        Additional Paid in
                          Capital-Wa
      rrants
                          Series: A, B, J,C, D
                        
                        
                        Additional Paid in
                          Capital-Beneficial
                          Conversion Feature
                        
                        
                        Shares
                          Outstanding
                        
                        
                        Amount
                        
                        
                        Additional Paid
                          InCapital-
                          PreferredStock
                          B-1
                        
                        
                        Additional Paid in
                          Capital-Beneficial
                          Conversion FeatureBalance,
      January 1, 2008
                        
                        
                        4,971,859
                        
                        
                        
                        4,972
                        
                        
                        
                        5,323,972
                        
                        
                        
                        311,110
                        
                        
                        
                        6,920,263
                        
                        
                        
                        95,418
                        
                        
                        
                        95
                        
                        
                        
                        132,662
                        
                        
                        
                        82,029Net
      Income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Conversion
      of Preferred Stock B to Common Stock
                        
                        
                        (392,020
                        )
                        
                        
                        (392
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of Common Stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Appropriation
      of Retained Earnings
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Foreign
      Currency Translation Adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance,
      December 31, 2008
                        
                        
                        4,579,839
                        
                        
                        
                        4,580
                        
                        
                        
                        5,323,972
                        
                        
                        
                        311,110
                        
                        
                        
                        6,920,263
                        
                        
                        
                        95,418
                        
                        
                        
                        95
                        
                        
                        
                        132,662
                        
                        
                        
                        82,029Balance,
      January 1, 2009
                        
                        
                        4,579,839
                        
                        
                        
                        4,580
                        
                        
                        
                        5,323,972
                        
                        
                        
                        311,110
                        
                        
                        
                        6,920,263
                        
                        
                        
                        95,418
                        
                        
                        
                        95
                        
                        
                        
                        132,662
                        
                        
                        
                        82,029Net
      Income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Conversion
      of Preferred Stock B to Common Stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of Common Stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Appropriation
      of Retained Earnings
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Foreign
      Currency Translation Adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance,
      March 31, 2009
                        
                        
                        4,579,839
                        
                        
                        
                        4,580
                        
                        
                        
                        5,323,972
                        
                        
                        
                        311,110
                        
                        
                        
                        6,920,263
                        
                        
                        
                        95,418
                        
                        
                        
                        95
                        
                        
                        
                        132,662
                        
                        
                        
                        82,029
 
 See Accompanying Notes to Financial
Statements and
Accountant’s Report
  5
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Common StockShares
                                  Outstanding
                                
                                
                                Amount
                                
                                
                                Additional
                                  Paid In
                                  Capital
                                
                                
                                Additional Paid in
                                  Capital-Warrants Series:
                                  E,G
                                
                                
                                Additional Paid in
                                  Capital-Warrants Series:
                                  F,R
                                
                                
                                Statutory
                                  Reserve
                                
                                
                                Retained
                                  Earnings
                                
                                
                                Accumulated Other
                                  Comprehensive
                                  Income
                                
                                
                                TotalBalance,
      January 1, 2008
                                
                                
                                24,877,271
                                
                                
                                
                                24,877
                                
                                
                                
                                23,196,304
                                
                                
                                
                                47,946
                                
                                
                                
                                107,652
                                
                                
                                
                                3,258,201
                                
                                
                                
                                9,167,930
                                
                                
                                
                                2,268,593
                                
                                
                                
                                50,846,606Net
      Income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,600,493
                                
                                
                                
                                -
                                
                                
                                
                                1,600,493Conversion
      of Preferred Stock B to Common Stock
                                
                                
                                392,020
                                
                                
                                
                                392
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of Common Stock
                                
                                
                                22
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Appropriation
      of Retained Earnings
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                698,527
                                
                                
                                
                                (698,527
                                )
                                
                                
                                -
                                
                                
                                
                                -Foreign
      Currency Translation Adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5,408,250
                                
                                
                                
                                5,408,250Balance,
      December 31, 2008
                                
                                
                                25,269,313
                                
                                
                                
                                25,269
                                
                                
                                
                                23,196,304
                                
                                
                                
                                47,946
                                
                                
                                
                                107,652
                                
                                
                                
                                3,956,728
                                
                                
                                
                                10,069,896
                                
                                
                                
                                7,676,844
                                
                                
                                
                                57,855,350Balance,
      January 1, 2009
                                
                                
                                25,269,313
                                
                                
                                
                                25,269
                                
                                
                                
                                23,196,304
                                
                                
                                
                                47,946
                                
                                
                                
                                107,652
                                
                                
                                
                                3,956,728
                                
                                
                                
                                10,069,896
                                
                                
                                
                                7,676,844
                                
                                
                                
                                57,855,350Net
      Income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                345,637
                                
                                
                                
                                -
                                
                                
                                
                                345,637Conversion
      of Preferred Stock B to Common Stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of Common Stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Appropriation
      of Retained Earnings
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Foreign
      Currency Translation Adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                44,351
                                
                                
                                
                                44,351Balance,
      March 31, 2009
                                
                                
                                25,269,313
                                
                                
                                
                                25,269
                                
                                
                                
                                23,196,304
                                
                                
                                
                                47,946
                                
                                
                                
                                107,652
                                
                                
                                
                                3,956,728
                                
                                
                                
                                10,415,533
                                
                                
                                
                                7,721,194
                                
                                
                                
                                58,245,337
 
 3/31/2009
                            
                            
                            12/31/2008
                            
                            
                            TotalComprehensive IncomeNet
      Income
                            
                            $
                            345,637
                            
                            
                            $
                            1,600,493
                            
                            
                            $
                            1,946,130Other Comprehensive IncomeForeign
      Currency Translation Adjustment
                            
                            
                            44,351
                            
                            
                            
                            5,408,250
                            
                            
                            
                            5,452,601Total
                            
                            $
                            389,988
                            
                            
                            $
                            7,008,743
                            
                            
                            $
                            7,398,731
 
 See Accompanying Notes to Financial
Statements and
Accountant’s Report
  6
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOW
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (Stated
in U.S. Dollars)
 
 3/31/2009
                    
                    
                    3/31/2008Cash
      Flows from Operating ActivitiesNet
      Income
                    
                    $
                    345,637
                    
                    
                    $
                    149,327Depreciation
      expense
                    
                    
                    332,656
                    
                    
                    
                    640,248Amortization
      expense
                    
                    
                    2,267
                    
                    
                    
                    29,532Withdraw/(deposit)
      in restricted time deposits
                    
                    
                    4,342
                    
                    
                    
                    (185,141
                    )Decrease/(increase)
      in accounts and other receivables
                    
                    
                    57,335
                    
                    
                    
                    (5,357,649
                    )Decrease/(increase)
      in inventory
                    
                    
                    35,721
                    
                    
                    
                    (38,915
                    )Decrease/(increase)
      in prepaid expenses
                    
                    
                    (862,362
                    )
                    
                    
                    (831,430
                    )Increase/(decrease)
      in accounts and other payables
                    
                    
                    633,024
                    
                    
                    
                    (287,732
                    )Cash
      Sourced/(Used) in Operating Activities
                    
                    
                    548,620
                    
                    
                    
                    (5,881,760
                    )Cash
      Flows from Investing ActivitiesInvestment
      in equity
                    
                    
                    (6,481
                    )
                    
                    
                    1,304,154Purchase
      of property, plant, and equipment
                    
                    
                    (53,942
                    )
                    
                    
                    (2,920,649
                    )Increase
      of goodwill
                    
                    
                    (2,108
                    )
                    
                    
                    -Purchase
      of other intangible asset
                    
                    
                    (1,166
                    )
                    
                    
                    (113,620
                    )Increase
      in construction in progress
                    
                    
                    (1,580,130
                    )
                    
                    
                    (1,274,121
                    )Cash
      Sourced/(Used) in Investing Activities
                    
                    
                    (1,643,828
                    )
                    
                    
                    (3,004,236
                    )Cash
      Flows from Financing ActivitiesProceeds/(settlement)
      of bank loans
                    
                    
                    2,749
                    
                    
                    
                    4,385,832Cash
      Sourced/(Used) in Financing Activities
                    
                    
                    2,749
                    
                    
                    
                    4,385,832Net
      increase in cash & cash equivalents for the year
                    
                    
                    (1,092,459
                    )
                    
                    
                    (4,500,164
                    )Effect
      of currency translation on cash and cash equivalents
                    
                    
                    44,351
                    
                    
                    
                    1,605,787Cash
      & cash equivalents at the beginning of period
                    
                    
                    3,027,543
                    
                    
                    
                    10,915,590Cash
      & cash equivalents at the end of period
                    
                    $
                    1,979,435
                    
                    
                    
                    8,021,212Supplementary
      cash flow informationInterest
      received
                    
                    $
                    1,850
                    
                    
                    $
                    33,166Interest
      paid
                    
                    $
                    41,452
                    
                    
                    $
                    60,467Income
      tax paid
                    
                    $
                    158,115
                    
                    
                    $
                    323,344
  See Accompanying Notes to Financial
Statements and
Accountant’s Report
  7
 
 SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 1.
              ORGANIZATION
      AND PRINCIPAL ACTIVITIES
 
 Sino Gas
International Holdings, Inc. (the “Company”) was incorporated under the laws of
the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
changed its name to American Arms, Inc. on April 5, 1984, and then changed its
name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to
Sino Gas International Holdings, Inc. on November 17, 2006.
 
 On
September 7, 2006, the Company underwent a reverse-merger with Gas Investment
China Ltd. (“GIC”), an International Business Company incorporated in the
British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange
of shares whereby the Company issued an aggregate of 14,361,646 shares to the
shareholders of GIC in exchange for all of the issued and outstanding shares of
GIC.  For financial reporting purposes, this transaction is classified
as a recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer,
accounting acquiree) and the historical financial statements of Gas Investment
China Co. Ltd. (Legal acquiree, accounting acquirer)
 
 The
Company is a natural gas services operator, principally engaging in the
investment, operation, and management of city gas pipeline infrastructure, in
the distribution of natural gas to residential and industrial users, in the
construction and operation gas stations, and in the development and application
of natural gas related technologies.  The Company owns and operates 37
natural gas distribution systems serving approximately 100,900 residential and
five commercial and industrial customers.  The Company’s facilities
include approximately 710 kilometers of pipeline and delivery networks
(including delivery trucks) with a daily capacity of approximately 89,000 cubic
meters of natural gas.
 
 The
common stock of the Company is currently quoted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.
 
 Basis of Presentation and
Organization
 
 The
Company’s consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”).
  This
basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Company’s principal subsidiaries,
which are prepared in accordance with the accounting principles and the relevant
financial regulations applicable to enterprises with limited liabilities
established in the PRC (“PRC GAAP”) or in the accounting standards used in the
places of their domicile. The accompanying consolidated financial statements
reflect necessary adjustments not recorded in the books of account of the
Company’s subsidiaries to present them in conformity with US GAAP.
  8
 SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a)
              Method of
      Accounting
 
 The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and notes
are representations of management.  Accounting policies adopted by the
Company conform to generally accepted accounting principles in the United States
of America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
 
 (b)
              Use of
      Estimates
 
 The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however, actual
results could differ materially from those estimates.
  (c)
              Economic and Political
      Risks
 
 The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environment in the PRC, and by the general
state of the PRC economy.
  The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment, and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to law and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.
  9
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
  (d)
              Principles of
      Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
subsidiaries (“the Group”). Significant inter-company transactions have been
eliminated in consolidation.  Investments in which the company has a
20 percent to 50 percent voting interest and where the company exercises
significant influence over the investor are accounted for using the equity
method.
 
 The
Company owned its subsidiaries soon after its inception and continued to acquire
and own the equity interests throughout the reporting periods. The following
table depicts the identities of the consolidating subsidiaries as of March 31,
2009 and December 31, 2008.
 
 Name of Company
                                
                                Place of
                                  Incorporation
                                
                                Date of
                                  Incorporation
                                
                                Beneficiary
                                  Interest %
                                
                                
                                Equity
                                  Interest %
                                
                                Registered
                                  CapitalGAS
      Investment China Co., Ltd.
                                
                                The
      British Virgin Islands
                                
                                6/19/2003
                                
                                
                                100
                                
                                
                                
                                100
                                
                                USD
                                  10,000,000Sino
      Gas Construction, Ltd.
                                
                                The
      British Virgin Islands
                                
                                1/9/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                USD
                                  50,000Sino
      Gas Investment Development, Ltd.
                                
                                The
      British Virgin Islands
                                
                                1/9/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                USD
                                  50,000Beijing
      Zhong Ran Wei Ye Gas Co., Ltd.
                                
                                PRC
                                
                                8/29/2001
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB
                                  184,916,420Beijing
      Chenguang Gas, Ltd.
                                
                                PRC
                                
                                10/30/2002
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB
                                  20,000,000Guannan
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                6/19/2003
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB
                                  9,510,000Ningjin
      Weiye Gas Co., Ltd
                                
                                PRC
                                
                                12/3/2003
                                
                                
                                100
                                
                                
                                
                                95
                                
                                RMB
                                  3,000,000
  10
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 Yutian
      Zhongran Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        12/19/2003
                        
                        
                        100
                        
                        
                        
                        90
                        
                        RMB
                          3,000,000Xingtang
      Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        2/18/2004
                        
                        
                        100
                        
                        
                        
                        95
                        
                        RMB
                          3,000,000Wuqiao
      Gas Co., Ltd.
                        
                        PRC
                        
                        6/30/2004
                        
                        
                        100
                        
                        
                        
                        95
                        
                        RMB
                          2,000,000Jinzhou
      Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        7/19/2004
                        
                        
                        100
                        
                        
                        
                        95
                        
                        RMB
                          5,000,000Sihong
      Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        12/3/2004
                        
                        
                        100
                        
                        
                        
                        95
                        
                        RMB
                          10,000,000Sishui
      Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        12/22/2004
                        
                        
                        100
                        
                        
                        
                        95
                        
                        RMB
                          3,000,000Langfang
      Weiye Dangerous Goods Transportation Co., Ltd.
                        
                        PRC
                        
                        3/22/2005
                        
                        
                        100
                        
                        
                        
                        95
                        
                        RMB
                          1,000,000Linzhang
      Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        7/6/2005
                        
                        
                        100
                        
                        
                        
                        85
                        
                        RMB
                          1,000,000Peixian
      Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        8/22/2005
                        
                        
                        100
                        
                        
                        
                        90
                        
                        RMB
                          5,000,000Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
                        
                        PRC
                        
                        9/30/2005
                        
                        
                        100
                        
                        
                        
                        100
                        
                        RMB
                          2,000,000Longyao
      Zhongran Weiye Gas Co., Ltd.
                        
                        PRC
                        
                        10/13/2005
                        
                        
                        100
                        
                        
                        
                        95
                        
                        RMB
                          3,000,000Yuxian
      Jinli Gas Co., Ltd.
                        
                        PRC
                        
                        11/8/2005
                        
                        
                        100
                        
                        
                        
                        100
                        
                        RMB
                          9,500,000
  11
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
  Hengshui
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              12/20/2005
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                3,000,000Shenzhou
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              12/23/2005
                              
                              
                              100
                              
                              
                              
                              95
                              
                              RMB
                                3,000,000Changli
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              12/8/2006
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                3,000,000Chenan
      Chenguang Gas Co., Ltd
                              
                              PRC
                              
                              1/23/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                1,500,000Wuhe
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              1/30/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                3,000,000Xinji
      Zhongchen Gas Co., Ltd
                              
                              PRC
                              
                              2/7/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                3,000,000Gucheng
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              3/21/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                3,000,000Luquan
      Chenguang Gas Co., Ltd.
                              
                              PRC
                              
                              4/27/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                2,000,000Shijiazhuang
      Chenguang Gas Co., Ltd.
                              
                              PRC
                              
                              6/14/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                2,000,000Nangong
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              6/25/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                3,000,000Sixian
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              9/3/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                3,000,000Baishan
      Weiye Gas Co., Ltd.
                              
                              PRC
                              
                              7/13/2007
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                15,000,000Guyuan
      Gas Co., Ltd.
                              
                              PRC
                              
                              12/15/2008
                              
                              
                              100
                              
                              
                              
                              100
                              
                              RMB
                                1,000,000
  12
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. 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 and Other
Receivable
  Accounts
and other receivable are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. The
Company extends unsecured credit to customers in the normal course of business
and does not accrue interest on trade accounts receivable.
  (g) 
Advances to
Suppliers
  Advances
to suppliers represent the cash paid in advance for purchasing raw materials.
The advances to suppliers are interest free and unsecured.
  (h)
 Investments in
Equity Securities
  The
equity method of accounting was used to account for the Company’s investment in
equity securities for which the Company did not have controlling equity
interest.  Non controlling equity interest for the Company is
typically a position of less than 50% beneficial ownership.
  The
consolidated statement of income includes the Company's share of the
post-acquisition results of the investment’s performance for the year. In the
consolidated balance sheet, investments in equity securities are stated at the
Company's share of the net assets of the investments plus any potential premium,
or less discounts paid at the time of acquisition, and less any identified
impairment loss.
  Beijing
Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned
investment and is principally engaged in sale of compressed natural gas to
domestic households and industrial firms around the suburbs of Beijing as well
as the suburban areas of the Hebei Province and Tianjin.
  13
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Qujing
Gas Co., Ltd. is the Company’s 39% owned investment and is principally engaged
in the business of gas pipeline construction in Yunnan Province.
 
 Place of Registration
                              
                              Form of Business
                                Structure
                              
                              Registered
                                Capital
                              
                              Nominal Value of
                                Registered Capital
                              
                              Principle ActivitiesPRC
                              
                              Sino-foreign
      equity
                                joint
      venture
                              
                              RMB
      20,000,000
                              
                              
                              40%
                              
                              Trading
      of natural gas and
                                gas
      pipeline constructionPRC
                              
                              Equity
      joint
                                venture
                              
                              RMB30,000,000
                              
                              
                              39%
                              
                              Gas
      pipeline
construction
 
 The
Company did not record any goodwill when it acquired its equity position in
Xiangke and Qujing. Accordingly, in accordance with SFAS 142, the Company has
not taken an amortization expense of goodwill during the time it has carried a
40% and 39% stakes in Xiangke and Qujing respectively.
 
 (i) Accounting for the
Impairment of Long-Lived Assets
 
 The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
 
 If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
  During
the reporting periods, there was no impairment loss.
  14
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 (j)
Plant and
Equipment
  Plant and
equipment, other than construction in progress, are stated at cost less
depreciation and amortization and accumulated impairment loss.  Plant
and equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:
 
 Asset Class
                                  
                                  Estimated Use LifeGas
      Pipelines (Up to December 31, 2007)
                                  
                                  25
      yearsGas
      Pipelines (Starting from January 1, 2008)
                                  
                                  50
      yearsBuildings
                                  
                                  25
      yearsLeasehold
      Improvements
                                  
                                  25
      yearsMachinery
      & Equipment
                                  
                                  20
      yearsMotor
      Vehicles
                                  
                                  10
      yearsOffice
      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 amortization and accumulated 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 LifeLand
      use rights
                    
                    40
      - 50 yearsFranchises
                    
                    30
      yearsOther
      intangibles
                    
                    3
      years
 
 (l)   
Construction in
Progress
  Construction
in progress represents the cost of constructing pipelines and is stated at
cost.  Costs comprise direct and indirect incremental costs of
acquisition or construction. Completed items are transferred from construction
in progress to the gas pipelines of fixed assets when they are ready for their
intended use.  The major cost of construction relates to construction
materials, direct labor wages, and other overhead.  Construction of
pipeline, through which to distribute natural gas, is one of the Group’s
principal businesses.  The Group builds city main pipeline network and
branch pipeline network to make gas connection to resident users, industrial,
and commercial users, with the objective of generating revenue on gas connection
and gas usage fees collected from these customers. These projects, once
completed, will significantly increase the gas supply capacity.
  15
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 (m) 
Unearned
Revenue
  Unearned
revenue represents prepayments by customers for gas purchases and advance
payments on construction and installation of pipeline contracts.  The
Company records such prepayment as unearned revenue when the payments are
received.
  (n)
 Financial
Instruments
  The
carrying amounts of all financial instruments approximate fair
value.  The carrying amounts of cash, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short-term
nature of these items.  The carrying amounts of borrowings approximate
the fair value based on the Company’s expected borrowing rate for debt with
similar remaining maturities and comparable risk.
  (o) 
 Foreign Currency
Translation
  The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi
(RMB).  The consolidated financial statements are translated into
United States dollars from RMB at year-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and
expenses.  Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
  3/31/2009
                        
                        
                        12/31/2008Years
      end RMB : US$ exchange rate
                        
                        
                        6.8456
                        
                        
                        
                        6.8542Average
      yearly RMB : US$ exchange rate
                        
                        
                        6.8466
                        
                        
                        
                        6.9623
 
 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.
  16
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
  (p) 
Revenue
Recognition
  Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue.
  Net sales
consist of gas and connection fee revenue. Cost of sales include gas and
connection cost.  Gas connection revenue is recognized when the
outcome of a contract can be estimated reliably and the stage of completion at
the balance sheet date can be measured reliably. Sales of natural gas are
recognized when goods are delivered and title has passed.
  (q)  
Investment
Income
  Investment
income represents the Group’s share of post-acquisition results of its
investment in equity securities for the year.
  (r)  
Income
Taxes
  The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are
available.  The Company has implemented Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes.  Income tax liabilities computed according to the United States
and People’s Republic of China (PRC) tax laws are provided for the tax effects
of transactions reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to differences between the
basis of fixed assets and intangible assets for financial and tax
reporting.  The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are recovered or
settled.  Deferred taxes also are recognized for operating losses that
are available to offset future income taxes.  A valuation allowance is
created to evaluate deferred tax assets, whether it is more likely than not that
these items will expire either before the Company is able to realize that tax
benefit, or that future realization is uncertain.
  In
respect of the Company’s subsidiaries domiciled and operated in China and
British Virgin Islands, the taxation of these entities are summarized
below:
  ·
              All
      of the operating companies are located in the PRC; and GAS Investment
      China Co., Ltd., Sino Gas Construction, Ltd., and Sino Gas Investment
      Development, Ltd. are located in the British Virgin Islands. All of these
      entities are subject to the relevant tax laws and regulations of the PRC,
      and the British Virgin Islands in which the related entity domiciled. The
      maximum tax rates of the subsidiaries pursuant to the countries in which
      they domicile are: -
  17
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Subsidiary
                                                  
                                                  Country of Domicile
                                                  
                                                  Income Tax RatePRC
      Operating Companies (per Note 2. (d)
                                                    Principals
      of Consolidation)
                                                  
                                                  PRC
                                                  
                                                  
                                                  25.0
                                                  %i. 
      GAS Investment China Co., Ltd.
                                                  
                                                  British
      Virgin Islands
                                                  
                                                  
                                                  0.00
                                                  %ii. 
      Sino Gas Construction, Ltd.
                                                  
                                                  British
      Virgin Islands
                                                  
                                                  
                                                  0.00
                                                  %iii. 
      Sino Gas Investment Development, Ltd.
                                                  
                                                  British
      Virgin Islands
                                                  
                                                  
                                                  0.00
                                                  %
 
 ·
              Effective
      January 1, 2008, PRC government implements a new 25% tax rate for all
      enterprises regardless of whether domestic or foreign enterprise without
      any tax holiday, which is defined as "two-year exemption followed by
      three-year half exemption" hitherto enjoyed by tax payers. As a result of
      the new tax law, standard 15% tax rate preference terminated as of
      December 31, 2007.  However, PRC government has established a
      set of transition rules to allow enterprises already started tax holidays
      before January 1, 2008, to continue enjoying the tax holidays until being
      fully utilized.
 ·
                Since
      Sino Gas International Holdings, Inc. is primarily a holding company
      without any business activities in the United States, the Company shall
      not be subject to United States income tax for the three-month ended March
      31, 2009 and 2008
  18
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 (s)
 Advertising
  The Group
expensed all advertising costs as incurred
  (t)  
 Concentration of
Credit Risk
  Concentration
of credit risk is limited to accounts receivable and is subject to the financial
conditions of major customers.  The Company does not require
collateral or other security to support accounts receivable.  The
Company conducts periodic reviews of its clients’ financial condition and
customers’ payment practices to minimize collection risk on accounts
receivable.
  (u)
 Retirement
Benefits
  Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred.
  (v) 
Statutory
Reserves
 
 As
stipulated by the Company Law of the People's Republic of China (PRC) as
applicable to Chinese companies with foreign ownership, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:
  i.
              Making
      up cumulative prior years' losses, if
any;
 ii.
              Allocations
      to the "Statutory reserve" of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered
  capital;
 iii.
              Allocations
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.
  (w) 
Statement of Cash
Flows
  In
accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
the Company’s operations is calculated based upon the local
currencies.  As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
  19
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 (x) 
 Comprehensive
Income
  Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements.  The Company’s current component of other
comprehensive income is the foreign currency translation
adjustment.
  (y) 
Recent Accounting
Pronouncements
  In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133").
 SFAS 161 requires entities to provide greater transparency about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
SFAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations and cash flows.  SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.
  In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy).  Statement 162 will become effective
60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting
Principles."
  In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1").  FSP
APB 14-1 requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account for
the liability (debt) and equity (conversion option) components of the instrument
in a manner that reflects the issuer's non-convertible debt borrowing
rate.  FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 on a retroactive basis.
  20
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Management
of the Company does not anticipate that the adoption of these six standards will
have a material impact on these consolidated financial statements.
  (z)   Earnings Per
Share
  Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
is computed on the basis of the weighted average number of shares of common
stock plus the effect of dilutive potential common shares outstanding during the
period using the treasury stock method for warrants and the as-if method for
convertible securities. Dilutive potential common shares include outstanding
warrants, and convertible preferred stock.
  21
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 3. RESTRICTED
CASH
  Restricted
Cash represents compensating balances held at banks to partially secure banking
facilities in the form of loans and notes payable. The imposed restrictions
dictate that funds cannot be withdrawn when there are outstanding loans and
notes payable, and the funds are only allowed to be used to settle bank
indebtedness. The funds deposited as compensating balances are interest bearing.
The amount of cash restricted varies based on the Bank’s credit policy at the
time that the Company requests for increase or extension of credit
facilities.
 
 4. ACCOUNTS
RECEIVABLE
  For
natural gas sales, it is due when the gas is sold. Normally, most of them are
settled by prepayments from the customers.
  For
construction projects, connection fees are generally collected in installments.
First deposits of 30% of total contract sum are received from client when the
project commences. Second payment of 30% is received at milestone set out
following the contracts. Third payment of 30% is received after the construction
is completed. The final sum of the remaining portion normally acts as retention
money for quality warranty to the developer. The retention money would be
received by the company after the 1 year warranty period.
  Trade
accounts receivable are recorded at the invoiced amount, net of allowances for
doubtful accounts and sales returns. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
customer facts and economic conditions. Outstanding account balances are
reviewed individually for collectibles. Account balances are charged off against
the allowance after all means of collection have been exhausted and collection
is improbable. To date, the Company has not charged off any balances as it has
yet to exhaust all means of collection.  The Company does not have any
off-balance-sheet credit exposure to its customers.
  The
credit and billing policy is that residential customers are billed and collected
immediately, whereas industrial customers are billed and paid according to the
contract terms from 10 days to one month. For the construction business,
customers are billed and pay based on the percentage of completion method of the
construction project.
  22
 SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 Accounts Receivable3/31/2009
                      
                      
                      12/31/2008Gross
      accounts receivable
                      
                      $
                      5,973,836
                      
                      
                      $
                      6,049,415Allowance
      for bad debt
                      
                      
                      (37,598
                      )
                      
                      
                      (35,794
                      )Net
      accounts receivable
                      
                      $
                      5,936,238
                      
                      
                      $
                      6,013,621
 
 Allowance for Bad Debt3/31/2009
                        
                        
                        12/31/2008Beginning
      balance
                        
                        
                        35,794
                        
                        
                        $
                        36,760Addition
                        
                        
                        1,804
                        
                        
                        
                        -Reverse
                        
                        
                        -
                        
                        
                        
                        (966
                        )Ending
      balance
                        
                        
                        37,598
                        
                        
                        $
                        35,794
 
 Accounts Receivable Aging
      Report3/31/2009
                      
                      
                      12/31/200830
      Days
                      
                      $
                      2,046,928
                      
                      
                      $
                      4,896,06630-60
      Days
                      
                      
                      443,425
                      
                      
                      
                      258,10760-90
      Days
                      
                      
                      1,044,211
                      
                      
                      
                      292,98890-180
      Days
                      
                      
                      2,306,418
                      
                      
                      
                      311,954180-360
      Days
                      
                      
                      -
                      
                      
                      
                      205,745>360
      Days
                      
                      
                      95,255
                      
                      
                      
                      48,760Total
                      
                      $
                      5,936,238
                      
                      
                      $
                      6,013,621
 
 The
following are the ten most significant accounts receivable at March 31,
2009:
 
 Hebei
      Zhonggang Steel, Ltd.
                    
                    $
                    754,555Lianyun
      Port Development
                    
                    
                    382,814Guannan
      Fangwu Construction Co., Ltd.
                    
                    
                    369,644Xuzhou
      Shenyuan Real Estate Co., Ltd.
                    
                    
                    349,157Sihong
      Jinwan Development Co., Ltd.
                    
                    
                    338,036Beijing
      Yincheng Construction Co., Ltd.
                    
                    
                    288,603Peixuan
      Jiannan Development Company
                    
                    
                    284,199Tonghua
      Tongsheng Real Estate Co., Ltd.
                    
                    
                    272,465Suqian
      City Ming Wei Co., Ltd.
                    
                    
                    259,014Jiangsu
      Hongzhe Lake Farm
                    
                    
                    241,103Total
                    
                    $
                    3,539,590
  23
 SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 5.
                INVESTMENT
 
 3/31/2009
                    
                    
                    12/31/2008Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
                    
                    $
                    4,823,665
                    
                    
                    $
                    4,817,613Qujing
      Gas Co., Ltd.
                    
                    
                    341,825
                    
                    
                    
                    341,397Total
                    
                    $
                    5,165,490
                    
                    
                    $
                    5,159,009
 
 6.
                PROPERTY, PLANT, AND EQUIPMENT,
      NET
 
 Property,
Plant, and Equipment consisted of the followings at March 31, 2009 and December
31, 2008:
 
 At Cost
                            
                            3/31/2009
                            
                            
                            12/31/2008Gas
      Pipelines
                            
                            $
                            27,602,154
                            
                            
                            $
                            27,859,313Motor
      Vehicles
                            
                            
                            5,607,544
                            
                            
                            
                            5,600,508Machinery
      & Equipment
                            
                            
                            858,912
                            
                            
                            
                            857,834Buildings
                            
                            
                            1,862,509
                            
                            
                            
                            1,568,380Leasehold
      Improvements
                            
                            
                            80,522
                            
                            
                            
                            80,101Office
      Equipment
                            
                            
                            224,872
                            
                            
                            
                            216,43536,236,513
                            
                            
                            
                            36,182,572Less: Accumulated
      depreciation
                            
                            
                            (3,482,109
                            )
                            
                            
                            (3,149,453
                            )$
                            32,754,404
                            
                            
                            $
                            33,033,118
 
 Accumulated Depreciation
                      
                      3/31/2009
                      
                      
                      12/31/2008Gas
      Pipelines
                      
                      $
                      1,714,145
                      
                      
                      $
                      1,532,478Motor
      Vehicles
                      
                      
                      1,208,148
                      
                      
                      
                      1,109,489Machinery
      & Equipment
                      
                      
                      207,266
                      
                      
                      
                      198,072Buildings
                      
                      
                      227,306
                      
                      
                      
                      193,126Leasehold
      Improvements
                      
                      
                      51,676
                      
                      
                      
                      48,325Office
      Equipment
                      
                      
                      73,568
                      
                      
                      
                      67,963Total
                      
                      $
                      3,482,109
                      
                      
                      $
                      3,149,453
 
 Depreciation
expenses included in the consolidated statements of income for the three months
and twelve months ended March 31, 2009 and December 31, 2008 were $332,657 and
$1,459,682, respectively.
  24
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 7.
                INTANGIBLE
      ASSETS
 
 Intangible
assets consisted of the following at March 31, 2009 and December 31,
2008:
 
 At Cost
                          
                          3/31/2009
                          
                          
                          12/31/2008Land
      use rights
                          
                          $
                          511,550
                          
                          
                          $
                          510,907Franchises
                          
                          
                          401,718
                          
                          
                          
                          401,214Goodwill
                          
                          
                          1,680,083
                          
                          
                          
                          1,677,975Others
                          
                          
                          15,331
                          
                          
                          
                          15,3122,608,683
                          
                          
                          
                          2,605,408Less: Accumulated
    Amortization
                          
                          
                          (414,423
                          )
                          
                          
                          (412,156
                          )$
                          2,194,260
                          
                          
                          $
                          2,193,252
 
 Accumulated Amortization
                          
                          3/31/2009
                          
                          
                          12/31/2008Land
      use rights
                          
                          $
                          32,979
                          
                          
                          $
                          32,938Franchises
                          
                          
                          370,067
                          
                          
                          
                          369,603Goodwill
                          
                          
                          -
                          
                          
                          
                          -Others
                          
                          
                          11,377
                          
                          
                          
                          9,615Total
                          
                          $
                          414,423
                          
                          
                          $
                          412,156
 
 The
Company operates as a local natural gas distributor in a city or county, known
as an operation location, under an exclusive franchise agreement between the
Company and the local government or entities in charge of gas utility.
Franchises are the rights to develop sites in Anping and Jinzhou in China. They
are stated at cost less accumulated amortization.
 
 Goodwill
is related to the acquisitions of Beijing Chenguang Gas and Guannan
Gas.  Management annually reviews the carrying value of goodwill using
the sum of the discounted cash flows to determine if an impairment charge is
necessary. The Company has determined no impairment to goodwill as of
date.
  25
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 8.
                SHORT-TERM
      BANK LOAN
 
 Name of Bank
                              
                              Due Date
                              
                              Interest Rate
                              
                              
                              3/31/2009
                              
                              
                              12/31/2008Bank
      of Dalian
                              
                              12/18/2009
                              
                              
                              6.69
                              %
                              
                              $
                              2,191,189
                              
                              
                              $
                              2,188,439Total
                              
                              
                              
                              
                              
                              
                              
                              $
                              2,191,189
                              
                              
                              $
                              2,188,439
 
 Interest
expenses for the short-term bank loans were $41,452 and $187,999 for the
three-month and twelve-month periods ended March 31, 2009 and December 31,
2008.
 
 9.
                OTHER
      PAYABLES
 
 Other
payables consisted of the following at March 31, 2009 and December 31,
2008:
 
 3/31/2009
                    
                    
                    12/31/2008Employees’
      welfare payables
                    
                    $
                    340,414
                    
                    
                    $
                    137,264Amount
      due to employees
                    
                    
                    316,017
                    
                    
                    
                    366,732Tax
      payable
                    
                    
                    221,242
                    
                    
                    
                    267,790Other
      Payable
                    
                    
                    5,033,814
                    
                    
                    
                    5,403,085Total
                    
                    $
                    5,911,487
                    
                    
                    $
                    6,174,871
 
 All the
amounts due to employees are unsecured, interest free, and have no fixed
repayment terms.
  26
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 10.
                CAPITAL
      STOCK
 
 The
authorized capital stock consists of (i) 250,000,000 shares of common stock, par
value      $0.001 per share, of which 25,269,313
shares are issued and outstanding, and (ii) 100,000,000 shares of preferred
stock, par value $0.001 per share.  The preferred stock consists of
(a) series A convertible preferred stock, with 20,000,000 shares authorized and
0 shares are issued and outstanding; (b) series B convertible preferred stock,
with 5,000,000 shares authorized and 4,579,839 shares are issued and
outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000
shares authorized and 95,418 shares are issued and outstanding.
 
 The
following is a summary of the material terms of its capital
stock.  This summary is subject to and qualified in its entirety by
its Articles of Incorporation, as amended and corrected, certificates of
designations for its series A, series B, and series B-1 convertible preferred
stock, its by-laws and by the applicable provisions of Utah law.
 
 Common
Stock
 
 The
Company is authorized to issue 250,000,000 shares of common stock, with a par
value of $0.001.  There are 25,269,313 shares of common stock issued
and outstanding at December 31, 2008.  All shares of common stock have
one vote per share on all matters including election of directors, without
provision for cumulative voting.  The common stock is not redeemable
and has no conversion or preemptive rights.  The common stock
currently outstanding is validly issued, fully paid and
non-assessable.  In the event of liquidation of the company, the
holders of common stock will share equally in any balance of the company's
assets available for distribution to them after satisfaction of creditors and
preferred shareholders, if any.  The holders of common stock are
entitled to equal dividends and distributions per share with respect to the
common stock when, as and if, declared by the board of directors from funds
legally available.
 
 Preferred
Stock
 
 In
addition to the 250,000,000 shares of common stock, the Company is authorized to
issue 100,000,000 shares of preferred stock, with a par value of $0.001 per
share.  Shares of the preferred stock may be issued from time to time
in one or more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the board of directors
prior to the issuance.
  27
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 On August
30, 2006, the Company’s board of directors designated 20,000,000 shares of its
preferred stock as series A convertible preferred stock and 5,000,000 shares of
its preferred stock as series B convertible preferred stock.  On
August 31, 2006, the Company filed certificates of designations for the series A
and series B convertible preferred stock with the Office of the Secretary of
State of Utah.  On September 6, 2006, the board of directors amended
the designations of the Series B convertible preferred stock and the Company
filed an amended certificate of designations for the Series B convertible
preferred stock with the Office of the Secretary of State of
Utah.  The board of directors created the series A convertible
preferred stock to allow the Company to consummate the share exchange
transaction with the Gas (BVI) Shareholders and the series B convertible
preferred stock in connection with its private financing
transactions.  Each of the shares of series A convertible preferred
stock was automatically converted into one share of its common stock upon the
effectiveness of its reverse stock-split on November 17, 2006.  On
September 12, 2007, the Company’s board of directors designated 3,000,000 shares
of its preferred stock as series B-1 convertible preferred stock with the same
right and privilege as series B convertible preferred stock, and 95,418 shares
of series B-1 preferred stock were issued in connection with the September
financing transaction.  Therefore, at March 31, 2009 and December 31,
2008, the Company has no shares of series A convertible preferred stock issued
and outstanding, and has 4,579,839 and 95,418 shares of series B and series B-1
convertible preferred stock issued and outstanding respectively.
 
 Conversion
 
 The
Company issued 14,361,646 of its common shares upon the automatic conversion of
its series A convertible preferred shares after the 304.44-for-1 reverse
stock-split on November 17, 2006.  The Company no longer has any
series A convertible preferred shares outstanding.
 
 Each
share of the series B convertible preferred stock will become convertible into
common stock, at the option of its holder after the 304.44-for-1 reverse
stock-split, based on the then applicable conversion rate, which is initially
one share of series B convertible preferred stock for one share of common
stock.
 
 Financing
Transactions
 
 On May
15, 2007, Vision Opportunity Master Fund, Ltd. exercised 1,094,891 shares of
Series J Warrants at $2.74 per share.  The Company received $3,000,000
cash gross proceeds.  In consideration of exercise of Series J
Warrants, 1,094,891 new Series E Warrants and 109,489 Series G Warrants were
issued to Vision and placement agent Kuhns’ Brother
respectively.  Pursuant to the financial advisory agreement between
the Company and the placement agent Kuhns’ Brother, the Company totally
reimbursed $412,241 of the gross proceeds to Kuhns’ Brother, including $146,374
disbursements of Kuhns’ Brother’s legal counsel.  The Company received
$2,587,759 net proceeds.
  28
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 On
September 7, 2007, the Company entered into a securities purchase agreement with
a series of private placement investors leading by Vision Opportunity Master
Fund, Ltd. for a sale of 8,340,762 shares of the Company’s common
stock.  The Company generated an aggregate of $18,766,700 gross
proceeds.  Simultaneously, the Company entered into a Warrant Purchase
Agreement, Amendment and Waiver (“WPA”) with the holders of its outstanding
Warrants and Series B Preferred Stock, who acquired those securities by private
placement in September and October of 2006. Pursuant to the WPA, all of the
Series A and Series B Warrants issued in 2006 were purchased back by the Company
for $3,500,000; the exercise price of Series C Warrants was changed to $3.375;
all of the Series D Warrants was purchased for a purchase price of issuing
additional 770,897 shares of Series B preferred Stock; all of the outstanding
Series J and Series E Warrants were cancelled; additional 271,074 Series F
Warrants and 271,074 Series R Warrants were issued respectively. Among the
$18,766,700 cash gross proceeds, $3,500,000 was used to purchase back the Series
A and Series B Warrants issued in 2006 from private placement investors;
$1,473,833 was reimbursed to the placement agent Roth Capital, including the
out-of-pocket expenses and $232,028 legal counsel expense. The Company received
$13,792,866 net proceeds.
 
 Financial
      Transactions5/15/2007
                      
                      
                      9/7/2007Gross
      proceeds
                      
                      $
                      3,000,000
                      
                      
                      $
                      18,766,700Commission
      to Placement Agent
                      
                      
                      (265,867
                      )
                      
                      
                      (1,241,805
                      )Legal
      counsel expense
                      
                      
                      (146,374
                      )
                      
                      
                      (232,028
                      )Used
      to purchase Warrants A & B
                      
                      
                      -
                      
                      
                      
                      (3,500,000
                      )Net
      proceeds
                      
                      $
                      2,587,759
                      
                      
                      $
                      13,792,867
 
 The
following table depicts the issued and outstanding shares of Common Stock,
Preferred Stock, and Warrants at March 31, 2009.
 
 Authorized Shares
                      
                      
                      Shares issued and
                        outstandingCommon
      Stock
                      
                      
                      250,000,000
                      
                      
                      
                      25,269,313Convertible
      Preferred Stock A
                      
                      
                      10,000,000
                      
                      
                      
                      -Convertible
      Preferred Stock B
                      
                      
                      5,000,000
                      
                      
                      
                      4,579,839Convertible
      Preferred Stock B-1
                      
                      
                      3,000,000
                      
                      
                      
                      95,418
 
 Strike Price
                        
                        Contractual Life
                        
                        Expiration
                          Date
                        
                        Shares issued
                          and outstanding
                        
                        
                        Weighted Average
                          Fair ValueSeries
      A Warrants
                        
                        
                        3.84
                        
                        60
      Months
                        
                        9/6/2011
                        
                        
                        241,708
                        
                        
                        
                        0.70Series
      C Warrants
                        
                        
                        3.38
                        
                        60
      Months
                        
                        9/6/2011
                        
                        
                        3,083,589
                        
                        
                        
                        0.81Series
      F Warrants
                        
                        
                        4.84
                        
                        36
      Months
                        
                        9/6/2010
                        
                        
                        271,074
                        
                        
                        
                        0.20Series
      G Warrants
                        
                        
                        3.84
                        
                        48
      Months
                        
                        9/6/2011
                        
                        
                        109,489
                        
                        
                        
                        0.44Series
      R Warrants
                        
                        
                        4.84
                        
                        36
      Months
                        
                        9/6/2010
                        
                        
                        271,074
                        
                        
                        
                        0.20Outstanding
      Option
                        
                        
                        3.00
                        
                        48
      Months
                        
                        11/1/2010
                        
                        
                        100,000
                        
                        
                        
                        0.92
  29
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 The
Company used the Black-Scholes model to calculate the values of Warrants. The
following shows the assumptions that were employed in the model:
  Warrants A
                    
                    
                    Warrants C
                    
                    
                    Warrants F
                    
                    
                    Warrants G
                    
                    
                    Warrants R
                    
                    
                    Outstanding
                      OptionWeighted-average
      fair value of warrants
                    
                    
                    0.70
                    
                    
                    
                    0.81
                    
                    
                    
                    0.20
                    
                    
                    
                    0.44
                    
                    
                    
                    0.20
                    
                    
                    
                    0.92Strike
      price
                    
                    $
                    3.84
                    
                    
                    $
                    3.38
                    
                    
                    $
                    4.84
                    
                    
                    $
                    3.84
                    
                    
                    $
                    4.84
                    
                    
                    $
                    3.00Risk-free
      interest rate
                    
                    
                    4.18
                    %
                    
                    
                    4.18
                    %
                    
                    
                    4.18
                    %
                    
                    
                    4.18
                    %
                    
                    
                    4.18
                    %
                    
                    
                    4.18
                    %Expected
      volatility
                    
                    
                    40.00
                    %
                    
                    
                    40.00
                    %
                    
                    
                    40.00
                    %
                    
                    
                    40.00
                    %
                    
                    
                    40.00
                    %
                    
                    
                    40.00
                    %Years
      to maturity
                    
                    
                    5.00
                    
                    
                    
                    5.00
                    
                    
                    
                    3.00
                    
                    
                    
                    4.00
                    
                    
                    
                    3.00
                    
                    
                    
                    4.00
  30
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Total
Capitalization
 
 The
following table depicts an analysis of total capitalization for the issuance of
Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional
Paid in Capital at March 31, 2009:
 
 Preferred
      Stock B
                      
                      
                      Preferred
      Stock B-1
                      
                      
                      Common
      StockName of Shareholders
                      
                      Number
      of Shares
                        outstanding
                      
                      
                      Capital
                      
                      
                      Number
      of Shares
                        outstanding
                      
                      
                      Capital
                      
                      
                      Number
      of Shares
                        outstanding
                      
                      
                      Capital
                      
                      
                      Additional
      Paid
                        in
      Capital
                      
                      
                      %
      of Equity
                        HoldingsManager
      / Insider
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      12,653,662
                      
                      
                      
                      12,654
                      
                      
                      
                      4,064,862
                      
                      
                      
                      51
                      %Minority
      Investor
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,428,551
                      
                      
                      
                      3,428
                      
                      
                      
                      747,457
                      
                      
                      
                      9
                      %Private
      Placement- Investor
                      
                      
                      4,579,839
                      
                      
                      
                      4,580
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      9,187,100
                      
                      
                      
                      9,187
                      
                      
                      
                      24,307,327
                      
                      
                      
                      40
                      %Beneficial-
      Conversion Feature
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7,002,292
                      
                      
                      
                      -4,579,839
                      
                      
                      
                      4,580
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      25,269,313
                      
                      
                      
                      25,269
                      
                      
                      
                      36,121,938
                      
                      
                      
                      100
                      %
  31
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 11.
                SEGMENT
      INFORMATION
 
 The
Company has contracted with customers usually in two revenue segments
altogether, one is for the construction and installation of gas facilities and
another one is the subsequent sales of gas to the customers through the gas
facilities the Company constructs. However, the respective gas facilities
contracts and gas supply contracts have separately provided for the basis of
revenue recognition and distinctive from each other for the relevant
cost-and-revenue to be incurred and hence separate calculation and subsequent
payment of fees for respective business without any interdependence on each
other in this respect.
 
 For
management purposes, the company is currently organized into two major operating
divisions: gas pipeline construction (installation of gas facilities) and sales
of piped gas. These principal operating activities are the basis on which the
Company reports its primary segment information.
 
 Balance
Sheet Segment Report
 As
of March 31, 2009
 
 Gas Distribution
                            
                            
                            Gas pipeline
                              Installation
                            
                            
                            Others
                            
                            
                            TotalAssetsCurrent
      Assets
                            
                            $
                            11,653,889
                            
                            
                            $
                            3,862,349
                            
                            
                            $
                            356,305
                            
                            
                            $
                            15,872,542Non-Current
      Assets
                            
                            
                            14,803,951
                            
                            
                            
                            44,045,806
                            
                            
                            
                            -
                            
                            
                            
                            58,849,757Total
      Assets
                            
                            
                            26,457,840
                            
                            
                            
                            47,908,155
                            
                            
                            
                            356,305
                            
                            
                            
                            74,722,299LiabilitiesCurrent
      Liabilities
                            
                            
                            1,395,129
                            
                            
                            
                            14,929,802
                            
                            
                            
                            152,032
                            
                            
                            
                            16,476,962Total
      Liabilities
                            
                            
                            1,395,129
                            
                            
                            
                            14,929,802
                            
                            
                            
                            152,032
                            
                            
                            
                            16,476,962Net Assets
                            
                            $
                            25,062,711
                            
                            
                            $
                            32,978,353
                            
                            
                            $
                            204,273
                            
                            
                            $
                            58,245,337
  32
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Income
Statement Segment Report
 For
the three months ended March 31, 2009
 
 Gas
                          Distribution
                        
                        
                        Gas pipeline
                          Installation
                        
                        
                        Others
                        
                        
                        TotalSales
      Revenue
                        
                        $
                        3,813,956
                        
                        
                        $
                        1,223,736
                        
                        
                        $
                        -
                        
                        
                        $
                        5,037,692Cost
      of Revenue
                        
                        
                        (3,643,225
                        )
                        
                        
                        (129,987
                        )
                        
                        
                        -
                        
                        
                        
                        (3,773,212
                        )Gross
      Profit
                        
                        
                        170,731
                        
                        
                        
                        1,093,749
                        
                        
                        
                        -
                        
                        
                        
                        1,264,480Operating
      Expense
                        
                        
                        (87,394
                        )
                        
                        
                        (559,866
                        )
                        
                        
                        (68,259
                        )
                        
                        
                        (715,519
                        )Other
      Income / Expense
                        
                        
                        (6,177
                        )
                        
                        
                        (39,571
                        )
                        
                        
                        578
                        
                        
                        
                        (45,170
                        )Earnings
      before tax
                        
                        
                        77,161
                        
                        
                        
                        494,311
                        
                        
                        
                        (67,681
                        )
                        
                        
                        503,791Income
      tax
                        
                        
                        (21,354
                        )
                        
                        
                        (136,800
                        )
                        
                        
                        -
                        
                        
                        
                        (158,155
                        )Net
      Income
                        
                        $
                        55,807
                        
                        
                        $
                        357,511
                        
                        
                        $
                        (67,681
                        )
                        
                        $
                        345,637
 
 Balance
Sheet Segment Report
 As
of December 31, 2008
 
 Gas Distribution
                          
                          
                          Gas pipeline
                            Installation
                          
                          
                          Others
                          
                          
                          TotalAssetsCurrent
      Assets
                          
                          $
                          11,815,718
                          
                          
                          $
                          3,915,982
                          
                          
                          $
                          423,986
                          
                          
                          $
                          16,155,686Non-Current
      Assets
                          
                          
                          14,474,690
                          
                          
                          
                          43,066,163
                          
                          
                          
                          -
                          
                          
                          
                          57,540,853Total
      Assets
                          
                          
                          26,290,407
                          
                          
                          
                          46,982,145
                          
                          
                          
                          423,986
                          
                          
                          
                          73,696,538LiabilitiesCurrent
      Liabilities
                          
                          
                          1,353,788
                          
                          
                          
                          14,487,400
                          
                          
                          
                          -
                          
                          
                          
                          15,841,188Total
      Liabilities
                          
                          
                          1,353,788
                          
                          
                          
                          14,487,400
                          
                          
                          
                          -
                          
                          
                          
                          15,841,188Net Assets
                          
                          $
                          24,936,619
                          
                          
                          $
                          32,494,745
                          
                          
                          $
                          423,986
                          
                          
                          $
                          57,855,350
  33
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 Income
Statement Segment Report
 For
the three months ended March 31, 2008
 
 Gas
                          Distribution
                        
                        
                        Gas pipeline
                          Installation
                        
                        
                        Others
                        
                        
                        TotalSales
      Revenue
                        
                        $
                        2,987,419
                        
                        
                        $
                        1,354,697
                        
                        
                        $
                        -
                        
                        
                        $
                        4,342,116Cost
      of Revenue
                        
                        
                        (2,545,638
                        )
                        
                        
                        (429,834
                        )
                        
                        
                        -
                        
                        
                        
                        (2,975,472
                        )Gross
      Profit
                        
                        
                        441,781
                        
                        
                        
                        924,863
                        
                        
                        
                        -
                        
                        
                        
                        1,366,644Operating
      Expense
                        
                        
                        (232,194
                        )
                        
                        
                        (493,412
                        )
                        
                        
                        (289,548
                        )
                        
                        
                        (1,015,154
                        )Other
      Income / Expense
                        
                        
                        (18,061
                        )
                        
                        
                        (38,380
                        )
                        
                        
                        28,295
                        
                        
                        
                        (28,146
                        )Earnings
      before tax
                        
                        
                        191,526
                        
                        
                        
                        393,071
                        
                        
                        
                        (261,253
                        )
                        
                        
                        323,344Income
      tax
                        
                        
                        (55,685
                        )
                        
                        
                        (118,332
                        )
                        
                        
                        -
                        
                        
                        
                        (174,017
                        )Net
      Income
                        
                        $
                        135,841
                        
                        
                        $
                        274,739
                        
                        
                        $
                        (261,253
                        )
                        
                        $
                        149,327
 
 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 piped gas
and gas pipeline construction are carried out in the PRC. Accordingly, no
analysis of the Company's sales and assets by geographical market is
presented.
  No other
measures of segment profit or loss and assets have been provided or reviewed by
the company's chief operating decision maker.
  34
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 12.
                EARNINGS
      PER SHARE
 
 Components
of basic and diluted earnings per share were as follows:
 
 3/31/2009Net
      Income
                        
                        $
                        345,637Preferred
      Dividends
                        
                        
                        -Constructive
      Preferred Dividends
                        
                        
                        -Income
      Available to Common Stockholders
                        
                        $
                        345,637Original
      Shares
                        
                        
                        25,269,313Addition
      to Common Stock
                        
                        
                        -Basic
      Weighted Average Shares Outstanding
                        
                        
                        25,269,313Addition
      to Common Stock from Conversion of Preferred Stock B
                        
                        
                        4,579,839Addition
      to Common Stock from Conversion of Preferred Stock B-1
                        
                        
                        95,418Addition
      to Common Stock from Exercise of Warrants
                        
                        
                        -Diluted
      Weighted Average Shares Outstanding
                        
                        
                        29,944,570Earnings
      Per ShareBasic
                        
                        $
                        0.014Diluted
                        
                        $
                        0.012Weighted
      Average Shares OutstandingBasic
                        
                        
                        25,269,313Diluted
                        
                        
                        29,944,570
  35
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 (Stated
in U.S. Dollars)
 
 13.
                LIQUIDATED
      DAMAGE
 
 The
Company entered into a registration rights agreement related to a private
placement financing transaction with accredited investors on September 13,
2007.  Pursuant to the agreement, the Company had to (1) file the
registration statement within 45 days of the execution, and (2) declare the
effectiveness within 150 days of filing the registration
statement.  However, the Company did not meet the aforementioned
requirements under the registration rights agreement, and was subjected to
liquidated damages.  The Company has paid $481,805 in liquidated
damages to investors in 2008, which was reported as other expense in the
statements of income.
 
 14.
                CONTINGENT
      LIABILITIES
 
 Pursuant
to the warrants purchase agreement related to 2006 private placement financing
transactions, the Company was required to reach $7.9 million and $11 million net
income target for the fiscal years ended 2007 and 2008
respectively.  However, the Company did not meet the stipulated 2007
and 2008 net income target and therefore incurred certain contingent
liabilities. The Company is liable to issue 1.2 million and 1.5 million shares
make good common stock to the accredited investors in 2009 in compensation of
not attaining the 2007 and 2008 net income target respectively.
  36
 
 Item 2.  Management’s Discussion and
Analysis
 
 The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve significant risks
and uncertainties. As a result of many factors, such as those set forth
elsewhere in this Form 10-Q, our actual results may differ materially from those
anticipated in these forward-looking statements.
 
 Economic
& Industrial Trend
 
 We
generate revenue from two sources: connection fees for constructing connections
to our natural gas distribution network and sales of natural gas. Our connection
activities are closely related to the development of the real estate industry in
our targeted cities in China, given the fact that almost all of our connection
fees are from new residential apartments. Natural gas facilities in new
apartments are often required by local governments, who aim to promote the use
of natural gas to improve local residents’ quality of life.
 
 We have
experienced high growth of our connection activities since inception of our
business due to the Chinese real estate boom in the past years. However,
starting 2007, the Chinese government implemented a series of policies and
regulations to curb inflation and the property market. These policies, together
with the worldwide financial crisis in 2008, has resulted a slowdown of the real
estate market in China and our business, in turn, was affected in 2008.
Recently, the Chinese government has changed its policies and prioritized
boosting of the economy. The Chinese government has adopted new policies to
address the slowdown of the real estate market, such as reducing stamp duties
and transactions fees, lowering interest rates, and loosening bank lending
policies. The Chinese government has also decided to inject
stimulus package to boost the overall economy, including allocation of
funds for mass housing projects. We have seen signs of recovery of the real
estate market in China in recent months.
 
 Even with
the current slowdown of the Chinese real estate market, we believe that the
future growth trend of the real estate market will not change because of the
continuous urbanization in China.  Therefore, in the next several
months, we expect to see the return of growth of household connections,
especially in small-to-medium sized cities where the real estate market is at an
early developing stage.
 
 Our gas
users are composed of industrial and residential users. Gas sales to residential
users are much less affected by economic and industrial factors and we
anticipate that such sales would maintain stable growth in the future, due to
the increasing pool of our residential customers. Gas sales to industrial users
are subject to the performance of the end industrial users. Gas sales to our
industrial users have increased 41.6% during 2008 as existing users have
expanded their production capacity. For our biggest industrial user, Hebei Zhong
Gang Co. Ltd, our average daily gas sales were 24,000 cubic meters in 2008. As
we expand into more cities, we expect to add one to two industrial users in the
coming year if capital is available.
 
 Material
Opportunities
 
 The gas
distribution market is quite fragmented in the small (population less than
100,000) to medium (population between 100,000 to 300,000) sized
cities. We have been in active talks with potential project targets. The size of
the projects varies from small cities, like the ones we have, to medium-sized
cities. For small city markets, many of them are still untapped or undeveloped.
The development of these markets is generally considered our major growth
components. The current worldwide financial crisis has created pricing
opportunities for us to acquire projects since we could acquire projects
 at attractive prices.
 
 Most
medium-sized or large cities have already been developed by large gas
distributors or are still operated by state-owned companies. Acquisition
opportunities exist in state-owned companies, as the central government
encourages suppliers to turn them into privately-owned companies. The expansion
into these markets would have material impact on the Company, increasing the
Company’s assets and revenues significantly. The Company would
require additional fundraising for such acquisitions.
  Material
Challenges
 
 There are
a vast number of small-to-medium sized cities left undeveloped by our industry,
but the competition is intense, as there are many small new players in the
market attracted by the profitability and growth potentials of the natural gas
business. Meanwhile, from time to time, we are also facing competitions from
stronger competitors, as large city markets are getting saturated and our
competitors are beginning to expand into smaller cities.
 
 We  have
limited opportunities in developing into first-tier cities in China, as most of
them have already been taken by other large gas distributors, such as Xin’ao Gas
Co. Ltd (largest in China), in the past decade.
  37
  Still,
potential residential users in small and medium-sized cities need to be educated
about the benefits of using natural gas. Time is required for residents to
realize the benefits of natural gas. This is especially true for new markets,
where there is no use of natural gas. Small cities tend to be more reluctant for
use of new energy resources, such as natural gas, than large cities, and
residents depend more on coal.
 
 China’s
energy market is highly regulated by the government with regard to the purchase
and sale price of natural gas. When an adjustment to the purchase price by the
government occurs, gas distributors will correspondingly increase the sale
price, subject to a public hearing and government approval. The increase of
natural gas price in China is lagging behind that in the international markets,
which has soared in the past year. The Chinese government has seldom adjusted
natural gas price, but we cannot rule out the possibilities of the increase of
natural gas prices in the future. We can adjust the sale price accordingly after
the increase of purchase price.  However, passing the increase to end
users would make natural gas more expensive, as compared to other alternative
energies. Thus this increase of price will deter our business
development.
 
 Risks
in Short-Term and Long-Term Periods
 
 In each
of the cities we are developing and aiming to develop, the real estate market is
the major factor that impacts us. Most of our residential customers are new home
buyers. If the real estate market turns downward, the demands for new homes
would decrease, resulting in fewer natural gas connections, and thus negatively
impacting our business.
 
 To reduce
the Company’s heavy dependence on connection fees, the Company is exploring
opportunities to diversify our business by expanding into related areas, such as
pipeline and gas station businesses. However, we do not expect to expand into
these areas in large scale 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. The Company would be constrained by inadequate capital
when developing into larger cities or engaging in merger and acquisition
activities. With such situations, the Company would require additional
fundraising to finance such  business activities.
 
 Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
 
 During
the three months ended March 31, 2009, net revenues were $5,037,692,
representing an increase of 16.02 % from the same period of last
year.  Gross profit for the three months ended March 31, 2009 was
$1,264,480, representing a decrease of 7.48% from the same period of last
year.  Our operating income for the three months ended March 31, 2009
was $548,961, representing an increase of 56.18% from the same period of
2008.
 
 For the 3 months ended
                                            March 31,2009
                                          
                                          
                                          2008
                                          
                                          
                                          ChangeUS$
                                          
                                          
                                          US$%Net
      Revenues
                                          
                                          
                                          5,037,692
                                          
                                          
                                          
                                          4,342,116
                                          
                                          
                                          
                                          16.02
                                          %Gross
      Profit
                                          
                                          
                                          1,264,480
                                          
                                          
                                          
                                          1,366,645
                                          
                                          
                                          
                                          -7.48
                                          %Operating
      Income
                                          
                                          
                                          548,961
                                          
                                          
                                          
                                          351,490
                                          
                                          
                                          
                                          56.18
                                          %Net
      Income
                                          
                                          
                                          345,637
                                          
                                          
                                          
                                          149,327
                                          
                                          
                                          
                                          131.46
                                          %Gross
      Margin
                                          
                                          
                                          25.10
                                          %
                                          
                                          
                                          31.47
                                          %
                                          
                                          
                                          -
      20.24
                                          %Net
      Margin
                                          
                                          
                                          6.86
                                          %
                                          
                                          
                                          3.44
                                          %
 
 Net
Revenues
 
 We
generate revenues from two sources: connection fees for constructing connections
to our natural gas distribution network, and sales of natural gas.
 
 Total net
revenues for the three months ended March 31, 2009 were $5,037,692, compared to
$4,342,116 for the same period in 2008, representing an increase of 16.02%. The
increase was mainly due to the increase of gas sales, which was able to offset
the decrease in connection fees. During this period, we connected 2,878 new
residential households to our gas distribution network, resulting in total
connection fees of $1,223,736.  Gas sales during the same period were
11.52 million cubic meters, or $3,813,956. In comparison, we connected 4,590 new
residential households to our gas distribution network for the same period in
2008, resulting in total connection fees of $1,354,697. Gas sales during the
period were 9.45 million cubic meters, or $2,987,419.
  38
 For the 3 months ended December 31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        Change(In
      $ million)
                                        
                                        US$
                                        
                                        
                                        %
                                        
                                        
                                        US$
                                        
                                        %
                                        
                                        
                                        %Net
      Revenues
                                        
                                        
                                        5.04
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        4.34
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        16.02
                                        %Connection
      Fees
                                        
                                        
                                        1.22
                                        
                                        
                                        
                                        24
                                        %
                                        
                                        
                                        1.35
                                        
                                        
                                        
                                        31
                                        %
                                        
                                        
                                        -9.67
                                        %Gas
      Sales
                                        
                                        
                                        3.81
                                        
                                        
                                        
                                        76
                                        %
                                        
                                        
                                        2.99
                                        
                                        
                                        
                                        69
                                        %
                                        
                                        
                                        27.67
                                        %
 
 The
increase in our net revenues for the three months ended March 31,
2009  were due to the following factors:
 
 1)
Increase of gas sales. With more customers added to our existing gas
network distribution system, our gas sales increased accordingly.
 
 2)
Decrease of connection fees from residential customers. (Connection fees offer a
higher gross margin than gas sales.) The slowdown of the real estate market and
the unfavorable capital markets conditions continued to affect our business
operations, especially our connection fees.  The slowdown of the real
estate market has caused real estate developers to grant fewer new contracts to
us to perform new gas connection services.  In addition, real estate
developers have also postponed the execution of certain existing contracts for
connection services.  The unfavorable capital markets conditions have
caused us to scale back our business operations. In the first quarter of 2009,
the lack of capital has greatly reduced the amount of connection fees from
new projects.
 
 3) Higher
average connection fees per unit. In the first quarter of 2009, we developed
certain residential projects with higher connection fees per unit, compared with
the same period of 2008. The higher connection fees per unit helped to offset
the lower number of residential units developed in the first quarter of
2009.
 
 Connection
Fees
 
 Connection
fees during the three months ended March 31, 2009 were $1.22 million,
representing a decrease of 9.67% over the same period of 2008, accounting for
24.29% of the total net revenue as compared with approximately 31.20% of the
total net revenue for the same period in 2008. The source of connection fees was
mainly from the development of new residential users. Connection fees from
residential users during the three months ended March 31, 2009 were $1.14
million, representing a decrease of 16.12% from the same period of
2008.
 
 For the 3 months ended March 31,(in US$ millions)
                                                
                                                2009
                                                
                                                
                                                2008
                                                
                                                
                                                ChangeUS$
                                                
                                                
                                                %
                                                
                                                
                                                US$
                                                
                                                
                                                %
                                                
                                                
                                                %Connection
      Fees
                                                
                                                
                                                1.22
                                                
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                1.35
                                                
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                -9.67
                                                %Residential
      Users
                                                
                                                
                                                1.14
                                                
                                                
                                                
                                                92.86
                                                %
                                                
                                                
                                                1.35
                                                
                                                
                                                
                                                100
                                                %
                                                
                                                
                                                -16.12
                                                %Industrial
      Users
                                                
                                                
                                                0.09
                                                
                                                
                                                
                                                7.14
                                                %
                                                
                                                
                                                0.00
                                                
                                                
                                                
                                                0
                                                %
 
 The table
below is a breakdown of our top five customers by connection fees:
 
 Customers
                      
                      Connection Fees:
                        ($ million)Hebei
      Xiangyin Real Estate Development Co., Ltd.
                      
                      
                      0.045Shenzhou
      City’s Middle School
                      
                      
                      0.044Nangong
      Middle School
                      
                      
                      0.044Xuzhou
      Ganglong Real Estate Development Co., Ltd.
                      
                      
                      0.035Henan
      Dihua Real Estate Co., Ltd.
                      
                      
                      0.023
 
 Due to
seasonality, the first quarter of each year usually generates less revenue for
the Company with regards to connection fees. Generally, there are no
construction projects because of cold weather in Northern China and the Chinese
New Year holiday. Generally, new construction projects begin in the end of the
quarter.
 
 Gas
Sales
 
 In terms
of volume, we sold 11.52 million cubic meters of natural gas during the three
months ended March 31, 2009, compared with 9.45 million cubic meters for the
same period of 2008. In terms of monetary value, gas sales were $3.81 million
during the three months ended March 31, 2009, accounting for 75.71% of total net
revenue for the three months ended March 31, 2009, representing an increase of
27.67% over the same period of 2008. Gas sales to residential users increased
63.3% to $1.04 million for the three months ended March 31, 2009 from $0.64
million in the same period of 2008. Gas sales to industrial users increased
43.25% to $1.27 million for the three months ended March 31, 2009 from $0.88
million in the same period of 2008. Gas sales to commercial users increased
2.77% to $1.51 million for the three months ended March 31, 2009 from $1.47
million in the same period of 2008.
  39
 
 For the 3 months ended March 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      Change($
      million)
                                      
                                      US$
                                      
                                      
                                      %
                                      
                                      
                                      US$
                                      
                                      
                                      %
                                      
                                      
                                      %Gas
      Sales
                                      
                                      
                                      3.81
                                      
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      2.99
                                      
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      27.67
                                      %Residential
      Users
                                      
                                      
                                      1.04
                                      
                                      
                                      
                                      27
                                      %
                                      
                                      
                                      0.64
                                      
                                      
                                      
                                      21
                                      %
                                      
                                      
                                      63.3
                                      %Industrial
      Users
                                      
                                      
                                      1.27
                                      
                                      
                                      
                                      33
                                      %
                                      
                                      
                                      0.88
                                      
                                      
                                      
                                      30
                                      %
                                      
                                      
                                      43.25
                                      %Commercial
      Users
                                      
                                      
                                      1.51
                                      
                                      
                                      
                                      40
                                      %
                                      
                                      
                                      1.47
                                      
                                      
                                      
                                      49
                                      %
                                      
                                      
                                      2.77
                                      %
 
 Such
increases were primarily due to the fact that our invested projects maintained
steady development, and more users were added to our gas distribution
network.
 
 The table
below is a breakdown of our major industrial customers for gas use in the first
quarter of 2009.
 
 Industrial Customers
                                        
                                        Gas Usage
                                          (million
                                          cubic
                                          meters)
                                        
                                        
                                        Gas Usage
                                          ($ million)Hebei Zhonggang
      Steel Co., Ltd.
                                        
                                        
                                        1.98
                                        
                                        
                                        
                                        0.71Oil
      Pipeline of The First Machine Factory of Huabei Petrol
    Bureau
                                        
                                        
                                        0.32
                                        
                                        
                                        
                                        0.11Buohai
      Oil equipment manufacturer of PetroChina Group
                                        
                                        
                                        0.25
                                        
                                        
                                        
                                        0.09Elite
      (Langfang) Textile Corporation
                                        
                                        
                                        0.08
                                        
                                        
                                        
                                        0.03Hebei
      Jihengyuan Group Ltd.
                                        
                                        
                                        0.05
                                        
                                        
                                        
                                        0.02
 
 Gas sales
of $0.71 million were contributed by Hebei Zhonggang Steel Co., Ltd., which
started to use gas at the beginning of 2006. The gas consumption of Hebei
Zhonggang was 1.98 million cubic meters during the three months ended March 31,
2009, representing a slight increase, compared with 1.94 million cubic meters
for the same period of 2008.
 
 As
mentioned above, due to  our business’ seasonality, gas sales
accounted for a relatively higher percentage of our total net revenues. As our
residential customer base grows, gas sales to residential users would increase
gradually.
 
 Cost
of Revenues
 
 Cost of
revenues for the three months ended March 31, 2009, which includes cost of
connection and cost of gas sales, was $3.77 million, representing an increase of
26.81% from $2.98 million in the same period of 2008.
 
 For the 3 months ended March 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  Change($
      million)
                                  
                                  US$
                                  
                                  
                                  %
                                  
                                  
                                  US$
                                  
                                  
                                  %
                                  
                                  
                                  %Cost
      of Revenues
                                  
                                  
                                  3.77
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  2.98
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  26.81
                                  %Connection
      Cost
                                  
                                  
                                  0.13
                                  
                                  
                                  
                                  3
                                  %
                                  
                                  
                                  0.43
                                  
                                  
                                  
                                  14
                                  %
                                  
                                  
                                  -69.76
                                  %Gas
      Cost
                                  
                                  
                                  3.64
                                  
                                  
                                  
                                  97
                                  %
                                  
                                  
                                  2.55
                                  
                                  
                                  
                                  86
                                  %
                                  
                                  
                                  43.12
                                  %
 
 Cost of
Connection
  Our cost
of connection during the three months ended March 31, 2009 was $0.13 million, or
3% of our total cost of revenues. By comparison, the cost of connection during
the same period of 2008 was $0.43 million, or 14% of our total cost of
revenues.
 
 Cost of
connection decreased by approximately 69.76% from the same period in 2008,
mainly due to the decrease of connection service activities for the three months
ended March 31, 2009 as compared to the same period of 2008.
  40
  Cost of
connection includes depreciation of major pipelines, the cost of courtyard
pipelines, valves, gas meters, and installation and maintenance
fees.
 
 Considering
the city's overall planning and our long-term interests, the capacity of the gas
pipeline network we designed to distribute gas for a city usually greatly
exceeded the number of households we served at the beginning of our service,
which makes the cost of connection, specifically the depreciation of pipelines
and maintenance cost relatively high if the number of residential users
connected is low. However, with the connection of more households to the gas
pipeline, the average cost to each household will be gradually
reduced.
 
 Cost of Gas
Sales
  The cost
of gas sales increased 43.12% to $3.64 million during the three months ended
March 31, 2009 from $2.55 million for the same period in 2008. This increase,
which surpassed the 27.67% increase in sales of natural gas during the same
period, is largely due to the increase of rental expenses on gas delivery
equipments and higher fuel costs.
 
 The cost
of natural gas sales includes the purchase and transportation of natural gas and
depreciation of delivery equipment.
 
 Langfang
Development Zone Wei Ye Hazardous Goods Transportation Co. Ltd, one of our
subsidiaries, is responsible for our gas transportation, and transportation cost
per cubic meter is  RMB 0.55 ($0.080) per cubic meter.
 
 Gross
Profit
 
 During
the three months ended Mar 31, 2009, gross profit was $1.26 million,
representing a decrease of approximately 7.48% from the same period of 2008.
Gross profit from connection fees was $1.09 million for the three months ended
March 31, 2009, accounting for 87% of total gross profit. In comparison, gross
profit from connection fees was $0.92 million for the three months ended March
31, 2008, accounting for 68% of total gross profit. Gross profit from gas sales
was $0.17 million for the three months ended March 31, 2009, accounting for 13%
of total gross profit, compared to $0.44 million, accounting for 32% of total
gross profit in the same period of 2008.
  For the 3 months ended March 31,2009
                                      
                                      
                                      2008
                                      
                                      
                                      Change($ million)
                                      
                                      US$
                                      
                                      
                                      %
                                      
                                      
                                      US$
                                      
                                      
                                      %
                                      
                                      
                                      %Gross
      Profit
                                      
                                      
                                      1.26
                                      
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      1.37
                                      
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      -7.48
                                      %Connection
                                      
                                      
                                      1.09
                                      
                                      
                                      
                                      87
                                      %
                                      
                                      
                                      0.92
                                      
                                      
                                      
                                      68
                                      %
                                      
                                      
                                      18.26
                                      %Gas
                                      
                                      
                                      0.17
                                      
                                      
                                      
                                      13
                                      %
                                      
                                      
                                      0.44
                                      
                                      
                                      
                                      32
                                      %
                                      
                                      
                                      -61.36
                                      %
 
 Gross
margin during the three months ended March 31, 2009 was 25.10%, compared to
31.47% during the same period in 2008.
 
 Gross
margin for connection fees for the three months ended Mar 31, 2009, was 89.38%,
compared to 68.27% in the same period of 2008. The increase of connection gross
margin is mainly due to higher average connection fees per unit.  In
the first quarter of 2009, we developed certain residential projects with higher
connection fees per unit.
 
 Gross
margin for sales of natural gas was 4.48% for the three months ended March 31,
2009, compared to 14.79% during the same period of 2008.  The decrease
was due to an increase of rental expenses on gas delivery trucks and higher
costs of fuel.
 
 Selling
and Marketing Expenses
 
 Our
selling and marketing expenses in the three months ended March 31, 2009 were
$0.20 million, approximately 4.03% of our net revenues, compared with $0.18
million or 4.18 % of our net revenues in the same period of 2008.
 
 General
and Administrative Expenses and Other Expenses
 
 General
and administrative expenses were $0.51 million for the three months ended March
31, 2009, which was 38.55% lower than $0.83 million for the same period of 2008.
Other expense was $0.05 million for the three months ended March 31, 2009,
compared with 0.03 million for the same period of 2008.
 
 Operating
Income
 
 The
operating income for the three months ended March 31, 2009 was $0.55 million,
representing an increase of 57.14%, compared to the operating income of $0.35
million for the same period of  2008.
 
 Income
tax
  Income
tax was $0.16 million for the three months ended Mar 31, 2009, compared to $0.17
million for the same period of 2008.
  41
  Net
Income
 
 Net
income for the three months ended March 31, 2009 was $0.35 million, representing
an increase of 133% from $0.15 million for the same period of 2008. The increase
is mainly due to the decrease of SG&A expenses.
 
 Cash
and cash equivalents
 
 Cash and
cash equivalents were $2.21 million as of March 31, 2009, a decrease of $1.05
million as compared to $3.26 million of cash and cash equivalents as of December
31, 2008.  In the first quarter of 2009, the major source of cash was
the Company’s operating activities.
 
 Accounts
Receivable
 
 Accounts
receivable during the three months as of March 31, 2009 were $5.94 million, a
slight decrease of $0.07 million from $6.01 million as of December 31,
2008.
 
 Our
accounts receivable is expected to gradually decrease during the first six
months of 2009 due to our businesses’ seasonality. Connection fees are generally
higher in the third and fourth quarters of every year than in the first two
quarters. Accounts receivable are collected in the beginning of the following
year.
 
 Notes
Receivable
  Notes
receivable of $0.05 million as of March 31, 2009 was the Note issued by Hebei
Zhonggang for its use of gas.
  Inventory
  Inventory
of $0.31 million as of March 31, 2009 was comprised of spare parts and natural
gas.
  Fixed
Assets
 
 Fixed
Assets as of March 31, 2009 were $36.24 million, representing a slight
increase of $0.06 million from $36.18 million as of December 31,
2008.  The table below is a breakdown of our fixed assets at
cost:
 
 2008
                      
                      
                      2007At CostGas
      Pipelines
                      
                      $
                      27,602,154
                      
                      
                      $
                      27,859,313Motor
      Vehicles
                      
                      
                      5,607,544
                      
                      
                      
                      5,600,508Machinery
      & Equipment
                      
                      
                      858,912
                      
                      
                      
                      857,834Buildings
                      
                      
                      1,862,509
                      
                      
                      
                      1,568,380Leasehold
      Improvements
                      
                      
                      80,522
                      
                      
                      
                      80,101Office
      Equipment
                      
                      
                      224,872
                      
                      
                      
                      216,435Less
      Accumulated depreciation
                      
                      
                      (3,482,109
                      )
                      
                      
                      (3,149,453
                      )$
                      32,754,404
                      
                      
                      $
                      33,033,118
 Bank
Loans
 
 Bank
loans as of March 31, 2009 were $2.19 million, representing no change, as
compared to that as of December 31, 2008.
  Accounts
Payables
 
 Accounts
payables as of March 31, 2009 was $6.44 million, representing an increase of
$0.09 million from that as of December 31, 2008.
 
 Other
Payables
 
 Other
payables as of March 31, 2009 were $5.91 million, representing a decrease of
$0.26 million from that as of December 31, 2008.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
required.
  42
  Item
4. Controls and Procedures
 
 Disclosure
Controls and Procedures
 
 Our
management is responsible for establishing and maintaining adequate disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act and have designed disclosure controls and procedures or caused
disclosure controls and procedures to be designed under its supervision in order
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, as applicable. Due to its
inherent limitations, disclosure controls and procedures may not prevent or
detect material misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  Under the
supervision of and with the participation of our Chief Executive Officer and our
Chief Financial Officer, our management conducted its evaluation of the
effectiveness of our Company’s disclosure controls and procedures as of March
31, 2009.  Based on that evaluation, our management concluded that, as
of March 31, 2009, our Company’s disclosure controls and procedures was not
effective due to the material weaknesses described below.
 
 Internal
Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act and have designed internal control over financial reporting or
caused internal control over financial reporting to be designed under its
supervision in order to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, as
applicable. Due to its inherent limitations, internal control over financial
reporting may not prevent or detect material misstatements. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
 
 During
the fiscal year ended December 31, 2008, our management conducted its evaluation
of the effectiveness of our Company’s internal control over financial reporting,
using the criteria in the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on that evaluation, our management concluded that, as of December 31, 2008, our
Company’s internal control over financial reporting was not effective due to the
material weaknesses described below.
 
 (1) The
Company has not yet established a comprehensive Code of Conduct and Ethics (the
“Code”) which is applicable to all Company directors, officers and
employees.
 
 (2) Our
Internal Audit Department has not taken an active role in the conduct of its
activities due to insufficient resources. The annual plan, budget, and specific
procedures to perform the internal audit function have not been fully developed,
and the anti-fraud audit plan has not been developed either.
 
 (3) Our
Company did not formulate a comprehensive Related Party Transactions Policy and
develop a master list of all Related Parties.
 
 Management’s
Plan for Remediation of Material Weaknesses
 
 In light
of the conclusion that our Company’s internal control over financial reporting
was not effective, our management has worked, and will continue to work, to
address these weaknesses in our internal control over financial reporting.
Implementations of certain remedial measures include the following:
 
 (1) We
are going to continue modify the Code, and arrange respective on-going training
to all the employees in the near future. Training which includes the content of
the Code will be provided to new employees at the time of hiring. All the
employees will be required to sign an affidavit acknowledging that the employee
has read and will intend to comply with the Code;
 
 (2) The
management is committed to develop a comprehensive and risk-based internal audit
function within the Company. With the limited human capital supplies in the
market, we will engage a third party professional to assist the management in
establishing the internal control system. At the same time, we have enhanced our
efforts of recruitment and interviews are undergoing. We expect that an internal
audit department will be set up in the near future. With the assistance from the
third party professional, the roles and responsibilities of the internal audit
department will be formulated and a comprehensive risk-based internal audit plan
will be developed and approved by the Audit Committee within a month after the
set up.
  (3) We
will continue to modify Related Party Transaction Policy and our goal is to
formulate a comprehensive policy in the near future.
 
 Changes
in Internal Control over Financial Reporting
 
 During
the quarter ended March 31, 2009, 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.
  43
  PART
II - OTHER INFORMATION
 Item
1. Legal Proceedings
 
 None.
 
 Item
1A. Risk Factors
 
 Not
required.
  Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 None.
 
 Item
3. Defaults Upon Senior Securities
 
 None.
 
 Item
4. Submission of Matters to a Vote of Security Holders.
 
 None.
 
 Item
5. Other Information
 
 None.
 
 Item
6.  Exhibits
  The
following exhibits are hereby filed as part of this Quarterly Report on Form
10-Q.
  Exhibit
                    Number:
                  
                  Description31.1
                  
                  Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                  
                  Certification
      of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
      Act of 2002.32
                  
                  Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant certifies that it has duly caused this Quarterly Report on
Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized, in Beijing.
  SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      May 20, 2009
                  By:
                  /s/ Yuchuan LiuYuchuan
      LiuChairman
      and Chief Executive Officer
  SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      May 20, 2009
                      By:
                      /s/ Yugang
      ZhangYugang
      ZhangChief
      Financial
Officer
  44