United
States


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM 10-Q


(Mark
one)


x
              Quarterly
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934




For
the Quarterly Period Ended September 30, 2010


or


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




Commission
File Number 000-51364




SINO
GAS INTERNATIONAL HOLDINGS, INC.


(Name of
small business issuer in its charter)


Utah
              90-0438712(State
      or other jurisdiction
                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   ̈
              Accelerated
      filer   ̈Non-accelerated
      filer   ̈
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company x





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


As of
November 15, 2010, the Registrant had 27,312,636 shares of common stock
outstanding.








Sino Gas
International Holdings, Inc.


Table of
Contents


PagePART
      I -
                  FINANCIAL
      INFORMATIONItem
      1.
                  Financial
      Statements (Unaudited)
                  2Notes
      to Financial Statements (Unaudited)
                  8Item
      2.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operation
                  44Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  53Item
      4.
                  Controls
      and Procedures
                  53PART
      II -
                  OTHER
      INFORMATION
                  53Item
      1.
                  Legal
      Proceedings
                  53Item
      1A.
                  Risk
      Factors
                  53Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  53Item
      3.
                  Defaults
      Upon Senior Securities
                  53Item
      4.
                  (Removed
      and Reserved)
                  53Item
      5.
                  Other
      Information
                  53Item
      6.
                  Exhibits
                  53







PART
I - FINANCIAL INFORMATION


Item
1. Financial Statements


Sino Gas International
Holdings, Inc.


Content
                      
                      PageReport
      of Independent Registered Public Accounting Firm
                      
                      1Consolidated
      Balance Sheets
                      
                      2Consolidated
      Statements of Income
                      
                      4Consolidated
      Statements of Stockholders’ Equity
                      
                      5Consolidated
      Statements of Cash Flows
                      
                      7Notes
      to Consolidated Financial Statements
                      
                      8








To:  The
Board of Directors and Stockholders of


Sino Gas International Holdings, Inc.




Report of Independent
Registered Public Accounting Firm




We have
reviewed the accompanying consolidated interim balance sheets of Sino Gas
International Holdings, Inc. as of September 30, 2010 and December 31, 2009, and
the related consolidated statements of income, stockholders’ equity, and cash
flows for the three-month and nine-month periods ended September 30, 2010 and
2009. These consolidated interim financial statements are the responsibility of
the Company's management.





We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
statements consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.





Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.




San
      Mateo, California
              Samuel
      H. Wong & Co., LLPNovember
      4, 2010
              Certified
      Public Accountants









Sino
Gas International Holdings, Inc.




Consolidated
Balance Sheets




As
of September 30, 2010 and December 31, 2009




(Stated
in US Dollars)





9/30/2010
                                                                
                                                                
                                                                12/31/2009ASSETSCurrent
      Assets
                                                                
                                                                NotesCash
      & cash equivalents
                                                                
                                                                2(e)
                                                                
                                                                
                                                                $
                                                                3,708,714
                                                                
                                                                
                                                                $
                                                                9,820,890Restricted
      cash
                                                                
                                                                3
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                126,400Notes
      receivable
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                351,021Accounts
      receivable
                                                                
                                                                2(f),4
                                                                
                                                                
                                                                
                                                                6,426,524
                                                                
                                                                
                                                                
                                                                5,036,609Inventory
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,115,042
                                                                
                                                                
                                                                
                                                                416,931Advance
      to suppliers
                                                                
                                                                2(g)
                                                                
                                                                
                                                                
                                                                5,097,456
                                                                
                                                                
                                                                
                                                                4,814,420Prepayment
      and others
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                724,901
                                                                
                                                                
                                                                
                                                                446,840Other
      receivables
                                                                
                                                                2(f)
                                                                
                                                                
                                                                
                                                                2,293,646
                                                                
                                                                
                                                                
                                                                1,686,115Total
      Current Assets
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                19,366,283
                                                                
                                                                
                                                                
                                                                22,699,226Non-Current
      AssetsInvestment
                                                                
                                                                2(h),5
                                                                
                                                                
                                                                
                                                                7,177,354
                                                                
                                                                
                                                                
                                                                7,031,333Property, plant
      & equipment, net
                                                                
                                                                2(j),6
                                                                
                                                                
                                                                
                                                                49,318,297
                                                                
                                                                
                                                                
                                                                47,772,011Construction
      in progress
                                                                
                                                                2(l)
                                                                
                                                                
                                                                
                                                                18,430,433
                                                                
                                                                
                                                                
                                                                13,357,395Intangible assets,
      net
                                                                
                                                                2(k),7
                                                                
                                                                
                                                                
                                                                2,248,347
                                                                
                                                                
                                                                
                                                                2,217,699Total
      Non-current Assets
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                77,174,431
                                                                
                                                                
                                                                
                                                                70,378,438Total
      Assets
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                96,540,714
                                                                
                                                                
                                                                $
                                                                93,077,664LIABILITIES
      & STOCKHOLDERS' EQUITYLIABILITIESCurrent
      LiabilitiesBank
      loans
                                                                
                                                                8
                                                                
                                                                
                                                                $
                                                                2,985,921
                                                                
                                                                
                                                                $
                                                                2,925,174Accounts
      payable
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                6,998,869
                                                                
                                                                
                                                                
                                                                8,560,120Other
      payables – current
                                                                
                                                                9(a)
                                                                
                                                                
                                                                
                                                                2,922,571
                                                                
                                                                
                                                                
                                                                6,339,571Accrued
      liabilities
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                92,469
                                                                
                                                                
                                                                
                                                                453,335Unearned
      revenue
                                                                
                                                                2(m)
                                                                
                                                                
                                                                
                                                                1,532,575
                                                                
                                                                
                                                                
                                                                620,860Total
      Current Liabilities
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                14,532,405
                                                                
                                                                
                                                                
                                                                18,899,060Non-current
      LiabilitiesLong-term
      bank loans
                                                                
                                                                8
                                                                
                                                                
                                                                
                                                                8,957,764
                                                                
                                                                
                                                                
                                                                6,581,641Non-current
      Convertible Bonds
                                                                
                                                                10
                                                                
                                                                
                                                                
                                                                5,486,499
                                                                
                                                                
                                                                
                                                                4,329,101Other
      payables - non-current
                                                                
                                                                9(b)
                                                                
                                                                
                                                                
                                                                2,019,692
                                                                
                                                                
                                                                
                                                                -Total
      Non-current Liabilities
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                16,463,955
                                                                
                                                                
                                                                
                                                                10,910,742Total
      Liabilities
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                30,996,360
                                                                
                                                                
                                                                $
                                                                29,809,802





See
Accompanying Notes to Financial Statements and Accountant’s
Report


2


Sino
Gas International Holdings, Inc.




Consolidated
Balance Sheets




As
of September 30, 2010 and December 31, 2009




(Stated
in US Dollars)





9/30/2010
                                        
                                        
                                        12/31/2009NotesSTOCKHOLDERS'
      EQUITYPreferred
      Stock B US$0.001 par value; 5,000,000 shares authorized; 4,409,097 and
      4,579,839 shares issued and outstanding as of September 30, 2010 and
      December 31, 2009 respectively.
                                        
                                        11
                                        
                                        
                                        $
                                        4,410
                                        
                                        
                                        $
                                        4,580Additional
      paid in capital - Preferred Stock B
                                        
                                        
                                        
                                        
                                        
                                        
                                        5,125,488
                                        
                                        
                                        
                                        5,323,972Preferred
      Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares
      issued and outstanding as of September 30, 2010 and December 31,
      2009.
                                        
                                        11
                                        
                                        
                                        
                                        95
                                        
                                        
                                        
                                        95Additional
      paid in capital - Preferred Stock B-1
                                        
                                        
                                        
                                        
                                        
                                        
                                        132,662
                                        
                                        
                                        
                                        132,662Common
      Stock US$0.001 par value; 250,000,000 shares authorized; 27,312,636 and
      26,769,313 shares issued and outstanding as of September 30, 2010 and
      December 31, 2009 respectively.
                                        
                                        11
                                        
                                        
                                        
                                        27,312
                                        
                                        
                                        
                                        26,769Additional
      paid in capital - Common Stock
                                        
                                        
                                        
                                        
                                        
                                        
                                        23,045,495
                                        
                                        
                                        
                                        22,513,732Additional
      paid in capital - Warrants Series: A, B, J, C, D
                                        
                                        
                                        
                                        
                                        
                                        
                                        311,110
                                        
                                        
                                        
                                        311,110Additional
      paid in capital - Warrants Series: E, G
                                        
                                        
                                        
                                        
                                        
                                        
                                        47,946
                                        
                                        
                                        
                                        47,946Additional
      paid in capital - Warrants Series: F, R
                                        
                                        
                                        
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        107,652Additional
      paid in capital - Convertible Bonds Detachable Warrants
                                        
                                        
                                        
                                        
                                        
                                        
                                        223,367
                                        
                                        
                                        
                                        223,367Additional
      paid in capital - Beneficial Conversion Feature
                                        
                                        
                                        
                                        
                                        
                                        
                                        8,094,814
                                        
                                        
                                        
                                        8,094,814Statutory
      reserve
                                        
                                        2(v)
                                        
                                        
                                        
                                        4,626,982
                                        
                                        
                                        
                                        4,612,191Retained
      earnings
                                        
                                        
                                        
                                        
                                        
                                        
                                        14,804,529
                                        
                                        
                                        
                                        14,143,089Accumulated
      other comprehensive income
                                        
                                        2(x)
                                        
                                        
                                        
                                        9,100,144
                                        
                                        
                                        
                                        7,725,883Total
      Stockholders' Equity
                                        
                                        
                                        
                                        
                                        
                                        
                                        65,544,354
                                        
                                        
                                        
                                        63,267,862Total
      Liabilities & Stockholders' Equity
                                        
                                        
                                        
                                        
                                        
                                        $
                                        96,540,714
                                        
                                        
                                        $
                                        93,077,664





See
Accompanying Notes to Financial Statements and Accountant’s
Report


3




Sino
Gas International Holdings, Inc.




Consolidated
Statements of Income




For
the three-month and nine-month periods ended September 30, 2010 and
2009




(Stated
in US Dollars)





Three Months Ended
                                
                                
                                Nine Months EndedNote
                                
                                
                                9/30/2010
                                
                                
                                9/30/2009
                                
                                
                                9/30/2010
                                
                                
                                9/30/2009Sales
      revenues
                                
                                2(p)
                                
                                
                                $
                                8,097,341
                                
                                
                                $
                                6,988,621
                                
                                
                                $
                                20,971,220
                                
                                
                                $
                                19,357,933Cost
      of revenues
                                
                                
                                
                                
                                
                                
                                (4,923,438
                                )
                                
                                
                                (4,505,070
                                )
                                
                                
                                (13,766,918
                                )
                                
                                
                                (14,074,466
                                )Gross
      Profit
                                
                                
                                
                                
                                
                                
                                3,173,903
                                
                                
                                
                                2,483,551
                                
                                
                                
                                7,204,302
                                
                                
                                
                                5,283,466Operating ExpenseSelling
      expense
                                
                                
                                
                                
                                
                                
                                (567,781
                                )
                                
                                
                                (288,766
                                )
                                
                                
                                (1,149,685
                                )
                                
                                
                                (709,256
                                )General
      and administrative expense
                                
                                
                                
                                
                                
                                
                                (749,396
                                )
                                
                                
                                (656,168
                                )
                                
                                
                                (2,354,525
                                )
                                
                                
                                (1,902,328
                                )Total
      operating expense
                                
                                
                                
                                
                                
                                
                                (1,317,177
                                )
                                
                                
                                (944,935
                                )
                                
                                
                                (3,504,210
                                )
                                
                                
                                (2,611,584
                                )Operating
      Income
                                
                                
                                
                                
                                
                                
                                1,856,726
                                
                                
                                
                                1,538,616
                                
                                
                                
                                3,700,092
                                
                                
                                
                                2,671,882Other Income/(Expense)Other
      income
                                
                                
                                
                                
                                
                                
                                2,099
                                
                                
                                
                                83,000
                                
                                
                                
                                12,394
                                
                                
                                
                                94,206Other
      expense
                                
                                
                                
                                
                                
                                
                                (4,589
                                )
                                
                                
                                (11,178
                                )
                                
                                
                                (26,087
                                )
                                
                                
                                (33,493
                                )Interest
      income
                                
                                
                                
                                
                                
                                
                                3,011
                                
                                
                                
                                941
                                
                                
                                
                                12,050
                                
                                
                                
                                4,019Interest
      expense
                                
                                
                                
                                
                                
                                
                                (436,223
                                )
                                
                                
                                (96,264
                                )
                                
                                
                                (2,182,773
                                )
                                
                                
                                (180,824
                                )Total
      other income/(expense)
                                
                                
                                
                                
                                
                                
                                (435,702
                                )
                                
                                
                                (23,501
                                )
                                
                                
                                (2,184,416
                                )
                                
                                
                                (116,092
                                )Income
      before tax
                                
                                
                                
                                
                                
                                
                                1,421,024
                                
                                
                                
                                1,515,116
                                
                                
                                
                                1,515,676
                                
                                
                                
                                2,555,790Income
      tax
                                
                                2(r),12
                                
                                
                                
                                (395,166
                                )
                                
                                
                                (306,479
                                )
                                
                                
                                (839,007
                                )
                                
                                
                                (580,383
                                )Gain/(loss)
      from discontinued operation, net of tax
                                
                                17
                                
                                
                                
                                (439
                                )
                                
                                
                                -
                                
                                
                                
                                (439
                                )
                                
                                
                                -Net
      income
                                
                                
                                
                                
                                
                                $
                                1,025,418
                                
                                
                                $
                                1,208,636
                                
                                
                                $
                                676,230
                                
                                
                                $
                                1,975,407Earnings
      per share
                                
                                2(z),13-      Basic
                                
                                
                                
                                
                                
                                $
                                0.038
                                
                                
                                $
                                0.045
                                
                                
                                $
                                0.025
                                
                                
                                $
                                0.076-      Diluted
                                
                                
                                
                                
                                
                                $
                                0.035
                                
                                
                                $
                                0.038
                                
                                
                                $
                                0.025
                                
                                
                                $
                                0.064Weighted
      Average Shares Outstanding-      Basic
                                
                                
                                
                                
                                
                                
                                27,090,770
                                
                                
                                
                                26,769,313
                                
                                
                                
                                26,899,913
                                
                                
                                
                                26,058,202-      Diluted
                                
                                
                                
                                
                                
                                
                                36,514,909
                                
                                
                                
                                31,444,570
                                
                                
                                
                                26,899,913
                                
                                
                                
                                30,733,459





See
Accompanying Notes to Financial Statements and Accountant’s
Report


4




Sino
Gas International Holdings, Inc.




Consolidated
Statements of Stockholders’ Equity




As
of September 30, 2010 and December 31, 2009




(Stated
in US Dollars)





Preferred
      Stock B
                    
                    
                    Preferred
      Stock B-1
                    
                    
                    Common
      StockShares
                      Outstanding
                    
                    
                    Amount
                    
                    
                    Additional
      Paid In
                      Capital-Preferred
                      Stock
      B
                    
                    
                    Shares
                      Outstanding
                    
                    
                    Amount
                    
                    
                    Additional
      Paid In
                      Capital-Preferred
                      Stock
      B-1
                    
                    
                    Shares
                      Outstanding
                    
                    
                    Amount
                    
                    
                    Additional
      Paid In
                      Capital-Common
                      StockBalance
      at January 1, 2009
                    
                    
                    4,579,839
                    
                    
                    
                    4,580
                    
                    
                    
                    5,323,972
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    25,269,313
                    
                    
                    
                    25,269
                    
                    
                    
                    23,196,304Net
      Income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of 2007 Make Good Common Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,500,000
                    
                    
                    
                    1,500
                    
                    
                    
                    (1,500
                    )Re-allocation
      of Beneficial Conversion Feature
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (681,072
                    )Issuance
      of Convertible Bonds
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Appropriate
      of Retained Earnings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
      Currency Translation Adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at December 31, 2009
                    
                    
                    4,579,839
                    
                    
                    
                    4,580
                    
                    
                    
                    5,323,972
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    26,769,313
                    
                    
                    
                    26,769
                    
                    
                    
                    22,513,732Balance
      at January 1, 2010
                    
                    
                    4,579,839
                    
                    
                    
                    4,580
                    
                    
                    
                    5,323,972
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    26,769,313
                    
                    
                    
                    26,769
                    
                    
                    
                    22,513,732Net
      Income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Preferred Stock B to Common Stock
                    
                    
                    (170,742
                    )
                    
                    
                    (170
                    )
                    
                    
                    (198,484
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    170,742
                    
                    
                    
                    170
                    
                    
                    
                    198,484Conversion
      of Convertible Bonds into Common Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    322,581
                    
                    
                    
                    323
                    
                    
                    
                    199,677Shares
      based compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,000
                    
                    
                    
                    50
                    
                    
                    
                    25,950Expiration
      of Warrants F&R
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    107,652Appropriation
      of Retained Earnings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
      Currency Translation Adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at September 30, 2010
                    
                    
                    4,409,097
                    
                    
                    
                    4,410
                    
                    
                    
                    5,125,488
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    27,312,636
                    
                    
                    
                    27,312
                    
                    
                    
                    23,045,495





See
Accompanying Notes to Financial Statements and Accountant’s
Report


5




Sino
Gas International Holdings, Inc.




Consolidated
Statements of Stockholders’ Equity




As
of September 30, 2010 and December 31, 2009




(Stated
in US Dollars)





Common
      StockAdditional
      Paid in
                      Capital-Warrants
                      Series:
      A,B,J,C,D
                    
                    
                    Additional
      Paid in
                      Capital-Warrants
                      Series:
      E,G
                    
                    
                    Additional
      Paid in
                      Capital-Warrants
                      Series:
      F,R
                    
                    
                    Additional
      Paid in
                      Capital-Convertible
      Bonds
                      Detachable
      Warrants
                    
                    
                    Additional
      Paid in
                      Capital-Beneficial
                      Conversion
      Feature
                    
                    
                    Statutory
                      Reserve
                    
                    
                    Retained
                      Earnings
                    
                    
                    Accumulated
      Other
                      Comprehensive
                      Income
                    
                    
                    TotalBalance
      at January 1, 2009
                    
                    
                    311,110
                    
                    
                    
                    47,946
                    
                    
                    
                    107,652
                    
                    
                    
                    -
                    
                    
                    
                    7,002,292
                    
                    
                    
                    3,956,728
                    
                    
                    
                    10,069,896
                    
                    
                    
                    7,676,844
                    
                    
                    
                    57,855,350Net
      Income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,047,584
                    
                    
                    
                    -
                    
                    
                    
                    4,047,584Issuance
      of 2007 Make Good Common Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Re-allocation
      of Beneficial Conversion Feature
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    681,072
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of Convertible Bonds
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    223,367
                    
                    
                    
                    1,092,522
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,315,889Appropriate
      of Retained Earnings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    655,463
                    
                    
                    
                    (655,463
                    )
                    
                    
                    -
                    
                    
                    
                    -Foreign
      Currency Translation Adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    49,039
                    
                    
                    
                    49,039Balance
      at December 31, 2009
                    
                    
                    311,110
                    
                    
                    
                    47,946
                    
                    
                    
                    107,652
                    
                    
                    
                    223,367
                    
                    
                    
                    8,094,814
                    
                    
                    
                    4,612,191
                    
                    
                    
                    14,143,089
                    
                    
                    
                    7,725,883
                    
                    
                    
                    63,267,862Balance
      at January 1, 2010
                    
                    
                    311,110
                    
                    
                    
                    47,946
                    
                    
                    
                    107,652
                    
                    
                    
                    223,367
                    
                    
                    
                    8,094,814
                    
                    
                    
                    4,612,191
                    
                    
                    
                    14,143,089
                    
                    
                    
                    7,725,883
                    
                    
                    
                    63,267,862Net
      Income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    676,230
                    
                    
                    
                    -
                    
                    
                    
                    676,230Conversion
      of Preferred Stock B to Common Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Convertible Bonds into Common Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    200,000Shares
      based compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    26,000Expiration
      of Warrants F&R
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (107,652
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -Appropriation
      of Retained Earnings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,791
                    
                    
                    
                    (14,791
                    )
                    
                    
                    -
                    
                    
                    
                    -Foreign
      Currency Translation Adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,374,260
                    
                    
                    
                    1,374,260Balance
      at September 30, 2010
                    
                    
                    311,110
                    
                    
                    
                    47,946
                    
                    
                    
                    -
                    
                    
                    
                    223,367
                    
                    
                    
                    8,094,814
                    
                    
                    
                    4,626,982
                    
                    
                    
                    14,804,529
                    
                    
                    
                    9,100,144
                    
                    
                    
                    65,544,354




12/31/2009
                        
                        
                        9/30/2010
                        
                        
                        TotalComprehensive IncomeNet
      Income
                        
                        $
                        4,047,584
                        
                        
                        $
                        676,230
                        
                        
                        $
                        4,723,814Other Comprehensive IncomeForeign
      Currency Translation Adjustment
                        
                        
                        49,039
                        
                        
                        
                        1,374,260
                        
                        
                        
                        1,423,299Total
                        
                        $
                        4,096,623
                        
                        
                        $
                        2,050,490
                        
                        
                        $
                        6,147,113





See
Accompanying Notes to Financial Statements and Accountant’s
Report


6




Sino
Gas International Holdings, Inc.
  Consolidated
Statements of Cash Flows
  For
the three-month and nine-month periods ended September 30, 2010 and
2009
  (Stated
in US Dollars)





Three Months Ended
                                
                                
                                Nine Months Ended9/30/2010
                                
                                
                                9/30/2009
                                
                                
                                9/30/2010
                                
                                
                                9/30/2009Cash
      Flows from Operating ActivitiesNet
      Income
                                
                                $
                                1,025,418
                                
                                
                                $
                                1,208,636
                                
                                
                                $
                                676,230
                                
                                
                                $
                                1,975,407Shares
      base compensation
                                
                                
                                26,000
                                
                                
                                
                                -
                                
                                
                                
                                26,000
                                
                                
                                
                                -Depreciation
      expense
                                
                                
                                482,168
                                
                                
                                
                                337,328
                                
                                
                                
                                1,204,262
                                
                                
                                
                                756,862Loss/(gain)
      from discontinued operation
                                
                                
                                439
                                
                                
                                
                                -
                                
                                
                                
                                439
                                
                                
                                
                                -Amortization
      expense of intangible assets
                                
                                
                                12,468
                                
                                
                                
                                8,653
                                
                                
                                
                                29,333
                                
                                
                                
                                42,547Amortization
      expense of convertible bonds
                                
                                
                                147,449
                                
                                
                                
                                -
                                
                                
                                
                                1,357,398Withdraw/(deposit)
      in restricted time deposits
                                
                                
                                -
                                
                                
                                
                                21,683
                                
                                
                                
                                126,400
                                
                                
                                
                                72,420Decrease/(increase)
      in accounts and other receivables
                                
                                
                                (1,086,267
                                )
                                
                                
                                4,140,180
                                
                                
                                
                                (1,646,425
                                )
                                
                                
                                5,067,040Decrease/(increase)
      in inventory
                                
                                
                                (584,044
                                )
                                
                                
                                (83,605
                                )
                                
                                
                                (698,110
                                )
                                
                                
                                (22,220
                                )Decrease/(increase)
      in prepaid expenses
                                
                                
                                (860,233
                                )
                                
                                
                                13,514
                                
                                
                                
                                (561,098
                                )
                                
                                
                                (1,322,692
                                )Increase/(decrease)
      in accounts and other payables
                                
                                
                                609,493
                                
                                
                                
                                (251,509
                                )
                                
                                
                                (2,407,708
                                )
                                
                                
                                1,636,273Cash
      Sourced/(Used) in Operating Activities
                                
                                
                                (227,111
                                )
                                
                                
                                5,394,880
                                
                                
                                
                                (1,893,279
                                )
                                
                                
                                8,205,638Cash
      Flows from Investing ActivitiesDisposal
      of discontinued operation
                                
                                
                                74
                                
                                
                                
                                -
                                
                                
                                
                                74
                                
                                
                                
                                -Increase
      of investment in equity
                                
                                
                                (116,998
                                )
                                
                                
                                (176,553
                                )
                                
                                
                                (146,534
                                )
                                
                                
                                (183,637
                                )Purchase
      of property, plant & equipment
                                
                                
                                (921,616
                                )
                                
                                
                                (5,845,643
                                )
                                
                                
                                (2,750,548
                                )
                                
                                
                                (7,531,104
                                )Increase
      of goodwill
                                
                                
                                (39,105
                                )
                                
                                
                                (1,769
                                )
                                
                                
                                (39,105
                                )
                                
                                
                                (4,074
                                )Purchase
      of other intangible assets
                                
                                
                                (16,312
                                )
                                
                                
                                (10,113
                                )
                                
                                
                                (20,876
                                )
                                
                                
                                (147,098
                                )Decrease/(increase)
      in construction in progress
                                
                                
                                (2,623,722
                                )
                                
                                
                                609,251
                                
                                
                                
                                (5,073,038
                                )
                                
                                
                                (1,501,673
                                )Cash
      Sourced/(Used) in Investing Activities
                                
                                
                                (3,717,679
                                )
                                
                                
                                (5,424,827
                                )
                                
                                
                                (8,030,027
                                )
                                
                                
                                (9,367,585
                                )Cash
      Flows from Financing ActivitiesIncrease/(decrease)
      of bank loans
                                
                                
                                193,840
                                
                                
                                
                                2,308
                                
                                
                                
                                2,436,870
                                
                                
                                
                                5,313Cash
      Sourced/(Used) in Financing Activities
                                
                                
                                193,840
                                
                                
                                
                                2,308
                                
                                
                                
                                2,436,870
                                
                                
                                
                                5,313Net
      increase in cash & cash equivalents for the periods
                                
                                
                                (3,750,950
                                )
                                
                                
                                (27,640
                                )
                                
                                
                                (7,486,436
                                )
                                
                                
                                (1,156,635
                                )Effect
      of currency translation
                                
                                
                                1,098,954
                                
                                
                                
                                87,368
                                
                                
                                
                                1,374,260
                                
                                
                                
                                43,062Cash
      & cash equivalents at the beginning of periods
                                
                                
                                6,360,710
                                
                                
                                
                                1,854,242
                                
                                
                                
                                9,820,890
                                
                                
                                
                                3,027,543Cash
      & cash equivalents at the end of periods
                                
                                $
                                3,708,714
                                
                                
                                $
                                1,913,970
                                
                                
                                $
                                3,708,714
                                
                                
                                $
                                1,913,970Supplementary
      cash flows informationInterest
      received
                                
                                $
                                3,011
                                
                                
                                $
                                1,412
                                
                                
                                $
                                12,050
                                
                                
                                $
                                4,019Interest
      paid
                                
                                
                                290,107
                                
                                
                                
                                96,264
                                
                                
                                
                                826,708
                                
                                
                                
                                180,824Income
      tax paid
                                
                                
                                395,166
                                
                                
                                
                                306,479
                                
                                
                                
                                839,007
                                
                                
                                
                                580,383





See
Accompanying Notes to Financial Statements and Accountant’s
Report


7




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





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 natural gas
distribution systems in 35 small and medium size cities serving approximately
167,750 residential and seven industrial customers. The Company’s facilities
include approximately 1040 kilometers of pipeline and delivery networks
(including delivery trucks) with a daily capacity of approximately 110,000 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 September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





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 September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





(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 September
30, 2010.





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
                      206,000,000Beijing
      Chenguang Gas, Ltd.
                    
                    PRC
                    
                    10/30/2002
                    
                    100
                    
                    100
                    
                    RMB
                      35,239,600Guannan
      Weiye Gas Co., Ltd.
                    
                    PRC
                    
                    6/19/2003
                    
                    100
                    
                    100
                    
                    RMB
                      9,510,000




10




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





Ningjin
      Weiye Gas Co., Ltd
                
                PRC
                
                12/3/2003
                
                100
                
                95
                
                RMB
                  3,000,000Yutian
      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
                  3,000,000




11




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





Yuxian
      Jinli Gas Co., Ltd.
                  
                  PRC
                  
                  11/8/2005
                  
                  100
                  
                  100
                  
                  RMB
                    9,500,000Hengshui
      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
                    3,000,000




12




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





Baishan
      Weiye Gas Co., Ltd.
                  
                  PRC
                  
                  7/13/2007
                  
                  100
                  
                  100
                  
                  RMB
                    15,000,000Xinhe
      Weiye Gas Co., Ltd.
                  
                  PRC
                  
                  7/2/2009
                  
                  100
                  
                  100
                  
                  RMB
                    1,000,000Hebei
      Weiye Gas Co., Ltd.
                  
                  PRC
                  
                  12/18/2009
                  
                  100
                  
                  100
                  
                  RMB
                    75,439,270Gaocheng
      Weiye Gas Co., Ltd.
                  
                  PRC
                  
                  1/27/2010
                  
                  100
                  
                  100
                  
                  RMB
                    200,000





(e)
Cash and Cash
Equivalents





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





(f)
Accounts 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.


13




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





Beijing
Zhongran Xiangke Oil Gas Technology Co., Ltd. (“Xiangke Oil Gas”) 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.





Qujing
Gas Co., Ltd. (“Qujing Gas”) 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
      ActivitiesP.R.C
              
              Sino-foreign
                equity
      joint
                venture
              
              RMB
                20,000,000
              
              40%
              
              Distribution
      of natural
                gas and
      gas pipeline
                constructionP.R.C
              
              Equityjoint
                venture
              
              RMB
                30,000,000
              
              39%
              
              Distribution
      of natural
                gas
      and gas pipeline
                construction





The
Company did not record any goodwill when it acquired its equity position in
Xiangke Oil Gas and Qujing Gas. Accordingly, in accordance with SFAS 142, the
Company has not taken an amortization expense of goodwill during the time it has
carried 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 September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





(j)
Property, Plant and
Equipment





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





Assets Class
                  
                  Estimated Useful 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 accumulated amortization and impairment loss.
Amortization is provided over their estimated useful lives, using the
straight-line method. Estimated useful lives of the intangibles are as
follows:





Asset Class
                          
                          Estimated Useful LifeLand
      use rights
                          
                          20
      - 50 yearsFranchises
                          
                          30
      yearsAccounting
      software
                          
                          3
      years





For
goodwill, impairment tests are performed annually and more frequently whenever
events or changes in circumstances indicate goodwill carrying values exceed
estimated reporting unit fair values. Upon indication that the carrying values
of such assets may not be recoverable, the Company recognizes an impairment loss
as a charge against current operations.  Based on the impairment tests
performed, there was no impairment of goodwill for the nine months ended
September 30, 2010.




15




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009




(l)
Construction in
Progress





Construction
in progress represents the cost of constructing pipelines and is stated at cost.
Costs comprise of direct and indirect incremental costs of acquisition or
construction. Completed items are transferred from construction in progress to
the gas pipelines of fixed assets when they are ready for their intended use.
The major cost of construction relates to construction materials, direct labor
wages, and other overhead.  Construction of pipeline, through which to
distribute natural gas, is one of the Group’s principal
businesses.  The Group builds city main pipeline network and branch
pipeline network to make gas connection to resident users, industrial and
commercial users, with the objective of generating revenue on gas connection and
gas usage fees collected from these customers. These projects, once completed,
will significantly increase the gas supply capacity.





(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.




9/30/2010
                    
                    
                    12/31/2009Years
      end RMB : US$ exchange rate
                    
                    
                    6.6981
                    
                    
                    
                    6.8372Average
      yearly RMB : US$ exchange rate
                    
                    
                    6.8164
                    
                    
                    
                    6.8409




16




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





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.




(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 Company’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.


17




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





In
respect of the Company’s subsidiaries domiciled and operated in China and
British Virgin Islands, the taxation of these entities is summarized
below:





·
            All
      of the operating companies are located in the PRC; and GAS Investment
      China Co., Ltd., Sino Gas Construction, Ltd., and Sino Gas Investment
      Development, Ltd. are located in the British Virgin Islands. All of these
      entities are subject to the relevant tax laws and regulations of the PRC,
      and the British Virgin Islands in which the related entity domiciled. The
      maximum tax rates of the subsidiaries pursuant to the countries in which
      they domicile are:





Subsidiary
                        
                        Country of Domicile
                        
                        Income Tax 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 nine months ended
      September 30, 2010.


18




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





(s)
              Advertising





The
Company 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 September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





(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 June
2009, FASB issued ASC 860, Transfers and Servicing, and
ASC 810, Consolidation, a
revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of
Variable Interest Entities (FASB ASC 810 Consolidation).  The
Company has adopted the new accounting policies and has determined that there is
no material impact to the financial statements presented herein.




On June
30, 2009, FASB issued ASC 105, Accounting Standards Codification
(FASB ASC 105 Generally Accepted Accounting Principles) a replacement of FASB
Statement No. 162 the Hierarchy of Generally Accepted Accounting
Principles. On the effective date of this standard, ASC became the source
of authoritative U.S. accounting and reporting standards for nongovernmental
entities, in addition to guidance issued by the SEC. This statement is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009.  If an accounting change results from the
application of this guidance, an entity should disclose the nature and reason
for the change in accounting principle in their financial
statements.  This new standard categorizes the US GAAP hierarchy to
two levels: one that is authoritative (in ASC) and one that is non-authoritative
(not in ASC). Exceptions include all rules and interpretive releases of the SEC
under the authority of federal securities laws, which are sources of
authoritative US GAAP for SEC registrants, and certain grandfathered
guidance having an effective date before March 15, 1992.  Statement
No. 168 is the final standard that will be issued by FASB in that
form.  There will no longer be, for example, accounting standards in
the form of statements, staff positions, Emerging Issues Task Force (“EITF”)
abstracts, or AICPA Accounting Statements of Position. The Company has adopted
and implemented the new accounting policy.




20




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009




In
October 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (Topic 605):
Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging
Issues Task Force”. This update provides application guidance on whether
multiple deliverables exist, how the deliverables should be separated and how
the consideration should be allocated to one or more units of accounting. This
update establishes a selling price hierarchy for determining the selling price
of a deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence, if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor-specific or third-party evidence is available. The Company
will be required to apply this guidance prospectively for revenue arrangements
entered into or materially modified after January 1, 2011; however, earlier
application is permitted. The management is in the process of evaluating the
impact of adopting this ASU on the Company’s financial statements.





The FASB
issued ASU-2010-09 (Topic 855) to amend guidance on subsequent events to remove
the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date
through which an entity has evaluated subsequent events. This change alleviates
potential conflicts with current SEC guidance. An SEC filer is still required to
evaluate subsequent events through the date financial statements are issued, but
disclosure of that date is no longer required. The amendments in ASU 2010-09
became effective upon issuance of the guidance. Management adopted this
pronouncement as of July 1, 2010.




(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.





3.
            RESTRICTED
      CASH





The
restricted cash reflects funds received from financing activities that is held
in an escrow account in the United States for the purpose of investor
relationship activities.


21




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





4.
            ACCOUNTS
      RECEIVABLE





For
natural gas sales, it is due when the gas is sold. Most of residential customers
are settled by prepayments with debit cards, while industrial customers are
billed and paid according to the contract terms from 10 days to one
month.





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





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.





Accounts Receivable9/30/2010
                      
                      
                      12/31/2009Gross
      accounts receivable
                      
                      $
                      6,491,439
                      
                      
                      $
                      5,087,484Allowance
      for bad debt
                      
                      
                      (64,914
                      )
                      
                      
                      (50,875
                      )Net
      accounts receivable
                      
                      $
                      6,426,524
                      
                      
                      $
                      5,036,609





Allowance for Bad Debt9/30/2010
                      
                      
                      12/31/2009Beginning
      balance
                      
                      $
                      50,875
                      
                      
                      $
                      35,794Addition
                      
                      
                      14,039
                      
                      
                      
                      15,081Reversal
                      
                      
                      -
                      
                      
                      
                      -Ending
      balance
                      
                      $
                      64,914
                      
                      
                      $
                      50,875




22




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





Accounts Receivable Aging
      Report9/30/2010
                    
                    
                    12/31/2009<30
      Days
                    
                    $
                    4,072,606
                    
                    
                    $
                    3,639,71230-60
      Days
                    
                    
                    105,145
                    
                    
                    
                    276,00460-90
      Days
                    
                    
                    73,445
                    
                    
                    
                    118,70490-180
      Days
                    
                    
                    647,911
                    
                    
                    
                    422,179180-360
      Days
                    
                    
                    1,166,794
                    
                    
                    
                    446,515>360
      Days
                    
                    
                    425,538
                    
                    
                    
                    184,370Total
                    
                    $
                    6,491,439
                    
                    
                    $
                    5,087,484





The
following are the ten most significant accounts receivable at September 30,
2010:





Jiangsu
      Zhonghuang Real Estate Co., Ltd
                    
                    $
                    674,009Baishan
      Huixin Real Estate Co., Ltd
                    
                    
                    619,085Hebei
      Zhonggang Steel, Ltd.
                    
                    
                    610,489Baishan
      Xingda Real Estate Co., Ltd.
                    
                    
                    425,576Baishan
      Yongsheng Real Estate Co., Ltd.
                    
                    
                    356,784Baishan
      Lixia Real Estate Co., Ltd.
                    
                    
                    326,072Jiangsu
      Zhongzheng Zhiye Ltd.
                    
                    
                    265,126Shengcheng
      Real Estate Co., Ltd.
                    
                    
                    214,701Jiangshu
      Shouyi Zhiye Co., Ltd.
                    
                    
                    196,677Hebei
      Haitian Real Estate Co., Ltd.
                    
                    
                    189,683Total
                    
                    $
                    3,878,202





5.
            INVESTMENT





Ref.
                              
                              
                              
                              9/30/2010
                              
                              
                              12/31/2009(1)
                              
                              Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
                              
                              $
                              5,400,731
                              
                              
                              $
                              5,290,855(2)
                              
                              Qujing
      Gas Co., Ltd.
                              
                              
                              1,746,764
                              
                              
                              
                              1,711,227(3)
                              
                              China
      Construction Bank
                              
                              
                              29,859
                              
                              
                              
                              29,251Total
                              
                              $
                              7,177,354
                              
                              
                              $
                              7,031,333





(1).
            The
      Company invested $1,642,152 (RMB 13,465,648) on Xiangke Oil Gas in the
      acquisition of 40% equity position. The $5,400,731 investment as of
      September 30, 2010 consisted of principal and accumulated post-acquisition
      investment income attributed to Xiangke Oil Gas’ prior years operation
      results.





The
following tabulation presented the condensed balance sheets and statements of
income ofXiangke Oil
Gas as of and for the year ended December 31, 2009.


23




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.Condensed
      Balance Sheets
                                                  
                                                  Condensed
      Statements of Income12/31/2009
                                                  
                                                  
                                                  
                                                  12/31/2009AssetsCurrent
      Assets
                                                  
                                                  $
                                                  6,135,845
                                                  
                                                  Revenue
                                                  
                                                  $
                                                  7,379,777Non-Current
      Assets
                                                  
                                                  
                                                  19,672,751
                                                  
                                                  Cost
      of revenue
                                                  
                                                  
                                                  (3,819,923
                                                  )Total
      Assets
                                                  
                                                  
                                                  25,808,596
                                                  
                                                  Gross
      profit
                                                  
                                                  
                                                  3,559,854Liabilities
                                                  
                                                  
                                                  
                                                  
                                                  Operating
      expenses
                                                  
                                                  
                                                  (1,951,894
                                                  )Current
      Liabilities
                                                  
                                                  
                                                  11,267,927
                                                  
                                                  Other
      expenses
                                                  
                                                  
                                                  (47,251
                                                  )Total
      Liabilities
                                                  
                                                  
                                                  11,267,927
                                                  
                                                  Earnings
      before tax
                                                  
                                                  
                                                  1,560,709Net Assets
                                                  
                                                  
                                                  14,540,669
                                                  
                                                  Income
      tax
                                                  
                                                  
                                                  (248,259
                                                  )Total Liabilities & Net
      Assets
                                                  
                                                  $
                                                  25,808,596
                                                  
                                                  Net
      income
                                                  
                                                  $
                                                  1,312,450





(2).
            Along
      with two local partners in Qujing city, the second largest city in Yunnan
      province of P.R.C, the Company established Qujing Gas Co., Ltd. with
      registered capital of $4,387,761 (RMB 30,000,000). The Company’s
      investment of $1,746,764 (RMB 11,700,000) presented 39% equity ownership
      of Qujing Gas. Since Qujing Gas has not finished the required registration
      procedures with local government, there was no business activity during
      the first three quarters of 2010.





(3).
            The
      investment of $29,859 (RMB 200,000) with China Construction Bank was a
      long-term investment fund.





6.
            PROPERTY, PLANT AND
      EQUIPMENT





Property,
Plant, and Equipment consisted of the followings at September 30, 2010 and
December 31, 2009:





9/30/2010
                    
                    At Cost
                    
                    
                    Accumulated
                      Depreciation
                    
                    
                    NetGas
      Pipelines
                    
                    $
                    45,268,608
                    
                    
                    $
                    2,934,933
                    
                    
                    $
                    42,333,675Motor
      Vehicles
                    
                    
                    5,901,486
                    
                    
                    
                    1,810,887
                    
                    
                    
                    4,090,599Machinery
      & Equipment
                    
                    
                    1,522,892
                    
                    
                    
                    336,200
                    
                    
                    
                    1,186,692Buildings
                    
                    
                    1,822,746
                    
                    
                    
                    274,947
                    
                    
                    
                    1,547,799Leasehold
      Improvements
                    
                    
                    82,752
                    
                    
                    
                    63,418
                    
                    
                    
                    19,334Office
      Equipment
                    
                    
                    253,388
                    
                    
                    
                    113,190
                    
                    
                    
                    140,198Total
                    
                    $
                    54,851,872
                    
                    
                    $
                    5,533,575
                    
                    
                    $
                    49,318,297




24




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





12/31/2009
                    
                    At Cost
                    
                    
                    Accumulated
                      Depreciation
                    
                    
                    NetGas
      Pipelines
                    
                    $
                    43,518,519
                    
                    
                    $
                    2,228,672
                    
                    
                    $
                    41,289,847Motor
      Vehicles
                    
                    
                    5,775,903
                    
                    
                    
                    1,506,012
                    
                    
                    
                    4,269,891Machinery
      & Equipment
                    
                    
                    1,482,599
                    
                    
                    
                    267,076
                    
                    
                    
                    1,215,523Buildings
                    
                    
                    1,005,517
                    
                    
                    
                    176,335
                    
                    
                    
                    829,182Leasehold
      Improvements
                    
                    
                    80,113
                    
                    
                    
                    59,409
                    
                    
                    
                    20,704Office
      Equipment
                    
                    
                    238,673
                    
                    
                    
                    91,809
                    
                    
                    
                    146,864Total
                    
                    $
                    52,101,324
                    
                    
                    $
                    4,329,313
                    
                    
                    $
                    47,772,011





Gas
pipelines purchased prior to 2008 were depreciated over their 25 years useful
lives. Starting from 2008, the Company purchased new quality of pipelines under
a 50 years warranty. The new gas pipelines were depreciated over their 50 years
useful lives.





Depreciation
expenses included in the consolidated statements of income for the nine months
and twelve months ended September 31, 2010 and December 31, 2009 were $1,204,262
and $1,179,860 respectively.





7.
            INTANGIBLE
      ASSETS





Intangible
assets consisted of the following at September 30, 2010 and December 31,
2009:





9/30/2010
                    
                    At Cost
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    NetLand
      Use Rights
                    
                    $
                    500,624
                    
                    
                    $
                    59,541
                    
                    
                    $
                    441,083Franchises
                    
                    
                    410,564
                    
                    
                    
                    380,394
                    
                    
                    
                    30,170Accounting
      Software
                    
                    
                    93,874
                    
                    
                    
                    33,860
                    
                    
                    
                    60,014Goodwill
                    
                    
                    1,717,080
                    
                    
                    
                    -
                    
                    
                    
                    1,717,080$
                    2,722,142
                    
                    
                    $
                    473,795
                    
                    
                    $
                    2,248,347




25




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





12/31/2009
                    
                    At Cost
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    NetLand
      Use rights
                    
                    $
                    543,117
                    
                    
                    $
                    52,318
                    
                    
                    $
                    490,799Franchises
                    
                    
                    402,211
                    
                    
                    
                    371,740
                    
                    
                    
                    30,471Accounting
      Software
                    
                    
                    38,858
                    
                    
                    
                    20,404
                    
                    
                    
                    18,454Goodwill
                    
                    
                    1,677,975
                    
                    
                    
                    -
                    
                    
                    
                    1,677,975$
                    2,662,160
                    
                    
                    $
                    444,462
                    
                    
                    $
                    2,217,699





The
Company operated 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 were the rights to develop sites in Anping and Jinzhou in China. They
were stated at cost less accumulated amortization.





Goodwill
was related to the acquisitions of Beijing Chenguang Gas, Yuxian Weiye Gas and
Guannan Weiye Gas. Management annually reviewed the carrying value of goodwill
using the sum of the discounted cash flows to determine if an impairment charge
is necessary. The Company has determined no impairment to goodwill as of
date.





8.
            LOANS





a. SHORT-TERM
BANK LOANS





Name of Bank
                            
                            Due Date
                            
                            Interest Rate
                            
                            
                            9/30/2010
                            
                            
                            12/31/2009Bank
      of Dalian - Beijing Branch
                            
                            12/24/2010
                            
                            
                            5.31
                            %
                            
                            $
                            2,985,921
                            
                            
                            $
                            2,925,174Total
                            
                            
                            
                            
                            
                            
                            
                            $
                            2,985,921
                            
                            
                            $
                            2,925,174





The loans
provided by Bank of Dalian were secured by Beijing Chenguang Gas, Ltd.’s
registered capital of $2,925,174 (RMB 20,000,000), CEO Mr. Liu Yuchuan’s and COO
Mr. Zhou Zhicheng’s properties, which have been appraised at total fair market
value of $933,254 (RMB 6,380,854).


26




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009





b.
LONG-TERM BANK LOANS





Name of Bank
                        
                        Due Date
                        
                        Interest Rate
                        
                        
                        9/30/2010
                        
                        
                        12/31/2009China
      Construction Bank - Zhongguancun Branch
                        
                        12/14/2011
                        
                        
                        5.94
                        %
                        
                        $
                        4,478,882
                        
                        
                        $
                        4,387,761China
      Development Bank - Beijing Branch
                        
                        12/24/2012
                        
                        
                        5.40
                        %
                        
                        
                        2,239,441
                        
                        
                        
                        2,193,880China
      Development Bank - Beijing Branch
                        
                        3/22/2013
                        
                        
                        5.40
                        %
                        
                        
                        2,239,441
                        
                        
                        
                        -Total
                        
                        
                        
                        
                        
                        
                        
                        $
                        8,957,764
                        
                        
                        $
                        6,581,641





The
Company obtained the loans from Construction Bank of China and China Development
Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd (the
“Guarantor”). The Guarantor guaranteed to the Banks the entire principal and
accrued interest. The Company pledged all of Beijing Zhongran Weiye Gas’
subsidiaries to the Guarantor and was required to pay 2% of the outstanding
loans as financial service to the guarantor per annum. Because the Company
lacked the favorable credit history to directly establish credit facility with
the banks, the pursuance of a credit collateralization from guarantor was a
financing solution of choice.





The loan
from China Development Bank was securitized by the CEO Mr. Liu Yuchuan’s
personal real property, which carried a $403,099 (RMB 2,700,000) loan mortgage.
Because the bank required the mortgage to be settled before it collateralized on
it, the Company paid the mortgage on behalf of the CEO. This receivable was
interest free. Mr. Liu Yuchuan was required to make the entire principle payment
in 30 months.





9.
            OTHER
      PAYABLES





(a).       
     Current other payables consisted of the following
at September 30, 2010 and December 31, 2009:





Ref.
                    
                    
                    9/30/2010
                    
                    
                    12/31/2009(1)
                    Amount
      due to Employees
                    
                    $
                    562,521
                    
                    
                    $
                    1,219,131(2)
                    Tax
      Payable
                    
                    
                    430,005
                    
                    
                    
                    695,890(3)
                    Payables
      to Subcontractors
                    
                    
                    1,930,045
                    
                    
                    
                    2,247,036(4)
                    Payable
      outstanding for the acquisition of Baishan Gas Co., Ltd.
                    
                    
                    -
                    
                    
                    
                    2,177,514Total
                    
                    $
                    2,922,571
                    
                    
                    $
                    6,339,571


27




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009


And
for the three-month and nine-month periods ended September 30, 2010 and
2009


1.
            Amounts
      due to employees included accrual payroll, welfare payable, continued
      education training program cost and individual travel advance. They were
      all unsecured, interest free, and have no fixed repayment
      terms.





2.
            The
      tax payable consisted of value added tax, sales tax, income tax and local
      tax payables.





3.
            All
      the payables to subcontractors were unbilled
  liabilities.





4.
            The
      outstanding payment was related to the acquisition of Baishan Gas Co.,
      Ltd.’s assets on July 9, 2007.





(b).     
       Non-current other payables at September 30,
2010 and December 31, 2009:





Ref.
                    
                    
                    9/30/2010
                    
                    
                    12/31/2009(1)
                    Payable
      outstanding for the acquisition of Baishan Gas Co., Ltd.
                    
                    $
                    2,019,692
                    
                    
                    $
                    -Total
                    
                    $
                    2,019,692
                    
                    
                    $
                    -





1.
            After
      assessment of the installment, the Company does not believe the obligation
      to be satisfied within one year from September 30, 2010. Therefore, the
      Company reclassifies this payable to long-term
  liability.





10.
            CONVERTIBLE
      BONDS AND BOND WARRANTS





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





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





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





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


28




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009





Pledge Agreement and
Guaranty


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





Event of
Default


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





Redemption





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





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





The
convertible bonds payable, net consisted of the followings:





9/30/2010Ref.
                      
                      
                      5.3MBonds
                      
                      
                      692KBonds
                      
                      
                      Total(1)
                      Convertible
      Bonds Payable - principal
                      
                      $
                      5,349,982
                      
                      
                      $
                      692,984
                      
                      
                      $
                      6,042,966(2)
                      Less:
      Interest Discount - Warrants
                      
                      
                      (178,950
                      )
                      
                      
                      (44,417
                      )
                      
                      
                      (223,367
                      )(3)
                      Less:
      Interest Discount - Beneficial Conversion Feature
                      
                      
                      (869,270
                      )
                      
                      
                      (223,252
                      )
                      
                      
                      (1,092,522
                      )(4)
                      Less:
      Bond Discount - Issuance Cost
                      
                      
                      (503,766
                      )
                      
                      
                      (91,382
                      )
                      
                      
                      (595,148
                      )(5)
                      Accretion
      of Interest Discount - Warrants
                      
                      
                      40,230
                      
                      
                      
                      8,841
                      
                      
                      
                      49,071(6)
                      Accretion
      of Interest Discount - Beneficial Conversion Feature
                      
                      
                      869,270
                      
                      
                      
                      223,252
                      
                      
                      
                      1,092,522(7)
                      Accretion
      of Bond Discount - Issuance Cost
                      
                      
                      113,251
                      
                      
                      
                      18,189
                      
                      
                      
                      131,440(8)
                      Accretion
      of Interest Discount - Redemption
                      
                      
                      252,572
                      
                      
                      
                      28,966
                      
                      
                      
                      281,538(9)
                      Conversion of Convertible Bonds into Common
      Stock
                      
                      
                      (200,000
                      )
                      
                      
                      -
                      
                      
                      
                      (200,000
                      )Convertible Bonds Payable,net
                      
                      $
                      4,873,318
                      
                      
                      $
                      613,181
                      
                      
                      $
                      5,486,499


29




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009




And
for the three-month and nine-month periods ended September 30, 2010 and
2009




12/31/2009Ref.
                      
                      
                      5.3MBonds
                      
                      
                      692KBonds
                      
                      
                      Total(1)
                      Convertible
      Bonds Payable - principal
                      
                      $
                      5,349,982
                      
                      
                      $
                      692,984
                      
                      
                      $
                      6,042,966(2)
                      Less:
      Interest Discount - Warrants
                      
                      
                      (178,950
                      )
                      
                      
                      (44,417
                      )
                      
                      
                      (223,367
                      )(3)
                      Less:
      Interest Discount - Beneficial Conversion Feature
                      
                      
                      (869,270
                      )
                      
                      
                      (223,252
                      )
                      
                      
                      (1,092,522
                      )(4)
                      Less:
      Bond Discount - Issuance Cost
                      
                      
                      (503,766
                      )
                      
                      
                      (91,382
                      )
                      
                      
                      (595,148
                      )(5)
                      Accretion
      of Interest Discount - Warrants
                      
                      
                      3,804
                      
                      
                      
                      236
                      
                      
                      
                      4,040(6)
                      Accretion
      of Interest Discount - Beneficial Conversion Feature
                      
                      
                      144,878
                      
                      
                      
                      12,403
                      
                      
                      
                      157,281(7)
                      Accretion
      of Bond Discount - Issuance Cost
                      
                      
                      10,709
                      
                      
                      
                      485
                      
                      
                      
                      11,194(8)
                      Accretion of
      Interest Discount - Redemption
                      
                      
                      23,884
                      
                      
                      
                      773
                      
                      
                      
                      24,656Convertible Bonds Payable,net
                      
                      $
                      3,981,271
                      
                      
                      $
                      347,830
                      
                      
                      $
                      4,329,101





(1).
            The
      principal amounts listed above represent the face amount of the
      convertible notes.





(2).
            The
      proceeds were allocated between the convertible bonds and warrants based
      on their relative fair value. For more information pertaining the
      calculation of fair value of convertible bonds detachable warrants, see
      Note 11 Capital Stock.





(3).
            Because
      the conversion price of bonds is $0.62, which was lower than the fair
      market value of common stock at issuance day, beneficial conversion
      feature was applied.





(4).
            The
      issuance cost consisted of commission to placement agent and legal
      expense.





(5).
            The
      interest discount of warrants was amortized over the whole period applying
      effective annual interest rate.





(6).
            The
      bonds were convertible at the option of the holders into shares of common
      stock. However, Rule 144 minimum of six months holding period requirement
      for a resale of securities was required, therefore, the beneficial
      conversion feature was amortized over six months
  period.





(7).
            The
      debt issuance cost was amortized over 36 months period applying effective
      annual interest rate.





(8).
            Based
      on 15% per annum redemption rate, the redemption values were determined to
      be $1,123,496 and $145,527 for the $5,349,982 and $692,984 convertible
      bonds respectively.


30




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


(9).
            Principle
      of $200,000 was converted into 322,581 shares common stock on August 24,
      2010





Included
in interest expense of $2,182,773, was $362,578 convertible bonds coupon expense
and $1,357,398 presenting 62.19% non-cash flow amortization expense of
convertible bonds.





11.
            CAPITAL
      STOCK





The
authorized capital stock consists of (i) 250,000,000 shares of common stock, par
value $0.001 per share, of which 27,312,636 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 4,409,097
shares are issued and outstanding; and (c) series B-1 convertible preferred
stock, with 3,000,000 shares authorized and 95,418 shares are issued and
outstanding.





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





Common
Stock





The
Company is authorized to issue 250,000,000 shares of common stock, with a par
value of $0.001. There are 27,312,636 shares of common stock issued and
outstanding at September 30, 2010. 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.


31




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


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 September 30, 2010, the Company has no
shares of series A convertible preferred stock issued and outstanding, and has
4,409,097 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.


32




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


Financing
Transactions





On
September 7, 2006, the Company entered into a stock purchase transaction with
Vision Opportunity Master Fund, Ltd., SEI Private Trust Co., and Coronado
Capital Partners LP by issuing 2,509,782 shares of series B convertible
preferred stock for an aggregate of $6,876,800 in gross cash proceeds. Pursuant
to the Purchase Agreement, 2,509,782 Series A Warrants, 1,254,891 Series B
Warrants, 2,284,651 Series J Warrants, 2,284,651 Series C Warrants and 1,142,326
Series D Warrants were issued to the private placement investors.
Simultaneously, 635,822 shares of series B convertible preferred stock and
241,708 Series A Warrants were issued to the placement agent Kuhns’ Brother.
Among the gross proceeds of $6,876,800, $675,000 was used to purchased the
Shell, Dolce Ventures, Inc. (Legal acquirer, accounting acquiree), $673,786 was
reimbursed to the placement agent Kuhns’ Brother, and $426,978 was paid for
legal counsel and other related expenses. The Company received $5,101,036 net
proceeds.





On
October 20, 2006, the Company entered into another stock purchase transaction
with Vision Opportunity Master Fund, Ltd., Nite Capital LP, and Ijaz Malik by
issuing 877,664 shares of series B convertible preferred stock for an aggregate
of $2,404,800 in gross cash proceeds. Pursuant to the Purchase Agreement,
877,664 Series A Warrants, 438,833 Series B Warrants, 798,938 Series J Warrants,
798,938 Series C Warrants and 399,469 Series D Warrants were issued to the
private placement investors. Simultaneously, $235,000 of gross proceeds were
reimbursed to the private placement agent and $10,000 of gross proceeds were
paid to transfer agent respectively. The Company received $2,159,800 net
proceeds.





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.





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.


33




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


FinancialTransactions9/7/2006
                
                
                10/20/2006
                
                
                5/15/2007
                
                
                9/7/2007Gross
      proceeds
                
                $
                6,876,800
                
                
                $
                2,404,800
                
                
                $
                3,000,000
                
                
                $
                18,766,700Used
      to Purchase Shell
                
                
                (675,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -Commissions
      to Placement Agent
                
                
                (673,786
                )
                
                
                (235,000
                )
                
                
                (265,867
                )
                
                
                (1,241,805
                )Legal
      Counsel & Other Related Expenses
                
                
                (426,978
                )
                
                
                -
                
                
                
                (146,374
                )
                
                
                (232,028
                )Paid
      to Transfer Agent
                
                
                -
                
                
                
                (10,000
                )
                
                
                -
                
                
                
                -Used
      to Purchase Warrants A & B
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,500,000
                )Net
      proceeds
                
                $
                5,101,036
                
                
                $
                2,159,800
                
                
                $
                2,587,759
                
                
                $
                13,792,867





The
following table depicts the issued and outstanding shares of Common Stock,
Preferred Stock, and Warrants at September 30, 2010.





Authorized Shares
                  
                  
                  Shares issued and outstandingCommon
      Stock
                  
                  
                  250,000,000
                  
                  
                  
                  27,312,636Convertible
      Preferred Stock A
                  
                  
                  10,000,000
                  
                  
                  
                  -Convertible
      Preferred Stock B
                  
                  
                  5,000,000
                  
                  
                  
                  4,409,097Convertible
      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
      G Warrants
                      
                      $
                      3.84
                      
                      48
      Months
                      
                      9/6/2011
                      
                      
                      109,489
                      
                      
                      $
                      0.44IR
      CCG Elite’s Option
                      
                      $
                      3.00
                      
                      48
      Months
                      
                      11/1/2010
                      
                      
                      100,000
                      
                      
                      $
                      0.925.3
      M Convertible Bonds Detachable Warrants
                      
                      $
                      0.744
                      
                      36
      Months
                      
                      11/30/2012
                      
                      
                      3,451,601
                      
                      
                      $
                      0.05692K
      Convertible Bonds Detachable Warrants
                      
                      $
                      0.744
                      
                      36
      Months
                      
                      12/23/2012
                      
                      
                      447,086
                      
                      
                      $
                      0.11





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




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


34


Sino
Gas International Holdings, Inc.
  Notes
to Consolidated Financial Statements
  As
of September 30, 2010 and December 31, 2009
  And
for the three-month and nine-month periods ended September 30, 2010 and
2009




Warrants A
                  
                  
                  Warrants C
                  
                  
                  Warrants
                    G
                  
                  
                  CCG Elite’s
                    Option
                  
                  
                  5.3M CB
                    Warrants
                  
                  
                  692K CB
                    WarrantsWeighted-average
      fair value of warrants
                  
                  $
                  0.70
                  
                  
                  $
                  0.81
                  
                  
                  $
                  0.44
                  
                  
                  $
                  0.92
                  
                  
                  $
                  0.05
                  
                  
                  $
                  0.11Strike
      price
                  
                  $
                  3.84
                  
                  
                  $
                  3.38
                  
                  
                  $
                  3.84
                  
                  
                  $
                  3.00
                  
                  
                  $
                  0.744
                  
                  
                  $
                  0.744Risk-free
      interest rate
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  1.12
                  %
                  
                  
                  1.51
                  %Expected
      volatility
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  12.84
                  %
                  
                  
                  12.84
                  %Years
      to maturity
                  
                  
                  5.00
                  
                  
                  
                  5.00
                  
                  
                  
                  4.00
                  
                  
                  
                  4.00
                  
                  
                  
                  3.00
                  
                  
                  
                  3.00





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


35




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009




Total
Capitalization





The
following table depicts an analysis of total capitalization for the issuance of
Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional
Paid in Capital at September 30, 2010:





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
                  
                  
                  
                  46.33
                  %Minority
      Investor
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,428,551
                  
                  
                  
                  3,428
                  
                  
                  
                  747,457
                  
                  
                  
                  12.56
                  %Private
      Placement - Investor
                  
                  
                  4,409,097
                  
                  
                  
                  4,410
                  
                  
                  
                  95,418
                  
                  
                  
                  95
                  
                  
                  
                  11,230,423
                  
                  
                  
                  11,230
                  
                  
                  
                  23,850,383
                  
                  
                  
                  41.12
                  %Beneficial
      Conversion Feature
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,094,814
                  
                  
                  
                  -4,409,097
                  
                  
                  $
                  4,410
                  
                  
                  
                  95,418
                  
                  
                  $
                  95
                  
                  
                  
                  27,312,636
                  
                  
                  $
                  27,312
                  
                  
                  
                  36,757,516
                  
                  
                  
                  100
                  %


36




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


12.
            INCOME
      TAX





January
1, 2008, the PRC government implemented a new income tax laws for all
enterprises. The new law imposed a 25% income tax rate on Company’s subsidiary
Beijing Gas. As such, Beijing Gas provided a $778,480 income tax expense for the
year ended December 31, 2008. Subsequently, in 2009, the Beijing was granted by
the PRC government a 10% income tax exemption. The exemption is the result of
Beijing Gas new recognition as a high-tech green energy enterprise. In
accordance with this exemption, Beijing Gas will enjoy a 15% tax rate.
Consequently, the PRC government has refunded $229,527, (a 10% income tax
provision) to Beijing Gas from its 2008 payment. The Company has accounted for
this transaction as a reduction of its 2009 income tax expense.





The
following table details the difference between the actual tax provisions and the
amounts of tax exemption obtained from PRC government for the nine month periods
ended September 30, 2010 and 2009 respectively.





9/30/2010
                  
                  
                  9/30/2009Provision
      for income tax - PRC subsidiaries
                  
                  $
                  839,007
                  
                  
                  $
                  773,580Tax
      exemption - granted by PRC government
                  
                  
                  -
                  
                  
                  
                  (193,197
                  )Income
      tax
                  
                  $
                  839,007
                  
                  
                  $
                  580,383





Income
before taxes and provision for taxes consisted of the following for the nine
month periods ended September 30, 2010 and 2009:





9/30/2010
                  
                  
                  9/30/2009Income
      (loss) before taxes:US
                  
                  $
                  (2,051,379
                  )
                  
                  $
                  (184,143
                  )BVI
                  
                  
                  (214,268
                  )
                  
                  
                  (115,890
                  )PRC
                  
                  
                  3,781,323
                  
                  
                  
                  2,855,823Total
      income before tax
                  
                  
                  1,515,676
                  
                  
                  
                  2,555,790Provision
      for taxes:US
      Federal
                  
                  
                  -
                  
                  
                  
                  -US
      State
                  
                  
                  -
                  
                  
                  
                  -PRC
                  
                  
                  839,007
                  
                  
                  
                  580,383Total
      provision for taxes
                  
                  $
                  839,007
                  
                  
                  $
                  580,383Effective
      tax rate
                  
                  
                  55.36
                  %
                  
                  
                  22.71
                  %





37




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


13.
            SEGMENT
      INFORMATION





The
Company has contracted with customers usually in two revenue segments: the
construction and installation of gas facilities and 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 are distinct from each other
for the relevant cost-and-revenue to be incurred. Hence, separate calculation
and subsequent payment of fees for each respective business without any
interdependence are made 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.





Financial
Position Segment Report


As
of September 30, 2010





Gas Distribution
                          
                          
                          Gas Pipeline
                            Installation
                          
                          
                          Shell, BVIs, &
                            Eliminations
                          
                          
                          TotalAssetsCurrent
      Assets
                          
                          $
                          11,794,262
                          
                          
                          $
                          6,427,918
                          
                          
                          $
                          1,144,103
                          
                          
                          $
                          19,366,283Non-Current
      Assets
                          
                          
                          27,223,468
                          
                          
                          
                          49,950,963
                          
                          
                          
                          -
                          
                          
                          
                          77,174,431Total
      Assets
                          
                          $
                          39,017,730
                          
                          
                          $
                          56,378,881
                          
                          
                          $
                          1,144,103
                          
                          
                          $
                          96,540,714LiabilitiesCurrent
      Liabilities
                          
                          $
                          1,783,135
                          
                          
                          $
                          12,656,802
                          
                          
                          $
                          92,468
                          
                          
                          $
                          14,532,405Non-current
      Liabilities
                          
                          
                          2,033,072
                          
                          
                          
                          14,430,883
                          
                          
                          
                          -
                          
                          
                          
                          16,463,955Total
      Liabilities
                          
                          
                          3,816,207
                          
                          
                          
                          27,087,685
                          
                          
                          
                          92,468
                          
                          
                          
                          30,996,360Net Assets
                          
                          $
                          35,201,523
                          
                          
                          $
                          29,291,196
                          
                          
                          $
                          1,051,635
                          
                          
                          $
                          65,544,354Liabilities & Equities
                          
                          $
                          39,017,730
                          
                          
                          $
                          56,378,881
                          
                          
                          $
                          1,144,103
                          
                          
                          $
                          96,540,714


38




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


Operation
Result Segment Report


For
the nine-month ended September 30, 2010





Gas Distribution
                
                
                Gas Pipeline
                  Installation
                
                
                Shell, BVIs, &
                  Eliminations
                
                
                TotalSales
      Revenue
                
                $
                17,798,043
                
                
                $
                9,700,002
                
                
                $
                (6,526,825
                )
                
                $
                20,971,220Cost
      of Revenue
                
                
                (16,908,410
                )
                
                
                (3,385,333
                )
                
                
                6,526,825
                
                
                
                (13,766,918
                )Gross
      Profit
                
                
                889,633
                
                
                
                6,314,669
                
                
                
                -
                
                
                
                7,204,302Operating
      Expense
                
                
                (365,303
                )
                
                
                (2,592,941
                )
                
                
                (545,966
                )
                
                
                (3,504,210
                )Operating
      Income/(Loss)
                
                
                524,330
                
                
                
                3,721,728
                
                
                
                (545,966
                )
                
                
                3,700,092Other
      Income/(Loss)
                
                
                (269,746
                )
                
                
                (194,990
                )
                
                
                (1,719,680
                )
                
                
                (2,184,416
                )Earnings
      before tax
                
                
                254,584
                
                
                
                3,526,738
                
                
                
                (2,265,646
                )
                
                
                1,515,676Income
      tax
                
                
                (56,488
                )
                
                
                (782,520
                )
                
                
                -
                
                
                
                (839,007
                )Gain/(loss)
      from discontinued operation, net of tax
                
                
                -
                
                
                
                -
                
                
                
                (439
                )
                
                
                (439
                )Net
      Income
                
                $
                198,097
                
                
                $
                2,744,218
                
                
                $
                (2,266,085
                )
                
                $
                676,230





Financial
Position Segment Report


As
of December 31, 2009





Gas Distribution
                        
                        
                        Gas Pipeline
                          Installation
                        
                        
                        Shell, BVIs, &
                          Eliminations
                        
                        
                        TotalAssetsCurrent
      Assets
                        
                        $
                        12,361,628
                        
                        
                        $
                        8,090,196
                        
                        
                        $
                        2,247,402
                        
                        
                        $
                        22,699,226Non-Current
      Assets
                        
                        
                        27,839,832
                        
                        
                        
                        42,538,606
                        
                        
                        
                        -
                        
                        
                        
                        70,378,438Total
      Assets
                        
                        
                        40,201,460
                        
                        
                        
                        50,628,802
                        
                        
                        
                        2,247,402
                        
                        
                        
                        93,077,664LiabilitiesCurrent
      Liabilities
                        
                        
                        1,695,239
                        
                        
                        
                        16,762,395
                        
                        
                        
                        441,426
                        
                        
                        
                        18,899,060Non-current
      Liabilities
                        
                        
                        1,002,095
                        
                        
                        
                        9,908,647
                        
                        
                        
                        -
                        
                        
                        
                        10,910,742Total
      Liabilities
                        
                        
                        2,697,334
                        
                        
                        
                        26,671,042
                        
                        
                        
                        441,426
                        
                        
                        
                        29,809,802Net Assets
                        
                        
                        37,504,126
                        
                        
                        
                        23,957,760
                        
                        
                        
                        1,805,976
                        
                        
                        
                        63,267,862Liabilities & Equities
                        
                        $
                        40,201,460
                        
                        
                        $
                        50,628,802
                        
                        
                        $
                        2,247,402
                        
                        
                        $
                        93,077,664


39




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


Operation
Result Segment Report


For
the nine-month ended September 30, 2009





Gas
                  Distribution
                
                
                Gas Pipeline
                  Installation
                
                
                Shell, BVIs, &
                  Eliminations
                
                
                TotalSales
      Revenue
                
                $
                15,265,503
                
                
                $
                7,494,485
                
                
                $
                (3,402,055
                )
                
                $
                19,357,933Cost
      of Revenue
                
                
                (14,803,848
                )
                
                
                (2,672,673
                )
                
                
                3,402,055
                
                
                
                (14,074,466
                )Gross
      Profit
                
                
                461,655
                
                
                
                4,821,811
                
                
                
                -
                
                
                
                5,283,466Operating
      Expense
                
                
                (201,936
                )
                
                
                (2,109,141
                )
                
                
                (300,507
                )
                
                
                (2,611,584
                )Operating
      Income/(Loss)
                
                
                259,719
                
                
                
                2,712,670
                
                
                
                (300,507
                )
                
                
                2,671,882Other
      Income/(Loss)
                
                
                (10,185
                )
                
                
                (106,381
                )
                
                
                474
                
                
                
                (116,092
                )Earnings
      before tax
                
                
                249,534
                
                
                
                2,606,289
                
                
                
                (300,033
                )
                
                
                2,555,790Income
      tax
                
                
                (50,712
                )
                
                
                (529,671
                )
                
                
                -
                
                
                
                (580,383
                )Net
      Income
                
                $
                198,822
                
                
                $
                2,076,618
                
                
                $
                (300,033
                )
                
                $
                1,975,407





The
Company's operations are located in the PRC. All revenue is from customers in
the PRC. All of the Company’s assets are located in the PRC. Sales of natural
gas and gas pipeline construction are carried out in the PRC. Accordingly, no
analysis of the Company's sales and assets by geographical market is
presented.




No other
measures of segment profit or loss and assets have been provided or reviewed by
the company's chief operating decision maker.


40




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


14.
            EARNINGS
      PER SHARE





Components
of basic and diluted earnings per share were as follows:





Three Months Ended
                      
                      
                      Nine Months EndedRef
                      
                      9/30/2010
                      
                      
                      9/30/2009
                      
                      
                      9/30/2010
                      
                      
                      9/30/2009Net
      Income
                      
                      
                      
                      $
                      1,025,418
                      
                      
                      $
                      1,208,636
                      
                      
                      $
                      676,230
                      
                      
                      $
                      1,975,407Preferred
      Dividends
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Constructive
      Preferred Dividends
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Income
      Available to Common Stockholders for Basic EPS
                      
                      
                      
                      
                      1,025,418
                      
                      
                      
                      1,208,636
                      
                      
                      
                      676,230
                      
                      
                      
                      1,975,407Interest Expense for
      Convertible Bonds, net
      of tax
                      
                      
                      
                      
                      268,308
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Income
      Available to Common Stockholders for Diluted EPS
                      
                      
                      
                      $
                      1,293,727
                      
                      
                      $
                      1,208,636
                      
                      
                      $
                      676,230
                      
                      
                      $
                      1,975,407Original
      Shares
                      
                      
                      
                      
                      26,769,313
                      
                      
                      
                      25,269,313
                      
                      
                      
                      26,769,313
                      
                      
                      
                      25,269,313Addition
      to Common Stock
                      
                      
                      
                      
                      321,457
                      
                      
                      
                      1,500,000
                      
                      
                      
                      130,600
                      
                      
                      
                      788,889Basic
      Weighted Average Shares Outstanding
                      
                      
                      
                      
                      27,090,770
                      
                      
                      
                      26,769,313
                      
                      
                      
                      26,899,913
                      
                      
                      
                      26,058,202Potentially
      Dilutive Securities:Addition
      to Common Stock from Conversion of Preferred Stock B
                      
                      (1)
                      
                      
                      -
                      
                      
                      
                      4,579,839
                      
                      
                      
                      -
                      
                      
                      
                      4,579,839Addition
      to Common Stock from Conversion of Preferred Stock B-1
                      
                      (2)
                      
                      
                      -
                      
                      
                      
                      95,418
                      
                      
                      
                      -
                      
                      
                      
                      95,418Addition
      to Common Stock from Conversion of Convertible Bonds
                      
                      (3)
                      
                      
                      9,424,139
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Addition
      to Common Stock from Exercise of Warrants
                      
                      (4)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Diluted
      Weighted Average Shares Outstanding
                      
                      
                      
                      
                      36,514,909
                      
                      
                      
                      31,444,570
                      
                      
                      
                      26,899,913
                      
                      
                      
                      30,733,459Earnings
      Per Share-   
      Basic
                      
                      
                      
                      $
                      0.038
                      
                      
                      $
                      0.045
                      
                      
                      $
                      0.025
                      
                      
                      $
                      0.076-   
      Diluted
                      
                      
                      
                      $
                      0.035
                      
                      
                      $
                      0.038
                      
                      
                      $
                      0.025
                      
                      
                      $
                      0.064Weighted
      Average Shares Outstanding-   
      Basic
                      
                      
                      
                      
                      27,090,770
                      
                      
                      
                      26,769,313
                      
                      
                      
                      26,899,913
                      
                      
                      
                      26,058,202-   
      Diluted
                      
                      
                      
                      
                      36,514,909
                      
                      
                      
                      31,444,570
                      
                      
                      
                      26,899,913
                      
                      
                      
                      30,733,459


41




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


(1).
            The
      application of conversions’ of preferred stock B to common stock was
      anti-dilutive for the three months and nine months ended September 30,
      2010.





(2).
            The
      application of conversions of preferred stock B-1 to common stock was
      anti-dilutive for the three months and nine months ended September 30,
      2010.





(3).
            The
      average price of the Company’s common stock was $0.71 for the nine months
      ended September 30, 2010, which was higher than the conversion price $0.62
      of the convertible bonds; however the conversion of the convertible bonds
      to common stock would have been anti-dilutive; therefore, they have been
      excluded from diluted earnings per
share.





(4).
            The
      exercise of warrants to common stock was anti-dilutive for the three
      months and nine months  ended September 30, 2010 and
      2009.





15.
            CONTINGENT
      LIABILITIES





a.
            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.





On May
26, 2009, the private placement investors led by Vision Opportunity Master Fund,
Ltd. waived the 2007 net income target application. The Company was exempt from
the issuance of 1.2 million shares of contingent common stock. Simultaneously,
1.5 million shares make good stock held in an escrow account were issued to the
private placement investor on May 8, 2009 as compensation for not attaining the
2008 net income target. A cost of $1,500, based on US$0.001 par value, was
debited to additional paid in capital account.





b.
            On
      September 14, 2009, the IRS of the United States charged the Company a
      $270,000 penalty for the failure to file timely Form 5471 on December 31,
      2007 tax return. However, the Company did not believe it should be subject
      to this liability because of the fact that the Company was only a holding
      company. It did not have any tax liability for the year 2007. The Company
      appealed the penalty by filing a protest letter to the IRS on February 12,
      2010. On September 28, 2010, the Company received a notice of
      determination letter from IRS to waive the
  penalty.





16.
            SHARE
      BASED COMPENSATION





For the
nine months ended September 30, 2010, the Company recorded an expense of $26,000
under the general and administrative account for the issuance of 50,000 common
shares at $0.52 per share on July 7, 2010. The shares were issued to investor
relation firm for services rendered in connection with the investor relationship
activities.


42




Sino
Gas International Holdings, Inc.




Notes
to Consolidated Financial Statements




As
of September 30, 2010 and December 31, 2009  And
for the three-month and nine-month periods ended September 30, 2010 and
2009


17.
            DISCONTINUED
      OPERATION





The
Company closed operation of its wholly-owned subsidiary Guyuan Gas Co., Ltd. in
July 2010. The Company has accounted for the disposition of the assets of
discontinued operation in accordance with SFAS 144 (FASB ASC360), “Accounting
for the Impairment or Disposal of Long-Lived Assets”. A loss of $439 was
recorded in the Company’s statement of operations for the nine months ended
September 30, 2010. The following table is a summary of Guyuan Weiye Gas Co.,
Ltd.’s financial position and result of operations as of and for the nine months
ended September 30, 2010.





Guyuan
      Weiye Gas Co., Ltd.Condensed
      Balance Sheet
                              
                              Condensed
      Statement of IncomeAssets
                              
                              
                              
                              Sales
      revenue
                              
                              $
                              -Current
      assets
                              
                              $
                              28,814
                              
                              Cost
      of sales
                              
                              
                              -Non-current
      assets
                              
                              
                              -
                              
                              Gross
      Profit
                              
                              
                              -Total
      assets
                              
                              
                              28,814Operating
      Income
                              
                              
                              -LiabilitiesCurrent
      liabilities
                              
                              
                              -
                              
                              Income
      tax
                              
                              
                              -Total
      liabilities
                              
                              
                              -
                              
                              Loss
      from discontinued operation, net of tax
                              
                              
                              (439
                              )Net Assets
                              
                              $
                              28,814
                              
                              Net
      Income
                              
                              $
                              (439
                              )


43


Item 2.   Management’s Discussion and Analysis
or Plan of Operation





The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form 10-Q. 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 linked 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, which 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, in
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, had been affected in 2008. Starting
from 2008, in response to a slowdown in its economy in that year, the Chinese
government implemented a wide range of initiatives that prioritized the boosting
of the overall economy. The key components of the central government’s spending
are infrastructure and clean energy. This stimulus aided in the continuity of
increase of both connection fees and gas sales in our business. We saw signs of
recovery of the real estate market in China at the beginning of 2009, and
experienced the increased activities in the third and fourthquarters
of 2009. Starting in April 2010, the Chinese government issued new policies to
curb the rise of housing prices in certain cities.  The new
initiatives from the government have resulted in lower transaction volumes
in recent months.





Even with
the ups and downs of the Chinese real estate market in the past two years, we
believe that the future growth trend of the real estate market will not change
because of the continuous urbanization in China. Moreover, the Chinese
government continues to strongly support the use of clean energy, particularly
natural gas, at both the national and local government levels.





There are
three pillars in the Chinese economy: domestic consumption (both private and
public), net exports, and domestic investment. The Chinese Government’s RMB 4
trillion stimulus package has made great impacts on China's domestic production
and investments in the past year. In 2009, GDP growth rebounded to 7.9 percent
in the second quarter from 6.1 percent in the first quarter, which represented a
10-year low. In the third quarter and fourth quarter, China’s economic growth
accelerated to 9.1 percent and 10.7 percent, respectively. China GDP grew by 8.7
percent in 2009, exceeding the targeted 8%. The GDP growth remains strong in
2010. China's GDP grew 11.9% and 10.3% in the
first and second quarters of 2010, respectively, from the same periods of 2009.
China’s GDP increased by 9.6% during the third quarter of
2010.





Our gas
users are composed of industrial and residential users. Gas sales from
residential users are much less affected by economic and industrial factors and
would maintain stable growth in the future, due to the increasing pool of our
residential customers. Gas sales from industrial users are subject to the
operating performance of the end industrial user. As we develop into more
cities, we expect to add more industrial users in the coming year if capital
requirements are available.





Material
Opportunities





The gas
distribution market is quite fragmented in the small (population less than
300,000)- to medium (population between 300,000 to 1,000,000)-sized cities. We
are exploring potential project targets. The size of the projects varies from
small-sized cities to medium-sized cities. Many small-sized city markets are
still untapped or undeveloped. The development of these markets
is  considered major growth components of the Company.





Most
medium-sized and large-sized cities have already been developed by large
distributors or are still operated by state-owned companies. Acquisition
opportunities exist for those still run by state-owned companies, as the central
government encourages suppliers to turn them into privately-owned companies. The
acquisition of these markets would have material impact on the Company,
increasing the Company’s assets and revenues significantly. The Company intends
to raise money for accretive acquisitions when they become
available.


44





Material
Challenges





Numerous
small- to medium-sized cities left undeveloped, but competition is growing
as there are many small new players in the market attracted by the profitability
and growth potential of the business. In addition, we are also facing
competition from stronger competitors, as large-sized city markets are becoming
saturated and our competitors are beginning to expand into smaller
cities.





We are
facing 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.





In
addition, potential users in small- and medium-sized cities need to be educated
in the benefits of natural gas. This is especially true for new markets where
there is no use of natural gas. Small cities where residents depend more on coal
tend to be more reluctant in the use of new energies than large
cities.





China’s
energy market is highly regulated by the government with regard to purchase
price and sale price of natural gas. Whenever there is an adjustment to purchase
price by the government, gas distributors would increase the sale price
correspondingly, subject to a public hearing and government approval. The
increase of natural gas prices in China is lagging behind that in the
international markets. The Chinese government has seldom adjusted natural gas
and we cannot rule out the possibilities of an increase of natural gas prices by
the government in the future. Although we can adjust the sale price accordingly
after the increase of purchase prices, passing the increase to end users, this
adjustment would make natural gas more expensive as compared to other
alternative energies. Thus, this increase of price may adversely affect 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 dependence on connection fees, the Company is exploring
opportunities to diversify its business by expanding into related areas, such as
pipeline and gas station businesses. However, we do not expect to develop into
these areas on a 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. Without the necessary capital, the Company would be
constrained by inadequate capital when developing into larger cities or engaging
in merger and acquisition activities, and would require additional fundraising
to finance such business activities.





Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009




During
the three months ended September 30, 2010, net revenues were $8,097,341, representing an increase of15.86% from
the same period of last year.  Gross profit for the three months ended
September 30, 2010 was $3,173,903,
representing an increase of 27.80% from the
same period of last year.  Our operating income for the three months
ended September 30, 2010 was $1,856,726, representing an increase of 20.68% from the same period of
2009.





For the 3 months ended
                  September30,2010
                
                
                2009
                
                
                ChangeUS$
                
                
                US$Net
      Revenues
                
                
                8,097,341
                
                
                
                6,988,621
                
                
                
                15.86
                %Gross
      Profit
                
                
                3,173,903
                
                
                
                2,483,551
                
                
                
                27.80
                %Operating
      Income
                
                
                1,856,726
                
                
                
                1,538,616
                
                
                
                20.68
                %Net
      Income
                
                
                1,025,418
                
                
                
                1,208,636
                
                
                
                -15.16
                %Gross
      Margin
                
                
                39.20
                %
                
                
                35.54
                %
                
                
                10.30
                %Net
      Margin
                
                
                12.66
                %
                
                
                17.29
                %


45





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 September30,
2010 were $8,097,341,
compared to $6,988,621 for the same period
in 2009, representing an increase of15.86%. The
increase was due to the increase of both gas sales and connection fees. During
this period, we connected 9,878 new
residential households to our gas distribution network, resulting in total
connection fees of $3,478,985.  Gas sales during the three
months ended September 30, 2010 were $4,618,335. In comparison, we connected 7,239 new
residential households to our gas distribution network for the same period in
2009, resulting in total connection fees of $3,339,462. Gas sales during the same period in
2009 were $3,646,312.


For the 3 months endedSeptember30,2010
                
                
                2009
                
                
                Change(In $ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Net
      Revenues
                
                
                8.10
                
                
                
                100
                %
                
                
                6.99
                
                
                
                100
                %
                
                
                15.86
                %Connection
      Fees
                
                
                3.48
                
                
                
                43
                %
                
                
                3.34
                
                
                
                48
                %
                
                
                4.09
                %Gas
      Sales
                
                
                4.62
                
                
                
                57
                %
                
                
                3.65
                
                
                
                52
                %
                
                
                26.66
                %





Connection
Fees





Connection
fees during the three months ended September30,
2010 were $3.48 million,
representing an increase of4.09% from the same period of 2009, accounting
for 43% of the total net revenue in
the three months ended September 30, 2010 as compared with approximately 48% of the
total net revenue for the same period in 2009. The source of connection fees was
mainly from the development of new residential users.





For the 3 months endedSeptember30,(in US$ millions)
                
                2010
                
                
                2009
                
                
                ChangeUS$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Connection
      Fees
                
                
                3.48
                
                
                
                100
                %
                
                
                3.34
                
                
                
                100
                %
                
                
                4.09
                %Residential
      Users
                
                
                3.48
                
                
                
                100
                %
                
                
                3.339
                
                
                
                99.91
                %Industrial
      Users
                
                
                0.00
                
                
                
                0
                %
                
                
                0.03
                
                
                
                0.09
                %




Gas
Sales





Gas sales
were $4.62 million during the three months ended September 30, 2010,
accounting for 57% of total net revenue for the three months ended
September 30, 2010, representing an increase
of26.66% over the same period of
2009. Gas sales to residential users increased 54.23% to $2.23 million
for the three months ended September 30,
2010 from $1.45 million in the same
period of 2009. Gas sales to industrial and commercial users increased8.48% to $2.39 million for the three months ended September
30, 2010 from $2.2 million in the same
period of 2009.


For the 3 months endedSeptember30,2010
                
                
                2009
                
                
                Change($ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Gas
      Sales
                
                
                4.62
                
                
                
                100
                %
                
                
                3.65
                
                
                
                100
                %
                
                
                26.66
                %Residential
      Users
                
                
                2.23
                
                
                
                48
                %
                
                
                1.45
                
                
                
                40
                %
                
                
                54.23
                %Industrial and
      Commercial Users
                
                
                2.39
                
                
                
                52
                %
                
                
                2.20
                
                
                
                60
                %
                
                
                8.48
                %




Cost
of Revenues





Cost of
revenues for the three months ended September 30, 2010, which includes cost of
connection and cost of gas sales, was $4.92
million, representing an increase of 9.29% from $4.51
million in the same period of 2009.


46





For the 3 months endedSeptember30,2010
                
                
                2009
                
                
                Change($ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Cost
      of Revenues
                
                
                4.92
                
                
                
                100
                %
                
                
                4.51
                
                
                
                100
                %
                
                
                9.29
                %Connection
      Cost
                
                
                0.76
                
                
                
                16
                %
                
                
                1.04
                
                
                
                23
                %
                
                
                -26.80
                %Gas
      Cost
                
                
                4.16
                
                
                
                84
                %
                
                
                3.46
                
                
                
                77
                %
                
                
                20.16
                %





Cost of
Connection





The cost
of connection decreased 26.80% to $0.76 million during the three months ended September
30, 2010 from $1.04 million for the same period in 2009.
During the three months ended September 30, 2010, we incurred lower costs of raw
materials, parts, and installation and maintenance fees as compared to the same
period of 2009.





Cost of
connection includes depreciation of major pipelines, the cost of courtyard
pipelines, valves, gas meters, and installation and maintenance
fees.





Cost of
Gas Sales





The cost
of gas sales increased20.16% to
$4.16 million during the three months
ended September 30, 2010 from $3.46 million for the same period in
2009. This increase in cost of gas sales is largely due to the increase of gas
sales during this quarter.





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





Gross
Profit





During
the three months ended September 30, 2010, gross profit was $3.17 million, representing an increase of
approximately 27.80% from the same period of 2009. Gross profit
from connection fees was $2.72 million for
the three months ended September 30, 2010, accounting for 86% of total gross profit. In comparison, gross
profit from connection fees was $2.3
million for the three months ended September 30, 2009, accounting for 93% of total gross profit for the three months
ended September 30, 2009. Gross profit from gas sales was $0.45 million for the three months ended September
30, 2010, accounting for 14% of total gross
profit, compared to $0.18 million,
accounting for 7% of total gross profit, in
the same period of 2009.





For the 3 months endedSeptember30,2010
                
                
                2009
                
                
                Change($ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Gross
      Profit
                
                
                3.17
                
                
                
                100
                %
                
                
                2.48
                
                
                
                100
                %
                
                
                27.80
                %Connection
                
                
                2.72
                
                
                
                86
                %
                
                
                2.30
                
                
                
                93
                %
                
                
                18.11
                %Gas
                
                
                0.45
                
                
                
                14
                %
                
                
                0.18
                
                
                
                7
                %
                
                
                148.63
                %





Gross
margin during the three months ended September 30, 2010 was 39.20%, compared to 35.54% during the same period in
2009.





Gross
margin for connection fees for the three months ended September 30, 2010
was 78.05%,
compared to 68.79% in the same period of
2009.





Gross
margin for sales of natural gas was 9.93% for the three months ended September 30,
2010, compared to 5.06% during the same
period of 2009.




Selling
and Marketing Expenses





Our
selling and marketing expenses in the three months ended September 30, 2010 were
$0.57
million, approximately 7.01% of our
net revenues, compared with $0.29 million or 4.13% of our net revenues in the same period of
2009.


47





General
and Administrative Expenses and Other Expenses





General
and administrative expenses were $0.75 million for the three months ended September
30, 2010, approximately 9.25% of our net
revenues, compared with $0.66 million, or approximately 9.39% of net revenues for the same period in
2009.





Operating
Income





The
operating income for the three months ended September 30, 2010 was $1.86 million, representing an increase
of 20.68%, compared to the operating
income of $1.54 million for the same
period of 2009.  This increase was driven by the increase of
sales and the improvement of gross margin from both connection fee
revenue and gas sales during this period.





Other
Income (Expense)





Other
expense was $0.44 million for the three months ended September
30, 2010, compared with other expense of $0.02 million
for the same period of 2009.  The significant increase was due to the
amortization costs of convertible bonds and interest expense of convertible
bonds. We completed a convertible debt financing in the last quarter of 2009,
which resulted in costs associated with the financing, such as interest
discount-warrants, beneficial conversion feature, and debt issuance cost.
Included in our interest expense of $436,233, was $120,859 of convertible bonds
coupon expense and $147,449 of non-cash
flow amortization expense of convertible bonds.





Income
tax





Income
tax was $0.40 million for the three months ended September
30, 2010, compared to $0.31 million for the
same period of 2009.





Net
Income





Net income for the three months ended September 30,
2010 was $1.03 million, compared with
net income of $1.21 million for the same
period of 2009.   Driven by the increase of sales, and improvement of
gross margin from both connection fee revenue and gas sales, operating
income achieved an improvement of 20.68% to
$1.86 million
compared to the operating income of $1.54
million for the same period of 2009.  However, the increase in
operating income was offset by the additions of amortization costs of
convertible bonds.  Excluding non-cash, non-operational items of
amortization expense of convertible bonds in the total of $0.15
million, our adjusted net income in the third quarter of 2010 would have been
$1.17 million.





Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009





During
the nine months ended September 30, 2010, our net revenues were $20,971,220, representing an increase
of 8.33% from the same period of 2009,
and gross profit was $7,204,302,
representing an increase of 36.36%
from the same period of 2009. During the nine months ended September 30,
2010, our operating income was $3,700,092,
representing a significant increase of 38.48% from the same period of
2009.





For the9 months ended
                  September 30,2010
                
                
                2009
                
                
                ChangeUS$
                
                
                US$
                
                
                %Net
      Revenues
                
                
                20,971,220
                
                
                
                19,357,933
                
                
                
                8.33
                %Gross
      Profit
                
                
                7,204,302
                
                
                
                5,283,466
                
                
                
                36.36
                %Operating
      Income
                
                
                3,700,092
                
                
                
                2,671,882
                
                
                
                38.48
                %Net
      Income
                
                
                676,230
                
                
                
                1,975,407
                
                
                
                -65.77
                %Gross
      Margin
                
                
                34.35
                %
                
                
                27.29
                %
                
                
                25.87
                %Net
      Margin
                
                
                3.22
                %
                
                
                10.20
                %




Net
Revenues





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





Total net
revenues for the nine months ended September 30, 2010 were $20,971,220, representing an increase of 8.33%, compared to $19,357,933 for the same period in 2009. The
increase was due to the increases of both gas sales and connection fee
revenue. During this period, we connected 23,572 new residential households to our gas
distribution network, resulting in total connection fees of $8,307,036. Gas sales during the nine months ended
September 30, 2010 were $12,664,183. In
comparison, we connected 17,452 new
residential households to our gas distribution network in the same period of
2009, resulting in total connection fees of $7,494,485. Gas sales during the same period
in 2009 were $11,863,448.


48





For the9months endedSeptember30,2010
                
                
                2009
                
                
                Change(In $ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Net
      Revenues
                
                
                20.97
                
                
                
                100
                %
                
                
                19.36
                
                
                
                100
                %
                
                
                8.33
                %Connection
      Fees
                
                
                8.31
                
                
                
                40
                %
                
                
                7.49
                
                
                
                39
                %
                
                
                10.84
                %Gas
      Sales
                
                
                12.66
                
                
                
                60
                %
                
                
                11.86
                
                
                
                61
                %
                
                
                6.75
                %





Our net
revenues for the nine months ended September 30, 2010 increased by 8.33%, which largely resulted from the following
factors:





1.
            Increase
      of connection fees from residential customers.  We were able to
      connect more residential households during the nine months ended September
      30, 2010 as compared to the same period of last
  year.





2.
            Increase
      of gas sales. Gas sales to residential users continued to grow
      significantly. The increase was partially offset by the decrease
      of sales to industrial users during this period. Lower sales from
      industrial users were due to the following factors: (1) The severe weather
      conditions in China affected the logistics of gas delivery in the first
      quarter of 2010, and the Chinese government prioritized the delivery gas
      to residential users during the severe weather during this period. (2)
      There were adjustments of production lines in two of our industrial users
      in the second quarter of 2010, and they were not back to operations
      until September 2010. This adjustment in operations caused the reduction
      of gas consumption in these two industrial users during this
      period.





Connection
Fees





Connection
fees during the nine months ended September 30, 2010 were $8.31
million, representing an increase of 10.84% over
the same period of 2009, accounting for 39.61% of the total net revenue in the nine
months ended September 30, 2010 compared with approximately 38.72% for the same period in 2009. Almost
all connection fees in the nine months ended September 30, 2010 were from
the development of new residential users.





For the9months endedSeptember30,(inUS$millions)
                
                2010
                
                
                2009
                
                
                ChangeUS$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Connection
      Fees
                
                
                8.31
                
                
                
                100
                %
                
                
                7.49
                
                
                
                100
                %
                
                
                10.84
                %Residential
      Users
                
                
                8.31
                
                
                
                99.96
                %
                
                
                7.41
                
                
                
                98.83
                %
                
                
                12.11
                %Industrial
      Users
                
                
                0.003
                
                
                
                0.04
                %
                
                
                0.08
                
                
                
                1.17
                %
                
                
                -
                %





Gas
Sales





Gas sales
were $12.66 million during the nine months
ended September 30, 2010, accounting for 60.39% of
total net revenue in the nine months ended September 30, 2010, representing an
increase of 6.75% over the same period of last year. During
the nine months ended September 30, 2010, gas sales to residential users
increased 42.57% from $4.76 million in the same period of
2009 to $6.78 million in 2010.
During the nine months ended September 30, 2010, gas sales to industrial and
commercial users decreased 17.21% from
$7.10 million in the same period of
2009 to $5.88 million.





For the9months endedSeptember30,2010
                
                
                2009
                
                
                Change($ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Gas
      Sales
                
                
                12.66
                
                
                
                100
                %
                
                
                11.86
                
                
                
                100
                %
                
                
                6.75
                %Residential
      Users
                
                
                6.78
                
                
                
                54
                %
                
                
                4.76
                
                
                
                40
                %
                
                
                42.57
                %Industrial
      and Commercial Users
                
                
                5.88
                
                
                
                46
                %
                
                
                7.10
                
                
                
                60
                %
                
                
                -17.21
                %


49





Cost
of Revenues





Cost of
revenues for the nine months ended September 30, 2010, which includes cost of
connection and cost of gas sales, was $13.77 million, representing a slight
decrease of 2.19% from $14.07 million in the same period of
2009.





For the9monthsendedSeptember30,2010
                
                
                2009
                
                
                Change($ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Cost
      of Revenues
                
                
                13.77
                
                
                
                100
                %
                
                
                14.07
                
                
                
                100
                %
                
                
                -2.19
                %Connection
      Cost
                
                
                1.20
                
                
                
                14
                %
                
                
                2.67
                
                
                
                19
                %
                
                
                -25.45
                %Gas
      Cost
                
                
                11.77
                
                
                
                86
                %
                
                
                11.40
                
                
                
                81
                %
                
                
                3.27
                %





Cost of
Connection





The cost
of connection decreased 25.45% to $1.20 million during the nine months ended
September 30, 2010 from $2.67 million
for the same period in 2009. During the nine months ended September 30,
2010, we incurred lower costs of raw materials, parts, and installation and
maintenance fees as compared to the same period of 2009.





Cost of
connection includes depreciation of major pipelines, the cost of courtyard
pipelines, valves, gas meters, and installation and maintenance
fees.





Cost of
Gas Sales





The cost
of gas sales increased3.27% to $7.61 million during the nine months
ended September 30, 2010 from the same period in 2009, when it was $11.4 million. This increase in cost of
gas sales is largely due to the increase of gas sales during this
period.





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





Gross
Profit





During
the nine months ended September 30, 2010, gross profit was $7.2 million, representing an increase of
approximately 36.36% from the same
period of 2009. Gross profit from connection fees was $6.31 million for the nine months ended September
30, 2010, accounting for 88% of total
gross profit during the period. In comparison, gross profit from connection fees
was $4.82 million for the nine months ended September
30, 2009, accounting for 91% of total gross profit during the period. Gross
profit from gas sales for the nine months ended September 30, 2010 was $0.89 million, accounting for 12% of total
gross profit during the period, compared to $0.46 million for the nine months ended September
30, 2009, accounting for 9% of total gross
profit in the period of 2009.





For the9monthsendedSeptember30,2010
                
                
                2009
                
                
                Change($ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Gross
      Profit
                
                
                7.20
                
                
                
                100
                %
                
                
                5.28
                
                
                
                100
                %
                
                
                36.36
                %Connection
                
                
                6.31
                
                
                
                88
                %
                
                
                4.82
                
                
                
                91
                %
                
                
                30.96
                %Gas
                
                
                0.89
                
                
                
                12
                %
                
                
                0.46
                
                
                
                9
                %
                
                
                92.71
                %





Gross
margin during nine months ended September 30, 2010 was 34.35%, compared to 27.29% during the same period in
2009.





Gross
margin for connection fees for the nine months ended September 30, 2010
was 76.02%, compared to 64.34% during the same period of 2009. The
decrease in the cost of connection contributed to the improvement of gross
margin.





Gross
margin for sales of natural gas was 7.02%
for the nine months ended September 30, 2010, compared to 3.89% during the same period of 2009. The
increase was primarily due to improvement of delivery cost for the nine
months ended September 30, 2010.


50





Selling
and Marketing Expenses





Our
selling and marketing expenses in the nine months ended September 30, 2010 were
$ 1.15 million, or approximately 5.48% of our net revenues, compared
with $0.71 million, or approximately 3.66 % of
net revenues for the same period in 2009.




General
and Administrative Expenses and other expenses





General
and administrative expenses were $2.35
million for the nine months ended September 30, 2010, or approximately
11.23%
of our net revenues, compared with $1.90
million, or approximately 9.83% of net
revenues for the same period in 2009.  The increase was primarily due to
higher professional fees in the nine months ended September 30, 2010 as compared
to the same period of 2009.  We incurred approximately $100,000 for
engaging Ernst & Yong on SOX compliance and internal control
consultation during the nine months ended September 30, 2010.





Operating
Income





The
operating income for the nine months ended September 30, 2010 was $3.7 million, representing an increase of 38.48%, compared to the operating income of
$2.67 million in 2009. The increase
was driven by the increase of sales, and improvement of gross margin from
both connection fee revenue and gas sales during this period.





Other
Income (Expense)





Other
expense was $2.18 million for the nine
months ended September 30, 2010, compared with other expense of $0.12 million for the same period of
2009.  The significant increase was due to the amortization costs of
convertible bonds and interest expense of convertible bonds. We completed a
convertible debt financing in the last quarter of 2009, which resulted in costs
associated with the financing, such as interest discount-warrants, beneficial
conversion feature, and debt issuance cost. Included in interest expense of
$2.18 million for the nine months ended
September 30, 2010 was $0.36 million in convertible bonds coupon expense
and $1.36 million non-cash flow amortization expense of
convertible bonds.





Income
tax





Income
tax was $0.84 million for the nine months
ended September 30, 2010, compared to $0.58 million
in 2009.





Net
Income





Net income in the nine months ended September 30,
2010 was $0.68 million, compared with net income
of $1.98 million in the same
period in 2009.  Driven by the increase of sales, and improvement of gross
margin from both connection fee revenue and gas sales during this period,
operating income achieved improvement of 38.48% to $3.70 million compared to the operating income of
$2.67 million for the same period of 2009.
 However, the increase in operating income was offset by the additions
of amortization costs of convertible bonds. Excluding these non-cash and
non-operational items of amortization expense of convertible bonds in the total
of $1.36 million, our adjusted net income in the nine
months ended September 30, 2010 would have been $2.04 million.





Liquidity
and Capital Resources





Cash and
cash equivalents were $3.71 million as
of September 30, 2010, representing a decrease of $6.11 million
as compared to $9.82 million of cash and
cash equivalents as of December 31, 2009.





Cash used
in operating activities for the nine months ended September 30, 2010 was $1.89 million, representing a decrease of
$10.10 million from $8.21 million sourced during the same period of
2009. Such decrease was mainly due to the decrease of net income, adjusted for
non-cash expense items and changes in working capital.


51





Cash used
in investing activities for the nine months ended September 30, 2010
was $8.03 million, representing a
decrease of $1.34 million from $9.37 million during the same period of
2009. Such decrease was mainly due to the decrease of property, plant and
equipment and construction in progress.





Cash
sourced in financing activities for the nine months ended September 30,
2010 was $2.44 million.  We borrowed $2.24 million from local bank in the first quarter of
2010.





Accounts
Receivable





Accounts
receivable as of September 30, 2010 were $6.43 million, representing an increase of $1.39 million from $5.04 million as of December 31,
2009.





Notes
Receivable





There are
no notes receivable as of September 30, 2010.





Inventory





Inventory
of $1.12 million as of September 30, 2010
was comprised of spare parts and natural gas.





Fixed
Assets





Fixed
Assets as of September 30, 2010 were $54.85 million, representing an increase of
$2.75 million from $52.10 million as of
December 31, 2009.  The table below is a breakdown of our fixed assets
at cost:





2010
                
                
                2009At
      CostGas
      Pipelines
                
                $
                45,268,608
                
                
                $
                43,518,519Motor
      Vehicles
                
                
                5,901,486
                
                
                
                5,775,903Machinery
      & Equipment
                
                
                1,522,892
                
                
                
                1,482,599Buildings
                
                
                1,822,746
                
                
                
                1,005,517Leasehold
      Improvements
                
                
                82,752
                
                
                
                80,113Office
      Equipment
                
                
                253,388
                
                
                
                238,673Less
      Accumulated depreciation
                
                
                (5,533,575
                )
                
                
                (4,329,313
                )$
                49,318,297
                
                
                $
                47,772,011





Bank
Loans





Short-term
bank loans as of September 30, 2010 were $2.99 million, with no change compared to that
as of December 31, 2009.





Long-term
bank loans as of September 30, 2010 were $8.96 million, representing an increase of
$2.38
million compared to $6.58 million as of
December 31, 2009. We borrowed an additional loan in the first quarter of
2010.





Accounts
Payables





Accounts
payables as of September 30, 2010 was $7.0 million,
representing a decrease of $1.56 million from that as of December 31,
2009.





Other
Payables





Other
payables - current as of September 30, 2010 were $2.92 million, representing a decrease of
$3.42
million from that as of December 31, 2009.  $2.02 million was
reclassified from Other payable – current to Other payable – non-current in the
second quarter of this year.


52





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
required.





Item
4. Controls and Procedures





Disclosure
Controls and Procedures





Disclosure
controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act”)) are designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
This information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures. Our management, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on the evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2010.





Changes
in Internal Control over Financial Reporting





During
the quarter ended September 30, 2010, there was no change in our internal
controls over financial reporting that has materially affected, or that is
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION


Item
1. Legal Proceedings





None.





Item
1A. Risk Factors





Not
required.





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





None.




Item
3. Defaults Upon Senior Securities





None.





Item
4. (Removed and Reserved)







Item
5. Other Information





None.





Item
6.  Exhibits





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





Exhibit
              Number:
            
            Description23.1
            
            Consent
      of Samuel H. Wong & Co., LLP31.1
            
            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


53


SIGNATURES





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




SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      November 15, 2010
              By:
              /s/  Yuchuan LiuYuchuan
      LiuChairman
      and Chief Executive OfficerSINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      November 15, 2010
              By:
              /s/  Yugang ZhangYugang
      ZhangChief
      Financial Officer


54