United
States
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 
 FORM 10-Q
 
 (Mark
one)
  x
                        Quarterly Report Under
      Section 13 or 15(d) of the Securities Exchange Act of
      1934
 
 For
the Quarterly Period Ended September 30, 2009
 
 or
   ̈
                        Transition Report Under
      Section 13 or 15(d) of the Securities Exchange Act of
      1934
 
 Commission
File Number 000-51364
 
 SINO
GAS INTERNATIONAL HOLDINGS, INC.
 (Name of
small business issuer in its charter)
  Utah
                        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  ̈
                        Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                          (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  ̈   No x
 
 As of
November 13, 2009, the Registrant had 26,769,313 shares of common stock
outstanding.
  
  Sino Gas
International Holdings, Inc.
 
 Table of
Contents
  PagePART
      I -
                          FINANCIAL
      INFORMATIONItem
      1.
                          Financial
      Statements
                          3Notes
      to Financial Statements (Unaudited)
                          12Item
      2.
                          Management's
      Discussion and Analysis or Plan of Operation
                          42Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          53Item
      4.
                          Controls
      and Procedures
                          53PART
      II -
                          OTHER
      INFORMATIONItem
      1.
                          Legal
      Proceedings
                          55Item
      1A.
                          Risk
      Factors
                          55Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          55Item
      3.
                          Defaults
      Upon Senior Securities
                          55Item
      4.
                          Submission
      of Matters to a Vote of Security Holders.
                          55Item
      5.
                          Other
      Information
                          55Item
      6.
                          Exhibits
                          55
  2
 
 PART
I - FINANCIAL INFORMATION
 
 Item
1. Financial Statements
  SINO
GAS INTERNATIONAL HOLDINGS, INC
 
 REVIEWED
CONSOLIDATED FINANCIAL STATEMENTS
 
 SEPTEMBER
30, 2009 AND DECEMBER 31, 2008
 
 STATED
IN US DOLLARS
    3
 
 Sino Gas International
Holdings, Inc.
 
 CONTENTS
                              
                              PAGESReport
      of Registered Independent Public Accounting Firm
                              
                              5Consolidated
      Balance Sheets
                              
                              6 –
      7Consolidated
      Statements of Income
                              
                              8Consolidated
      Statements of Changes in Stockholders’ Equity
                              
                              9 –
      10Consolidated
      Statements of Cash Flows
                              
                              11Notes
      to Consolidated Financial Statements
                              
                              12 –
      41
  4
 
 To:
                          The
      Board of Directors and Stockholders
 Sino 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 September 30, 2009 and December 31, 2008, and
the related consolidated statements of income, stockholders’ equity, and cash
flows for the three-month and nine-month periods ended September 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., LLPNovember
      2, 2009
                          
                          Certified
      Public Accountants
  5
  Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 Note
                                              
                                              9/30/2009
                                              
                                              
                                              12/31/2008ASSETSCurrent AssetsCash
      & cash equivalents
                                              
                                              2(e)
                                              
                                              $
                                              1,913,970
                                              
                                              
                                              $
                                              3,027,543Restricted
      cash
                                              
                                              3
                                              
                                              
                                              161,859
                                              
                                              
                                              
                                              234,279Notes
      receivable
                                              
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              109,422Accounts
      receivable
                                              
                                              2(f),4
                                              
                                              
                                              3,120,296
                                              
                                              
                                              
                                              6,013,621Inventory
                                              
                                              
                                              
                                              
                                              369,561
                                              
                                              
                                              
                                              347,341Advances
      to suppliers
                                              
                                              2(g)
                                              
                                              
                                              4,213,120
                                              
                                              
                                              
                                              3,024,518Prepayments
                                              
                                              
                                              
                                              
                                              504,683
                                              
                                              
                                              
                                              370,593Other
      receivables
                                              
                                              2(f)
                                              
                                              
                                              964,075
                                              
                                              
                                              
                                              3,028,368Total
      Current Assets
                                              
                                              
                                              
                                              
                                              11,247,564
                                              
                                              
                                              
                                              16,155,686Non-Current AssetsInvestment
                                              
                                              2(h),5
                                              
                                              
                                              5,342,647
                                              
                                              
                                              
                                              5,159,009Property,
      plant & equipment, net
                                              
                                              2(j),6
                                              
                                              
                                              39,807,361
                                              
                                              
                                              
                                              33,033,118Construction
      in progress
                                              
                                              2(l)
                                              
                                              
                                              18,657,145
                                              
                                              
                                              
                                              17,155,473Intangible
      assets, net
                                              
                                              2(k),7
                                              
                                              
                                              2,301,876
                                              
                                              
                                              
                                              2,193,252Total
      Non-Current Assets
                                              
                                              
                                              
                                              
                                              66,109,029
                                              
                                              
                                              
                                              57,540,852TOTAL
      ASSETS
                                              
                                              
                                              
                                              $
                                              77,356,593
                                              
                                              
                                              $
                                              73,696,538LIABILITIESCurrent LiabilitiesBank
      loans
                                              
                                              8
                                              
                                              $
                                              2,193,752
                                              
                                              
                                              $
                                              2,188,439Accounts
      payable
                                              
                                              
                                              
                                              
                                              9,000,737
                                              
                                              
                                              
                                              6,350,092Other
      payables
                                              
                                              9
                                              
                                              
                                              5,406,991
                                              
                                              
                                              
                                              6,174,871Unearned
      revenue
                                              
                                              2(m)
                                              
                                              
                                              627,654
                                              
                                              
                                              
                                              938,696Accrued
      liabilities
                                              
                                              
                                              
                                              
                                              253,641
                                              
                                              
                                              
                                              189,090Total
      Current Liabilities
                                              
                                              
                                              
                                              
                                              17,482,775
                                              
                                              
                                              
                                              15,841,188TOTAL
      LIABILITIES
                                              
                                              
                                              
                                              $
                                              17,482,775
                                              
                                              
                                              $
                                              15,841,188
  See Accompanying Notes to Consolidated
Financial Statements
  6
  Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 Note
                                                              
                                                              9/30/2009
                                                              
                                                              
                                                              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 September 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 September 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 September 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)
                                                              
                                                              
                                                              3,956,728
                                                              
                                                              
                                                              
                                                              3,956,728Retained
      earnings
                                                              
                                                              
                                                              
                                                              
                                                              12,726,375
                                                              
                                                              
                                                              
                                                              10,069,896Accumulated
      other comprehensive income
                                                              
                                                              2(x)
                                                              
                                                              
                                                              7,719,905
                                                              
                                                              
                                                              
                                                              7,676,844Total
      Stockholders' Equity
                                                              
                                                              
                                                              
                                                              
                                                              59,873,818
                                                              
                                                              
                                                              
                                                              57,855,350TOTAL
      LIABILITIES ANDSTOCKHOLDERS’
      EQUITY
                                                              
                                                              
                                                              
                                                              $
                                                              77,356,593
                                                              
                                                              
                                                              $
                                                              73,696,538
 
 See Accompanying Notes to Consolidated
Financial Statements
  7
 
 Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Income
 For
the three months and nine months ended September 30, 2009 and 2008
 (Stated
in US Dollars)
 
 Three Months Ended
                                      
                                      
                                      Nine Months EndedNote
                                      
                                      9/30/2009
                                      
                                      
                                      9/30/2008
                                      
                                      
                                      9/30/2009
                                      
                                      
                                      9/30/2008Sales
      revenues
                                      
                                      2(p)
                                      
                                      $
                                      6,988,621
                                      
                                      
                                      $
                                      5,440,212
                                      
                                      
                                      $
                                      19,357,933
                                      
                                      
                                      $
                                      14,903,850Cost
      of revenues
                                      
                                      
                                      
                                      
                                      (4,505,070
                                      )
                                      
                                      
                                      (3,160,189
                                      )
                                      
                                      
                                      (14,074,466
                                      )
                                      
                                      
                                      (9,690,253
                                      )Gross
      Profit
                                      
                                      
                                      
                                      
                                      2,483,551
                                      
                                      
                                      
                                      2,280,022
                                      
                                      
                                      
                                      5,283,466
                                      
                                      
                                      
                                      5,213,597Operating ExpenseSelling
      and marketing expenses
                                      
                                      
                                      
                                      
                                      (288,766
                                      )
                                      
                                      
                                      (226,678
                                      )
                                      
                                      
                                      (709,256
                                      )
                                      
                                      
                                      (594,575
                                      )General
      and administrative expenses
                                      
                                      
                                      (656,168
                                      )
                                      
                                      
                                      (650,119
                                      )
                                      
                                      
                                      (1,902,328
                                      )
                                      
                                      
                                      (2,646,999
                                      )Total
      operating expense
                                      
                                      
                                      
                                      
                                      (944,935
                                      )
                                      
                                      
                                      (876,798
                                      )
                                      
                                      
                                      (2,611,584
                                      )
                                      
                                      
                                      (3,241,573
                                      )Operating
      Income
                                      
                                      
                                      
                                      
                                      1,538,616
                                      
                                      
                                      
                                      1,403,225
                                      
                                      
                                      
                                      2,671,882
                                      
                                      
                                      
                                      1,972,024Other Income/(Expense)Other
      income
                                      
                                      
                                      
                                      
                                      83,000
                                      
                                      
                                      
                                      58,913
                                      
                                      
                                      
                                      94,206
                                      
                                      
                                      
                                      673Other
      expense
                                      
                                      
                                      
                                      
                                      (11,178
                                      )
                                      
                                      
                                      (27,541
                                      )
                                      
                                      
                                      (33,493
                                      )
                                      
                                      
                                      (511,467
                                      )Interest
      income
                                      
                                      
                                      
                                      
                                      941
                                      
                                      
                                      
                                      26,970
                                      
                                      
                                      
                                      4,019
                                      
                                      
                                      
                                      72,632Interest
      expense
                                      
                                      
                                      
                                      
                                      (96,264
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (180,824
                                      )
                                      
                                      
                                      (157,057
                                      )Total
      other income/(expense)
                                      
                                      
                                      
                                      
                                      (23,501
                                      )
                                      
                                      
                                      58,342
                                      
                                      
                                      
                                      (116,092
                                      )
                                      
                                      
                                      (595,220
                                      )Earnings
      from continued operation
                                      
                                      
                                      
                                      
                                      1,515,116
                                      
                                      
                                      
                                      1,461,567
                                      
                                      
                                      
                                      2,555,790
                                      
                                      
                                      
                                      1,376,804Income
      tax
                                      
                                      2(r),12
                                      
                                      
                                      (306,479
                                      )
                                      
                                      
                                      (417,975
                                      )
                                      
                                      
                                      (580,383
                                      )
                                      
                                      
                                      (720,773
                                      )Net
      income
                                      
                                      
                                      
                                      $
                                      1,208,636
                                      
                                      
                                      $
                                      1,043,591
                                      
                                      
                                      $
                                      1,975,407
                                      
                                      
                                      $
                                      656,031Earnings
      per share
                                      
                                      2(z),13-   Basic
                                      
                                      
                                      
                                      $
                                      0.045
                                      
                                      
                                      $
                                      0.039
                                      
                                      
                                      $
                                      0.076
                                      
                                      
                                      $
                                      0.025-    Diluted
                                      
                                      
                                      
                                      $
                                      0.038
                                      
                                      
                                      $
                                      0.033
                                      
                                      
                                      $
                                      0.064
                                      
                                      
                                      $
                                      0.021Weighted
      Average Shares Outstanding-   Basic
                                      
                                      
                                      
                                      
                                      26,769,313
                                      
                                      
                                      
                                      26,769,291
                                      
                                      
                                      
                                      26,058,202
                                      
                                      
                                      
                                      26,568,884-   Diluted
                                      
                                      
                                      
                                      
                                      31,444,570
                                      
                                      
                                      
                                      31,169,437
                                      
                                      
                                      
                                      30,733,459
                                      
                                      
                                      
                                      31,169,437
  See Accompanying Notes to Consolidated
Financial Statements
  8
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 Preferred Stock B
                                
                                
                                Preferred Stock B-1Shares
                                  Outstanding
                                
                                
                                Amount
                                
                                
                                Additional Paid In
                                  Capital-Preferred
                                  Stock B
                                
                                
                                Additional Paid in
                                  Capital- Warrants
                                  Series: A, B, J, C, D
                                
                                
                                Additional Paid in
                                  Capital-Beneficial
                                  Conversion Feature
                                
                                
                                Shares
                                  Outstanding
                                
                                
                                Amount
                                
                                
                                Additional
      Paid In Capital- Preferred Stock
      B-1
                                
                                
                                Additional Paid in
                                  Capital-Beneficial
                                  Conversion FeatureBalance,
      January 1, 2008
                                
                                
                                4,971,859
                                
                                
                                
                                4,972
                                
                                
                                
                                5,323,972
                                
                                
                                
                                311,110
                                
                                
                                
                                6,920,263
                                
                                
                                
                                95,418
                                
                                
                                
                                95
                                
                                
                                
                                132,662
                                
                                
                                
                                82,029Net
      Income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Conversion
      of Preferred Stock B to Common Stock
                                
                                
                                (392,020
                                )
                                
                                
                                (392
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of Common Stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Appropriation
      of Retained Earnings
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Foreign
      Currency Translation Adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Balance,
      December 31, 2008
                                
                                
                                4,579,839
                                
                                
                                
                                4,580
                                
                                
                                
                                5,323,972
                                
                                
                                
                                311,110
                                
                                
                                
                                6,920,263
                                
                                
                                
                                95,418
                                
                                
                                
                                95
                                
                                
                                
                                132,662
                                
                                
                                
                                82,029Balance,
      January 1, 2009
                                
                                
                                4,579,839
                                
                                
                                
                                4,580
                                
                                
                                
                                5,323,972
                                
                                
                                
                                311,110
                                
                                
                                
                                6,920,263
                                
                                
                                
                                95,418
                                
                                
                                
                                95
                                
                                
                                
                                132,662
                                
                                
                                
                                82,029Net
      Income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Issuance
      of 2008 Make Good Shares
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Reallocation
      of Beneficial Conversion Feature
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Appropriation
      of Retained Earnings
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Foreign
      Currency Translation Adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Balance,
      September 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
  9
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Changes in Stockholders’ Equity
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 Common StockShares
                                  Outstanding
                                
                                
                                Amount
                                
                                
                                Additional
                                  Paid In
                                  Capital
                                
                                
                                Additional Paid in
                                  Capital- WarrantsSeries:
                                  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
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,975,407
                                
                                
                                
                                -
                                
                                
                                
                                1,975,407Issuance
      of 2008 Make Good Shares
                                
                                
                                1,500,000
                                
                                
                                
                                1,500
                                
                                
                                
                                (1,500
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Reallocation
      of Beneficial Conversion Feature
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (681,072
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                681,072
                                
                                
                                
                                -
                                
                                
                                
                                -Appropriation
      of Retained Earnings
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Foreign
      Currency Translation Adjustment
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                43,062
                                
                                
                                
                                43,062Balance,
      September 30, 2009
                                
                                
                                26,769,313
                                
                                
                                
                                26,769
                                
                                
                                
                                22,513,732
                                
                                
                                
                                47,946
                                
                                
                                
                                107,652
                                
                                
                                
                                3,956,728
                                
                                
                                
                                12,726,375
                                
                                
                                
                                7,719,905
                                
                                
                                
                                59,873,818
 
 9/30/2009
                                      
                                      
                                      12/31/2008
                                      
                                      
                                      TotalComprehensive
      IncomeNet
      Income
                                      
                                      $
                                      1,975,407
                                      
                                      
                                      $
                                      1,600,493
                                      
                                      
                                      $
                                      3,575,900Other Comprehensive IncomeForeign
      Currency Translation Adjustment
                                      
                                      
                                      43,062
                                      
                                      
                                      
                                      5,408,250
                                      
                                      
                                      
                                      5,451,312Total
                                      
                                      $
                                      2,018,469
                                      
                                      
                                      $
                                      7,008,743
                                      
                                      
                                      $
                                      9,027,212
  See Accompanying Notes to Consolidated
Financial Statements
  10
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Cash Flows
 For
the three months and nine months ended September 30, 2009 and 2008
 (Stated
in US Dollars)
 
 Three Months Ended
                                      
                                      
                                      Nine Months Ended9/30/2009
                                      
                                      
                                      9/30/2008
                                      
                                      
                                      9/30/2009
                                      
                                      
                                      9/30/2008Cash Flows from Operating ActivitiesNet
      Income
                                      
                                      $
                                      1,208,636
                                      
                                      
                                      $
                                      1,043,592
                                      
                                      
                                      $
                                      1,975,407
                                      
                                      
                                      $
                                      656,031Depreciation
      expense
                                      
                                      
                                      337,328
                                      
                                      
                                      
                                      326,246
                                      
                                      
                                      
                                      756,862
                                      
                                      
                                      
                                      1,228,894Amortization
      expense
                                      
                                      
                                      8,653
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      42,547
                                      
                                      
                                      
                                      -Withdraw/(deposit)
      in restricted time deposits
                                      
                                      
                                      21,683
                                      
                                      
                                      
                                      353,713
                                      
                                      
                                      
                                      72,420
                                      
                                      
                                      
                                      92,765Decrease/(increase)
      in accounts and other receivables
                                      
                                      
                                      4,140,180
                                      
                                      
                                      
                                      1,821,303
                                      
                                      
                                      
                                      5,067,040
                                      
                                      
                                      
                                      358,635Decrease/(increase)
      in inventory
                                      
                                      
                                      (83,605
                                      )
                                      
                                      
                                      12,209
                                      
                                      
                                      
                                      (22,220
                                      )
                                      
                                      
                                      (56,066
                                      )Decrease/(increase)
      in prepaid expenses
                                      
                                      
                                      13,514
                                      
                                      
                                      
                                      (319,667
                                      )
                                      
                                      
                                      (1,322,692
                                      )
                                      
                                      
                                      (3,338,084
                                      )Increase/(decrease)
      in accounts and other payables
                                      
                                      
                                      (251,509
                                      )
                                      
                                      
                                      326,093
                                      
                                      
                                      
                                      1,636,273
                                      
                                      
                                      
                                      1,056,866Cash
      Sourced/(Used) in Operating Activities
                                      
                                      
                                      5,394,880
                                      
                                      
                                      
                                      3,563,489
                                      
                                      
                                      
                                      8,205,638
                                      
                                      
                                      
                                      (960
                                      )Cash
      Flows from Investing ActivitiesInvestment
      in equity
                                      
                                      
                                      (176,553
                                      )
                                      
                                      
                                      (10,776
                                      )
                                      
                                      
                                      (183,637
                                      )
                                      
                                      
                                      (385,884
                                      )Disposal/(purchase)
      of property, plant & equipment
                                      
                                      
                                      (5,845,643
                                      )
                                      
                                      
                                      (1,131,927
                                      )
                                      
                                      
                                      (7,531,104
                                      )
                                      
                                      
                                      (3,912,706
                                      )Increase
      of goodwill
                                      
                                      
                                      (1,769
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (4,074
                                      )
                                      
                                      
                                      (170,961
                                      )Purchase
      of other intangible assets
                                      
                                      
                                      (10,113
                                      )
                                      
                                      
                                      33,956
                                      
                                      
                                      
                                      (147,098
                                      )
                                      
                                      
                                      -Increase
      in construction in progress
                                      
                                      
                                      609,251
                                      
                                      
                                      
                                      (1,671,961
                                      )
                                      
                                      
                                      (1,501,673
                                      )
                                      
                                      
                                      (4,809,144
                                      )Cash
      Sourced/(Used) in Investing Activities
                                      
                                      
                                      (5,424,827
                                      )
                                      
                                      
                                      (2,780,708
                                      )
                                      
                                      
                                      (9,367,585
                                      )
                                      
                                      
                                      (9,278,696
                                      )Cash
      Flows from Financing ActivitiesProceeds/(repayment)
      of bank loans
                                      
                                      
                                      2,308
                                      
                                      
                                      
                                      (2,899,810
                                      )
                                      
                                      
                                      5,313
                                      
                                      
                                      
                                      1,641,859Issuance/(conversion)
      of stock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (392,653
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (392,653
                                      )Cash
      Sourced/(Used) in Financing Activities
                                      
                                      
                                      2,308
                                      
                                      
                                      
                                      (3,292,464
                                      )
                                      
                                      
                                      5,313
                                      
                                      
                                      
                                      1,249,206Net
      increase in cash & cash equivalents for the period
                                      
                                      
                                      (27,640
                                      )
                                      
                                      
                                      (2,509,682
                                      )
                                      
                                      
                                      (1,156,635
                                      )
                                      
                                      
                                      (8,030,449
                                      )Effect
      of currency translation
                                      
                                      
                                      87,368
                                      
                                      
                                      
                                      902,199
                                      
                                      
                                      
                                      43,062
                                      
                                      
                                      
                                      3,660,283Cash
      & cash equivalents at the beginning of period
                                      
                                      
                                      1,854,242
                                      
                                      
                                      
                                      8,021,212
                                      
                                      
                                      
                                      3,027,543
                                      
                                      
                                      
                                      10,915,590Cash
      & cash equivalents at the end of period
                                      
                                      $
                                      1,913,970
                                      
                                      
                                      $
                                      6,545,424
                                      
                                      
                                      $
                                      1,913,970
                                      
                                      
                                      $
                                      6,545,424Supplementary
      cash flows informationInterest
      received
                                      
                                      $
                                      1,412
                                      
                                      
                                      $
                                      26,970
                                      
                                      
                                      $
                                      4,019
                                      
                                      
                                      $
                                      72,632Interest
      paid
                                      
                                      
                                      96,264
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      180,824
                                      
                                      
                                      
                                      157,057Income
      tax paid
                                      
                                      
                                      306,479
                                      
                                      
                                      
                                      597,768
                                      
                                      
                                      
                                      580,383
                                      
                                      
                                      
                                      720,773
  See Accompanying Notes to Consolidated
Financial Statements
  11
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
  12
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 September 30,
2009.
  13
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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
  14
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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
  15
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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
                                  
                                  RMB1,000,000Xinhe
      Gas Co., Ltd.
                                  
                                  PRC
                                  
                                  7/2/2009
                                  
                                  100
                                  
                                  100
                                  
                                  RMB1,000,000
  16
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
 
 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
  17
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 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.
  18
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
  19
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
  20
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
  9/30/2009
                                    
                                    
                                    12/31/2008
                                    
                                    
                                    9/30/2008Years
      end RMB : US$ exchange rate
                                    
                                    
                                    6.8376
                                    
                                    
                                    
                                    6.8542
                                    
                                    
                                    
                                    6.8551Average
      yearly RMB : US$ exchange rate
                                    
                                    
                                    6.8425
                                    
                                    
                                    
                                    6.9623
                                    
                                    
                                    
                                    6.9989
 
 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.
  21
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
                                              ii.  Sino
      Gas Construction, Ltd.
                                              iii. 
      Sino Gas Investment Development, Ltd.
                                            
                                            British
      Virgin Islands
                                              British
      Virgin Islands
                                              British
      Virgin Islands
                                            
                                            0.00%
                                              0.00%
                                              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.
  22
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 nine-month ended
      September 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.
  23
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. SFAS 165 is effective for interim or
annual financial periods ending after June 15, 2009.
 
 In June
2009, FASB issued FASB Statement No. 166, Accounting for Transfers for
Financial Assets and FASB Statement No. 167, a revision to FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities.
 
 Statement
166 is a revision to FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, and
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures.
  24
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 Statement
167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities, and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other
things, the other entity’s purpose and design and the reporting entity’s ability
to direct the activities of the other entity that most significantly impact the
other entity’s economic performance.
 
 On July
1, 2009, FASB issued FASB Statement No. 168, The “FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting
Principles.  The ASC has become the source of authoritative US
GAAP recognized by the FASB to be applied by nongovernmental entities and
provides that all such guidance carries an equal level of authority. The ASC is
not intended to change or alter existing GAAP. The ASC is effective for interim
and annual periods ending after September 15, 2009.
 
 Management
of the Company does not anticipate that the adoption of these 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. Most of residential customers
are settled by prepayments with debit cards, while industrial customers are
billed and paid according to the contract terms from 10 days to one
month.
 
 For
construction projects, connection fees are generally collected in installments.
First deposits of 30% of total contract sum are received from client when the
project commences. Second payment of 30% is received at milestone set out
following the contracts. Third payment of 30% is received after the construction
is completed. The final sum of the remaining portion normally acts as retention
money for quality warranty to the developer. The retention money would be
received by the company after the 1 year warranty period.
  25
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 Receivable9/30/2009
                                              
                                              
                                              12/31/2008Accounts
      Receivable - gross
                                              
                                              $
                                              3,151,814
                                              
                                              
                                              $
                                              6,049,415Allowance
      for bad debt
                                              
                                              
                                              (31,518
                                              )
                                              
                                              
                                              (35,794
                                              )Accounts
      Receivable, net
                                              
                                              $
                                              3,120,296
                                              
                                              
                                              $
                                              6,013,621
 
 Allowance for Bad Debt9/30/2009
                                      
                                      
                                      12/31/2008Beginning
      Balance
                                      
                                      $
                                      35,794
                                      
                                      
                                      $
                                      36,760Addition
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Reversal
                                      
                                      
                                      (4,276
                                      )
                                      
                                      
                                      (966
                                      )Ending
      Balance
                                      
                                      $
                                      31,518
                                      
                                      
                                      $
                                      35,794
 
 Accounts Receivable Aging
      Report9/30/2009
                                      
                                      
                                      12/31/200830
      Days
                                      
                                      $
                                      1,742,369
                                      
                                      
                                      $
                                      4,896,06630-60
      Days
                                      
                                      
                                      184,431
                                      
                                      
                                      
                                      258,10760-90
      Days
                                      
                                      
                                      468,849
                                      
                                      
                                      
                                      292,98890-180
      Days
                                      
                                      
                                      320,553
                                      
                                      
                                      
                                      311,954180-360
      Days
                                      
                                      
                                      400,329
                                      
                                      
                                      
                                      205,745>360
      Days
                                      
                                      
                                      3,765
                                      
                                      
                                      
                                      48,760Total
                                      
                                      $
                                      3,120,296
                                      
                                      
                                      $
                                      6,013,621
  26
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 The
followings are the ten most significant accounts receivable at September 30,
2009:-
 
 Hebei
      Zhonggang Steel, Ltd.
                                  
                                  $
                                  670,618Beijing
      Huicheng Real Estate Co., Ltd
                                  
                                  
                                  360,378Beijing
      Zhenshi Real Estate Co., Ltd.
                                  
                                  
                                  161,141Henan
      Tihua Real Estate Co., Ltd.
                                  
                                  
                                  135,540Baishan
      Xiangda Real Estate Co., Ltd
                                  
                                  
                                  124,283Baishan
      Jiahe Real Estate Co., Ltd.
                                  
                                  
                                  108,257Tonghua
      Tongsheng Real Estate Co., Ltd.
                                  
                                  
                                  90,828Tangshan
      Sunda Real Estate Co., Ltd.
                                  
                                  
                                  84,028Huayou
      Yiji Oil Special Pipe Co., Ltd
                                  
                                  
                                  79,526Jiangsu
      Hongzhe Lake Farm
                                  
                                  
                                  68,705Total
                                  
                                  $
                                  1,883,304
 
 5.
                          INVESTMENT
 
 9/30/2009
                                  
                                  
                                  12/31/2008Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
                                  
                                  $
                                  4,829,309
                                  
                                  
                                  $
                                  4,817,613Qujing
      Gas Co., Ltd.
                                  
                                  
                                  513,338
                                  
                                  
                                  
                                  341,397Total
                                  
                                  $
                                  5,342,647
                                  
                                  
                                  $
                                  5,159,009
 
 
 6.
                          PROPERTY, PLANT, AND EQUIPMENT,
      NET
 
 Property,
Plant, and Equipment consisted of the followings at September 30, 2009 and
December 31, 2008:
 
 9/30/2009
                                    
                                    AtCost
                                    
                                    
                                    AccumulatedDepreciation
                                    
                                    
                                    NetGas
      Pipelines
                                    
                                    $
                                    34,641,390
                                    
                                    
                                    $
                                    1,875,645
                                    
                                    
                                    $
                                    32,765,746Motor
      Vehicles
                                    
                                    
                                    5,701,904
                                    
                                    
                                    
                                    1,405,489
                                    
                                    
                                    
                                    4,296,415Machinery
      & Equipment
                                    
                                    
                                    1,482,513
                                    
                                    
                                    
                                    244,097
                                    
                                    
                                    
                                    1,238,417Buildings
                                    
                                    
                                    1,572,188
                                    
                                    
                                    
                                    237,173
                                    
                                    
                                    
                                    1,335,015Leasehold
      Improvements
                                    
                                    
                                    81,539
                                    
                                    
                                    
                                    58,251
                                    
                                    
                                    
                                    23,287Office
      Equipment
                                    
                                    
                                    234,142
                                    
                                    
                                    
                                    85,660
                                    
                                    
                                    
                                    148,481Total
                                    
                                    $
                                    43,713,676
                                    
                                    
                                    $
                                    3,906,315
                                    
                                    
                                    $
                                    39,807,361
 
  27
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 12/31/2008
                                      
                                      AtCost
                                      
                                      
                                      AccumulatedDepreciation
                                      
                                      
                                      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 nine months
ended September 30, 2009 was $756,862.
 
 7.
                          INTANGIBLE
      ASSETS
 
 Intangible
assets consisted of the following at September 30, 2009 and December 31,
2008:-
 
 9/30/2009
                                    
                                    AtCost
                                    
                                    
                                    AccumulatedAmortization
                                    
                                    
                                    NetLand
      Use Rights
                                    
                                    $
                                    631,733
                                    
                                    
                                    $
                                    66,365
                                    
                                    
                                    $
                                    565,368Franchises
                                    
                                    
                                    402,188
                                    
                                    
                                    
                                    371,414
                                    
                                    
                                    
                                    30,774Accounting
      Software
                                    
                                    
                                    40,609
                                    
                                    
                                    
                                    16,924
                                    
                                    
                                    
                                    23,685Goodwill
                                    
                                    
                                    1,682,049
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,682,049$
                                    2,756,579
                                    
                                    
                                    $
                                    454,703
                                    
                                    
                                    $
                                    2,301,876
 
 12/31/2008
                                    
                                    AtCost
                                    
                                    
                                    AccumulatedAmortization
                                    
                                    
                                    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
nine months ended September 30, 2009 was $42,547.
  28
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 8.
                          SHORT-TERM
      BANK LOAN
 
 NameofBank
                                          
                                          DueDate
                                          
                                          InterestRate
                                          
                                          
                                          9/30/2009
                                          
                                          
                                          12/31/2008Bank
      of Dalian
                                          
                                          12/18/2009
                                          
                                          
                                          6.69
                                          %
                                          
                                          $
                                          2,193,752
                                          
                                          
                                          $
                                          2,188,439Total
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          2,193,752
                                          
                                          
                                          $
                                          2,188,439
 
 Interest
expense for the short-term bank loan was $180,824 for the nine-month period
ended September 30, 2009.
  9.
                          OTHER
      PAYABLES
 
 Other
payables consisted of the following at September 30, 2009 and December 31,
2008:-
 
 9/30/2009
                                
                                
                                12/31/2008Employees’
      Welfare Payables
                                
                                $
                                51,970
                                
                                
                                $
                                137,264Amount
      due to Employees
                                
                                
                                47,572
                                
                                
                                
                                366,732Tax
      Payable
                                
                                
                                11,875
                                
                                
                                
                                267,790Payables
      to Subcontractors
                                
                                
                                1,431,438
                                
                                
                                
                                1,060,462Raw
      Materials
                                
                                
                                1,666,743
                                
                                
                                
                                7,272Employees
      Training Program
                                
                                
                                24,283
                                
                                
                                
                                277,017Individual
      Travel Advance
                                
                                
                                194,624
                                
                                
                                
                                78,028Payments
      for Acquisition of Baishan Gas
                                
                                
                                1,978,486
                                
                                
                                
                                3,975,631Others
                                
                                
                                -
                                
                                
                                
                                4,675Total
                                
                                $
                                5,406,991
                                
                                
                                $
                                6,174,871
  29
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 September 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.
  30
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 September 30, 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.
  31
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
  32
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 September 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
  33
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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
  34
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 September 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
                                    
                                    
                                    
                                    22,943,683
                                    
                                    
                                    
                                    40
                                    %Beneficial-
      Conversion Feature
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    7,002,292
                                    
                                    
                                    
                                    -4,579,839
                                    
                                    
                                    
                                    4,580
                                    
                                    
                                    
                                    95,418
                                    
                                    
                                    
                                    95
                                    
                                    
                                    
                                    26,769,313
                                    
                                    
                                    
                                    26,769
                                    
                                    
                                    
                                    35,439,366
                                    
                                    
                                    
                                    100
                                    %
  35
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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 September 30, 2009
 Gas
                                          Distribution
                                        
                                        
                                        GasPipeline
                                          Installation
                                        
                                        
                                        Shell,BVIs,&
                                          Eliminations
                                        
                                        
                                        TotalAssetsCurrent
      Assets
                                        
                                        $
                                        7,393,829
                                        
                                        
                                        $
                                        3,629,945
                                        
                                        
                                        $
                                        223,789
                                        
                                        
                                        $
                                        11,247,564Non-Current
      Assets
                                        
                                        
                                        21,768,602
                                        
                                        
                                        
                                        44,340,428
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        66,109,029Total
      Assets
                                        
                                        
                                        29,162,431
                                        
                                        
                                        
                                        47,970,373
                                        
                                        
                                        
                                        223,789
                                        
                                        
                                        
                                        77,356,593LiabilitiesCurrent
      Liabilities
                                        
                                        
                                        1,514,313
                                        
                                        
                                        
                                        15,816,430
                                        
                                        
                                        
                                        152,032
                                        
                                        
                                        
                                        17,482,775Total
      Liabilities
                                        
                                        
                                        1,514,313
                                        
                                        
                                        
                                        15,816,430
                                        
                                        
                                        
                                        153,032
                                        
                                        
                                        
                                        17,482,775Net Assets
                                        
                                        
                                        27,648,118
                                        
                                        
                                        
                                        32,153,943
                                        
                                        
                                        
                                        71,757
                                        
                                        
                                        
                                        59,873,818Liabilities & Equities
                                        
                                        $
                                        29,162,431
                                        
                                        
                                        $
                                        47,970,373
                                        
                                        
                                        $
                                        223,789
                                        
                                        
                                        $
                                        77,356,593
 
  36
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 Operation
Result Segment Report
 For
the nine months ended September 30, 2009
 Gas
                                    Distribution
                                  
                                  
                                  Gas Pipeline
                                    Installation
                                  
                                  
                                  Shell,BVIs,&
                                    Eliminations
                                  
                                  
                                  TotalSales
      Revenue
                                  
                                  $
                                  15,265,503
                                  
                                  
                                  $
                                  7,494,485
                                  
                                  
                                  $
                                  (3,402,055
                                  )
                                  
                                  $
                                  19,357,933Cost
      of Revenue
                                  
                                  
                                  (14,803,848
                                  )
                                  
                                  
                                  (2,672,673
                                  )
                                  
                                  
                                  3,402,055
                                  
                                  
                                  
                                  (14,074,466
                                  )Gross
      Profit
                                  
                                  
                                  461,655
                                  
                                  
                                  
                                  4,821,811
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,283,466Operating
      Expense
                                  
                                  
                                  (201,936
                                  )
                                  
                                  
                                  (2,109,141
                                  )
                                  
                                  
                                  (300,507
                                  )
                                  
                                  
                                  (2,611,584
                                  )Operating
      Income/(Loss)
                                  
                                  
                                  259,719
                                  
                                  
                                  
                                  2,712,670
                                  
                                  
                                  
                                  (300,507
                                  )
                                  
                                  
                                  2,671,882Other
      Income/(Loss)
                                  
                                  
                                  (10,185
                                  )
                                  
                                  
                                  (106,381
                                  )
                                  
                                  
                                  474
                                  
                                  
                                  
                                  (116,092
                                  )Earnings
      before tax
                                  
                                  
                                  249,534
                                  
                                  
                                  
                                  2,606,289
                                  
                                  
                                  
                                  (300,033
                                  )
                                  
                                  
                                  2,555,790Income
      tax
                                  
                                  
                                  (50,712
                                  )
                                  
                                  
                                  (529,671
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (580,383
                                  )Net
      Income
                                  
                                  $
                                  198,822
                                  
                                  
                                  $
                                  2,076,618
                                  
                                  
                                  $
                                  (300,033
                                  )
                                  
                                  $
                                  1,975,407
 
 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
  37
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 Operation
Result Segment Report
 For
the nine months ended September 30, 2008
 
 Gas
                                    Distribution
                                  
                                  
                                  Gas Pipeline
                                    Installation
                                  
                                  
                                  Shell,BVIs,&
                                    Eliminations
                                  
                                  
                                  TotalSales
      Revenue
                                  
                                  $
                                  8,593,097
                                  
                                  
                                  $
                                  6,310,753
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  14,903,850Cost
      of Revenue
                                  
                                  
                                  (7,708,001
                                  )
                                  
                                  
                                  (1,982,252
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (9,690,253
                                  )Gross
      Profit
                                  
                                  
                                  885,096
                                  
                                  
                                  
                                  4,328,501
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,213,597Operating
      Expense
                                  
                                  
                                  (422,520
                                  )
                                  
                                  
                                  (2,066,304
                                  )
                                  
                                  
                                  (752,749
                                  )
                                  
                                  
                                  (3,241,573
                                  )Operating
      Income/(Loss)
                                  
                                  
                                  462,576
                                  
                                  
                                  
                                  2,262,197
                                  
                                  
                                  
                                  (752,749
                                  )
                                  
                                  
                                  1,972,024Other
      Income/(Loss)
                                  
                                  
                                  (19,254
                                  )
                                  
                                  
                                  (94,161
                                  )
                                  
                                  
                                  (481,805
                                  )
                                  
                                  
                                  (595,220
                                  )Earnings
      before tax
                                  
                                  
                                  443,322
                                  
                                  
                                  
                                  2,168,036
                                  
                                  
                                  
                                  (1,234,554
                                  )
                                  
                                  
                                  1,376,804Income
      tax
                                  
                                  
                                  (122,363
                                  )
                                  
                                  
                                  (598,410
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (720,773
                                  )Net
      Income
                                  
                                  $
                                  320,959
                                  
                                  
                                  $
                                  1,569,626
                                  
                                  
                                  $
                                  (1,234,554
                                  )
                                  
                                  $
                                  656,031
 
 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.
  38
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 30, 2009 and December 31, 2008
 (Stated
in US Dollars)
 
 12.
                          INCOME
      TAX
 
 January
1, 2008, the PRC government implemented a new income tax laws for all
enterprises. The new law imposed a 25% income tax rate on Company’s subsidiary
Beijing Gas.  As such, Beijing Gas provided a $778,480 income tax
expense for the year ended December 31, 2008. Subsequently, in 2009, the Beijing
Gas 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 period ended
September 30, 2009.
 
 9/30/2009Provision
      for Income Tax - PRC Subsidiaries
                                  
                                  $
                                  811,568Tax
      Exemption - Granted by PRC Government
                                  
                                  
                                  (231,185
                                  )Income
      Tax
                                  
                                  $
                                  580,383
  39
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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:-
 
 9/30/2009Net
      Income
                                    
                                    $
                                    1,975,407Preferred
      Dividends
                                    
                                    
                                    -Constructive
      Preferred Dividends
                                    
                                    
                                    -Income
      Available to Common Stockholders
                                    
                                    
                                    1,975,407Original
      Shares
                                    
                                    
                                    25,269,313Addition
      to Common Stock
                                    
                                    
                                    788,889Basic
      Weighted Average Shares Outstanding
                                    
                                    
                                    26,058,202Addition
      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
                                    
                                    
                                    30,733,459Earnings
      Per Share-    Basic
                                    
                                    $
                                    0.076-    Diluted
                                    
                                    $
                                    0.064Weighted
      Average Shares Outstanding-    Basic
                                    
                                    
                                    26,058,202-   Diluted
                                    
                                    
                                    30,733,459
  40
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of September 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.
  41
  Item 2.  Management’s Discussion and Analysis
or Plan of Operation
 
 The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve significant risks
and uncertainties. As a result of many factors, such as those set forth
elsewhere in this Form 10-Q, our actual results may differ materially from those
anticipated in these forward-looking statements.
 
 Economic
& Industrial Trend
 
 We
generate revenue from two sources: connection fees for constructing connections
to our natural gas distribution network and sales of natural gas. Our connection
activities are closely 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 pillars in Chinese economy: domestic consumption (both private and
public), net exports, and domestic investment. Chinese Government RMB 4 trillion
stimulus package has great impacts on China's domestic production and
investments in the past several months. Signs of Improvements in investments,
retail sales, and industrial output data are encouraging. Retail sales are
rebounding in the past three months. Massive government spending on
infrastructure boost China's Fixed Asset Investment (FAI) year on year growth
average over 30% in the first five months of the year.  However,
exports and imports, continues to decline. Export decreased 26.4% in the month
of May compared with the same period of last year. The export has been
negatively affected by the economic slowdown of the U.S. and European countries.
In summary, China’s economy is gradually improving with government
support.
 
 GDP
growth rebounded to 7.9 per cent in the second quarter from 6.1per cent in the
first, which represented a 10-year low. In the third quarter, China’s economic
growth accelerated to 8.9 per cent.
 
 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. As we expand into
more cities, we expect to add more industrial users in the coming year if
capital is available.
 
 Material
Opportunities
 
 The gas
distribution market is quite fragmented in the small to medium sized
cities (population less than 1,000,000). 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.
  42
 
 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.
 
 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 not often 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 September 30, 2009 Compared to Three Months Ended September 30,
2008
  During
the three months ended September 30, 2009, net revenues were $6,988,621,
representing an increase of 28.46 % from the same period of last
year.  Gross profit for the three months ended September 30, 2009 was
$2,483,551, representing an increase of 8.93% from the same period of last
year.  Our operating income for the three months ended September
30, 2009 was $1,538,616, representing an increase of 9.65% from the same period
of 2008.  Net income for the three months ended September 30, 2009 was
$1,208,636, representing an increase of
15.82% from $1,043,591 for the same period of
2008.
  43
 
 For the 3 months ended
                              September 30,2009
                            
                            
                            2008
                            
                            
                            ChangeUS$
                            
                            
                            US$Net
      Revenues
                            
                            
                            6,988,621
                            
                            
                            
                            5,440,212
                            
                            
                            
                            28.46
                            %Gross
      Profit
                            
                            
                            2,483,551
                            
                            
                            
                            2,280,022
                            
                            
                            
                            8.93
                            %Operating
      Income
                            
                            
                            1,538,616
                            
                            
                            
                            1,403,225
                            
                            
                            
                            9.65
                            %Net
      Income
                            
                            
                            1,208,636
                            
                            
                            
                            1,043,592
                            
                            
                            
                            15.82
                            %Gross
      Margin
                            
                            
                            35.54
                            %
                            
                            
                            41.91
                            %
                            
                            
                            -15.21
                            %Net
      Margin
                            
                            
                            17.29
                            %
                            
                            
                            19.18
                            %
 
 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 September 30, 2009 were $6,988,621, compared
to $5,440,212 for the same period in 2008, representing an increase of 28.46%.
The increase was mainly due to the increase of gas sales. During this period, we
connected 7,239 new residential households to our gas distribution network,
resulting in total connection fees of $3,342,309.  Gas sales during
the same period were $3,646,312. In comparison, we connected 6,857 new
residential households to our gas distribution network for the same period in
2008, resulting in total connection fees of $3,401,014. Gas sales during the
period were $2,039,198.
  44
 
 For the 3 monthsendedSeptember 30,2009
                            
                            
                            2008
                            
                            
                            Change(In
      $ million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Net
      Revenues
                            
                            
                            6.99
                            
                            
                            
                            100
                            %
                            
                            
                            5.44
                            
                            
                            
                            100
                            %
                            
                            
                            28.46
                            %Connection
      Fees
                            
                            
                            3.34
                            
                            
                            
                            48
                            %
                            
                            
                            3.40
                            
                            
                            
                            63
                            %
                            
                            
                            -1.73
                            %Gas
      Sales
                            
                            
                            3.65
                            
                            
                            
                            52
                            %
                            
                            
                            2.04
                            
                            
                            
                            37
                            %
                            
                            
                            78.81
                            %
 
 The
increases in our net revenues for the three months ended September 30,
2009 were mainly due to the increase of gas sales. With more customers
added to our existing gas network distribution system, our gas sales
increased accordingly.
 
 Connection
Fees
 
 Connection
fees during the three months ended September 30, 2009 were $3.34 million,
representing a slightly decrease of 1.73% over the same period of 2008,
accounting for 48% of the total net revenue as compared with approximately
63% of the total net revenue for the same period in 2008. The source of
connection fees was mainly from the development of new residential
users.
  Forthe3monthsendedSeptember 30,(inUS$millions)
                              
                              2009
                              
                              
                              2008
                              
                              
                              ChangeUS$
                              
                              
                              %
                              
                              
                              US$
                              
                              
                              %
                              
                              
                              %Connection
      Fees
                              
                              
                              3.34
                              
                              
                              
                              100
                              %
                              
                              
                              3.40
                              
                              
                              
                              100
                              %
                              
                              
                              -1.73
                              %Residential
      Users
                              
                              
                              3.339
                              
                              
                              
                              99.91
                              %
                              
                              
                              3.40
                              
                              
                              
                              100
                              %
                              
                              
                              -1.81Industrial
      Users
                              
                              
                              0.003
                              
                              
                              
                              0.09
                              %
                              
                              
                              0.00
                              
                              
                              
                              0
                              %
  Gas
Sales
 
 In terms
of volume, we sold 10.55 million cubic meters of natural gas during the three
months ended September 30, 2009, compared with 5.91 million cubic meters for the
same period of 2008. In terms of monetary value, gas sales were
$3.65 million during the three months ended September 30, 2009, accounting
for 52% of total net revenue for the three months ended September 30, 2009,
representing an increase of 78.81% over the same period of 2008. Gas sales to
residential users increased 222.31% to $1.45 million for the three months ended
September 30, 2009 from $0.45 million in the same period of 2008. Gas sales
to industrial and commercial users increased 38.36% to $2.20 million for the
three months ended September 30, 2009 from $1.59 million in the same period of
2008.
  45
  For the 3 months endedSeptember 30,2009
                            
                            
                            2008
                            
                            
                            Change($
      million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Gas
      Sales
                            
                            
                            3.65
                            
                            
                            
                            100
                            %
                            
                            
                            2.04
                            
                            
                            
                            100
                            %
                            
                            
                            78.81
                            %Residential
      Users
                            
                            
                            1.45
                            
                            
                            
                            40
                            %
                            
                            
                            0.45
                            
                            
                            
                            22
                            %
                            
                            
                            222.31
                            %Industrial and
      Commercial Users
                            
                            
                            2.20
                            
                            
                            
                            60
                            %
                            
                            
                            1.59
                            
                            
                            
                            78
                            %
                            
                            
                            38.36
                            %
 
 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 September 30, 2009, which includes cost of
connection and cost of gas sales, was $4.51 million, representing an increase of
42.56% from $3.16 million in the same period of 2008.
 
 For the 3 months endedSeptember 30,2009
                            
                            
                            2008
                            
                            
                            Change($
      million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Cost
      of Revenues
                            
                            
                            4.51
                            
                            
                            
                            100
                            %
                            
                            
                            3.16
                            
                            
                            
                            100
                            %
                            
                            
                            42.56
                            %Connection
      Cost
                            
                            
                            1.04
                            
                            
                            
                            23
                            %
                            
                            
                            1.16
                            
                            
                            
                            37
                            %
                            
                            
                            -10.18
                            %Gas
      Cost
                            
                            
                            3.46
                            
                            
                            
                            77
                            %
                            
                            
                            2.00
                            
                            
                            
                            63
                            %
                            
                            
                            73.2
                            %
 
 Cost of
Connection
 
 The cost
of connection decreased 10.18% to $1.04 million during the three months ended
September 30, 2009 from $1.16 million for the same period in
2008.
  46
  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
pipelines, the average cost to each household will be gradually
reduced.
 
 Cost of
Gas Sales
 
 The cost
of gas sales increased 73.2% to $3.46 million during the three months
ended September 30, 2009 from $2.0 million for the same period in
2008.
 
 The cost
of natural gas sales includes the purchase and transportation of natural gas and
depreciation of delivery equipment.
 
 Gross
Profit
 
 During
the three months ended September 30, 2009, gross profit was $2.48 million,
representing an increase of approximately 8.93% from the same period of
2008. Gross profit from connection fees was $2.3 million for the three months
ended September 30, 2009, accounting for 93% of total gross profit. In
comparison, gross profit from connection fees was $2.24 million for the three
months ended September 30, 2008, accounting for 98% of total gross profit. Gross
profit from gas sales was $0.18 million for the three months ended September 30,
2009, accounting for 7% of total gross profit, compared to $0.04 million,
accounting for 2% of total gross profit in the same period of 2008.
  For the 3 months endedSeptember 30,2009
                          
                          
                          2008
                          
                          
                          Change($ million)
                          
                          US$
                          
                          
                          %
                          
                          
                          US$
                          
                          
                          %
                          
                          
                          %Gross
      Profit
                          
                          
                          2.48
                          
                          
                          
                          100
                          %
                          
                          
                          2.28
                          
                          
                          
                          100
                          %
                          
                          
                          8.93
                          %Connection
                          
                          
                          2.30
                          
                          
                          
                          93
                          %
                          
                          
                          2.24
                          
                          
                          
                          98
                          %
                          
                          
                          2.66
                          %Gas
                          
                          
                          0.18
                          
                          
                          
                          7
                          %
                          
                          
                          0.04
                          
                          
                          
                          2
                          %
                          
                          
                          356.62
                          %
 
 Gross
margin during the three months ended September 30, 2009 was 35.54%,
compared to 41.91% during the same period in 2008.
 
 Gross
margin for connection fees for the three months ended September 30, 2009,
was 68.79%, compared to 65.85% in the same period of 2008.
 
 Gross
margin for sales of natural gas was 5.06% for the three months ended
September 30, 2009, compared to 1.98% during the same period of
2008.
  Selling
and Marketing Expenses
 
 Our
selling and marketing expenses in the three months ended September 30, 2009 were
$0.29 million, approximately 4.13% of our net revenues, compared with $0.23
million or 4.17 % of our net revenues in the same period of
2008.
 
 General
and Administrative Expenses and Other Expenses
 
 General
and administrative expenses were $0.66 million for the three months ended
September 30, 2009, which were 0.93% higher than $0.65 million for the same
period of 2008. Other expense was $23.5 thousand for the three months ended
September 30, 2009, compared with other income of $58.3 thousand for the same
period of 2008.
 
 Operating
Income
 
 The
operating income for the three months ended Sep.30, 2009 was $1.54 million,
representing an increase of 10%, compared to the operating income
of $1.4 million for the same period of 2008.
 
 Income
tax
 
 Income
tax was $0.31 million for the three months ended September 30, 2009, compared to
$0.42 million for the same period of 2008.
  47
  Net
Income
 
 Net
income for the three months ended September 30, 2009 was $1.21 million,
representing an increase of 15.82% from $1.04 million for the same period
of 2008. The improvement is mainly due to the increase of gross margin and
reduction of income tax expense.
 
 Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
 
 During
the nine months ended September 30, 2009, our net revenues and gross profit were
$19,357,933 and $5,283,466, respectively, representing an increase
of 29.89% and 1.34%, respectively, from those of the same period in the
previous year. Our operating income in 2009 was $2,671,882, representing
an increase of 35.49% from 2008.  Net income for the nine months
ended September 30, 2009 was $1,975,407, representing an improvement
of 201.12% from $656,031 for the same period of 2008.
 
 For the
      9 months ended
                              September30,2009
                            
                            
                            2008
                            
                            
                            ChangeUS$
                            
                            
                            US$
                            
                            
                            %Net
      Revenues
                            
                            
                            19,357,933
                            
                            
                            
                            14,903,850
                            
                            
                            
                            29.89
                            %Gross
      Profit
                            
                            
                            5,283,466
                            
                            
                            
                            5,213,597
                            
                            
                            
                            1.34
                            %Operating
      Income
                            
                            
                            2,671,882
                            
                            
                            
                            1,972,024
                            
                            
                            
                            35.49
                            %Net
      Income
                            
                            
                            1,975,407
                            
                            
                            
                            656,031
                            
                            
                            
                            201.12
                            %Gross
      Margin
                            
                            
                            27.29
                            %
                            
                            
                            34.98
                            %
                            
                            
                            -21.98
                            %Net
      Margin
                            
                            
                            10.2
                            %
                            
                            
                            4.4
                            %
 
 Net
Revenues
 
 We
generate revenues from two sources: connection fees for constructing connections
to our natural gas distribution network and sales of natural gas.
 
 Total net
revenues for the nine months ended September 30, 2009 were $19,357,933, compared
to $14,903,850 for the same period in 2008, representing an increase of 29.89%.
The increase was due to increase of both natural gas and connection fees
revenue, resulting from the higher connection per unit we charged to the
customer. During this period, we connected 17,452 new residential households to
our gas distribution network, resulting in total connection fees of $7,494,485.
Gas sales during the same period amounted to $11,863,448. In comparison, we
connected 18,543 new residential households to our gas distribution network in
2008, resulting in total connection fees of $6,310,753. Gas sales during the
period amounted to $8,593,097.
  48
  For the
      9 months endedSeptember 30,2009
                            
                            
                            2008
                            
                            
                            Change(In
      $ million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Net
      Revenues
                            
                            
                            19.36
                            
                            
                            
                            100
                            %
                            
                            
                            14.9
                            
                            
                            
                            100
                            %
                            
                            
                            29.89
                            %Connection
      Fees
                            
                            
                            7.49
                            
                            
                            
                            39
                            %
                            
                            
                            6.31
                            
                            
                            
                            42
                            %
                            
                            
                            18.76
                            %Gas
      Sales
                            
                            
                            11.86
                            
                            
                            
                            61
                            %
                            
                            
                            8.59
                            
                            
                            
                            58
                            %
                            
                            
                            38.06
                            %
 
 Connection
Fees
 
 Connection
fees during the nine months ended September 30, 2009 were $7.49 million,
representing an increase of 18.76% over the same period of 2008, accounting
for 39% of the total net revenue compared with approximately 42% for the same
period in 2008. With regard to the source of connection fees, almost all
connection fees came from the development of new residential users. We
connected 17,452 residential users during the nine months ended September
30, 2009.
  For the 9 months endedSeptember 30,(in US$ millions)
                                                                      
                                                                      2009
                                                                      
                                                                      
                                                                      2008
                                                                      
                                                                      
                                                                      ChangeUS$
                                                                      
                                                                      
                                                                      %
                                                                      
                                                                      
                                                                      US$
                                                                      
                                                                      
                                                                      %
                                                                      
                                                                      
                                                                      %Connection
      Fees
                                                                      
                                                                      
                                                                      7.49
                                                                      
                                                                      
                                                                      
                                                                      100
                                                                      %
                                                                      
                                                                      
                                                                      6.31
                                                                      
                                                                      
                                                                      
                                                                      100
                                                                      %
                                                                      
                                                                      
                                                                      18.76
                                                                      %Residential
      Users
                                                                      
                                                                      
                                                                      7.41
                                                                      
                                                                      
                                                                      
                                                                      99
                                                                      %
                                                                      
                                                                      
                                                                      6.31
                                                                      
                                                                      
                                                                      
                                                                      100
                                                                      %
                                                                      
                                                                      
                                                                      17.37
                                                                      %Industrial
      Users
                                                                      
                                                                      
                                                                      0.09
                                                                      
                                                                      
                                                                      
                                                                      1
                                                                      %
                                                                      
                                                                      
                                                                      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
 
 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 $11.86 million during
the nine months ended September 30, 2009, accounting for 61% of total net
revenue in 2009, representing an increase of 38.06% over the year 2008. Gas
sales to residential increased 129.56% from $2.07 million in 2008 to
$4.76million in 2009. Gas sales to industrial and commercial users
increased 9%, from $6.52 million in 2008 to $7.11 million in
2009.
  For the
      9 months endedSeptember 30,2009
                            
                            
                            2008
                            
                            
                            Change($
      million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Gas
      Sales
                            
                            
                            11.86
                            
                            
                            
                            100
                            %
                            
                            
                            8.59
                            
                            
                            
                            100
                            %
                            
                            
                            38.06
                            %Residential
      Users
                            
                            
                            4.76
                            
                            
                            
                            40
                            %
                            
                            
                            2.07
                            
                            
                            
                            24
                            %
                            
                            
                            129.56
                            %Industrial
      and Commercial Users
                            
                            
                            7.10
                            
                            
                            
                            60
                            %
                            
                            
                            6.52
                            
                            
                            
                            76
                            %
                            
                            
                            9.00
                            %
  49
  Cost
of Revenues
 
 Cost of
revenues for the nine months ended September 30, 2009, which includes cost of
connection and cost of gas sales was $14.07 million, an increase of 45.24%, from
$9.69 million in the same period of 2008.
 
 For the 9 months endedSeptember 30,2009
                            
                            
                            2008
                            
                            
                            Change($
      million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Cost
      of Revenues
                            
                            
                            14.07
                            
                            
                            
                            100
                            %
                            
                            
                            9.69
                            
                            
                            
                            100
                            %
                            
                            
                            45.24
                            %Connection
      Cost
                            
                            
                            2.67
                            
                            
                            
                            19
                            %
                            
                            
                            1.98
                            
                            
                            
                            20
                            %
                            
                            
                            34.83
                            %Gas
      Cost
                            
                            
                            11.4
                            
                            
                            
                            81
                            %
                            
                            
                            7.71
                            
                            
                            
                            80
                            %
                            
                            
                            47.92
                            %
 
 Cost of
Connection
 
 The cost
of connection increased 34.83% to $2.67 million during the nine months
ended September 30, 2009 from $1.98 million for the same period in 2008.
This increase, which outpaced the 18.76% 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 pipelines, the average cost to each household will be
gradually reduced.
 
 Cost of
Gas Sales
 
 The cost
of gas sales increased 47.92% to $11.4 million during the nine months ended
September 30, 2009 from the same period in 2008, when it was $7.71 million.
This increase, which surpassed the 38.06% 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.
  50
  Gross
Profit
 
 Gross
profit slightly increased from $5.21 million in 2008 to $5.28 million for
2009.
  For the 9 months endedSeptember 30,2009
                            
                            
                            2008
                            
                            
                            Change($
      million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Gross
      Profit
                            
                            
                            5.28
                            
                            
                            
                            100
                            %
                            
                            
                            5.21
                            
                            
                            
                            100
                            %
                            
                            
                            1.34
                            %Connection
                            
                            
                            4.82
                            
                            
                            
                            91
                            %
                            
                            
                            4.33
                            
                            
                            
                            83
                            %
                            
                            
                            11.4
                            %Gas
                            
                            
                            0.46
                            
                            
                            
                            9
                            %
                            
                            
                            0.89
                            
                            
                            
                            17
                            %
                            
                            
                            -47.84
                            %
 
 During
the nine months ended September 30, 2009, gross profit was $5.28 million, a
slightly increase of approximately 1.34% from the same period of 2008.
Gross profit from connection fees is $4.82 million for the nine months of 2009,
accounting for 91% of total gross profit. In comparison, gross profit from
connection fees was $4.33 million for the nine months of 2008, accounting for
83% of total gross profit. Gross profit from gas sales was $0.46 million,
accounting for 9% of total gross profit, compared to $0.89 million, 17% of total
gross profit in the same period of 2008.
 
 Gross
margin during nine months ended September 30, 2009 is 27.29%, compared to 34.98%
during the same period in 2008.
 
 Gross
margin for connection fees for the nine months ended September 30, 2009 was
64.34%, compared to 68.59% during the same period of 2008. Higher cost of raw
materials, parts, and installation and maintenance fees contributed to the
decrease.
 
 Gross
margin for sales of natural gas was 3.89% for the nine months ended September
30, 2009, compared to 10.30% 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 nine months ended September 30, 2009 were
$709,256 and approximately 3.66% of our net revenues, compared with $594,575, or
3.99% of net revenues in the same period of 2008.
 
 General
and Administrative Expenses and other expenses
 
 General
and administrative expenses were $1.90 million for the nine months ended
September 30, 2009, which was 28.13% lower than $2.65 million for
the same period last year. Other expense was $0.12 million for the nine months
ended September 30, 2009, compared with 0.60 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 nine months ended September 30, 2009 was $2.67 million,
representing an increase of 35.5%, compared to the operating income of $1.97
million in 2008.
  51
  Income
tax
 
 Income
tax was $0.58million for the nine months ended September 30, 2009, compared to
$0.72 million in 2008.
 
 Net
Income
 
 Net
income in the nine months ended September 30, 2009 was $1.98 million,
representing a strong improvement of 201.12% from $0.66 million in the
same period in 2008. This improvement was due to the significant decrease of
SG&A and other expenses, reduction of income tax expense, and increase of
gross profit during the first nine months ended September 30, 2009 as compared
to the same period of 2008.
 
 Liquidity
and Capital Resources
 
 Cash and
cash equivalents were $2.08 million as of September 30, 2009, a decrease of
$1.18 million as compared to $3.26 million of cash and cash equivalents as of
December 31, 2008.
 
 In the
nine months of 2009, the major source of cash was the Company’s operating
activities. Cash sourced in operating activities during the nine months
ended September 30, 2009 is $8.21 million, an increase of $8.21million from
$960 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 nine months ended September 30,
2009, resulting in a decrease of $1.24 million from that during the same
period of 2008.
 
 Cash used
in investing activities during the nine months ended September 30, 2009 is
$9.37million, a slight increase from $9.28 million during the same period of
2008.
 
 Accounts
Receivable
 
 Accounts
receivable as of September 30, 2009 were $3.12 million, a decrease of $2.89
million from $6.01 million as of December 31, 2008.
 
 Our
accounts receivable is expected to gradually decrease during the first nine
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. The management also makes great efforts to collect accounts receivable to
reduce the outstanding balance.
 
 Notes
Receivable
 
 There are
no notes receivable as of September 30, 2009
 
 Inventory
 
 Inventory
of $0.37 million as of September 30, 2009 was comprised of spare parts and
natural gas.
 
 Fixed
Assets
 
 Fixed
Assets as of September 30, 2009 were $43.71million, representing an
increase of $7.53 million from $36.18 million as of December 31,
2008.  The table below is a breakdown of our fixed assets at
cost:
  52
  2009
                            
                            
                            2008At
      CostGas
      Pipelines
                            
                            $
                            34,641,390
                            
                            
                            $
                            27,859,313Motor
      Vehicles
                            
                            
                            5,701,904
                            
                            
                            
                            5,600,508Machinery
      & Equipment
                            
                            
                            1,482,513
                            
                            
                            
                            857,834Buildings
                            
                            
                            1,572,188
                            
                            
                            
                            1,568,380Leasehold
      Improvements
                            
                            
                            81,539
                            
                            
                            
                            80,101Office
      Equipment
                            
                            
                            234,142
                            
                            
                            
                            216,435Less
      Accumulated depreciation
                            
                            
                            (3,906,315
                            )
                            
                            
                            (3,149,453
                            )$
                            39,807,361
                            
                            
                            $
                            33,033,118
 Bank
Loans
 
 Bank
loans as of September 30, 2009 were $2.19 million, no change from that as of
December 31, 2008.
 
 Accounts
Payables
 
 Accounts
payables as of September 30, 2009 was $9.0 million, representing an increase of
$2.65million from that as of December 31, 2008.
 
 Other
Payables
 
 Other
payables as of September 30, 2009 were $5.41million, representing a decrease of
$0.76 million from that as of December 31, 2008.
  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
September 30, 2009.  Based on that evaluation, our management
concluded that, as of September 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.
  53
  A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of our financial
reporting.
  Our
internal control over financial reporting was not effective as a result of the
following identified material weaknesses:
  (1) There
was not adequate resources and personnel within the Company to carry out the
comprehensive internal audit functions which include the formulation of
systematic risk assessment procedures, the annual audit plan and budget and
anti-fraud audit.
 
 (2)A more comprehensive Code
of Conduct and Ethics (the “Code”), which is applicable to all Company
directors, officers and employees, is still work-in-progress as of September 30,
2009.
 
 (3) A
more comprehensive Related Party Transactions Policy and the master list of all
Related Parties are still work-in-progress as of September 30,
2009.
 
 Management’s
Plan for Remediation of Material Weaknesses
 
 In light
of our Company’s internal control over financial reporting 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) With
the limited quality personnel resource supplies in the market, the management
had already engaged a third party professional to assist in establishing the
internal audit functions since July 2009 whereas another round of internal
control assessment had been carried out in September 2009. The Internal Audit
Manual and Internal Audit Charter were completed and pending for the approval of
the board of directors. Going forward, the Company will prepare the internal
audit and anti-fraud plan and budget based on the risk assessment results. The
respective internal audit work procedures will be executed based on the approved
internal audit plan;
 
 (2)
Management is expected to release the comprehensive Code of conduct by December
31, 2009.  The Company will update the Code on an annual basis, while
trainings and seminars will be arranged to all new and existing management and
employees so as to enhance the awareness of the Code of Ethics. In the future,
all employees will be required to sign a declaration to acknowledge that the
employee has read and will comply with the Code; and
  (3)
Management is expected to release the comprehensive Related Parties Transaction
Policy by March 31, 2010. The Company will update the master list as well as the
policy on an annual basis.
 
 Changes
in Internal Control over Financial Reporting
 
 During
the quarter ended September 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.
  54
  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:
      November 13, 2009
                          By:
                          /s/ Yuchuan
      LiuYuchuan
      LiuChairman
      and Chief Executive Officer
  SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      November  13, 2009
                          By:
                          /s/ Yugang
      ZhangYugang
      ZhangChief
      Financial Officer
  55