United
States


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
one)




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





For
the Quarterly Period Ended June 30, 2009





or




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





Commission
File Number 000-51364





SINO
GAS INTERNATIONAL HOLDINGS, INC.


(Name of
small business issuer in its charter)




Utah
            32-0028823(State
      or other jurisdiction
              of
      incorporation or organization)
            (I.R.S.
      Employer
              Identification
      No.)





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





Issuer’s
telephone number: 86-10-82600527











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


Yes xNo  ̈





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





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





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting companyx





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





As of
August 14, 2009, the Registrant had 26,769,313 shares of common stock
outstanding.









Sino Gas
International Holdings, Inc.





Table of
Contents




PagePART
      I -
                FINANCIAL
      INFORMATION
                2Item
      1.
                Financial
      Statements
                2Notes
      to Financial Statements (Unaudited)
                11Item
      2.
                Management's
      Discussion and Analysis or Plan of Operation
                41Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                51Item
      4.
                Controls
      and Procedures
                51PART
      II -
                OTHER
      INFORMATION
                52Item
      1.
                Legal
      Proceedings
                52Item
      1A.
                Risk
      Factors
                52Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                52Item
      3.
                Defaults
      Upon Senior Securities
                52Item
      4.
                Submission
      of Matters to a Vote of Security Holders.
                52Item
      5.
                Other
      Information
                52Item
      6.
                Exhibits
                52




1




PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements





SINO
GAS INTERNATIONAL HOLDINGS, INC
 
 REVIEWED
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE
30, 2009 AND DECEMBER 31, 2008
 
 STATED
IN US DOLLARS
  
 
 2
 
 Sino Gas International
Holdings, Inc.
 
 CONTENTS
                      
                      PAGESReport
      of Registered Independent Public Accounting Firm
                      
                      4Consolidated
      Balance Sheets
                      
                      5 –
      6Consolidated
      Statements of Income
                      
                      7Consolidated
      Statements of Changes in Stockholders’ Equity
                      
                      8 –
      9Consolidated
      Statements of Cash Flows
                      
                      10Notes
      to Consolidated Financial Statements
                      
                      11 –
      40
 
 3
 
 To:
                  
                  The
      Board of Directors and StockholdersSino
      Gas International Holdings,
Inc.
 
 Report of Registered
Independent Public Accounting Firm
 
 We have
reviewed the accompanying consolidated interim balance sheets of Sino Gas
International Holdings, Inc. as of June 30, 2009 and December 31, 2008, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for the three-month and six-month periods ended June 30, 2009 and 2008. These
consolidated interim financial statements are the responsibility of the
Company's management.
 
 We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
statements consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
 
 South
      San Francisco, California
                
                Samuel
      H. Wong & Co., LLPJuly
      25, 2009
                
                Certified
      Public Accountants
  4
  Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 Note
                                                  
                                                  
                                                  6/30/2009
                                                  
                                                  
                                                  12/31/2008ASSETSCurrent AssetsCash
      & cash equivalents
                                                  
                                                  
                                                  2(e)
                                                  
                                                  
                                                  $
                                                  1,854,242
                                                  
                                                  
                                                  $
                                                  3,027,543Restricted
      cash
                                                  
                                                  
                                                  3
                                                  
                                                  
                                                  
                                                  183,541
                                                  
                                                  
                                                  
                                                  234,279Notes
      receivable
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  146,096
                                                  
                                                  
                                                  
                                                  109,422Accounts
      receivable
                                                  
                                                  
                                                  2(f),4
                                                  
                                                  
                                                  
                                                  4,664,089
                                                  
                                                  
                                                  
                                                  6,013,621Inventory
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  285,957
                                                  
                                                  
                                                  
                                                  347,341Advances
      to suppliers
                                                  
                                                  
                                                  2(g)
                                                  
                                                  
                                                  
                                                  4,150,547
                                                  
                                                  
                                                  
                                                  3,024,518Prepayments
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  580,769
                                                  
                                                  
                                                  
                                                  370,593Other
      receivables
                                                  
                                                  
                                                  2(f)
                                                  
                                                  
                                                  
                                                  3,414,366
                                                  
                                                  
                                                  
                                                  3,028,368Total
      Current Assets
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  15,279,607
                                                  
                                                  
                                                  
                                                  16,155,686Non-Current AssetsInvestment
                                                  
                                                  
                                                  2(h),5
                                                  
                                                  
                                                  
                                                  5,166,094
                                                  
                                                  
                                                  
                                                  5,159,009Property,
      plant & equipment, net
                                                  
                                                  
                                                  2(j),6
                                                  
                                                  
                                                  
                                                  34,299,046
                                                  
                                                  
                                                  
                                                  33,033,118Construction
      in progress
                                                  
                                                  
                                                  2(l)
                                                  
                                                  
                                                  
                                                  19,266,398
                                                  
                                                  
                                                  
                                                  17,155,473Intangible
      assets, net
                                                  
                                                  
                                                  2(k),7
                                                  
                                                  
                                                  
                                                  2,298,646
                                                  
                                                  
                                                  
                                                  2,193,252Total
      Non-Current Assets
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  61,030,184
                                                  
                                                  
                                                  
                                                  57,540,852TOTAL
      ASSETS
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  76,309,791
                                                  
                                                  
                                                  $
                                                  73,696,538LIABILITIESCurrent LiabilitiesBank
      loans
                                                  
                                                  
                                                  8
                                                  
                                                  
                                                  $
                                                  2,191,445
                                                  
                                                  
                                                  $
                                                  2,188,439Accounts
      payable
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  7,258,282
                                                  
                                                  
                                                  
                                                  6,350,092Other
      payables
                                                  
                                                  
                                                  9
                                                  
                                                  
                                                  
                                                  6,000,522
                                                  
                                                  
                                                  
                                                  6,174,871Unearned
      revenue
                                                  
                                                  
                                                  2(m)
                                                  
                                                  
                                                  
                                                  2,030,857
                                                  
                                                  
                                                  
                                                  938,696Accrued
      liabilities
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  250,871
                                                  
                                                  
                                                  
                                                  189,090Total
      Current Liabilities
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  17,731,977
                                                  
                                                  
                                                  
                                                  15,841,188TOTAL
      LIABILITIES
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  17,613,643
                                                  
                                                  
                                                  $
                                                  15,841,188
 
 See
Accompanying Notes to Consolidated Financial Statements
  5
  Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 Note
                        
                        
                        6/30/2009
                        
                        
                        12/31/2008STOCKHOLDERS'
      EQUITYPreferred
      Stock B US$0.001 par value; 5,000,000 shares authorized; 4,579,839 shares
      issued and outstanding as of June 30, 2009 and December 31, 2008,
      respectively.
                        
                        
                        10
                        
                        
                        $
                        4,580
                        
                        
                        $
                        4,580Additional
      paid in capital - Preferred Stock B
                        
                        
                        
                        
                        
                        
                        5,323,972
                        
                        
                        
                        5,323,972Additional
      paid in capital - Warrants Series: A, B, J, C, D
                        
                        
                        
                        
                        
                        
                        311,110
                        
                        
                        
                        311,110Preferred
      Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares
      issued and outstanding as of June 30, 2009 and December 31, 2008,
      respectively.
                        
                        
                        10
                        
                        
                        
                        95
                        
                        
                        
                        95Additional
      paid in capital - Preferred Stock B-1
                        
                        
                        
                        
                        
                        
                        132,662
                        
                        
                        
                        132,662Additional
      paid in capital - Beneficial Conversion Feature
                        
                        
                        
                        
                        
                        
                        7,002,292
                        
                        
                        
                        7,002,292Common
      Stock US$0.001 par value; 250,000,000 shares authorized; 26,769,313 and
      25,269,313 shares issued and outstanding as of June 30, 2009 and December
      31, 2008, respectively.
                        
                        
                        10
                        
                        
                        
                        26,769
                        
                        
                        
                        25,269Additional
      paid in capital - Common Stock
                        
                        
                        
                        
                        
                        
                        22,513,732
                        
                        
                        
                        23,196,304Additional
      paid in capital - Warrants Series: E, G
                        
                        
                        
                        
                        
                        
                        47,946
                        
                        
                        
                        47,946Additional
      paid in capital - Warrants Series: F, R
                        
                        
                        
                        
                        
                        
                        107,652
                        
                        
                        
                        107,652Statutory
      reserve
                        
                        
                        2(v)
                        
                        
                        
                        4,018,865
                        
                        
                        
                        3,956,728Retained
      earnings
                        
                        
                        
                        
                        
                        
                        11,455,602
                        
                        
                        
                        10,069,896Accumulated
      other comprehensive income
                        
                        
                        2(x)
                        
                        
                        
                        7,632,537
                        
                        
                        
                        7,676,844Total
      Stockholders' Equity
                        
                        
                        
                        
                        
                        
                        58,577,814
                        
                        
                        
                        57,855,350TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
                        
                        
                        
                        
                        $
                        76,309,791
                        
                        
                        $
                        73,696,538
 See Accompanying Notes to Consolidated
Financial Statements
 6
 Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Income
 For
the three months and six months ended June 30, 2009 and 2008
 (Stated
in US Dollars)
 
 Three Months Ended
                                
                                
                                Six Months EndedNote
                                
                                
                                6/30/2009
                                
                                
                                6/30/2008
                                
                                
                                6/30/2009
                                
                                
                                6/30/2008Sales
      revenues
                                
                                
                                2(p)
                                
                                
                                $
                                7,331,620
                                
                                
                                $
                                5,121,521
                                
                                
                                $
                                12,369,312
                                
                                
                                $
                                9,463,638Cost
      of revenues
                                
                                
                                
                                
                                
                                
                                (5,796,185
                                )
                                
                                
                                (3,554,592
                                )
                                
                                
                                (9,569,397
                                )
                                
                                
                                (6,530,063
                                )Gross
      Profit
                                
                                
                                
                                
                                
                                
                                1,535,435
                                
                                
                                
                                1,566,930
                                
                                
                                
                                2,799,915
                                
                                
                                
                                2,933,575Operating ExpenseSelling
      and marketing expenses
                                
                                
                                
                                
                                
                                
                                (217,418
                                )
                                
                                
                                (186,193
                                )
                                
                                
                                (420,490
                                )
                                
                                
                                (367,896
                                )General
      and administrative expenses
                                
                                
                                
                                (733,712
                                )
                                
                                
                                (1,163,429
                                )
                                
                                
                                (1,246,159
                                )
                                
                                
                                (1,996,879
                                )Total
      operating expense
                                
                                
                                
                                
                                
                                
                                (951,130
                                )
                                
                                
                                (1,349,621
                                )
                                
                                
                                (1,666,649
                                )
                                
                                
                                (2,364,776
                                )Operating
      Income
                                
                                
                                
                                
                                
                                
                                584,305
                                
                                
                                
                                217,308
                                
                                
                                
                                1,133,266
                                
                                
                                
                                568,799Other Income/(Expense)Other
      income
                                
                                
                                
                                
                                
                                
                                11,045
                                
                                
                                
                                1,269
                                
                                
                                
                                11,206
                                
                                
                                
                                1,269Other
      expense
                                
                                
                                
                                
                                
                                
                                (16,585
                                )
                                
                                
                                (483,081
                                )
                                
                                
                                (22,314
                                )
                                
                                
                                (483,926
                                )Interest
      income
                                
                                
                                
                                
                                
                                
                                1,227
                                
                                
                                
                                12,496
                                
                                
                                
                                3,077
                                
                                
                                
                                45,662Interest
      expense
                                
                                
                                
                                
                                
                                
                                (43,108
                                )
                                
                                
                                (156,100
                                )
                                
                                
                                (84,560
                                )
                                
                                
                                (216,567
                                )Total
      other income/(expense)
                                
                                
                                
                                
                                
                                
                                (47,422
                                )
                                
                                
                                (625,416
                                )
                                
                                
                                (92,591
                                )
                                
                                
                                (653,562
                                )Earnings
      from continued operation
                                
                                
                                
                                
                                
                                
                                536,883
                                
                                
                                
                                (408,107
                                )
                                
                                
                                1,040,675
                                
                                
                                
                                (84,763
                                )Income
      tax
                                
                                
                                2(r),12
                                
                                
                                
                                (115,749
                                )
                                
                                
                                (128,781
                                )
                                
                                
                                (273,904
                                )
                                
                                
                                (302,798
                                )Net
      income
                                
                                
                                
                                
                                
                                $
                                421,134
                                
                                
                                $
                                (536,888
                                )
                                
                                $
                                766,771
                                
                                
                                $
                                (387,561
                                )Earnings
      per share
                                
                                
                                2(z),13-  Basic
                                
                                
                                
                                
                                
                                $
                                0.02
                                
                                
                                $
                                (0.02
                                )
                                
                                $
                                0.03
                                
                                
                                $
                                (0.01
                                )-  Diluted
                                
                                
                                
                                
                                
                                $
                                0.01
                                
                                
                                $
                                (0.02
                                )
                                
                                $
                                0.02
                                
                                
                                $
                                (0.01
                                )Weighted
      Average Shares Outstanding-  Basic
                                
                                
                                
                                
                                
                                
                                26,135,980
                                
                                
                                
                                25,312,896
                                
                                
                                
                                25,702,646
                                
                                
                                
                                25,297,638-  Diluted
                                
                                
                                
                                
                                
                                
                                30,811,237
                                
                                
                                
                                30,529,350
                                
                                
                                
                                30,377,903
                                
                                
                                
                                30,529,350
  See Accompanying Notes to Consolidated
Financial Statements
 7
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 PreferredStockB
                      
                      
                      PreferredStockB-1Shares
                        Outstanding
                      
                      
                      Amount
                      
                      
                      AdditionalPaidIn
                        Capital-Preferred
                        StockB
                      
                      
                      AdditionalPaidin
                        Capital-Warrants
                        Series:A,B,J,C,D
                      
                      
                      AdditionalPaidin
                        Capital-Beneficial
                        ConversionFeature
                      
                      
                      Shares
                        Outstanding
                      
                      
                      Amount
                      
                      
                      AdditionalPaidIn
                        Capital-Preferred
                        StockB-1
                      
                      
                      AdditionalPaidin
                        Capital-Beneficial
                        ConversionFeatureBalance,
      January 1, 2008
                      
                      
                      4,971,859
                      
                      
                      
                      4,972
                      
                      
                      
                      5,323,972
                      
                      
                      
                      311,110
                      
                      
                      
                      6,920,263
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      132,662
                      
                      
                      
                      82,029Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Conversion
      of Preferred Stock B to Common Stock
                      
                      
                      (392,020
                      )
                      
                      
                      (392
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Common Stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Appropriation
      of Retained Earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2008
                      
                      
                      4,579,839
                      
                      
                      
                      4,580
                      
                      
                      
                      5,323,972
                      
                      
                      
                      311,110
                      
                      
                      
                      6,920,263
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      132,662
                      
                      
                      
                      82,029Balance,
      January 1, 2009
                      
                      
                      4,579,839
                      
                      
                      
                      4,580
                      
                      
                      
                      5,323,972
                      
                      
                      
                      311,110
                      
                      
                      
                      6,920,263
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      132,662
                      
                      
                      
                      82,029Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of 2007 Make Good Shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Reallocation
      of Beneficial Conversion Feature
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Appropriation
      of Retained Earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      June 30, 2009
                      
                      
                      4,579,839
                      
                      
                      
                      4,580
                      
                      
                      
                      5,323,972
                      
                      
                      
                      311,110
                      
                      
                      
                      6,920,263
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      132,662
                      
                      
                      
                      82,029
  See Accompanying Notes to Consolidated
Financial Statements
  8
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 Common StockShares
                        Outstanding
                      
                      
                      Amount
                      
                      
                      Additional
                        PaidIn
                        Capital
                      
                      
                      Additional Paid in
                        Capital-Warrants Series:
                        E,G
                      
                      
                      Additional Paid in
                        Capital-Warrants Series:
                        F,R
                      
                      
                      Statutory
                        Reserve
                      
                      
                      Retained
                        Earnings
                      
                      
                      Accumulated Other
                        Comprehensive
                        Income
                      
                      
                      TotalBalance,
      January 1, 2008
                      
                      
                      24,877,271
                      
                      
                      
                      24,877
                      
                      
                      
                      23,196,304
                      
                      
                      
                      47,946
                      
                      
                      
                      107,652
                      
                      
                      
                      3,258,201
                      
                      
                      
                      9,167,930
                      
                      
                      
                      2,268,593
                      
                      
                      
                      50,846,606Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,600,493
                      
                      
                      
                      -
                      
                      
                      
                      1,600,493Conversion
      of Preferred Stock B to Common Stock
                      
                      
                      392,020
                      
                      
                      
                      392
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Common Stock
                      
                      
                      22
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Appropriation
      of Retained Earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      698,527
                      
                      
                      
                      (698,527
                      )
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,408,250
                      
                      
                      
                      5,408,250Balance,
      December 31, 2008
                      
                      
                      25,269,313
                      
                      
                      
                      25,269
                      
                      
                      
                      23,196,304
                      
                      
                      
                      47,946
                      
                      
                      
                      107,652
                      
                      
                      
                      3,956,728
                      
                      
                      
                      10,069,896
                      
                      
                      
                      7,676,844
                      
                      
                      
                      57,855,350Balance,
      January 1, 2009
                      
                      
                      25,269,313
                      
                      
                      
                      25,269
                      
                      
                      
                      23,196,304
                      
                      
                      
                      47,946
                      
                      
                      
                      107,652
                      
                      
                      
                      3,956,728
                      
                      
                      
                      10,069,896
                      
                      
                      
                      7,676,844
                      
                      
                      
                      57,855,350Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      766,771
                      
                      
                      
                      -
                      
                      
                      
                      766,771Issuance
      of 2007 Make Good Shares
                      
                      
                      1,500,000
                      
                      
                      
                      1,500
                      
                      
                      
                      (1,500
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Reallocation
      of Beneficial Conversion Feature
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (681,072
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      681,072
                      
                      
                      
                      -
                      
                      
                      
                      -Appropriation
      of Retained Earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      62,137
                      
                      
                      
                      (62,137
                      )
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (44,306
                      )
                      
                      
                      (44,306
                      )Balance,
      June 30, 2009
                      
                      
                      26,769,313
                      
                      
                      
                      26,769
                      
                      
                      
                      22,513,732
                      
                      
                      
                      47,946
                      
                      
                      
                      107,652
                      
                      
                      
                      4,018,865
                      
                      
                      
                      11,455,602
                      
                      
                      
                      7,632,537
                      
                      
                      
                      58,577,814
 
 
 6/30/2009
                            
                            
                            12/31/2008
                            
                            
                            TotalComprehensive IncomeNet
      Income
                            
                            $
                            766,771
                            
                            
                            $
                            1,600,493
                            
                            
                            $
                            2,367,264Other Comprehensive IncomeForeign
      Currency Translation Adjustment
                            
                            
                            (44,306
                            )
                            
                            
                            5,408,250
                            
                            
                            
                            5,363,944Total
                            
                            $
                            722,464
                            
                            
                            $
                            7,008,743
                            
                            
                            $
                            7,731,208
  See Accompanying Notes to Consolidated
Financial Statements
  9
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Cash Flows
 For
the three months and six months ended June 30, 2009 and 2008
 (Stated
in US Dollars)
  Three Months Ended
                          
                          
                          Six Months Ended6/30/2009
                          
                          
                          6/30/2008
                          
                          
                          6/30/2009
                          
                          
                          6/30/2008Cash
      Flows from Operating ActivitiesNet
      Income
                          
                          $
                          421,134
                          
                          
                          $
                          (536,888
                          )
                          
                          $
                          766,771
                          
                          
                          $
                          (387,561
                          )Depreciation
      expense
                          
                          
                          86,877
                          
                          
                          
                          218,405
                          
                          
                          
                          419,533
                          
                          
                          
                          858,653Amortization
      expense
                          
                          
                          31,627
                          
                          
                          
                          14,463
                          
                          
                          
                          33,894
                          
                          
                          
                          43,995Withdraw/(deposit)
      in restricted time deposits
                          
                          
                          46,396
                          
                          
                          
                          (75,807
                          )
                          
                          
                          50,738
                          
                          
                          
                          (260,948
                          )Decrease/(increase)
      in accounts and other receivables
                          
                          
                          869,525
                          
                          
                          
                          3,894,981
                          
                          
                          
                          926,859
                          
                          
                          
                          (1,462,668
                          )Decrease/(increase)
      in inventory
                          
                          
                          25,664
                          
                          
                          
                          (29,360
                          )
                          
                          
                          61,385
                          
                          
                          
                          (68,276
                          )Decrease/(increase)
      in prepaid expenses
                          
                          
                          (473,843
                          )
                          
                          
                          (2,186,986
                          )
                          
                          
                          (1,336,205
                          )
                          
                          
                          (3,018,416
                          )Increase/(decrease)
      in accounts and other payables
                          
                          
                          1,254,759
                          
                          
                          
                          1,018,505
                          
                          
                          
                          1,887,783
                          
                          
                          
                          730,773Cash
      Sourced/(Used) in Operating Activities
                          
                          
                          2,262,138
                          
                          
                          
                          2,317,312
                          
                          
                          
                          2,810,758
                          
                          
                          
                          (3,564,449
                          )Cash
      Flows from Investing ActivitiesInvestment
      in equity
                          
                          
                          (604
                          )
                          
                          
                          (1,679,262
                          )
                          
                          
                          (7,085
                          )
                          
                          
                          (375,108
                          )Disposal/(purchase)
      of property, plant & equipment
                          
                          
                          (1,631,519
                          )
                          
                          
                          139,869
                          
                          
                          
                          (1,685,461
                          )
                          
                          
                          (2,780,780
                          )Increase
      of goodwill
                          
                          
                          (196
                          )
                          
                          
                          -
                          
                          
                          
                          (2,304
                          )
                          
                          
                          -Purchase
      of other intangible assets
                          
                          
                          (135,818
                          )
                          
                          
                          (91,297
                          )
                          
                          
                          (136,984
                          )
                          
                          
                          (204,917
                          )Increase
      in construction in progress
                          
                          
                          (530,794
                          )
                          
                          
                          (1,863,062
                          )
                          
                          
                          (2,110,924
                          )
                          
                          
                          (3,137,183
                          )Cash
      Sourced/(Used) in Investing Activities
                          
                          
                          (2,298,930
                          )
                          
                          
                          (3,493,752
                          )
                          
                          
                          (3,942,758
                          )
                          
                          
                          (6,497,988
                          )Cash
      Flows from Financing ActivitiesProceeds
      of bank loans
                          
                          
                          256
                          
                          
                          
                          155,838
                          
                          
                          
                          3,005
                          
                          
                          
                          4,541,670Cash
      Sourced/(Used) in Financing Activities
                          
                          
                          256
                          
                          
                          
                          155,838
                          
                          
                          
                          3,005
                          
                          
                          
                          4,541,670Net
      increase in cash & cash equivalents for the period
                          
                          
                          (36,536
                          )
                          
                          
                          (1,020,603
                          )
                          
                          
                          (1,128,995
                          )
                          
                          
                          (5,520,767
                          )Effect
      of currency translation
                          
                          
                          (88,657
                          )
                          
                          
                          1,152,297
                          
                          
                          
                          (44,306
                          )
                          
                          
                          2,758,083Cash
      & cash equivalents at the beginning of period
                          
                          
                          1,979,435
                          
                          
                          
                          8,021,212
                          
                          
                          
                          3,027,543
                          
                          
                          
                          10,915,590Cash
      & cash equivalents at the end of period
                          
                          $
                          1,854,242
                          
                          
                          $
                          8,152,907
                          
                          
                          $
                          1,854,242
                          
                          
                          $
                          8,152,907Supplementary
      cash flows informationInterest
      received
                          
                          $
                          757
                          
                          
                          $
                          12,496
                          
                          
                          $
                          2,607
                          
                          
                          $
                          45,662Interest
      paid
                          
                          
                          43,108
                          
                          
                          
                          156,900
                          
                          
                          
                          84,560
                          
                          
                          
                          21,367Income
      tax paid
                          
                          
                          346,934
                          
                          
                          
                          123,005
                          
                          
                          
                          505,089
                          
                          
                          
                          123,005
  See Accompanying Notes to Consolidated
Financial Statements
  10
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
  1.
                ORGANIZATION
      AND PRINCIPAL ACTIVITIES
 
 Sino Gas
International Holdings, Inc. (the “Company”) was incorporated under the laws of
the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
changed its name to American Arms, Inc. on April 5, 1984, and then changed its
name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to
Sino Gas International Holdings, Inc. on November 17, 2006.
 
 On
September 7, 2006, the Company underwent a reverse-merger with Gas Investment
China Ltd. (“GIC”), an International Business Company incorporated in the
British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange
of shares whereby the Company issued an aggregate of 14,361,646 shares to the
shareholders of GIC in exchange for all of the issued and outstanding shares of
GIC. For financial reporting purposes, this transaction is classified as a
recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer,
accounting acquiree) and the historical financial statements of Gas Investment
China Co. Ltd. (Legal acquiree, accounting acquirer)
 
 The
Company is a natural gas services operator, principally engaging in the
investment, operation, and management of city gas pipeline infrastructure, in
the distribution of natural gas to residential and industrial users, in the
construction and operation gas stations, and in the development and application
of natural gas related technologies. The Company owns and operates 37 natural
gas distribution systems serving approximately 100,900 residential and five
commercial and industrial customers. The Company’s facilities include
approximately 710 kilometers of pipeline and delivery networks (including
delivery trucks) with a daily capacity of approximately 89,000 cubic meters of
natural gas.
 
 The
common stock of the Company is currently quoted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.
 
 
 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.
 
 11
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
  (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.
 
 (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 at June 30,
2009.
 
 12
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
  Name of Company
                                                                
                                                                Place of
                                                                  Incorporation
                                                                
                                                                Date of
                                                                  Incorporation
                                                                
                                                                Beneficiary
                                                                  Interest %
                                                                
                                                                
                                                                Equity
                                                                  Interest
                                                                  %
                                                                
                                                                
                                                                Registered
      CapitalGAS
      Investment China Co., Ltd.
                                                                
                                                                The
      British Virgin Islands
                                                                
                                                                6/19/2003
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                USD
                                                                10,000,000Sino
      Gas Construction, Ltd.
                                                                
                                                                The
      British Virgin Islands
                                                                
                                                                1/9/2007
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                USD
                                                                50,000Sino
      Gas Investment Development, Ltd.
                                                                
                                                                The
      British Virgin Islands
                                                                
                                                                1/9/2007
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                USD
                                                                50,000Beijing
      Zhong Ran Wei Ye Gas Co., Ltd.
                                                                
                                                                PRC
                                                                
                                                                8/29/2001
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                RMB
                                                                184,916,420Beijing
      Chenguang Gas, Ltd.
                                                                
                                                                PRC
                                                                
                                                                10/30/2002
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                RMB
                                                                20,000,000Guannan
      Weiye Gas Co., Ltd.
                                                                
                                                                PRC
                                                                
                                                                6/19/2003
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                RMB
                                                                9,510,000Ningjin
      Weiye Gas Co., Ltd
                                                                
                                                                PRC
                                                                
                                                                12/3/2003
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                95
                                                                
                                                                
                                                                RMB
                                                                3,000,000Yutian
      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
                                                                5,000,000
 
 13


Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




Sihong
      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
                                        45,694,900Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
                                        PRC
                                        9/30/2005
                                        
                                        
                                        100
                                        
                                        
                                        
                                        100
                                        
                                        
                                        RMB
                                        2,000,000Longyao
      Zhongran Weiye Gas Co., Ltd.
                                        PRC
                                        10/13/2005
                                        
                                        
                                        100
                                        
                                        
                                        
                                        95
                                        
                                        
                                        RMB
                                        3,000,000Yuxian
      Jinli Gas Co., Ltd.
                                        PRC
                                        11/8/2005
                                        
                                        
                                        100
                                        
                                        
                                        
                                        100
                                        
                                        
                                        RMB
                                        9,500,000Hengshui
      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
                                        1,500,000


14




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




Wuhe
      Weiye Gas Co., Ltd.
                    PRC
                    1/30/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    3,000,000Xinji
      Zhongchen Gas Co., Ltd
                    PRC
                    2/7/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    3,000,000Gucheng
      Weiye Gas Co., Ltd.
                    PRC
                    3/21/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    3,000,000Luquan
      Chenguang Gas Co., Ltd.
                    PRC
                    4/27/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    2,000,000Shijiazhuang
      Chenguang Gas Co., Ltd.
                    PRC
                    6/14/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    2,000,000Nangong
      Weiye Gas Co., Ltd.
                    PRC
                    6/25/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    3,000,000Sixian
      Weiye Gas Co., Ltd.
                    PRC
                    9/3/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    3,000,000Baishan
      Weiye Gas Co., Ltd.
                    PRC
                    7/13/2007
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    15,000,000Guyuan
      Gas Co., Ltd.
                    PRC
                    12/15/2008
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    RMB
                    1,000,000


15




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)


(e)
Cash and Cash
Equivalents





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





(f)
Accounts and Other
Receivable





Accounts
and other receivable are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. The
Company extends unsecured credit to customers in the normal course of business
and does not accrue interest on trade accounts receivable.





(g)
Advances to
Suppliers





Advances
to suppliers represent the cash paid in advance for purchasing raw materials.
The advances to suppliers are interest free and unsecured.





(h)
Investments in Equity
Securities





The
equity method of accounting was used to account for the Company’s investment in
equity securities for which the Company did not have controlling equity
interest. Non-controlling equity interest for the Company is typically a
position of less than 50% beneficial ownership.





The
consolidated statement of income includes the Company's share of the
post-acquisition results of the investment’s performance for the year. In the
consolidated balance sheet, investments in equity securities are stated at the
Company's share of the net assets of the investments plus any potential premium,
or less discounts paid at the time of acquisition, and less any identified
impairment loss.





Beijing
Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned
investment and is principally engaged in sale of compressed natural gas to
domestic households and industrial firms around the suburbs of Beijing as well
as the suburban areas of the Hebei Province and Tianjin city.





Qujing
Gas Co., Ltd. is the Company’s 39% owned investment and is principally engaged
in the business of gas pipeline construction in Yunnan Province.





16




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




Place of Registration
                              
                              Form of Business
                                Structure
                              
                              Registered
                                Capital
                              
                              
                              Nominal Value of
                                Registered Capital
                              
                              Principle ActivitiesPRC
                              
                              Sino-foreign
      equity
                                joint
      venture
                              
                              RMB
                              20,000,000
                              
                              
                              
                              40
                              %
                              Trading
      of natural gas and
                                gas
      pipeline constructionPRC
                              
                              Equity
      joint
                                venture
                              
                              RMB
                              30,000,000
                              
                              
                              
                              39
                              %
                              Gas
      pipeline
construction





The
Company did not record any goodwill when it acquired its equity position in
Xiangke and Qujing. Accordingly, in accordance with SFAS 142, the Company has
not taken an amortization expense of goodwill during the time it has carried a
40% and 39% stakes in Xiangke and Qujing, respectively.





(i) Accounting for the
Impairment of Long-Lived Assets





The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.





If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.





During
the reporting periods, there was no impairment loss.




17




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




(j)
Property, Plant, and
Equipment





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





Asset Class
                
                Estimated 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, such as land use rights, franchises, and accounting software, are stated
at cost less accumulated amortization. Amortization is provided over their
estimated useful lives, using the straight-line method. Estimated useful lives
of these intangibles are as follows:





Asset Class
                
                Estimated Useful LifeLand
      Use Rights
                
                40
      - 50 yearsFranchises
                
                30
      yearsAccounting
      Software
                
                3
      years





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




18




Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




(l)
Construction in
Progress





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





(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.




19




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




(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.




6/30/2009
                  
                  
                  12/31/2008
                  
                  
                  6/30/2008Years
      end RMB : US$ exchange rate
                  
                  
                  6.8448
                  
                  
                  
                  6.8542
                  
                  
                  
                  6.8718Average
      yearly RMB : US$ exchange rate
                  
                  
                  6.8432
                  
                  
                  
                  6.9623
                  
                  
                  
                  7.0726





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 Group’s share of post-acquisition results of its
investment in equity securities for the year.




20




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)


(r)
Income
Taxes





The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are
available.  The Company has implemented Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes.  Income tax liabilities computed according to the United States
and People’s Republic of China (PRC) tax laws are provided for the tax effects
of transactions reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to differences between the
basis of fixed assets and intangible assets for financial and tax reporting. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will be either taxable or deductible when the assets
and liabilities are recovered or settled.  Deferred taxes also are
recognized for operating losses that are available to offset future income
taxes.  A valuation allowance is created to evaluate deferred tax
assets, whether it is more likely than not that these items will expire either
before the Company is able to realize that tax benefit, or that future
realization is uncertain.





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





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





Subsidiary
                        
                        Country of Domicile
                        
                        Income Tax RatePRC
      Operating Companies (per Note 2. (d) Principals of
      Consolidation)
                        
                        PRC
                        
                        
                        15.0
                        %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 entity. However,
      Beijing Gas is exempt from this policy since it is a high-tech green
      energy enterprise. As a result, the Company will continue enjoying 15% tax
      holiday.




21




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




·
            Since
      Sino Gas International Holdings, Inc. is primarily a holding company
      without any business activities in the United States, the Company shall
      not be subject to United States income tax for the six-month ended June
      30, 2009 and 2008.





(s)
Advertising





The Group
expensed all advertising costs as incurred





(t)
Concentration of
Credit Risk





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





(u)
Retirement
Benefits





Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred.





(v)
Statutory
Reserves





As
stipulated by the Company Law of the People's Republic of China (PRC) as
applicable to Chinese companies with foreign ownership, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:





i.
            Making
      up cumulative prior years' losses, if
any;


ii.
            Allocations
      to the "Statutory reserve" of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered
  capital;


iii.
            Allocations
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.




22




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)


(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.




(x)
Comprehensive
Income





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





(y)
Recent Accounting
Pronouncements




In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133").
 SFAS 161 requires entities to provide greater transparency about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
SFAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial
position, results of operations and cash flows.  SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy).  Statement 162 will become effective
60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting
Principles."




23




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)


In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1").  FSP
APB 14-1 requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account for
the liability (debt) and equity (conversion option) components of the instrument
in a manner that reflects the issuer's non-convertible debt borrowing
rate. FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 on a retroactive basis.





Management
of the Company does not anticipate that the adoption of these three standards
will have a material impact on these consolidated financial
statements.





(z)
Earnings Per
Share





Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
is computed on the basis of the weighted average number of shares of common
stock plus the effect of dilutive potential common shares outstanding during the
period using the treasury stock method for warrants and the as-if method for
convertible securities. Dilutive potential common shares include outstanding
warrants and convertible preferred stock.





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.





4.
              ACCOUNTS
      RECEIVABLE




For
natural gas sales, it is due when the gas is sold. Normally, most of them are
settled by prepayments from the customers.





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




24




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)


Trade
accounts receivable are recorded at the invoiced amount, net of allowances for
doubtful accounts and sales returns. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
customer facts and economic conditions. Outstanding account balances are
reviewed individually for collectibles. Account balances are charged off against
the allowance after all means of collection have been exhausted and collection
is improbable. To date, the Company has not charged off any balances as it has
yet to exhaust all means of collection. The Company does not have any
off-balance-sheet credit exposure to its customers.





The
credit and billing policy is that residential customers are billed and collected
immediately, whereas industrial customers are billed and paid according to the
contract terms from 10 days to one month. For the construction business,
customers are billed and pay based on the percentage of completion method of the
construction project.





Accounts
Receivable





6/30/2009
                  
                  
                  12/31/2008Accounts
      Receivable - gross
                  
                  $
                  4,711,201
                  
                  
                  $
                  6,049,415Allowance
      for bad debt
                  
                  
                  (47,112
                  )
                  
                  
                  (35,794
                  )Accounts
      Receivable, net
                  
                  $
                  4,664,089
                  
                  
                  $
                  6,013,621





Allowance for Bad
Debt





6/30/2009
                  
                  
                  12/31/2008Beginning
      Balance
                  
                  $
                  35,794
                  
                  
                  $
                  36,760Addition
                  
                  
                  11,318
                  
                  
                  
                  -Reversal
                  
                  
                  -
                  
                  
                  
                  (966
                  )Ending
      Balance
                  
                  $
                  47,112
                  
                  
                  $
                  35,794





Accounts Receivable Aging
Report





6/30/2009
                  
                  
                  12/31/200830
      Days
                  
                  $
                  2,131,397
                  
                  
                  $
                  4,896,06630-60
      Days
                  
                  
                  201,524
                  
                  
                  
                  258,10760-90
      Days
                  
                  
                  22,167
                  
                  
                  
                  292,98890-180
      Days
                  
                  
                  2,195,506
                  
                  
                  
                  311,954180-360
      Days
                  
                  
                  730
                  
                  
                  
                  205,745>360
      Days
                  
                  
                  112,765
                  
                  
                  
                  48,760Total
                  
                  $
                  4,664,089
                  
                  
                  $
                  6,013,621




25


Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




The
followings are the ten most significant accounts receivable at June 30,
2009:-





Hebei
      Zhonggang Steel, Ltd.
                    
                    $
                    707,565Xuzhou
      Shenyuan Real Estate Co., Ltd.
                    
                    
                    349,306Tonghua
      Tongsheng Real Estate Co., Ltd.
                    
                    
                    272,582Peixuan
      Jiangnan Development Company
                    
                    
                    269,680Suqian
      City Ming Wei Co., Ltd.
                    
                    
                    259,125Jiangsu
      Hongzhe Lake Farm
                    
                    
                    241,206Beijing
      Yincheng Construction Co., Ltd
                    
                    
                    186,248Beijing
      Zhenshi Real Estate Co., Ltd
                    
                    
                    161,038Yuxian
      Kangju Real Estate Co., Ltd
                    
                    
                    150,263Tonghua
      Liyu Real Estate Co., Ltd
                    
                    
                    147,569Total
                    
                    $
                    2,744,582




5. INVESTMENT





6/30/2009
                    
                    
                    12/31/2008Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
                    
                    $
                    4,824,229
                    
                    
                    $
                    4,817,613Qujing
      Gas Co., Ltd.
                    
                    
                    341,865
                    
                    
                    
                    341,397Total
                    
                    $
                    5,166,094
                    
                    
                    $
                    5,159,009




6. PROPERTY, PLANT, AND EQUIPMENT,
NET





Property,
Plant, and Equipment consisted of the followings at June 30, 2009 and December
31, 2008:





6/30/2009
                    
                    At Cost
                    
                    
                    Accumulated Depreciation
                    
                    
                    NetGas
      Pipelines
                    
                    $
                    28,526,224
                    
                    
                    $
                    1,649,970
                    
                    
                    $
                    26,876,253Motor
      Vehicles
                    
                    
                    6,602,269
                    
                    
                    
                    1,314,905
                    
                    
                    
                    5,287,364Machinery
      & Equipment
                    
                    
                    859,012
                    
                    
                    
                    216,235
                    
                    
                    
                    642,777Buildings
                    
                    
                    1,570,534
                    
                    
                    
                    222,412
                    
                    
                    
                    1,348,121Leasehold
      Improvements
                    
                    
                    80,211
                    
                    
                    
                    54,924
                    
                    
                    
                    25,287Office
      Equipment
                    
                    
                    229,782
                    
                    
                    
                    110,539
                    
                    
                    
                    119,243Total
                    
                    $
                    37,868,032
                    
                    
                    $
                    3,568,986
                    
                    
                    $
                    34,299,046




26




Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of June 30, 2009 and December 31, 2008
 (Stated
in US Dollars)




12/31/2008
                    
                    At Cost
                    
                    
                    Accumulated Depreciation
                    
                    
                    NetGas
      Pipelines
                    
                    $
                    27,859,313
                    
                    
                    $
                    1,532,478
                    
                    
                    $
                    26,326,835Motor
      Vehicles
                    
                    
                    5,600,508
                    
                    
                    
                    1,109,489
                    
                    
                    
                    4,491,019Machinery
      & Equipment
                    
                    
                    857,834
                    
                    
                    
                    198,072
                    
                    
                    
                    659,762Buildings
                    
                    
                    1,568,380
                    
                    
                    
                    193,126
                    
                    
                    
                    1,375,254Leasehold
      Improvements
                    
                    
                    80,101
                    
                    
                    
                    48,325
                    
                    
                    
                    31,776Office
      Equipment
                    
                    
                    216,435
                    
                    
                    
                    67,963
                    
                    
                    
                    148,472Total
                    
                    $
                    36,182,572
                    
                    
                    $
                    3,149,453
                    
                    
                    $
                    33,033,119





Depreciation
expenses included in the consolidated statements of income for the six months
ended June 30, 2009 were $419,533.




7. INTANGIBLE
ASSETS





Intangible
assets consisted of the following at June 30, 2009 and December 31,
2008:-





6/30/2009
                  
                  At Cost
                  
                  
                  Accumulated Amortization
                  
                  
                  NetLand
      Use Rights
                  
                  $
                  628,856
                  
                  
                  $
                  59,447
                  
                  
                  $
                  569,409Franchises
                  
                  
                  401,764
                  
                  
                  
                  370,719
                  
                  
                  
                  31,045Accounting
      Software
                  
                  
                  33,796
                  
                  
                  
                  15,884
                  
                  
                  
                  17,912Goodwill
                  
                  
                  1,680,280
                  
                  
                  
                  -
                  
                  
                  
                  1,680,280$
                  2,744,697
                  
                  
                  $
                  446,050
                  
                  
                  $
                  2,298,646





12/31/2008
                  
                  At Cost
                  
                  
                  Accumulated Amortization
                  
                  
                  NetLand
      Use rights
                  
                  $
                  510,907
                  
                  
                  $
                  32,938
                  
                  
                  $
                  477,969Franchises
                  
                  
                  401,214
                  
                  
                  
                  369,603
                  
                  
                  
                  31,611Accounting
      Software
                  
                  
                  15,312
                  
                  
                  
                  9,615
                  
                  
                  
                  5,697Goodwill
                  
                  
                  1,677,975
                  
                  
                  
                  -
                  
                  
                  
                  1,677,975$
                  2,605,408
                  
                  
                  $
                  412,156
                  
                  
                  $
                  2,193,252





The
Company operates as a local natural gas distributor in a city or county, known
as an operation location, under an exclusive franchise agreement between the
Company and the local government or entities in charge of gas utility.
Franchises are the rights to develop sites in Anping and Jinzhou in China. They
are stated at cost less accumulated amortization. Amortization expenses for the
six months ended June 30, 2009 was $33,894.


27


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





8.
            SHORT-TERM
      BANK LOAN





NameofBank
                          
                          DueDate
                          
                          InterestRate
                          
                          
                          6/30/2009
                          
                          
                          12/31/2008Bank
      of Dalian
                          
                          12/18/2009
                          
                          
                          6.69
                          %
                          
                          $
                          2,191,445
                          
                          
                          $
                          2,188,439Total
                          
                          
                          
                          
                          
                          
                          
                          $
                          2,191,445
                          
                          
                          $
                          2,188,439





Interest
expense for the short-term bank loan was $84,560 for the six-month period ended
June 30, 2009.




9.
            OTHER
      PAYABLES





Other
payables consisted of the following at June 30, 2009 and December 31,
2008:-





6/30/2009
                  
                  
                  12/31/2008Employees’
      Welfare Payables
                  
                  $
                  191,077
                  
                  
                  $
                  137,264Amount
      due to Employees
                  
                  
                  490,019
                  
                  
                  
                  366,732Tax
      Payable
                  
                  
                  72,194
                  
                  
                  
                  267,790Payables
      to Subcontractors
                  
                  
                  977,444
                  
                  
                  
                  1,060,462Raw
      Materials
                  
                  
                  347,269
                  
                  
                  
                  7,272Employees
      Training Program
                  
                  
                  6,891
                  
                  
                  
                  277,017Individual
      Travel Advance
                  
                  
                  7,676
                  
                  
                  
                  78,028Payments
      for Acquisition of Baishan Gas
                  
                  
                  3,901,907
                  
                  
                  
                  3,975,631Others
                  
                  
                  6,045
                  
                  
                  
                  4,675Total
                  
                  $
                  6,000,522
                  
                  
                  $
                  6,174,871




28


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





10.
            CAPITAL
      STOCK





The
authorized capital stock consists of (i) 250,000,000 shares of common stock, par
value      $0.001 per share, of which 26,769,313
shares are issued and outstanding, and (ii) 100,000,000 shares of preferred
stock, par value $0.001 per share. The preferred stock consists of (a) series A
convertible preferred stock, with 20,000,000 shares authorized and 0 shares are
issued and outstanding; (b) series B convertible preferred stock, with 5,000,000
shares authorized and 4,579,839 shares are issued and outstanding; and (c)
series B-1 convertible preferred stock, with 3,000,000 shares authorized and
95,418 shares are issued and outstanding.





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





Common
Stock





The
Company is authorized to issue 250,000,000 shares of common stock, with a par
value of $0.001.  There were 26,769,313 shares and 25,269,313 shares
of common stock issued and outstanding at June 30, 2009 and December 31, 2008,
respectively. 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.


29


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





On August
30, 2006, the Company’s board of directors designated 20,000,000 shares of its
preferred stock as series A convertible preferred stock and 5,000,000 shares of
its preferred stock as series B convertible preferred stock. On August 31, 2006,
the Company filed certificates of designations for the series A and series B
convertible preferred stock with the Office of the Secretary of State of
Utah.  On September 6, 2006, the board of directors amended the
designations of the Series B convertible preferred stock and the Company filed
an amended certificate of designations for the Series B convertible preferred
stock with the Office of the Secretary of State of Utah.  The board of
directors created the series A convertible preferred stock to allow the Company
to consummate the share exchange transaction with the Gas (BVI) Shareholders and
the series B convertible preferred stock in connection with its private
financing transactions. Each of the shares of series A convertible preferred
stock was automatically converted into one share of its common stock upon the
effectiveness of its reverse stock-split on November 17, 2006. On September 12,
2007, the Company’s board of directors designated 3,000,000 shares of its
preferred stock as series B-1 convertible preferred stock with the same right
and privilege as series B convertible preferred stock, and 95,418 shares of
series B-1 preferred stock were issued in connection with the September
financing transaction.  Therefore, at March 31, 2009 and December 31,
2008, the Company has no shares of series A convertible preferred stock issued
and outstanding, and has 4,579,839 and 95,418 shares of series B and series B-1
convertible preferred stock issued and outstanding respectively.





Conversion





The
Company issued 14,361,646 of its common shares upon the automatic conversion of
its series A convertible preferred shares after the 304.44-for-1 reverse
stock-split on November 17, 2006. The Company no longer has any series A
convertible preferred shares outstanding.





Each
share of the series B convertible preferred stock will become convertible into
common stock, at the option of its holder after the 304.44-for-1 reverse
stock-split, based on the then applicable conversion rate, which is initially
one share of series B convertible preferred stock for one share of common
stock.


30


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





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.


31


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





On
September 7, 2007, the Company entered into a securities purchase agreement with
a series of private placement investors leading by Vision Opportunity Master
Fund, Ltd. for a sale of 8,340,762 shares of the Company’s common
stock.  The Company generated an aggregate of $18,766,700 gross
proceeds.  Simultaneously, the Company entered into a Warrant Purchase
Agreement, Amendment and Waiver (“WPA”) with the holders of its outstanding
Warrants and Series B Preferred Stock, who acquired those securities by private
placement in September and October of 2006. Pursuant to the WPA, all of the
Series A and Series B Warrants issued in 2006 were purchased back by the Company
for $3,500,000; the exercise price of Series C Warrants was changed to $3.375;
all of the Series D Warrants was purchased for a purchase price of issuing
additional 770,897 shares of Series B preferred Stock; all of the outstanding
Series J and Series E Warrants were cancelled; additional 271,074 Series F
Warrants and 271,074 Series R Warrants were issued respectively. Among the
$18,766,700 cash gross proceeds, $3,500,000 was used to purchase back the Series
A and Series B Warrants issued in 2006 from private placement investors;
$1,473,833 was reimbursed to the placement agent Roth Capital, including the
out-of-pocket expenses and $232,028 legal counsel expense. The Company received
$13,792,866 net proceeds.





Financial Transactions9/7/2006
                    
                    
                    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 June 30, 2009.





AuthorizedShares
                    
                    
                    SharesissuedandoutstandingCommon
      Stock
                    
                    
                    250,000,000
                    
                    
                    
                    26,769,313Convertible
      Preferred Stock A
                    
                    
                    10,000,000
                    
                    
                    
                    -Convertible
      Preferred Stock B
                    
                    
                    5,000,000
                    
                    
                    
                    4,579,839Convertible
      Preferred Stock B-1
                    
                    
                    3,000,000
                    
                    
                    
                    95,418




32


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





StrikePrice
                      
                      ContractualLife
                      
                      Expiration
                        Date
                      
                      Sharesissued
                        andoutstanding
                      
                      
                      WeightedAverage
                        FairValueSeries
      A Warrants
                      
                      
                      3.84
                      
                      60
      Months
                      
                      9/6/2011
                      
                      
                      241,708
                      
                      
                      
                      0.70Series
      C Warrants
                      
                      
                      3.38
                      
                      60
      Months
                      
                      9/6/2011
                      
                      
                      3,083,589
                      
                      
                      
                      0.81Series
      F Warrants
                      
                      
                      4.84
                      
                      36
      Months
                      
                      9/6/2010
                      
                      
                      271,074
                      
                      
                      
                      0.20Series
      G Warrants
                      
                      
                      3.84
                      
                      48
      Months
                      
                      9/6/2011
                      
                      
                      109,489
                      
                      
                      
                      0.44Series
      R Warrants
                      
                      
                      4.84
                      
                      36
      Months
                      
                      9/6/2010
                      
                      
                      271,074
                      
                      
                      
                      0.20Stock
      Option
                      
                      
                      3.00
                      
                      48
      Months
                      
                      11/1/2010
                      
                      
                      100,000
                      
                      
                      
                      0.92





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




WarrantsA
                
                
                WarrantsC
                
                
                WarrantsF
                
                
                WarrantsG
                
                
                WarrantsR
                
                
                StockOptionWeighted-average
      fair value of warrants
                
                
                0.70
                
                
                
                0.81
                
                
                
                0.20
                
                
                
                0.44
                
                
                
                0.20
                
                
                
                0.92Strike
      price
                
                $
                3.84
                
                
                $
                3.38
                
                
                $
                4.84
                
                
                $
                3.84
                
                
                $
                4.84
                
                
                $
                3.00Risk-free
      interest rate
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %Expected
      volatility
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %Years
      to maturity
                
                
                5.00
                
                
                
                5.00
                
                
                
                3.00
                
                
                
                4.00
                
                
                
                3.00
                
                
                
                4.00




33


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





Total
Capitalization





The
following table depicts an analysis of total capitalization for the issuance of
Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional
Paid in Capital at June 30, 2009:-





Preferred Stock B
                  
                  
                  Preferred Stock B-1
                  
                  
                  Common StockName
      of
                    Shareholders
                  
                  Number
      of Shares
                    outstanding
                  
                  
                  Capital
                  
                  
                  Number
      of Shares
                    outstanding
                  
                  
                  Capital
                  
                  
                  Number
      of Shares
                    outstanding
                  
                  
                  Capital
                  
                  
                  Additional
      Paid
                    in
      Capital
                  
                  
                  %
      of Equity
                    HoldingsManager
      / Insider
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,653,662
                  
                  
                  
                  12,654
                  
                  
                  
                  4,064,862
                  
                  
                  
                  47
                  %Minority
      Investor
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,428,551
                  
                  
                  
                  3,428
                  
                  
                  
                  747,457
                  
                  
                  
                  13
                  %Private
      Placement- Investor
                  
                  
                  4,579,839
                  
                  
                  
                  4,580
                  
                  
                  
                  95,418
                  
                  
                  
                  95
                  
                  
                  
                  10,687,100
                  
                  
                  
                  10,687
                  
                  
                  
                  23,626,255
                  
                  
                  
                  40
                  %Beneficial-
      Conversion Feature
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,002,292
                  
                  
                  
                  -4,579,839
                  
                  
                  
                  4,580
                  
                  
                  
                  95,418
                  
                  
                  
                  95
                  
                  
                  
                  26,769,313
                  
                  
                  
                  26,769
                  
                  
                  
                  36,121,938
                  
                  
                  
                  100
                  %




34


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





11.
            SEGMENT
      INFORMATION





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





For
management purposes, the company is currently organized into two major operating
divisions: gas pipeline construction (installation of gas facilities) and sales
of piped gas. These principal operating activities are the basis on which the
Company reports its primary segment information.





Financial
Position Segment Report


As
of June 30, 2009





Gas
                            Distribution
                          
                          
                          Gas Pipeline
                            Installation
                          
                          
                          Shell, BVIs, &
                            Eliminations
                          
                          
                          TotalAssetsCurrent
      Assets
                          
                          $
                          10,775,979
                          
                          
                          $
                          4,285,265
                          
                          
                          $
                          218,364
                          
                          
                          $
                          15,279,607Non-Current
      Assets
                          
                          
                          17,364,469
                          
                          
                          
                          43,665,714
                          
                          
                          
                          -
                          
                          
                          
                          61,030,184Total
      Assets
                          
                          
                          28,140,448
                          
                          
                          
                          47,950,979
                          
                          
                          
                          218,364
                          
                          
                          
                          76,309,791LiabilitiesCurrent
      Liabilities
                          
                          
                          1,742,065
                          
                          
                          
                          15,850,180
                          
                          
                          
                          139,732
                          
                          
                          
                          17,731,977Total
      Liabilities
                          
                          
                          1,742,065
                          
                          
                          
                          15,850,180
                          
                          
                          
                          139,732
                          
                          
                          
                          17,731,977Net Assets
                          
                          
                          26,398,383
                          
                          
                          
                          32,100,799
                          
                          
                          
                          78,632
                          
                          
                          
                          58,577,814Liabilities & Equities
                          
                          $
                          28,140,448
                          
                          
                          $
                          47,950,979
                          
                          
                          $
                          218,364
                          
                          
                          $
                          76,309,791




35


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





Operation
Result Segment Report


For
the six months ended June 30, 2009





Gas
                      Distribution
                    
                    
                    Gas Pipeline
                      Installation
                    
                    
                    Shell,BVIs,&
                      Eliminations
                    
                    
                    TotalSales
      Revenue
                    
                    $
                    10,441,304
                    
                    
                    $
                    4,152,176
                    
                    
                    $
                    (2,224,168
                    )
                    
                    $
                    12,369,312Cost
      of Revenue
                    
                    
                    (10,164,044
                    )
                    
                    
                    (1,629,521
                    )
                    
                    
                    2,224,168
                    
                    
                    
                    (9,569,397
                    )Gross
      Profit
                    
                    
                    277,260
                    
                    
                    
                    2,522,655
                    
                    
                    
                    -
                    
                    
                    
                    2,799,915Operating
      Expense
                    
                    
                    (142,883
                    )
                    
                    
                    (1,300,024
                    )
                    
                    
                    (223,742
                    )
                    
                    
                    (1,666,649
                    )Operating
      Income/(Loss)
                    
                    
                    134,377
                    
                    
                    
                    1,222,631
                    
                    
                    
                    (223,742
                    )
                    
                    
                    1,133,266Other
      Income/(Loss)
                    
                    
                    (9,215
                    )
                    
                    
                    (83,846
                    )
                    
                    
                    470
                    
                    
                    
                    (92,591
                    )Earnings
      before tax
                    
                    
                    125,162
                    
                    
                    
                    1,138,785
                    
                    
                    
                    (223,272
                    )
                    
                    
                    1,040,675Income
      tax
                    
                    
                    (27,123
                    )
                    
                    
                    (246,781
                    )
                    
                    
                    -
                    
                    
                    
                    (273,904
                    )Net
      Income
                    
                    $
                    98,039
                    
                    
                    $
                    892,004
                    
                    
                    $
                    (223,272
                    )
                    
                    $
                    766,771





Financial
Position Segment Report


As
of December 31, 2008





Gas
                            
                            
                            Gas Pipeline
                            
                            
                            Shell,BVIs,&Distribution
                            
                            
                            Installation
                            
                            
                            Eliminations
                            
                            
                            TotalAssetsCurrent
      Assets
                            
                            $
                            11,815,718
                            
                            
                            $
                            3,915,982
                            
                            
                            $
                            423,986
                            
                            
                            $
                            16,155,686Non-Current
      Assets
                            
                            
                            14,474,690
                            
                            
                            
                            43,066,162
                            
                            
                            
                            -
                            
                            
                            
                            57,540,852Total
      Assets
                            
                            
                            26,290,408
                            
                            
                            
                            46,982,144
                            
                            
                            
                            423,986
                            
                            
                            
                            73,696,538LiabilitiesCurrent
      Liabilities
                            
                            
                            1,353,788
                            
                            
                            
                            14,487,400
                            
                            
                            
                            -
                            
                            
                            
                            15,841,188Total
      Liabilities
                            
                            
                            1,353,788
                            
                            
                            
                            14,487,400
                            
                            
                            
                            -
                            
                            
                            
                            15,841,188Net Assets
                            
                            
                            24,936,619
                            
                            
                            
                            32,494,745
                            
                            
                            
                            423,986
                            
                            
                            
                            57,855,350Liabilities & Equities
                            
                            $
                            26,290,407
                            
                            
                            $
                            46,982,144
                            
                            
                            $
                            423,986
                            
                            
                            $
                            73,696,538




36


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





Operation
Result Segment Report


For
the six months ended June 30, 2008





Gas
                      
                      
                      Gas Pipeline
                      
                      
                      Shell,BVIs,&Distribution
                      
                      
                      Installation
                      
                      
                      Eliminations
                      
                      
                      TotalSales
      Revenue
                      
                      $
                      6,553,899
                      
                      
                      $
                      2,909,739
                      
                      
                      $
                      -
                      
                      
                      $
                      9,463,638Cost
      of Revenue
                      
                      
                      (5,709,186
                      )
                      
                      
                      (820,877
                      )
                      
                      
                      -
                      
                      
                      
                      (6,530,063
                      )Gross
      Profit
                      
                      
                      844,713
                      
                      
                      
                      2,088,862
                      
                      
                      
                      -
                      
                      
                      
                      2,933,575Operating
      Expense
                      
                      
                      (494,742
                      )
                      
                      
                      (1,223,431
                      )
                      
                      
                      (646,603
                      )
                      
                      
                      (2,364,776
                      )Operating
      Income/(Loss)
                      
                      
                      349,971
                      
                      
                      
                      865,431
                      
                      
                      
                      (646,603
                      )
                      
                      
                      568,799Other
      Income/(Loss)
                      
                      
                      (67,795
                      )
                      
                      
                      (167,648
                      )
                      
                      
                      (418,119
                      )
                      
                      
                      (653,562
                      )Earnings
      before tax
                      
                      
                      282,176
                      
                      
                      
                      697,783
                      
                      
                      
                      (1,064,722
                      )
                      
                      
                      (84,763
                      )Income
      tax
                      
                      
                      (87,190
                      )
                      
                      
                      (215,608
                      )
                      
                      
                      -
                      
                      
                      
                      (302,798
                      )Net
      Income
                      
                      $
                      194,986
                      
                      
                      $
                      482,174
                      
                      
                      $
                      (1,064,722
                      )
                      
                      $
                      (387,561
                      )





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





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


37


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





12.
            INCOME
      TAX




On
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 will refund $231,185, (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 periods ended June
30, 2009 and 2008.




6/30/2009
                    
                    
                    6/30/2008Provision
      for Income Tax - PRC Subsidiaries
                    
                    $
                    505,089
                    
                    
                    $
                    302,798Tax
      Exemption - Granted by PRC Government
                    
                    
                    (231,185
                    )
                    
                    
                    -Income
      Tax
                    
                    $
                    273,904
                    
                    
                    $
                    302,798





38


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





13.
            EARNINGS
      PER SHARE





Components
of basic and diluted earnings per share was as follows:-





6/30/2009Net
      Income
                      
                      $
                      766,771Preferred
      Dividends
                      
                      
                      -Constructive
      Preferred Dividends
                      
                      
                      -Income
      Available to Common Stockholders
                      
                      $
                      766,771Original
      Shares
                      
                      
                      25,269,313Addition
      to Common Stock
                      
                      
                      433,333Basic
      Weighted Average Shares Outstanding
                      
                      
                      25,702,646Addition
      to Common Stock from Conversion of Preferred Stock B
                      
                      
                      4,579,839Addition
      to Common Stock from Conversion of Preferred Stock B-1
                      
                      
                      95,418Addition
      to Common Stock from Exercise of Warrants
                      
                      
                      -Diluted
      Weighted Average Shares Outstanding
                      
                      
                      30,377,903Earnings
      Per Share-   
      Basic
                      
                      $
                      0.03-   
      Diluted
                      
                      $
                      0.02Weighted
      Average Shares Outstanding-   
      Basic
                      
                      
                      25,702,646-   
      Diluted
                      
                      
                      30,377,903




39


Sino
Gas International Holdings, Inc.


Notes
to Consolidated Financial Statements


As
of June 30, 2009 and December 31, 2008


(Stated
in US Dollars)





14.
            LIQUIDATED
      DAMAGE





The
Company entered into a registration rights agreement related to a private
placement financing transaction with accredited investors on September 13, 2007.
Pursuant to the agreement, the Company had to (1) file the registration
statement within 45 days of the execution, and (2) declare the effectiveness
within 150 days of filing the registration statement. However, the Company did
not meet the aforementioned requirements under the registration rights
agreement, and was subjected to liquidated damages. The Company has paid
$481,805 in liquidated damages to investors in 2008, which was reported as other
expense in the statements of income.





15.
            CONTINGENT
      LIABILITIES





Pursuant
to the warrants purchase agreement related to 2006 private placement financing
transactions, the Company was required to reach $7.9 million and $11 million net
income target for the fiscal years ended 2007 and 2008 respectively. However,
the Company did not meet the stipulated 2007 and 2008 net income target and
therefore incurred certain contingent liabilities.




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 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 in the compensation of 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.




40




Item 2.  Management’s Discussion and
Analysis





The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve significant risks
and uncertainties. As a result of many factors, such as those set forth
elsewhere in this Form 10-Q, our actual results may differ materially from those
anticipated in these forward-looking statements.





Economic
& Industrial Trend





We
generate revenue from two sources: connection fees for constructing connections
to our natural gas distribution network and sales of natural gas. Our connection
activities are closely related to the development of the real estate industry in
our targeted cities in China, given the fact that almost all of our connection
fees are from new residential apartments. Natural gas facilities in new
apartments are often required by local governments, which aim to promote the use
of natural gas to improve local residents’ quality of life.





We have
experienced growth of our connection activities since inception of our business
due to the Chinese real estate boom in the past years. However, starting 2007,
the Chinese government implemented a series of policies and regulations to curb
inflation and the property market. These policies, together with the worldwide
financial crisis in 2008, has resulted a slowdown of the real estate market in
China and our business, in turn, was affected in 2008. Recently, the Chinese
government has changed its policies and prioritized boosting of the economy. The
Chinese government has adopted new policies to address the slowdown of the real
estate market, such as reducing stamp duties and transactions fees, lowering
interest rates, and loosening bank lending policies. The Chinese government has
also decided to inject stimulus package to boost the overall economy,
including allocation of funds for mass housing projects. We have seen signs of
recovery of the real estate market in China in recent months.





There are
three primary
factorin the Chinese economy: domestic consumption (both private and
public), net exports, and domestic investment. The Chinese Government's RMB 4
trillion stimulus package has had significant impact on China's
domestic production and investments in the past several months. There haven been
signs of the improvement in investments, retail sales and industrial output
data. Retail sales are rebounding in the past three months. Massive government
spending on infrastructure boosts China's Fixed Asset Investment (FAI) with year
on year growth average over 30% in the first five months of the
year.  However, exports and imports continues to decline. Exports
decreased 26.4% in the month of May compared with the same period of last
year. Export have been negatively affected by the economic slowdown of the
US and European countries. In summary, the Chinese economy is gradually
improving with government support.





Our gas
users are composed of industrial and residential users. Gas sales to residential
users are much less affected by economic and industrial factors and we
anticipate that such sales would maintain stable growth in the future, due to
the increasing pool of our residential customers. Gas sales to industrial users
are subject to the performance of the end industrial users. Year on year growth
of Gas sales to our industrial users is 24.51% during the first half of 2009 as
existing users have expanded their production capacity. As we expand into more
cities, we expect to add one to two industrial users in the coming year if
capital is available.





Material
Opportunities





The gas
distribution market is quite fragmented in the small (population less than
100,000) to medium (population between 100,000 to 300,000) sized
cities. We have been in active talks with potential project targets. The size of
the projects varies from small cities, like the ones we have, to medium-sized
cities. For small city markets, many of them are still untapped or undeveloped.
The development of these markets is generally considered our major growth
components. The current worldwide financial crisis has created pricing
opportunities for us to acquire projects since we may have opportunities
to acquire projects at attractive prices.





Most
medium-sized or large cities have already been developed by large gas
distributors or are still operated by state-owned companies. Acquisition
opportunities exist in state-owned companies, as the central government
encourages suppliers to turn them into privately-owned companies. The expansion
into these markets would have material impact on the Company, increasing the
Company’s assets and revenues significantly. The Company would
require additional fundraising for such acquisitions.





Material
Challenges





There are
a vast number of small-to-medium sized cities left undeveloped by our industry,
but the competition is intense, as there are many small new players in the
market attracted by the profitability and growth potentials of the natural gas
business. Meanwhile, from time to time, we are also facing competitions from
stronger competitors, as large city markets are getting saturated and our
competitors are beginning to expand into smaller cities.





We  have
limited opportunities in developing into first-tier cities in China, as most of
them have already been taken by other large gas distributors, such as Xin’ao Gas
Co. Ltd (largest in China), in the past decade.


41





Still,
potential residential users in small and medium-sized cities need to be educated
about the benefits of using natural gas. Time is required for residents to
realize the benefits of natural gas. This is especially true for new markets,
where there is no use of natural gas. Small cities tend to be more reluctant for
use of new energy resources, such as natural gas, than large cities, and
residents depend more on coal.





China’s
energy market is highly regulated by the government with regard to the purchase
and sale price of natural gas. When an adjustment to the purchase price by the
government occurs, gas distributors will correspondingly increase the sale
price, subject to a public hearing and government approval. The increase of
natural gas price in China is lagging behind that in the international markets,
which has soared in the past year. The Chinese government has seldom adjusted
natural gas price, but we cannot rule out the possibilities of the increase of
natural gas prices in the future. We can adjust the sale price accordingly after
the increase of purchase price.  However, passing the increase to end
users would make natural gas more expensive, as compared to other alternative
energies. Thus this increase of price will deter our business
development.





Risks
in Short-Term and Long-Term Periods





In each
of the cities we are developing and aiming to develop, the real estate market is
the major factor that impacts us. Most of our residential customers are new home
buyers. If the real estate market turns downward, the demands for new homes
would decrease, resulting in fewer natural gas connections, and thus negatively
impacting our business.





To reduce
the Company’s heavy dependence on connection fees, the Company is exploring
opportunities to diversify our business by expanding into related areas, such as
pipeline and gas station businesses. However, we do not expect to expand into
these areas in large scale in the near future.





Liquidity
and Capital Resources





Natural
gas distribution is a capital-intensive industry that requires large amounts of
capital for the construction of pipelines and gas stations, and the purchase of
transportation vehicles. The Company would be constrained by inadequate capital
when developing into larger cities or engaging in merger and acquisition
activities. With such situations, the Company would require additional
fundraising to finance such business activities.





Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008




During
the three months ended June 30, 2009, net revenues were $7,331,620, representing
an increase of 43.15 % from the same period of last year.  Gross
profit for the three months ended June 30, 2009 was $1,535,435, representing a
decrease of 2.01% from the same period of last year.  Our operating
income for the three months ended June 30, 2009 was $584,305, representing
an increase of 168.88% from the same period of 2008.  Net income for the
three months ended June 30, 2009 was $421,134, representing an improvement of
178.44% from loss of -$536,888 for the same period of 2008.





For the 3 months ended
                  June 30,2009
                
                
                2008
                
                
                ChangeUS$
                
                
                US$Net
      Revenues
                
                
                7,331,620
                
                
                
                5,121,521
                
                
                
                43.15
                %Gross
      Profit
                
                
                1,535,435
                
                
                
                1,566,930
                
                
                
                -2.01
                %Operating
      Income
                
                
                584,305
                
                
                
                217,308
                
                
                
                168.88
                %Net
      Income
                
                
                421,134
                
                
                
                -536,888
                
                
                
                -178.44
                %Gross
      Margin
                
                
                20.94
                %
                
                
                30.60
                %
                
                
                -
      31.55
                %Net
      Margin
                
                
                5.74
                %
                
                
                -10.48
                %





Net
Revenues




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




Total net
revenues for the three months ended June 30, 2009 were $7,331,620, compared to
$5,121,521 for the same period in 2008, representing an increase of 43.15%. The
increase was mainly due to the increase of both gas sales and connection fees.
During this period, we connected 7,218 new residential households to our gas
distribution network, resulting in total connection fees of
$2,928,440.  Gas sales during the same period were 11.38 million cubic
meters, or $4,403,180. In comparison, we connected 5,848 new residential
households to our gas distribution network for the same period in 2008,
resulting in total connection fees of $1,555,041. Gas sales during the period
were 10.55 million cubic meters, or $3,566,480.




42




For the 3 months ended June
      30,2009
                
                
                2008
                
                
                Change(In
      $ million)
                
                US$
                
                
                %
                
                
                US$
                
                %
                
                
                %Net
      Revenues
                
                
                7.33
                
                
                
                100
                %
                
                
                5.12
                
                
                
                100
                %
                
                
                43.15
                %Connection
      Fees
                
                
                2.93
                
                
                
                40
                %
                
                
                1.56
                
                
                
                30
                %
                
                
                88.32
                %Gas
      Sales
                
                
                4.40
                
                
                
                60
                %
                
                
                3.56
                
                
                
                70
                %
                
                
                23.46
                %





The
increases in our net revenues for the three months ended June 30 were due
to the following factors:





1)
Increase of gas sales. With more customers added to our existing gas
network distribution system, our gas sales increased accordingly.





2)
Increase of connection fees from residential customers.





l
            We
      connected more residential households during the second quarter of 2009
      compared to the same period of last
year.





l
            Higher
      average connection fees per unit. In the second quarter of 2009, we
      developed certain residential projects with higher connection fees per
      unit, compared with the same period of
2008.





Connection
Fees





Connection
fees during the three months ended June 30, 2009 were $2.93 million,
representing an increase of 88.32% over the same period of 2008, accounting
for 40% of the total net revenue as compared with approximately 30% of the
total net revenue for the same period in 2008. The source of connection fees was
mainly from the development of new residential users.





For the 3 months ended June
      30,(in US$ millions)
                
                2009
                
                
                2008
                
                
                ChangeUS$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Connection
      Fees
                
                
                2.93
                
                
                
                100
                %
                
                
                1.56
                
                
                
                100
                %
                
                
                88.32
                %Residential
      Users
                
                
                2.93
                
                
                
                100
                %
                
                
                1.56
                
                
                
                100
                %Industrial
      Users
                
                
                0.00
                
                
                
                0
                %
                
                
                0.00
                
                
                
                0
                %





Gas
Sales





In terms
of volume, we sold 11.38 million cubic meters of natural gas during the three
months ended June 30, 2009, compared with 10.55 million cubic meters for the
same period of 2008. In terms of monetary value, gas sales were
$4.40 million during the three months ended June 30, 2009, accounting
for 60% of total net revenue for the three months ended June 30, 2009,
representing an increase of 23.46% over the same period of 2008. Gas sales
to residential users increased 68.8% to $2.26 million for the three months ended
June 30, 2009 from $1.34 million in the same period of 2008. Gas sales to
industrial and commercial users decreased 3.89% to $2.14 million for the
three months ended June 30, 2009 from $2.23 million in the same period of
2008.


43




For the 3 months ended June 30,2009
                  
                  
                  2008
                  
                  
                  Change($
      million)
                  
                  US$
                  
                  
                  %
                  
                  
                  US$
                  
                  
                  %
                  
                  
                  %Gas
      Sales
                  
                  
                  4.40
                  
                  
                  
                  100
                  %
                  
                  
                  3.57
                  
                  
                  
                  100
                  %
                  
                  
                  23.46
                  %Residential
      Users
                  
                  
                  2.26
                  
                  
                  
                  51
                  %
                  
                  
                  1.34
                  
                  
                  
                  36
                  %
                  
                  
                  68.81
                  %Industrial and
      Commercial Users
                  
                  
                  2.14
                  
                  
                  
                  49
                  %
                  
                  
                  2.23
                  
                  
                  
                  64
                  %
                  
                  
                  -3.89
                  %




Overall,
the increases of gas sales were primarily due to the fact that our invested
projects maintained steady development, and more users were added to our gas
distribution network.





As our
residential customer base grows, gas sales to residential users would increase
gradually.





Cost
of Revenues





Cost of
revenues for the three months ended June 30, 2009, which includes cost of
connection and cost of gas sales, was $5.8 million, representing an increase of
63.06% from $3.55 million in the same period of 2008.





For the 3 months ended June
      30,2009
                
                
                2008
                
                
                Change($
      million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Cost
      of Revenues
                
                
                5.80
                
                
                
                100
                %
                
                
                3.55
                
                
                
                100
                %
                
                
                63.06
                %Connection
      Cost
                
                
                1.50
                
                
                
                26
                %
                
                
                0.39
                
                
                
                11
                %
                
                
                283.47
                %Gas
      Cost
                
                
                4.30
                
                
                
                74
                %
                
                
                3.16
                
                
                
                89
                %
                
                
                35.82
                %





Cost of
Connection





The cost
of connection increased 283.47%  to $1.50 million during the three months
ended June 30, 2009 from $0.39 million for the same period in 2008. This
increase, which outpaced the 88.32% increase in connection fees revenue during
the same period, is mainly due to higher cost of raw materials, parts,
installation and maintenance fees, and adjustment in the second quarter of cost
of connection from the first quarter of 2009.




44




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





Considering
the city's overall planning and our long-term interests, the capacity of the gas
pipeline network we designed to distribute gas for a city usually greatly
exceeded the number of households we served at the beginning of our service,
which makes the cost of connection, specifically the depreciation of pipelines
and maintenance cost relatively high if the number of residential users
connected is low. However, with the connection of more households to the gas
pipeline, the average cost to each household will be gradually
reduced.





Cost of
Gas Sales





The cost
of gas sales increased 35.82% to $4.30 million during the three months
ended June 30, 2009 from $3.16 million for the same period in 2008. This
increase, which surpassed the 23.46% increase in sales of natural gas during the
same period, is largely due to the increase of rental expenses on gas delivery
equipments and higher fuel costs.





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





Gross
Profit





During
the three months ended June 30, 2009, gross profit was $1.54 million,
representing a decrease of approximately 2.01% from the same period of
2008. Gross profit from connection fees was $1.43 million for the three months
ended June 30, 2009, accounting for 93% of total gross profit. In
comparison, gross profit from connection fees was $1.16 million for the three
months ended June 30, 2008, accounting for 74% of total gross profit. Gross
profit from gas sales was $0.11 million for the three months ended June 30,
2009, accounting for 7% of total gross profit, compared to $0.40 million,
accounting for 26% of total gross profit in the same period of
2008.




For the 3 months ended June
      30,2009
                
                
                2008
                
                
                Change($ million)
                
                US$
                
                
                %
                
                
                US$
                
                
                %
                
                
                %Gross
      Profit
                
                
                1.54
                
                
                
                100
                %
                
                
                1.57
                
                
                
                100
                %
                
                
                -2.01
                %Connection
                
                
                1.43
                
                
                
                93
                %
                
                
                1.16
                
                
                
                74
                %
                
                
                22.76
                %Gas
                
                
                0.11
                
                
                
                7
                %
                
                
                0.40
                
                
                
                26
                %
                
                
                -73.56
                %





Gross
margin during the three months ended June 30, 2009 was 20.94%,
compared to 30.60% during the same period in 2008.





Gross
margin for connection fees for the three months ended June 30, 2009,
was 48.79%, compared to 74.85% in the same period of 2008.





Gross
margin for sales of natural gas was 2.42% for the three months ended June
30, 2009, compared to 11.30% during the same period of 2008.




Selling
and Marketing Expenses





Our
selling and marketing expenses in the three months ended June 30, 2009 were
$0.22 million, approximately 2.97% of our net revenues, compared with $0.19
million or 3.64 % of our net revenues in the same period of
2008.





General
and Administrative Expenses and Other Expenses





General
and administrative expenses were $0.73 million for the three months ended June
30, 2009, which was 36.94% lower than $1.16 million for the same period of 2008.
Other expense was $0.05 million for the three months ended June 30, 2009,
compared with 0.63 million for the same period of 2008. The decrease was largely
due to the elimination of non-recurrent expenses incurred in
the second quarter of 2008, including the fees of legal counsel for
registration and fees of financial consultant, the escrow account expenses,
costs for Sarbanes-Oxley compliance consultation, and the penalties of late
registration and late registration statement effectiveness.





Operating
Income





The
operating income for the three months ended June 30, 2009 was $0.58 million,
representing an increase of 168.88%, compared to the operating income
of $0.22 million for the same period of  2008.





Income
tax





Income
tax was $0.12 million for the three months ended June 30, 2009, compared to
$0.13 million for the same period of 2008.


45





Net
Income





Net
income for the three months ended June 30, 2009 was $0.42 million,
representing an improvement of 178.44% from loss of -$0.54 million for the
same period of 2008. The improvement is mainly due to the decrease of SG&A
and other expenses.





Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008





During
the six months ended June 30, 2009, our net revenues and gross profit were
$12,369,312 and $2,799,915, respectively, representing an increase
of 30.70% and a decrease of 4.56%, respectively, from those of the
same period in the previous year. Our operating income in 2009 was $1,133,266,
representing an increase of 99.24% from 2008.  Net income for the six
months ended June 30, 2009 was $766,771, representing an improvement
of 297.85% from loss of -$387,561 for the same period of
2008.





For the 6 months ended
                  June 30,2009
                
                
                2008
                
                
                ChangeUS$
                
                
                US$
                
                
                %Net
      Revenues
                
                
                12,369,312
                
                
                
                9,463,638
                
                
                
                30.70
                %Gross
      Profit
                
                
                2,799,915
                
                
                
                2,933,575
                
                
                
                -4.56
                %Operating
      Income
                
                
                1,133,266
                
                
                
                568,799
                
                
                
                99.24
                %Net
      Income
                
                
                766,771
                
                
                
                -387,561
                
                
                
                -297.85
                %Gross
      Margin
                
                
                22.64
                %
                
                
                31.00
                %
                
                
                -26.98
                %Net
      Margin
                
                
                6.20
                %
                
                
                -4.10
                %





Net
Revenues





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





Total net
revenues for the six months ended June 30, 2009 were $12,369,312, compared to
$9,463,638 for the same period in 2008, representing an increase of 30.70%. The
increase was due to increase of natural gas and connection fees revenue,
resulting from the higher connection per unit we charged to the customer. During
this period, we connected 10,096 new residential households to our gas
distribution network, resulting in total connection fees of $4,152,176. Gas
sales during the same period amounted to 22.9 million cubic meters, or
$8,217,136. In comparison, we connected 10,438 new residential households to our
gas distribution network in 2008, resulting in total connection fees of
$2,909,739. Gas sales during the period amounted to 20.00 million cubic meters,
or $6,553,899.


46




For the 6 months ended June 30,2009
                        
                        
                        2008
                        
                        
                        Change(In
      $ million)
                        
                        US$
                        
                        
                        %
                        
                        
                        US$
                        
                        
                        %
                        
                        
                        %Net
      Revenues
                        
                        
                        12.37
                        
                        
                        
                        100
                        %
                        
                        
                        9.46
                        
                        
                        
                        100
                        %
                        
                        
                        30.70
                        %Connection
      Fees
                        
                        
                        4.15
                        
                        
                        
                        34
                        %
                        
                        
                        2.91
                        
                        
                        
                        31
                        %
                        
                        
                        42.70
                        %Gas
      Sales
                        
                        
                        8.22
                        
                        
                        
                        66
                        %
                        
                        
                        6.55
                        
                        
                        
                        69
                        %
                        
                        
                        25.38
                        %





Connection
Fees





Connection
fees during the six months ended June 30, 2009 were $4.15 million, representing
an increase of 42.70% over the same period of 2008, accounting for 34% of
the total net revenue compared with approximately 31% for the same period in
2008. With regard to the source of connection fees, almost all connection
fees came from the development of new residential users. We
connected 10,096 residential users during the six months ended June 30,
2009.




For the 6 months ended June
      30,(in
      US$ millions)
                        
                        2009
                        
                        
                        2008
                        
                        
                        ChangeUS$
                        
                        
                        %
                        
                        
                        US$
                        
                        
                        %
                        
                        
                        %Connection
      Fees
                        
                        
                        4.15
                        
                        
                        
                        100
                        %
                        
                        
                        2.91
                        
                        
                        
                        100
                        %
                        
                        
                        42.70
                        %Residential
      Users
                        
                        
                        4.07
                        
                        
                        
                        98
                        %
                        
                        
                        2.91
                        
                        
                        
                        100
                        %
                        
                        
                        39.79
                        %Industrial
      Users
                        
                        
                        0.08
                        
                        
                        
                        2
                        %
                        
                        
                        0.00
                        
                        
                        
                        0
                        %
                        
                        %





Such
increase was primarily attributable to the higher average connection fees
per unit compared to the same period of 2008. In the first half of 2009, we
developed certain residential projects with higher connection fees per unit. The
higher connection fees per unit helped to increase the total connection fees
revenue.





Gas
Sales





In terms
of volume, we sold 22.90 million cubic meters of natural gas during the six
months ended June 30, 2009, compared with 20.00 million cubic meters in 2008.
Overall, the increases of gas sales were primarily due to the fact that our
invested projects maintained steady development, and more users were added to
our gas distribution network. In terms of value, gas sales were $8.22 million
during the six months ended June 30, 2009, accounting for 66% of total net
revenue in 2009, representing an increase of 25.38% over the year 2008. Gas
sales to residential increased 62.94% from $2.03 million in
2008 to $3.31million in 2009. Gas sales to industrial and commercial users
increased 8.54%, from $4.52 million in 2008 to $4.91 million in
2009.




For the 6 months ended June
      30,2009
                          
                          
                          2008
                          
                          
                          Change($
      million)
                          
                          US$
                          
                          
                          %
                          
                          
                          US$
                          
                          
                          %
                          
                          
                          %Gas
      Sales
                          
                          
                          8.22
                          
                          
                          
                          100
                          %
                          
                          
                          6.55
                          
                          
                          
                          100
                          %
                          
                          
                          25.38
                          %Residential
      Users
                          
                          
                          3.31
                          
                          
                          
                          40
                          %
                          
                          
                          2.03
                          
                          
                          
                          31
                          %
                          
                          
                          62.94
                          %Industrial
      and Commercial Users
                          
                          
                          4.91
                          
                          
                          
                          60
                          %
                          
                          
                          4.52
                          
                          
                          
                          69
                          %
                          
                          
                          8.54
                          %




47





Cost
of Revenues





Cost of
revenues for the six months ended June 30, 2009, which includes cost of
connection and cost of gas sales was $9.57 million, an increase of 46.54%, from
$6.53 million in the same period of 2008.





For the 6 months
      ended June 30,2009
                        
                        
                        2008
                        
                        
                        Change($
      million)
                        
                        US$
                        
                        
                        %
                        
                        
                        US$
                        
                        
                        %
                        
                        
                        %Cost
      of Revenues
                        
                        
                        9.57
                        
                        
                        
                        100
                        %
                        
                        
                        6.53
                        
                        
                        
                        100
                        %
                        
                        
                        74.98
                        %Connection
      Cost
                        
                        
                        1.63
                        
                        
                        
                        17
                        %
                        
                        
                        0.82
                        
                        
                        
                        13
                        %
                        
                        
                        98.51
                        %Gas
      Cost
                        
                        
                        7.94
                        
                        
                        
                        83
                        %
                        
                        
                        5.71
                        
                        
                        
                        87
                        %
                        
                        
                        39.07
                        %





Cost of
Connection





The cost
of connection increased 98.51% to $1.63 million during the six months ended
June 30, 2009 from $0.82 million for the same period in 2008. This
increase, which outpaced the 42.70% increase in connection fees revenue during
the same period, is mainly due to higher cost of raw materials, parts, and
installation and maintenance fees.





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





Considering
the city's overall planning and the long-term interests of our company, the
capacity of the gas pipeline network we designed to distribute gas for a city
usually greatly exceeded the number of households we served at the very
beginning, which makes the cost of connection, specifically the depreciation of
fixed assets and maintenance cost greatly increase. However, with connection of
more households to the gas pipeline, the average cost to each household will be
gradually reduced.





Cost of
Gas Sales





The cost
of gas sales increased 39.07% to $7.94 million during the six months ended June
30, 2009 from the same period in 2008, when it was $5.71 million. This
increase, which surpassed the 25.38% increase in sales of natural gas during the
same period, is largely due to the increase of rental expenses on gas delivery
equipments and higher fuel costs.





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


48




Gross
Profit





Gross
profit slightly decreased from $2.93 million in 2008 to $2.8 million for
2009.




For the 6 months
      ended June 30,2009
                        
                        
                        2008
                        
                        
                        Change($
      million)
                        
                        US$
                        
                        
                        %
                        
                        
                        US$
                        
                        
                        %
                        
                        
                        %Gross
      Profit
                        
                        
                        2.80
                        
                        
                        
                        100
                        %
                        
                        
                        2.93
                        
                        
                        
                        100
                        %
                        
                        
                        -4.56
                        %Connection
                        
                        
                        2.52
                        
                        
                        
                        90
                        %
                        
                        
                        2.09
                        
                        
                        
                        71
                        %
                        
                        
                        20.77
                        %Gas
                        
                        
                        0.28
                        
                        
                        
                        10
                        %
                        
                        
                        0.84
                        
                        
                        
                        29
                        %
                        
                        
                        -67.18
                        %





During
the six months ended June 30, 2009, gross profit was $2.80 million,
a decrease of approximately 4.56% from the same period of 2008. Gross
profit from connection fees is $2.52 million for the six months of 2009,
accounting for 90% of total gross profit. In comparison, gross profit from
connection fees was $2.09 million for the six months of 2008, accounting for 71%
of total gross profit. Gross profit from gas sales was $0.28 million, accounting
for 10% of total gross profit, compared to $0.84 million, 29% of total gross
profit in the same period of 2008.





Gross
margin during six months ended June 30, 2009 is 22.64%, compared to 31.00%
during the same period in 2008.





Gross
margin for connection fees for the six months ended June 30, 2009 was 60.76%,
compared to 71.79% during the same period of 2008. The decrease of connection
gross margin is mainly because we built gas distribution infrastructures which
can be used for 25-30 years by the total potential residential households in our
operating cities and, now, only a small proportion of residential households
have been connected. As a result, the depreciation under the cost of connection
is relatively higher if the number of residential users connected is low.
As we develop more households in the cities, the margin will
improve.  Higher cost of raw materials, parts, and installation and
maintenance fees also contributed the decrease.





Gross
margin for sales of natural gas was 3.37% for the six months ended June 30,
2009, compared to 12.89% during the same period of 2008. The decrease was due to
an increase of rental expenses on gas delivery trucks and higher cost of
fuel.





Selling
and Marketing Expenses





Our
selling and marketing expenses in the six months ended June 30, 2009 were
$420,490 and approximately 3.4% of our net revenues, compared with $367,896, or
3.89% of net revenues in the same period of 2008.





General
and Administrative Expenses and other expenses





General
and administrative expenses were $1.25 million for the six months ended June 30,
2009, which was 37.5% lower than $2.00 million for the same period
last year. Other expense was $0.09 million for the six months ended June 30,
2009, compared with 0.65 million for the same period of 2008. The decrease was
largely due to the elimination of non-recurrent expenses incurred in first half
of 2008, including the fees of legal counsel for registration and fees of
financial consultant, the escrow account expenses , costs for Sarbanes-Oxley
compliance consultation, and the penalties of late registration and late
registration statement effectiveness.





Operating
Income





The
operating income for the six months ended June 30, 2009 was $1.13 million,
representing an increase of 98.2%, compared to the operating income of $0.57
million in 2008.


49




Income
tax





Income
tax was $0.27million for the six months ended June 30, 2009, compared to $0.30
million in 2008.





Net
Income





Net
income in the six months ended June 30, 2009 was $0.77 million, representing a
strong improvement of 297.85% from  loss of -$0.39 million in the same
period in 2008. This improvement was due to the significant decrease of SG&A
and other expenses during the first six months ended June 30, 2009 as compared
to the same period of 2008.





Liquidity
and Capital Resources





Cash and
cash equivalents were $1.85 million as of June 30, 2009, a decrease of $1.18
million as compared to $3.03 million of cash and cash equivalents as of
December 31, 2008.





In the
first half of 2009, the major source of cash was the Company’s operating
activities. Cash sourced in operating activities during the six months
ended June 30, 2009 is $2.81 million, an increase of $6.37 million from
($3.56) million during the same period of 2008. Such increase was mainly due to
the increase of net income, adjusted for non-cash expense items and changes in
working capital.





There are
no financing activities during the six months ended June 30,
2009, resulting in a decrease of $4.54 million from that during the same
period of 2008.





Cash used
in investing activities during the six months ended June 30, 2009 is $3.94
million, a decrease of $2.56 million from $6.50 million during the same period
of 2008.  Such decrease was mainly due to the decrease of property,
plant & equipment, and construction in progress.





Accounts
Receivable





Accounts
receivable as of June 30, 2009 were $4.66 million, a decrease of $1.35 million
from $6.01 million as of December 31, 2008.





Our
accounts receivable is expected to gradually decrease during the first six
months of 2009 due to our businesses’ seasonality. Connection fees are generally
higher in the third and fourth quarters of every year than in the first two
quarters. Accounts receivable are collected in the beginning of the following
year.





Notes
Receivable





Notes
receivable of $0.15 million as of June 30, 2009 was the Note issued by Hebei
Zhonggang for its use of gas.





Inventory





Inventory
of $0.29 million as of June 30, 2009 was comprised of spare parts and natural
gas.





Fixed
Assets





Fixed
Assets as of June 30, 2009 were $37.87 million, representing an increase of
$1.69 million from $36.18 million as of December 31, 2008.  The table
below is a breakdown of our fixed assets at cost:





2009
                
                
                2008At
      CostGas
      Pipelines
                
                $
                28,526,224
                
                
                $
                27,859,313Motor
      Vehicles
                
                
                6,602,269
                
                
                
                5,600,508Machinery
      & Equipment
                
                
                859,012
                
                
                
                857,834Buildings
                
                
                1,570,534
                
                
                
                1,568,380Leasehold
      Improvements
                
                
                80,211
                
                
                
                80,101Office
      Equipment
                
                
                229,782
                
                
                
                216,435Less
      Accumulated depreciation
                
                
                (3,568,986
                )
                
                
                (3,149,453
                )$
                34,299,046
                
                
                $
                33,033,118


Bank
Loans





Bank
loans as of June 30, 2009 were $2.19 million, no change from that as of December
31, 2008.





Accounts
Payables





Accounts
payables as of June 30, 2009 was $7.26 million, representing an increase of
$0.91million from that as of December 31, 2008.





Other
Payables





Other
payables as of June 30, 2009 were $6.0 million, representing a decrease of $0.17
million from that as of December 31, 2008.


50




Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
required.





Item
4. Controls and Procedures





Disclosure
Controls and Procedures





Our
management is responsible for establishing and maintaining adequate disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act and have designed disclosure controls and procedures or caused
disclosure controls and procedures to be designed under its supervision in order
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, as applicable. Due to its
inherent limitations, disclosure controls and procedures may not prevent or
detect material misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Under the
supervision of and with the participation of our Chief Executive Officer and our
Chief Financial Officer, our management conducted its evaluation of the
effectiveness of our Company’s disclosure controls and procedures as of June 30,
2009.  Based on that evaluation, our management concluded that, as of
June 30, 2009, our Company’s disclosure controls and procedures was not
effective due to the material weaknesses described below.





Internal
Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act and have designed internal control over financial reporting or
caused internal control over financial reporting to be designed under its
supervision in order to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, as
applicable. Due to its inherent limitations, internal control over financial
reporting may not prevent or detect material misstatements. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.





During
the six months ended June 30, 2009, our management conducted its evaluation of
the effectiveness of our Company’s internal control over financial reporting,
using the criteria in the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on that evaluation, our management concluded that, as of June 30, 2009, our
Company’s internal control over financial reporting was not effective due to the
material weaknesses described below.





(1) The
Company has not yet established a comprehensive Code of Conduct and Ethics (the
“Code”) which is applicable to all Company directors, officers and
employees.





(2) Our
Internal Audit Department has not taken an active role in the conduct of its
activities due to insufficient resources. The annual plan, budget, and specific
procedures to perform the internal audit function have not been fully developed,
and the anti-fraud audit plan has not been developed either.





(3) Our
Company did not formulate a comprehensive Related Party Transactions Policy and
develop a master list of all Related Parties.





Management’s
Plan for Remediation of Material Weaknesses





In light
of the conclusion that our Company’s internal control over financial reporting
was not effective, our management has worked, and will continue to work, to
address these weaknesses in our internal control over financial reporting.
Implementations of certain remedial measures include the following:





(1) We
are going to continue modify the Code, and arrange respective on-going training
to all the employees in the near future. Training which includes the content of
the Code will be provided to new employees at the time of hiring. All the
employees will be required to sign an affidavit acknowledging that the employee
has read and will intend to comply with the Code;





(2) The
management is committed to develop a comprehensive and risk-based internal audit
function within the Company. With the limited human capital supplies in the
market, we will engage a third party professional to assist the management in
establishing the internal control system. At the same time, we have enhanced our
efforts of recruitment and interviews are undergoing. We expect that an internal
audit department will be set up in the near future. With the assistance from the
third party professional, the roles and responsibilities of the internal audit
department will be formulated and a comprehensive risk-based internal audit plan
will be developed and approved by the Audit Committee within a month after the
set up.





51




(3) We
will continue to modify Related Party Transaction Policy and our goal is to
formulate a comprehensive policy in the near future.





Changes
in Internal Control over Financial Reporting





During
the quarter ended June 30, 2009, there was no change in our internal controls
over financial reporting that has materially affected, or that is reasonably
likely to materially affect, our internal control over financial
reporting.




PART
II - OTHER INFORMATION


Item
1. Legal Proceedings





None.





Item
1A. Risk Factors





Not
required.





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





None.





Item
3. Defaults Upon Senior Securities





None.





Item
4. Submission of Matters to a Vote of Security Holders.





None.





Item
5. Other Information





None.





Item
6.  Exhibits





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




Exhibit
                  Number:
                
                Description31.1
                
                Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                
                Certification
      of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
      Act of 2002.32
                
                Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section 1350





SIGNATURES





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




SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      August 19, 2009
              By:
              /s/ Yuchuan
      LiuYuchuan
      LiuChairman
      and Chief Executive Officer




SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      August 19, 2009
              By:
              /s/ Yugang
      ZhangYugang
      ZhangChief
      Financial Officer




52