United
States


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM 10-Q





(Mark
one)




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





For
the Quarterly Period Ended March 31, 2010





or




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





Commission
File Number 000-51364





SINO
GAS INTERNATIONAL HOLDINGS, INC.


(Name of
small business issuer in its charter)




Utah
            90-0438712(State
      or other jurisdiction
              of
      incorporation or organization)
            (I.R.S.
      Employer
              Identification
      No.)





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





Issuer’s
telephone number: 86-10-82600527




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


Yes xNo
 ̈





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





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





Large
      accelerated filer  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting 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 May
13, 2010, the Registrant had 26,769,313 shares of common stock
outstanding.





Sino Gas
International Holdings, Inc.





Table of
Contents





PagePART
      I -
                FINANCIAL
      INFORMATION
                2Item
      1.
                Financial
      Statements
                3Notes
      to Financial Statements (Unaudited)
                12Item
      2.
                Management's
      Discussion and Analysis or Plan of Operation
                48Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                54Item
      4.
                Controls
      and Procedures
                54PART
      II -
                OTHER
      INFORMATION
                54Item
      1.
                Legal
      Proceedings
                54Item
      1A.
                Risk
      Factors
                54Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                54Item
      3.
                Defaults
      Upon Senior Securities
                54Item
      4.
                Removed
      and Reserved
                54Item
      5.
                Other
      Information
                54Item
      6.
                Exhibits
                54




2


PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements




Sino
Gas International Holdings, Inc.
 
 Reviewed
Consolidated Financial Statements
 
 March
31, 2010 and December 31, 2009
 
 (Stated
in US Dollars)
  3
  Sino Gas International
Holdings, Inc.
 
 Content
                  
                  PageReport
      of Independent Registered Public Accounting Firm
                  
                  5Consolidated
      Balance Sheets
                  
                  6 -
      7Consolidated
      Statements of Income
                  
                  8Consolidated
      Statements of Stockholders’ Equity
                  
                  9 -
      10Consolidated
      Statements of Cash Flows
                  
                  11Notes
      to Consolidated Financial Statements
                  
                  12 -
      47
  4
  To:
              The
      Board of Directors and Stockholders
of
 Sino Gas
International Holdings, Inc.
 
 Report of Independent
Registered Public Accounting Firm
 
 We have
reviewed the accompanying consolidated interim balance sheets of Sino Gas
International Holdings, Inc. as of March 31, 2010 and December 31, 2009, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for the three-month periods ended March 31, 2010 and 2009. These consolidated
interim financial statements are the responsibility of the Company's
management.
 
 We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
statements consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
 
 South
      San Francisco, California
                Samuel
      H. Wong & Co., LLPApril
      30, 2010
                Certified
      Public Accountants
  5
  Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of March 31, 2010 and December 31, 2009
 (Stated
in US Dollars)
 
 3/31/2010
                                      
                                      
                                      12/31/2009ASSETSCurrent Assets
                                      
                                      NotesCash
      & cash equivalents
                                      
                                      2(e)
                                      
                                      
                                      $
                                      7,505,613
                                      
                                      
                                      $
                                      9,820,890Restricted
      cash
                                      
                                      3
                                      
                                      
                                      
                                      95,425
                                      
                                      
                                      
                                      126,400Notes
      receivable
                                      
                                      
                                      
                                      
                                      
                                      204,795
                                      
                                      
                                      
                                      351,021Accounts
      receivable
                                      
                                      2(f),4
                                      
                                      
                                      
                                      6,495,162
                                      
                                      
                                      
                                      5,036,609Inventory
                                      
                                      
                                      
                                      
                                      
                                      576,108
                                      
                                      
                                      
                                      416,931Advance
      to suppliers
                                      
                                      2(g)
                                      
                                      
                                      
                                      4,041,051
                                      
                                      
                                      
                                      4,814,420Prepayment
      and others
                                      
                                      
                                      
                                      
                                      
                                      477,588
                                      
                                      
                                      
                                      446,840Other
      receivables
                                      
                                      2(f)
                                      
                                      
                                      
                                      1,725,770
                                      
                                      
                                      
                                      1,686,115Total
      Current Assets
                                      
                                      
                                      
                                      
                                      
                                      21,121,512
                                      
                                      
                                      
                                      22,699,226Non-Current AssetsInvestment
                                      
                                      2(h),5
                                      
                                      
                                      
                                      7,032,465
                                      
                                      
                                      
                                      7,031,333Property,
      plant & equipment, net
                                      
                                      2(j),6
                                      
                                      
                                      
                                      49,023,402
                                      
                                      
                                      
                                      47,772,011Construction
      in progress
                                      
                                      2(l)
                                      
                                      
                                      
                                      13,372,320
                                      
                                      
                                      
                                      13,357,395Intangible
      assets, net
                                      
                                      2(k),7
                                      
                                      
                                      
                                      2,210,430
                                      
                                      
                                      
                                      2,217,699Total
      Non-current Assets
                                      
                                      
                                      
                                      
                                      
                                      71,638,617
                                      
                                      
                                      
                                      70,378,438Total
      Assets
                                      
                                      
                                      
                                      
                                      $
                                      92,760,129
                                      
                                      
                                      $
                                      93,077,664LIABILITIES
      & STOCKHOLDERS' EQUITYLIABILITIESCurrent LiabilitiesBank
      loans
                                      
                                      8
                                      
                                      
                                      $
                                      2,925,174
                                      
                                      
                                      $
                                      2,925,174Accounts
      payable
                                      
                                      
                                      
                                      
                                      
                                      7,216,072
                                      
                                      
                                      
                                      8,560,120Other
      payables
                                      
                                      9
                                      
                                      
                                      
                                      4,889,926
                                      
                                      
                                      
                                      6,339,571Accrued
      liabilities
                                      
                                      
                                      
                                      
                                      
                                      162,220
                                      
                                      
                                      
                                      453,335Unearned
      revenue
                                      
                                      2(m)
                                      
                                      
                                      
                                      700,664
                                      
                                      
                                      
                                      620,860Total
      Current Liabilities
                                      
                                      
                                      
                                      
                                      
                                      15,894,056
                                      
                                      
                                      
                                      18,899,060Non-current LiabilitiesLong-term
      bank loans
                                      
                                      8
                                      
                                      
                                      
                                      8,776,934
                                      
                                      
                                      
                                      6,581,641Non-current
      Convertible Bonds
                                      
                                      10
                                      
                                      
                                      
                                      5,009,457
                                      
                                      
                                      
                                      4,329,101Total
      Liabilities
                                      
                                      
                                      
                                      
                                      $
                                      29,680,447
                                      
                                      
                                      $
                                      29,809,802
 
 See
Accompanying Notes to Financial Statements and Accountant’s
Report
  6
  Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of March 31, 2010 and December 31, 2009
 (Stated
in US Dollars)
 
 STOCKHOLDERS'
      EQUITY
                                      
                                      
                                      
                                      
                                      3/31/2010
                                      
                                      
                                      12/31/2009NotesPreferred
      Stock B US$0.001 par value; 5,000,000 shares authorized; 4,579,839 shares
      issued and outstanding as of March 31, 2010 and December 31,
      2009.
                                      
                                      11
                                      
                                      
                                      $
                                      4,580
                                      
                                      
                                      $
                                      4,580Additional
      paid in capital - Preferred Stock B
                                      
                                      
                                      
                                      
                                      
                                      5,323,972
                                      
                                      
                                      
                                      5,323,972Preferred
      Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares
      issued and outstanding as of March 31, 2010 and December 31,
      2009.
                                      
                                      11
                                      
                                      
                                      
                                      95
                                      
                                      
                                      
                                      95Additional
      paid in capital - Preferred Stock B-1
                                      
                                      
                                      
                                      
                                      
                                      132,662
                                      
                                      
                                      
                                      132,662Common
      Stock US$0.001 par value; 250,000,000 shares authorized; 26,769,313 shares
      issued and outstanding as of March 31, 2010 and December 31,
      2009.
                                      
                                      11
                                      
                                      
                                      
                                      26,769
                                      
                                      
                                      
                                      26,769Additional
      paid in capital - Common Stock
                                      
                                      
                                      
                                      
                                      
                                      22,513,732
                                      
                                      
                                      
                                      22,513,732Additional
      paid in capital - Warrants Series: A, B, J, C, D
                                      
                                      
                                      
                                      
                                      
                                      311,110
                                      
                                      
                                      
                                      311,110Additional
      paid in capital - Warrants Series: E, G
                                      
                                      
                                      
                                      
                                      
                                      47,946
                                      
                                      
                                      
                                      47,946Additional
      paid in capital - Warrants Series: F, R
                                      
                                      
                                      
                                      
                                      
                                      107,652
                                      
                                      
                                      
                                      107,652Additional
      paid in capital - Convertible Bonds Detachable Warrants
                                      
                                      
                                      
                                      
                                      
                                      223,367
                                      
                                      
                                      
                                      223,367Additional
      paid in capital - Beneficial Conversion Feature
                                      
                                      
                                      
                                      
                                      
                                      8,094,814
                                      
                                      
                                      
                                      8,094,814Statutory
      reserve
                                      
                                      2(v)
                                      
                                      
                                      
                                      4,612,191
                                      
                                      
                                      
                                      4,612,191Retained
      earnings
                                      
                                      
                                      
                                      
                                      
                                      13,934,503
                                      
                                      
                                      
                                      14,143,089Accumulated
      other comprehensive income
                                      
                                      2(x)
                                      
                                      
                                      
                                      7,746,287
                                      
                                      
                                      
                                      7,725,883Total
      Stockholders' Equity
                                      
                                      
                                      
                                      
                                      
                                      63,079,682
                                      
                                      
                                      
                                      63,267,862Total
      Liabilities & Stockholders' Equity
                                      
                                      
                                      
                                      
                                      $
                                      92,760,129
                                      
                                      
                                      $
                                      93,077,664
 
 See
Accompanying Notes to Financial Statements and Accountant’s
Report
  7
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Income
 For
the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 Notes
                                                
                                                
                                                3/31/2010
                                                
                                                
                                                3/31/2009Revenue
                                                
                                                
                                                
                                                
                                                $
                                                6,957,661
                                                
                                                
                                                $
                                                5,037,692Cost
      of revenue
                                                
                                                
                                                
                                                
                                                
                                                (4,833,148
                                                )
                                                
                                                
                                                (3,773,212
                                                )Gross
      Profit
                                                
                                                
                                                
                                                
                                                
                                                2,124,513
                                                
                                                
                                                
                                                1,264,480Operating ExpensesSelling
      expenses
                                                
                                                
                                                
                                                
                                                
                                                271,243
                                                
                                                
                                                
                                                203,072General
      and administrative expenses
                                                
                                                
                                                
                                                
                                                
                                                906,531
                                                
                                                
                                                
                                                512,447Total
      operating expenses
                                                
                                                
                                                
                                                
                                                
                                                (1,177,774
                                                )
                                                
                                                
                                                715,519Operating
      Income
                                                
                                                
                                                
                                                
                                                
                                                946,739
                                                
                                                
                                                
                                                548,961Other Income/(Expense)Investment
      income
                                                
                                                2(q)
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Other
      income
                                                
                                                
                                                
                                                
                                                
                                                5,382
                                                
                                                
                                                
                                                161Other
      expense
                                                
                                                17
                                                
                                                
                                                
                                                (1,300
                                                )
                                                
                                                
                                                (5,729
                                                )Interest
      income
                                                
                                                
                                                
                                                
                                                
                                                4,770
                                                
                                                
                                                
                                                1,850Interest
      expense
                                                
                                                10
                                                
                                                
                                                
                                                (924,841
                                                )
                                                
                                                
                                                (41,452
                                                )Total
      other income/(expense)
                                                
                                                
                                                
                                                
                                                
                                                (915,989
                                                )
                                                
                                                
                                                (45,170
                                                )Earnings
      before income tax
                                                
                                                
                                                
                                                
                                                
                                                30,750
                                                
                                                
                                                
                                                503,791Income
      tax
                                                
                                                2(r),12
                                                
                                                
                                                
                                                (239,334
                                                )
                                                
                                                
                                                (158,155
                                                )Net
      income
                                                
                                                
                                                
                                                
                                                $
                                                (208,586
                                                )
                                                
                                                $
                                                345,637Income
      available to common stockholders for basic EPS
                                                
                                                
                                                
                                                
                                                $
                                                (208,586
                                                )
                                                
                                                $
                                                345,637Interest
      expense for convertible bonds, net of
    tax
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Income
      available to common stockholders for diluted EPS
                                                
                                                
                                                
                                                
                                                $
                                                (208,586
                                                )
                                                
                                                $
                                                345,637Earnings
      Per Share
                                                
                                                2(z),14Basic
                                                
                                                
                                                
                                                
                                                $
                                                (0.01
                                                )
                                                
                                                $
                                                0.01Diluted
                                                
                                                
                                                
                                                
                                                $
                                                (0.01
                                                )
                                                
                                                $
                                                0.01Weighted
      Average Shares OutstandingBasic
                                                
                                                
                                                
                                                
                                                
                                                26,769,313
                                                
                                                
                                                
                                                25,269,313Diluted
                                                
                                                
                                                
                                                
                                                
                                                26,769,313
                                                
                                                
                                                
                                                29,944,570
 
 See
Accompanying Notes to Financial Statements and Accountant’s
Report
  8
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Stockholders’ Equity
 As
of March 31, 2010 and December 31, 2009
 (Stated
in US Dollars)
 
 Preferred Stock B
                    
                    
                    Preferred Stock B-1
                    
                    
                    Common StockShares
                      Outstanding
                    
                    
                    Amount
                    
                    
                    Additional Paid In
                      Capital-Preferred
                      Stock B
                    
                    
                    Shares
                      Outstanding
                    
                    
                    Amount
                    
                    
                    Additional Paid In
                      Capital-Preferred
                      Stock B-1
                    
                    
                    Shares
                      Outstanding
                    
                    
                    Amount
                    
                    
                    Additional Paid In
                      Capital-Common
                      StockBalance
      at January 1, 2009
                    
                    
                    4,579,839
                    
                    
                    
                    4,580
                    
                    
                    
                    5,323,972
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    25,269,313
                    
                    
                    
                    25,269
                    
                    
                    
                    23,196,304Net
      Income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of 2007 Make Good Common Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,500,000
                    
                    
                    
                    1,500
                    
                    
                    
                    (1,500
                    )Re-allocation
      of Beneficial Conversion Feature
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (681,072
                    )Issuance
      of Convertible Bonds
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Appropriate
      of Retained Earnings
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
      Currency Translation Adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at December 31, 2009
                    
                    
                    4,579,839
                    
                    
                    
                    4,580
                    
                    
                    
                    5,323,972
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    26,769,313
                    
                    
                    
                    26,769
                    
                    
                    
                    22,513,732Balance
      at January 1, 2010
                    
                    
                    4,579,839
                    
                    
                    
                    4,580
                    
                    
                    
                    5,323,972
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    26,769,313
                    
                    
                    
                    26,769
                    
                    
                    
                    22,513,732Net
      Income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Foreign
      Currency Translation Adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at March 31, 2010
                    
                    
                    4,579,839
                    
                    
                    
                    4,580
                    
                    
                    
                    5,323,972
                    
                    
                    
                    95,418
                    
                    
                    
                    95
                    
                    
                    
                    132,662
                    
                    
                    
                    26,769,313
                    
                    
                    
                    26,769
                    
                    
                    
                    22,513,732
 
 See
Accompanying Notes to Financial Statements and Accountant’s
Report
  9
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Stockholders’ Equity
 As
of March 31, 2010 and December 31, 2009
 (Stated
in US Dollars)
 
 Common StockAdditional Paid in
                          Capital-Warrants
                          Series: A,B,J,C,D
                        
                        
                        Additional Paid in
                          Capital-Warrants
                          Series: E,G
                        
                        
                        Additional Paid in
                          Capital-Warrants
                          Series: F,R
                        
                        
                        Additional Paid in
                          Capital-Convertible Bonds
                          Detachable Warrants
                        
                        
                        Additional Paid in
                          Capital-Beneficial
                          Conversion Feature
                        
                        
                        Statutory
                          Reserve
                        
                        
                        Retained
                          Earnings
                        
                        
                        Accumulated Other
                          Comprehensive
                          Income
                        
                        
                        TotalBalance
      at January 1, 2009
                        
                        
                        311,110
                        
                        
                        
                        47,946
                        
                        
                        
                        107,652
                        
                        
                        
                        -
                        
                        
                        
                        7,002,292
                        
                        
                        
                        3,956,728
                        
                        
                        
                        10,069,896
                        
                        
                        
                        7,676,844
                        
                        
                        
                        57,855,350Net
      Income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,047,584
                        
                        
                        
                        -
                        
                        
                        
                        4,047,584Issuance
      of 2007 Make Good Common Stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Re-allocation
      of Beneficial Conversion Feature
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        681,072
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of Convertible Bonds
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        223,367
                        
                        
                        
                        1,092,522
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,315,889Appropriate
      of Retained Earnings
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        655,463
                        
                        
                        
                        (655,463
                        )
                        
                        
                        -
                        
                        
                        
                        -Foreign
      Currency Translation Adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        49,039
                        
                        
                        
                        49,039Balance
      at December 31, 2009
                        
                        
                        311,110
                        
                        
                        
                        47,946
                        
                        
                        
                        107,652
                        
                        
                        
                        223,367
                        
                        
                        
                        8,094,814
                        
                        
                        
                        4,612,191
                        
                        
                        
                        14,143,089
                        
                        
                        
                        7,725,883
                        
                        
                        
                        63,267,862Balance
      at January 1, 2010
                        
                        
                        311,110
                        
                        
                        
                        47,946
                        
                        
                        
                        107,652
                        
                        
                        
                        223,367
                        
                        
                        
                        8,094,814
                        
                        
                        
                        4,612,191
                        
                        
                        
                        14,143,089
                        
                        
                        
                        7,725,883
                        
                        
                        
                        63,267,862Net
      Income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (208,586
                        )
                        
                        
                        -
                        
                        
                        
                        (208,586
                        )Foreign
      Currency Translation Adjustment
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        20,404
                        
                        
                        
                        20,404Balance
      at March 31, 2010
                        
                        
                        311,110
                        
                        
                        
                        47,946
                        
                        
                        
                        107,652
                        
                        
                        
                        223,367
                        
                        
                        
                        8,094,814
                        
                        
                        
                        4,612,191
                        
                        
                        
                        13,934,503
                        
                        
                        
                        7,746,287
                        
                        
                        
                        63,079,682
 
 12/31/2009
                          
                          
                          3/31/2010
                          
                          
                          TotalComprehensive
      IncomeNet
      Income
                          
                          $
                          4,047,584
                          
                          
                          $
                          (208,586
                          )
                          
                          $
                          3,838,998Other
      Comprehensive IncomeForeign
      Currency Translation Adjustment
                          
                          
                          49,039
                          
                          
                          
                          20,404
                          
                          
                          
                          69,443Total
                          
                          $
                          4,096,623
                          
                          
                          $
                          (188,182
                          )
                          
                          $
                          3,908,441
 
 See
Accompanying Notes to Financial Statements and Accountant’s
Report
  10
 
 Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Cash Flows
 For
the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 3/31/2010
                          
                          
                          3/31/2009Cash
      Flows from Operating ActivitiesNet
      Income
                          
                          $
                          (208,586
                          )
                          
                          $
                          345,637Depreciation
      expense
                          
                          
                          338,917
                          
                          
                          
                          332,656Amortization
      expense of intangible assets
                          
                          
                          7,427
                          
                          
                          
                          2,267Amortization
      expense of convertible bonds discount
                          
                          
                          680,356
                          
                          
                          
                          -Withdraw
      from restricted time deposits
                          
                          
                          30,975
                          
                          
                          
                          4,342Decrease/(increase)
      in accounts and other receivables
                          
                          
                          (1,351,982
                          )
                          
                          
                          57,335Decrease/(increase)
      in inventory
                          
                          
                          (159,177
                          )
                          
                          
                          35,721Decrease/(increase)
      in prepaid expenses
                          
                          
                          742,620
                          
                          
                          
                          (862,362
                          )Increase/(decrease)
      in accounts and other payables
                          
                          
                          (3,005,004
                          )
                          
                          
                          633,024Cash
      Sourced/(Used) in Operating Activities
                          
                          
                          (2,924,453
                          )
                          
                          
                          548,620Cash
      Flows from Investing ActivitiesIncrease
      of investment
                          
                          
                          (1,131
                          )
                          
                          
                          (6,481
                          )Purchase
      of property, plant, and equipment
                          
                          
                          (1,590,308
                          )
                          
                          
                          (53,942
                          )Purchase
      of other intangible asset
                          
                          
                          (158
                          )
                          
                          
                          (3,274
                          )(Increase)/decrease
      in construction in progress
                          
                          
                          (14,924
                          )
                          
                          
                          (1,580,130
                          )Cash
      Sourced/(Used) in Investing Activities
                          
                          
                          (1,606,521
                          )
                          
                          
                          (1,643,828
                          )Cash
      Flows from Financing ActivitiesProceeds
      from bank loans
                          
                          
                          2,195,293
                          
                          
                          
                          2,749Cash
      Sourced/(Used) in Financing Activities
                          
                          
                          2,195,293
                          
                          
                          
                          2,749Increase/(decrease)
      in cash & cash equivalents for the year
                          
                          
                          (2,335,681
                          )
                          
                          
                          (1,092,459
                          )Effect
      of currency translation on cash and cash equivalents
                          
                          
                          20,404
                          
                          
                          
                          44,351Cash
      & cash equivalents at the beginning of year
                          
                          
                          9,820,890
                          
                          
                          
                          3,027,543Cash
      & cash equivalents at the end of year
                          
                          $
                          7,505,613
                          
                          
                          $
                          1,979,435Supplementary
      cash flow informationInterest
      received
                          
                          $
                          4,770
                          
                          
                          $
                          1,850Interest
      paid
                          
                          $
                          245,814
                          
                          
                          $
                          41,452Income
      taxes paid
                          
                          $
                          239,335
                          
                          
                          $
                          158,115
 
 See
Accompanying Notes to Financial Statements and Accountant’s Report
  11
 
 Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (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 natural gas
distribution systems in 35 small and medium size cities and serving
approximately 152,000 residential and seven industrial customers. The Company’s
facilities include approximately 1040 kilometers of pipeline and delivery
networks (including delivery trucks) with a daily capacity of approximately
110,000 cubic meters of natural gas.
 
 The
common stock of the Company is currently quoted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.
 
 Basis of Presentation and
Organization
 
 The
Company’s consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”).
  This
basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Company’s principal subsidiaries,
which are prepared in accordance with the accounting principles and the relevant
financial regulations applicable to enterprises with limited liabilities
established in the PRC (“PRC GAAP”) or in the accounting standards used in the
places of their domicile. The accompanying consolidated financial statements
reflect necessary adjustments not recorded in the books of account of the
Company’s subsidiaries to present them in conformity with US
GAAP.
  12
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a) Method of
Accounting
 
 The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
 
 (b)
Use of
estimates
 
 The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however, actual
results could differ materially from those estimates.
  (c) Economic
and political risks
 
 The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environment in the PRC, and by the general
state of the PRC economy.
  The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment, and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to law and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.
  13
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 (d)
Principles of
Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
subsidiaries (“the Group”). Significant inter-company transactions have been
eliminated in consolidation. Investments in which the company has a 20 percent
to 50 percent voting interest and where the company exercises significant
influence over the investor are accounted for using the equity
method.
 
 The
Company owned its subsidiaries soon after its inception and continued to acquire
and own the equity interests throughout the reporting periods. The following
table depicts the identities of the consolidating subsidiaries as of March 31,
2010.
 
 Name of Company
                                                                            
                                                                            Place of
                                                                              Incorporation
                                                                            
                                                                            Date of
                                                                              Incorporation
                                                                            
                                                                            Beneficiary
                                                                              Interest %
                                                                            
                                                                            
                                                                            Equity
                                                                              Interest %
                                                                            
                                                                            Registered
                                                                              CapitalGAS
      Investment China Co., Ltd.
                                                                            
                                                                            The
      British
                                                                              Virgin
      Islands
                                                                            
                                                                            6/19/2003
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            USD
                                                                              10,000,000Sino
      Gas Construction, Ltd.
                                                                            
                                                                            The
      British
                                                                              Virgin
      Islands
                                                                            
                                                                            1/9/2007
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            USD
                                                                              50,000Sino
      Gas Investment Development, Ltd.
                                                                            
                                                                            The
      British
                                                                              Virgin
      Islands
                                                                            
                                                                            1/9/2007
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            USD
                                                                              50,000Beijing
      Zhong Ran Wei Ye Gas Co., Ltd.
                                                                            
                                                                            PRC
                                                                            
                                                                            8/29/2001
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            RMB
                                                                              206,000,000Beijing
      Chenguang Gas, Ltd.
                                                                            
                                                                            PRC
                                                                            
                                                                            10/30/2002
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            RMB
                                                                              20,000,000Guannan
      Weiye Gas Co., Ltd.
                                                                            
                                                                            PRC
                                                                            
                                                                            6/19/2003
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            
                                                                            
                                                                            100
                                                                            
                                                                            RMB
                                                                              9,510,000
  14
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 Ningjin
      Weiye Gas Co., Ltd
                                                              
                                                              PRC
                                                              
                                                              12/3/2003
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB3,000,000Yutian
      Zhongran Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              12/19/2003
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              90
                                                              
                                                              RMB3,000,000Xingtang
      Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              2/18/2004
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB3,000,000Wuqiao
      Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              6/30/2004
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB2,000,000Jinzhou
      Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              7/19/2004
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB5,000,000Sihong
      Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              12/3/2004
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB10,000,000Sishui
      Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              12/22/2004
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB3,000,000Langfang
      Weiye Dangerous Goods Transportation Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              3/22/2005
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB1,000,000Linzhang
      Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              7/6/2005
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              85
                                                              
                                                              RMB1,000,000Peixian
      Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              8/22/2005
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              90
                                                              
                                                              RMB5,000,000Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              9/30/2005
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              100
                                                              
                                                              RMB2,000,000Longyao
      Zhongran Weiye Gas Co., Ltd.
                                                              
                                                              PRC
                                                              
                                                              10/13/2005
                                                              
                                                              
                                                              100
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              RMB3,000,000
  15
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 Yuxian
      Jinli Gas Co., Ltd.
                                
                                PRC
                                
                                11/8/2005
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB9,500,000Hengshui
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                12/20/2005
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB3,000,000Shenzhou
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                12/23/2005
                                
                                
                                100
                                
                                
                                
                                95
                                
                                RMB3,000,000Changli
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                12/8/2006
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB3,000,000Chenan
      Chenguang Gas Co., Ltd
                                
                                PRC
                                
                                1/23/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB1,500,000Wuhe
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                1/30/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB3,000,000Xinji
      Zhongchen Gas Co., Ltd
                                
                                PRC
                                
                                2/7/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB3,000,000Gucheng
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                3/21/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB3,000,000Luquan
      Chenguang Gas Co., Ltd.
                                
                                PRC
                                
                                4/27/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB2,000,000Shijiazhuang
      Chenguang Gas Co., Ltd.
                                
                                PRC
                                
                                6/14/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB2,000,000Nangong
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                6/25/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB3,000,000Sixian
      Weiye Gas Co., Ltd.
                                
                                PRC
                                
                                9/3/2007
                                
                                
                                100
                                
                                
                                
                                100
                                
                                RMB3,000,000
  16
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 Baishan
      Weiye Gas Co., Ltd.
                                                                  
                                                                  PRC
                                                                  
                                                                  7/13/2007
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  RMB
                                                                    15,000,000Guyuan
      Gas Co., Ltd.
                                                                  
                                                                  PRC
                                                                  
                                                                  12/15/2008
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  RMB
                                                                    1,000,000Xinhe
      Weiye Gas Co., Ltd.
                                                                  
                                                                  PRC
                                                                  
                                                                  7/2/2009
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  RMB
                                                                    1,000,000Hebei
      Weiye Gas Co., Ltd.
                                                                  
                                                                  PRC
                                                                  
                                                                  12/18/2009
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  RMB
                                                                    75,439,270Gaocheng
      Weiye Gas Co., Ltd.
                                                                  
                                                                  PRC
                                                                  
                                                                  1/27/2010
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  RMB200,000
 
 (e)
Cash and Cash
Equivalents
 
 The
Company considers all cash and other highly liquid investments with initial
maturities of three months or less to be cash equivalents.
 
 (f)
Accounts and Other
Receivable
 
 Accounts
and other receivable are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. The
Company extends unsecured credit to customers in the normal course of business
and does not accrue interest on trade accounts receivable.
 
 (g)
Advances to
Suppliers
 
 Advances
to suppliers represent the cash paid in advance for purchasing raw materials.
The advances to suppliers are interest free and unsecured.
 
 (h)
Investments in Equity
Securities
 
 The
equity method of accounting was used to account for the Company’s investment in
equity securities for which the Company did not have controlling equity
interest. Non-controlling equity interest for the Company is typically a
position of less than 50% beneficial ownership.
 
 The
consolidated statement of income includes the Company's share of the
post-acquisition results of the investment’s performance for the year. In the
consolidated balance sheet, investments in equity securities are stated at the
Company's share of the net assets of the investments plus any potential premium,
or less discounts paid at the time of acquisition, and less any identified
impairment loss.
  17
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 Beijing
Zhongran Xiangke Oil Gas Technology Co., Ltd. (“Xiangke Oil Gas”) is the
Company’s 40% owned investment and is principally engaged in sale of compressed
natural gas to domestic households and industrial firms around the suburbs of
Beijing as well as the suburban areas of the Hebei Province and
Tianjin.
 
 Qujing
Gas Co., Ltd. (“Qujing Gas”) is the Company’s 39% owned investment and is
principally engaged in the business of gas pipeline construction in Yunnan
Province.
 
 Place of Registration
                              
                              Form of Business
                                Structure
                              
                              Registered
                                Capital
                              
                              Nominal Value of
                                Registered
                                Capital
                              
                              
                              Principle ActivitiesP.R.C
                              
                              Sino-foreign
      equity joint venture
                              
                              RMB
      20,000,000
                              
                              
                              40
                              %
                              
                              Distribution
      of natural gas and gas pipeline constructionP.R.C
                              
                              Equity
      joint venture
                              
                              RMB
                                30,000,000
                              
                              
                              39
                              %
                              
                              Distribution
      of natural gas and gas pipeline
construction
 
 The
Company did not record any goodwill when it acquired its equity position in
Xiangke Oil Gas and Qujing Gas. Accordingly, in accordance with SFAS 142, the
Company has not taken an amortization expense of goodwill during the time it has
carried a 40% and 39% stakes in Xiangke and Qujing respectively.
 
 (i) Accounting for the
Impairment of Long-Lived Assets
 
 The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
 
 If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
 
 During
the reporting periods, there was no impairment loss.
  18
 
 Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
  (j)
Property, Plant and
Equipment
 
 Property,
plant and equipment, other than construction in progress, are stated at cost
less accumulated depreciation and impairment loss. Depreciation is provided over
their estimated useful lives, using the straight-line method. Estimated useful
lives of the property, plant and equipment are as follows:
 
 Assets Class
                      
                      Estimated Useful LifeGas
      Pipelines (Up to December 31, 2007)
                      
                      25
      yearsGas
      Pipelines (Starting from January 1, 2008)
                      
                      50
      yearsBuildings
                      
                      25
      yearsLeasehold
      Improvements
                      
                      25
      yearsMachinery
      & Equipment
                      
                      20
      yearsMotor
      Vehicles
                      
                      10
      yearsOffice
      Equipment
                      
                      8
      years
 
 The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
 
 (k)
Intangible
Assets
 
 Intangible
assets are stated at cost less accumulated amortization and impairment loss.
Amortization is provided over their estimated useful lives, using the
straight-line method. Estimated useful lives of the intangibles are as
follows:
 
 Asset Class
                      
                      Estimated Useful LifeLand
      use rights
                      
                      20
      - 50 yearsFranchises
                      
                      30
      yearsAccounting
      software
                      
                      3
      years
 
 For
goodwill, impairment tests are performed annually and more frequently whenever
events or changes in circumstances indicate goodwill carrying values exceed
estimated reporting unit fair values. Upon indication that the carrying values
of such assets may not be recoverable, the Company recognizes an impairment loss
as a charge against current operations.  Based on the impairment tests
performed, there was no impairment of goodwill for the three months ended March
31, 2010.
  19
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (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.
 
 (o)
Foreign Currency
Translation
 
 The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB). The
consolidated financial statements are translated into United States dollars from
RMB at year-end exchange rates as to assets and liabilities and average exchange
rates as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred.
  3/31/2010
                      
                      
                      12/31/2009Years
      end RMB : US$ exchange rate
                      
                      
                      6.8361
                      
                      
                      
                      6.8372Average
      yearly RMB : US$ exchange rate
                      
                      
                      6.8360
                      
                      
                      
                      6.8409
  20
   Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
  The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
  (p)
Revenue
Recognition
 
 Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue.
 
 Net sales
consist of gas and connection fee revenue. Cost of sales include gas and
connection cost. Gas connection revenue is recognized when the outcome of a
contract can be estimated reliably and the stage of completion at the balance
sheet date can be measured reliably. Sales of natural gas are recognized when
goods are delivered and title has passed.
 
 (q)
Investment
Income
 
 Investment
income represents the Company’s share of post-acquisition results of its
investment in equity securities for the year.
 
 (r)
Income
Taxes
 
 The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are available. The
Company has implemented Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes. Income tax liabilities computed according to
the United States and People’s Republic of China (PRC) tax laws are provided for
the tax effects of transactions reported in the financial statements and
consists of taxes currently due plus deferred taxes related primarily to
differences between the basis of fixed assets and intangible assets for
financial and tax reporting. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are recovered or
settled.  Deferred taxes also are recognized for operating losses that
are available to offset future income taxes. A valuation allowance is created to
evaluate deferred tax assets, whether it is more likely than not that these
items will expire either before the Company is able to realize that tax benefit,
or that future realization is uncertain.
  21
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 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
                            
                            
                            25.0
                            %i.    GAS
      Investment China Co., Ltd.
                            
                            British
      Virgin Islands
                            
                            
                            0.00
                            %ii.   
      Sino Gas Construction,
      Ltd.
                            
                            British
      Virgin Islands
                            
                            
                            0.00
                            %iii.   
      Sino Gas Investment
      Development, Ltd.
                            
                            British
      Virgin Islands
                            
                            
                            0.00
                            %
 
 ·
              Effective
      January 1, 2008, PRC government implements a new 25% tax rate for all
      enterprises regardless of whether domestic or foreign enterprise without
      any tax holiday, which is defined as "two-year exemption followed by
      three-year half exemption" hitherto enjoyed by tax payers. As a result of
      the new tax law, standard 15% tax rate preference terminated as of
      December 31, 2007. However, PRC government has established a set of
      transition rules to allow enterprises already started tax holidays before
      January 1, 2008, to continue enjoying the tax holidays until being fully
      utilized.
 
 ·
              Since
      Sino Gas International Holdings, Inc. is primarily a holding company
      without any business activities in the United States, the Company shall
      not be subject to United States income tax for the three months ended
      March 31, 2010.
  22
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 (s)
Advertising
 
 The
Company expensed all advertising costs as incurred.
 
 (t)
Concentration of
Credit Risk
 
 Concentration
of credit risk is limited to accounts receivable and is subject to the financial
conditions of major customers. The Company does not require collateral or other
security to support accounts receivable.  The Company conducts
periodic reviews of its clients’ financial condition and customers’ payment
practices to minimize collection risk on accounts receivable.
 
 (u)
Retirement
Benefits
 
 Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred.
 
 (v)
Statutory
Reserves
 
 As
stipulated by the Company Law of the People's Republic of China (PRC) as
applicable to Chinese companies with foreign ownership, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:
 
 i.
              Making
      up cumulative prior years' losses, if
any;
 ii.
              Allocations
      to the "Statutory reserve" of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered
  capital;
 iii.
              Allocations
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.
 
 (w)
Statement of Cash
Flows
 
 In
accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
the Company’s operations is calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
  23
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 (x)
Comprehensive
Income
 
 Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements.  The Company’s current component of other
comprehensive income is the foreign currency translation
adjustment.
 
 (y)
Recent Accounting
Pronouncements
  In June
2009, FASB issued FASB Statement No. 166, Accounting for Transfers for
Financial Assets (FASB ASC 860 Transfers and Servicing) and
FASB Statement No. 167 (FASB ASC 810 Consolidation), a revision to
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities(FASB ASC 810 Consolidation).
 Statement
166 is a revision to FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(FASB
ASC 860 Transfers and
Servicing), 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. Statement No. 166 (FASB
ASC 860 Transfers and
Servicing) must be applied as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is prohibited. This Statement
must be applied to transfers occurring on or after the effective date.  The
Company is still evaluating the impact of the above pronouncement.
 Statement
167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities (FASB ASC 810 Consolidation), 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. Statement No. 167 (FASB ASC 810 Consolidation) shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter.  Earlier application is prohibited. The Company is still
evaluating the impact of the above pronouncement.
  24
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 On June
30, 2009, FASB issued FASB Statement No. 168, Accounting Standards CodificationTM( FASB ASC 105 Generally Accepted Accounting
Principles)a replacement of FASB
Statement No. 162  the Hierarchy of Generally Accepted
Accounting Principles. On the effective date of this standard, FASB
Accounting Standards CodificationTM (ASC) became the source of authoritative U.S.
accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission (SEC). This statement
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009.  If an accounting change results from the
application of this guidance, an entity should disclose the nature and reason
for the change in accounting principle in their financial statements.  This
new standard flattens the GAAP hierarchy to two levels: one that is
authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC).
Exceptions include all rules and interpretive releases of the SEC under the
authority of federal securities laws, which are sources of authoritative GAAP
for SEC registrants, and certain grandfathered guidance having an effective date
before March 15, 1992. Statement No. 168 is the final standard that will be
issued by FASB in that form.  There will no longer be, for example,
accounting standards in the form of statements, staff positions, Emerging Issues
Task Force (EITF) abstracts, or AICPA Accounting Statements of
Position.
 
 The
Company is currently evaluating the potential impact, if any, of the adoption of
the above recent accounting pronouncements on its consolidated results of
operations and financial condition.
 
 (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.
  25
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 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.
 
 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.
  26
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 Accounts Receivable3/31/2010
                          
                          
                          12/31/2009Gross
      accounts receivable
                          
                          $
                          6,560,770
                          
                          
                          $
                          5,087,484Allowance
      for bad debt
                          
                          
                          (65,607
                          )
                          
                          
                          (50,875
                          )Net
      accounts receivable
                          
                          $
                          6,495,162
                          
                          
                          $
                          5,036,609
 
 Allowance for Bad Debt3/31/2010
                          
                          
                          12/31/2009Beginning
      balance
                          
                          $
                          50,875
                          
                          
                          $
                          35,794Addition
                          
                          
                          4,732
                          
                          
                          
                          15,081Reversal
                          
                          
                          -
                          
                          
                          
                          -Ending
      balance
                          
                          $
                          65,607
                          
                          
                          $
                          50,875
 
 Accounts Receivable Aging
      Report3/31/2010
                          
                          
                          12/31/2009<30
      Days
                          
                          $
                          3,229,237
                          
                          
                          $
                          3,639,71230-60
      Days
                          
                          
                          874,194
                          
                          
                          
                          276,00460-90
      Days
                          
                          
                          1,589,588
                          
                          
                          
                          118,70490-180
      Days
                          
                          
                          236,619
                          
                          
                          
                          422,179180-360
      Days
                          
                          
                          375,751
                          
                          
                          
                          446,515>360
      Days
                          
                          
                          189,772
                          
                          
                          
                          133,496Total
                          
                          $
                          6,495,162
                          
                          
                          $
                          5,036,609
 
 The
following are the ten most significant accounts receivable at March 31,
2010:
 
 Hebei
      Zhonggang Steel, Ltd.
                      
                      $
                      676,355Baishan
      Huixin Real Estate Co., Ltd
                      
                      
                      614,192Beijing
      Huicheng Construction Co., Ltd.
                      
                      
                      435,542Baishan
      Xingda Real Estate Co., Ltd.
                      
                      
                      417,177Baishan
      Yongsheng Real Estate Co., Ltd.
                      
                      
                      349,742Baishan
      Lixia Real Estate Co., Ltd.
                      
                      
                      319,636Jiangsu
      Zhongzheng Zhiye Ltd.
                      
                      
                      265,343Shengcheng
      Real Estate Co., Ltd.
                      
                      
                      210,464Hebei
      Haitian Real Estate Co., Ltd.
                      
                      
                      200,590Jiangsu
      Souyi Zhiye Ltd
                      
                      
                      192,796Total
                      
                      $
                      3,681,837
  27
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 5.
              INVESTMENT
 
 Ref.
                          
                          
                          
                          3/31/2010
                          
                          
                          12/31/2009(1)
                          
                          Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
                          
                          $
                          5,291,706
                          
                          
                          $
                          5,290,855(2)
                          
                          Qujing
      Gas Co., Ltd.
                          
                          
                          1,711,502
                          
                          
                          
                          1,711,227(3)
                          
                          China
      Construction Bank
                          
                          
                          29,257
                          
                          
                          
                          29,251Total
                          
                          $
                          7,032,465
                          
                          
                          $
                          7,031,333
 
 (1).
              The
      Company invested $1,642,152 (RMB 13,465,648) on Xiangke Oil Gas in the
      acquisition of 40% equity position. The $5,291,706 investment consisted of
      principal and accumulated post-acquisition investment income attributed to
      Xiangke Oil Gas’ prior years operation
results.
 
 The
following tabulation presented the condensed balance sheets and statements of
income ofXiangke Oil
Gas as of and for the year ended December 31, 2009.
 
 Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.Condensed Balance Sheets
                                                          
                                                          Condensed Statements of
    Income12/31/2009
                                                          
                                                          
                                                          
                                                          12/31/2009AssetsCurrent
      Assets
                                                          
                                                          $
                                                          6,135,845
                                                          
                                                          Revenue
                                                          
                                                          $
                                                          7,379,777Non-Current
      Assets
                                                          
                                                          
                                                          19,672,751
                                                          
                                                          Cost
      of revenue
                                                          
                                                          
                                                          (3,819,923
                                                          )Total
      Assets
                                                          
                                                          
                                                          25,808,596
                                                          
                                                          Gross
      profit
                                                          
                                                          
                                                          3,559,854Liabilities
                                                          
                                                          
                                                          
                                                          
                                                          Operating
      expenses
                                                          
                                                          
                                                          (1,951,894
                                                          )Current
      Liabilities
                                                          
                                                          
                                                          11,267,927
                                                          
                                                          Other
      expenses
                                                          
                                                          
                                                          (47,251
                                                          )Total
      Liabilities
                                                          
                                                          
                                                          11,267,927
                                                          
                                                          Earnings
      before tax
                                                          
                                                          
                                                          1,560,709Net Assets
                                                          
                                                          
                                                          14,540,669
                                                          
                                                          Income
      tax
                                                          
                                                          
                                                          (248,259
                                                          )Total Liabilities & Net
      Assets
                                                          
                                                          $
                                                          25,808,596
                                                          
                                                          Net
      income
                                                          
                                                          $
                                                          1,312,450
 
 (2).
              Along
      with two local partners in Qujing city, the second largest city in Yunnan
      province of P.R.C, the Company established Qujing Gas Co., Ltd. with
      registered capital of $4,387,761 (RMB 30,000,000). The Company’s
      investment of $1,711,502 (RMB 11,700,000) presented 39% equity ownership
      of Qujing Gas. Since Qujing Gas has not finished the required registration
      procedures with local government, there was no business activity during
      the first quarter of 2010.
 
 (3).
              The
      investment of $29,257 (RMB 200,000) with China Construction Bank was a
      long-term investment fund.
  28
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 6.
              PROPERTY, PLANT AND
      EQUIPMENT
 
 Property,
Plant, and Equipment consisted of the followings at March 31, 2010 and December
31, 2009:
 
 3/31/2010
                          
                          AtCost
                          
                          
                          Accumulated
                            Depreciation
                          
                          
                          NetGas
      Pipelines
                          
                          $
                          39,208,530
                          
                          
                          $
                          2,235,813
                          
                          
                          $
                          36,972,717Motor
      Vehicles
                          
                          
                          5,775,811
                          
                          
                          
                          1,605,477
                          
                          
                          
                          4,170,334Machinery
      & Equipment
                          
                          
                          1,482,838
                          
                          
                          
                          290,088
                          
                          
                          
                          1,192,750Buildings
                          
                          
                          6,902,741
                          
                          
                          
                          376,810
                          
                          
                          
                          6,525,931Leasehold
      Improvements
                          
                          
                          81,557
                          
                          
                          
                          61,992
                          
                          
                          
                          19,565Office
      Equipment
                          
                          
                          240,155
                          
                          
                          
                          98,050
                          
                          
                          
                          142,105Total
                          
                          $
                          53,691,632
                          
                          
                          $
                          4,668,230
                          
                          
                          $
                          49,023,402
 
 12/31/2009
                          
                          AtCost
                          
                          
                          Accumulated
                            Depreciation
                          
                          
                          NetGas
      Pipelines
                          
                          $
                          37,329,888
                          
                          
                          $
                          2,069,545
                          
                          
                          $
                          35,260,342Motor
      Vehicles
                          
                          
                          5,775,903
                          
                          
                          
                          1,506,012
                          
                          
                          
                          4,269,890Machinery
      & Equipment
                          
                          
                          1,482,599
                          
                          
                          
                          267,076
                          
                          
                          
                          1,215,524Buildings
                          
                          
                          7,194,148
                          
                          
                          
                          335,461
                          
                          
                          
                          6,858,686Leasehold
      Improvements
                          
                          
                          80,113
                          
                          
                          
                          59,409
                          
                          
                          
                          20,704Office
      Equipment
                          
                          
                          238,673
                          
                          
                          
                          91,809
                          
                          
                          
                          146,863Total
                          
                          $
                          52,101,324
                          
                          
                          $
                          4,329,313
                          
                          
                          $
                          47,772,011
 
 Gas
pipelines purchased prior to 2008 were depreciated over their 25 years useful
lives. Starting from 2008, the Company purchased new quality of pipelines under
50 years warranty. The new gas pipelines were depreciated over their 50 years
useful lives.
 
 Depreciation
expenses included in the consolidated statements of income for the three months
and twelve months ended March 31, 2010 and December 31, 2009 were $338,917 and
$1,179,860 respectively.
  29
 
 Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 7.
              INTANGIBLE
      ASSETS
 
 Intangible
assets consisted of the following at March 31, 2010 and December 31,
2009:
 
 3/31/2010
                    
                    AtCost
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    NetLand
      Use Rights
                    
                    $
                    543,204
                    
                    
                    $
                    58,903
                    
                    
                    $
                    484,301Franchises
                    
                    
                    402,276
                    
                    
                    
                    372,105
                    
                    
                    
                    30,171Accounting
      Software
                    
                    
                    38,863
                    
                    
                    
                    20,880
                    
                    
                    
                    17,983Goodwill
                    
                    
                    1,677,975
                    
                    
                    
                    -
                    
                    
                    
                    1,677,975$
                    2,662,318
                    
                    
                    $
                    451,888
                    
                    
                    $
                    2,210,430
 
 12/31/2009
                    
                    AtCost
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    NetLand
      Use rights
                    
                    $
                    543,117
                    
                    
                    $
                    52,318
                    
                    
                    $
                    490,799Franchises
                    
                    
                    402,211
                    
                    
                    
                    371,740
                    
                    
                    
                    30,471Accounting
      Software
                    
                    
                    38,858
                    
                    
                    
                    20,404
                    
                    
                    
                    18,454Goodwill
                    
                    
                    1,677,975
                    
                    
                    
                    -
                    
                    
                    
                    1,677,975$
                    2,662,160
                    
                    
                    $
                    444,462
                    
                    
                    $
                    2,217,699
 
 The
Company operated as a local natural gas distributor in a city or county, known
as an operation location, under an exclusive franchise agreement between the
Company and the local government or entities in charge of gas utility.
Franchises were the rights to develop sites in Anping and Jinzhou in China. They
were stated at cost less accumulated amortization.
 
 Goodwill
was related to the acquisitions of Beijing Chenguang Gas, Yuxian Weiye Gas and
Guannan Weiye Gas. Management annually reviewed the carrying value of goodwill
using the sum of the discounted cash flows to determine if an impairment charge
is necessary. The Company has determined no impairment to goodwill as of
date.
  30
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 8.
              LOANS
 
 a.  SHORT-TERM
BANK LOANS
 
 NameofBank
                                
                                DueDate
                                
                                InterestRate
                                
                                
                                3/31/2010
                                
                                
                                12/31/2009Bank
      of Dalian - Beijing Branch
                                
                                12/24/2010
                                
                                
                                5.31
                                %
                                
                                $
                                2,925,174
                                
                                
                                $
                                2,925,174Total
                                
                                
                                
                                
                                
                                
                                
                                $
                                2,925,174
                                
                                
                                $
                                2,925,174
 
 The loans
provided by Bank of Dalian were secured by Beijing Chenguang Gas, Ltd.’s
registered capital of $2,925,174 (RMB 20,000,000), CEO Mr. Liu Yuchuan and COO
Mr. Zhou Zhicheng’s properties, which have been appraised at total fair market
value of $933,254 (RMB 6,380,854).
 
 Interest
expenses for the short-term bank loans were $38,832 for the three months ended
March 31, 2010.
 
 b.  LONG-TERM
BANK LOANS
 
 NameofBank
                        
                        DueDate
                        
                        InterestRate
                        
                        
                        3/31/2010
                        
                        
                        12/31/2009China
      Construction Bank - Zhongguancun Branch
                        
                        12/14/2011
                        
                        
                        5.94
                        %
                        
                        $
                        4,388,466
                        
                        
                        $
                        4,387,761China
      Development Bank - Beijing Branch
                        
                        12/24/2012
                        
                        
                        5.40
                        %
                        
                        
                        2,194,234
                        
                        
                        
                        2,193,880China
      Development Bank - Beijing Branch
                        
                        3/22/2013
                        
                        
                        5.40
                        %
                        
                        
                        2,194,234
                        
                        
                        
                        -Total
                        
                        
                        
                        
                        
                        
                        
                        $
                        8,776,934
                        
                        
                        $
                        6,581,641
 
 The
Company obtained the loans from Construction Bank of China and China Development
Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd
(“Guarantor”). Guarantor guaranteed to the Banks the entire principal and
accrued interest. The Company pledged all Beijing Zhongran Weiye Gas’
subsidiaries to the guarantor and was required to pay 2% of the outstanding
loans as financial service to the guarantor per annum. Because the Company
lacked the favorable credit history to directly establish credit facility with
the banks, the pursuance of a credit collateralization from guarantor was a
financing solution of choice.
 
 Interest
expenses for the long-term bank loans were $84,794 for the three months ended
March 31, 2010.
  31
 Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 9.
              OTHER
      PAYABLES
 
 Other
payables consisted of the following at March 31, 2010 and December 31,
2009:
 
 Ref.
                          
                          
                          
                          3/31/2010
                          
                          
                          12/31/2009(1)
                          
                          Amount
      due to Employees
                          
                          $
                          545,142
                          
                          
                          $
                          1,219,131(2)
                          
                          Tax
      Payable
                          
                          
                          333,645
                          
                          
                          
                          695,890(3)
                          
                          Payables
      to Subcontractors
                          
                          
                          2,024,905
                          
                          
                          
                          2,247,036(4)
                          
                          Payable
      outstanding for the acquisition of Baishan Weiye Gas
                          
                          
                          1,986,234
                          
                          
                          
                          2,177,514Total
                          
                          $
                          4,889,926
                          
                          
                          $
                          6,339,571
 
 1.
              Amounts
      due to employees included accrued payroll, welfare payable, continued
      education training program cost and individual travel advance. They were
      all unsecured, interest free, and have no fixed repayment
      terms.
 
 2.
              The
      tax payable consisted of value added tax, sales tax, income tax and local
      tax payables.
 
 3.
              All
      the payables to subcontractors were unbilled
  liabilities.
 
 4.
              The
      outstanding payment was related to the acquisition of Baishan Gas Co.,
      Ltd.’s assets on July 9, 2007.
  32
 Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 10.
              CONVERTIBLE
      BONDS AND BOND WARRANTS
 
 a.     $5,349,982
Convertible Bond with 3,451,601 Detachable Warrants
 
 On
November 30, 2009, the Company completed a financing transaction with certain
purchasers issuing (i) $5,349,982 of the 8% senior secured convertible notes
(the “Bonds”) with conversion price of $0.62 to purchase an aggregate of
8,629,003 shares of the Company’s common stock and (ii) 3,451,601 warrants to
purchase an aggregate of 3,451,601 shares of the Company’s common stock, which
will expire in November 30, 2012 (both the “Bonds” and “Warrants”)
 
 b.     $692,984
Convertible Bond with 447,086 Detachable Warrants
 
 On
December 23, 2009, the Company completed a financing transaction with certain
purchasers issuing (i) $692,984 of the 8% senior secured convertible notes (the
“Bonds”) with conversion price of $0.62 to purchase an aggregate of 1,117,716
shares of the Company’s common stock and (ii) 447,086 warrants to purchase an
aggregate of 447,086 shares of the Company’s common stock, which will expire in
December 23, 2012 (both the “Bonds” and “Warrants”)
 
 Pledge Agreement and
Guaranty
 The notes
are secured by the pledge of 100% of the shares of the Company’s wholly owned
subsidiary Gas Investment China Co., Ltd. and a guaranty from Mr. Liu Yuchan,
the chairman of the board of directors and CEO of the Company.
 
 Event of
Default
 Upon an
event of default in any payment of interest or principal of the bonds, the
principal, accrued and unpaid interest, and any additional amounts owing in
respect of the bonds, will be due and payable at the option of the bondholders.
In addition, the bondholders have the right to convert these notes and then all
accrued and unpaid interest at any time.
 
 Redemption
  Bondholders
may require the Company to repurchase the notes in whole or in part at an amount
equal to 100% of the aggregate principal amount of the notes plus a premium such
that the total cash yield to maturity of the note is 15% per annum, upon the
occurrence of any change of control transaction or if the Company’s common stock
ceases to be quoted for trading or listed for trading on either the OTC Bulletin
Board or a subsequent market and such delisting is not cured within 30
days.
  33
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 The
Company has the right to redeem either 50% or 100% of the outstanding principal
amount of these notes on or after one year from the issuance days.
 
 The
convertible bonds payable, net consisted of the followings:
 
 3/31/2010Ref.
                                    
                                    
                                    
                                    5.3MBonds
                                    
                                    
                                    692KBonds
                                    
                                    
                                    Total(1)
                                    
                                    Convertible
      Bonds Payable - principal
                                    
                                    $
                                    5,349,982
                                    
                                    
                                    $
                                    692,984
                                    
                                    
                                    $
                                    6,042,966(2)
                                    
                                    Less:
      Interest Discount - Warrants
                                    
                                    
                                    (178,950
                                    )
                                    
                                    
                                    (44,417
                                    )
                                    
                                    
                                    (223,367
                                    )(3)
                                    
                                    Less:
      Interest Discount - Beneficial Conversion Feature
                                    
                                    
                                    (869,270
                                    )
                                    
                                    
                                    (223,252
                                    )
                                    
                                    
                                    (1,092,522
                                    )(4)
                                    
                                    Less:
      Bond Discount - Issuance Cost
                                    
                                    
                                    (503,766
                                    )
                                    
                                    
                                    (91,382
                                    )
                                    
                                    
                                    (595,148
                                    )(5)
                                    
                                    Accretion
      of Interest Discount - Warrants
                                    
                                    
                                    15,386
                                    
                                    
                                    
                                    2,950
                                    
                                    
                                    
                                    18,336(6)
                                    
                                    Accretion
      of Interest Discount - Beneficial Conversion Feature
                                    
                                    
                                    579,513
                                    
                                    
                                    
                                    124,029
                                    
                                    
                                    
                                    703,542(7)
                                    
                                    Accretion
      of Bond Discount - Issuance Cost
                                    
                                    
                                    43,314
                                    
                                    
                                    
                                    6,070
                                    
                                    
                                    
                                    49,384(8)
                                    
                                    Accretion of Interest Discount -
      Redemption
                                    
                                    
                                    96,599
                                    
                                    
                                    
                                    9,667
                                    
                                    
                                    
                                    106,266Convertible Bonds Payable,net
                                    
                                    $
                                    4,532,808
                                    
                                    
                                    $
                                    476,649
                                    
                                    
                                    $
                                    5,009,457
 
 12/31/2009Ref.
                                  
                                  
                                  
                                  5.3MBonds
                                  
                                  
                                  692KBonds
                                  
                                  
                                  Total(1)
                                  
                                  Convertible
      Bonds Payable - principal
                                  
                                  $
                                  5,349,982
                                  
                                  
                                  $
                                  692,984
                                  
                                  
                                  $
                                  6,042,966(2)
                                  
                                  Less:
      Interest Discount - Warrants
                                  
                                  
                                  (178,950
                                  )
                                  
                                  
                                  (44,417
                                  )
                                  
                                  
                                  (223,367
                                  )(3)
                                  
                                  Less:
      Interest Discount - Beneficial Conversion Feature
                                  
                                  
                                  (869,270
                                  )
                                  
                                  
                                  (223,252
                                  )
                                  
                                  
                                  (1,092,522
                                  )(4)
                                  
                                  Less:
      Bond Discount - Issuance Cost
                                  
                                  
                                  (503,766
                                  )
                                  
                                  
                                  (91,382
                                  )
                                  
                                  
                                  (595,148
                                  )(5)
                                  
                                  Accretion
      of Interest Discount - Warrants
                                  
                                  
                                  3,804
                                  
                                  
                                  
                                  236
                                  
                                  
                                  
                                  4,040(6)
                                  
                                  Accretion
      of Interest Discount - Beneficial Conversion Feature
                                  
                                  
                                  144,878
                                  
                                  
                                  
                                  12,403
                                  
                                  
                                  
                                  157,281(7)
                                  
                                  Accretion
      of Bond Discount - Issuance Cost
                                  
                                  
                                  10,709
                                  
                                  
                                  
                                  485
                                  
                                  
                                  
                                  11,194(8)
                                  
                                  Accretion of Interest Discount -
      Redemption
                                  
                                  
                                  23,884
                                  
                                  
                                  
                                  773
                                  
                                  
                                  
                                  24,656Convertible Bonds Payable,net
                                  
                                  $
                                  3,981,271
                                  
                                  
                                  $
                                  347,830
                                  
                                  
                                  $
                                  4,329,101
  (1).
              The
      principal amounts listed above represent the face amount of the
      convertible notes.
 
 (2).
              The
      proceeds were allocated between the convertible bonds and warrants based
      on their relative fair value. For more information pertaining the
      calculation of fair value of convertible bonds detachable warrants, see
      Note 11.
 
 (3).
              Since
      the conversion price of bonds is $0.62, which was lower than the fair
      market value of common stock at issuance days. Therefore, beneficial
      conversion feature was applied. The Company has determined the allocation
      of beneficial conversion feature.
  34
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 (4).
              The
      issuance cost consisted of commission to placement agent and legal
      expense.
 
 (5).
              The
      interest discount of warrants was amortized over the whole period applying
      effective annual interest rate.
 
 (6).
              The
      bonds were convertible at the option of the holders into shares of common
      stock. However, Rule 144 minimum of six months holding period requirement
      for a resale of securities was required, therefore, the beneficial
      conversion feature was amortized over six months
  period.
 
 (7).
              The
      debt issuance cost was amortized over 36 months period applying effective
      annual interest rate.
 
 (8).
              Based
      on 15% per annum redemption rate, the redemption values were determined to
      be $1,123,496 and $145,527 for the $5,349,982 and $692,984 convertible
      bonds respectively.
 
 Included
in interest expense of $924,841, was $120,859 convertible bonds coupon expense
and $680,356 presenting 73.56% non-cash flow amortization expense of convertible
bonds interest discount.
  35
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 11.
              CAPITAL
      STOCK
 
 The
authorized capital stock consists of (i) 250,000,000 shares of common stock, par
value $0.001 per share, of which 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 are 26,769,313 shares of common stock issued and
outstanding at March 31, 2010. All shares of common stock have one vote per
share on all matters including election of directors, without provision for
cumulative voting. The common stock is not redeemable and has no conversion or
preemptive rights. The common stock currently outstanding is validly issued,
fully paid and non-assessable. In the event of liquidation of the company, the
holders of common stock will share equally in any balance of the company's
assets available for distribution to them after satisfaction of creditors and
preferred shareholders, if any. The holders of common stock are entitled to
equal dividends and distributions per share with respect to the common stock
when, as and if, declared by the board of directors from funds legally
available.
 
 Preferred
Stock
 
 In
addition to the 250,000,000 shares of common stock, the Company is authorized to
issue 100,000,000 shares of preferred stock, with a par value of $0.001 per
share. Shares of the preferred stock may be issued from time to time in one or
more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the board of directors
prior to the issuance.
  36
 Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 On August
30, 2006, the Company’s board of directors designated 20,000,000 shares of its
preferred stock as series A convertible preferred stock and 5,000,000 shares of
its preferred stock as series B convertible preferred stock. On August 31, 2006,
the Company filed certificates of designations for the series A and series B
convertible preferred stock with the Office of the Secretary of State of Utah.
On September 6, 2006, the board of directors amended the designations of the
Series B convertible preferred stock and the Company filed an amended
certificate of designations for the Series B convertible preferred stock with
the Office of the Secretary of State of Utah.  The board of directors
created the series A convertible preferred stock to allow the Company to
consummate the share exchange transaction with the Gas (BVI) Shareholders and
the series B convertible preferred stock in connection with its private
financing transactions. Each of the shares of series A convertible preferred
stock was automatically converted into one share of its common stock upon the
effectiveness of its reverse stock-split on November 17, 2006. On September 12,
2007, the Company’s board of directors designated 3,000,000 shares of its
preferred stock as series B-1 convertible preferred stock with the same right
and privilege as series B convertible preferred stock, and 95,418 shares of
series B-1 preferred stock were issued in connection with the September
financing transaction. Therefore, at March 31, 2010, the Company has no shares
of series A convertible preferred stock issued and outstanding, and has
4,579,839 and 95,418 shares of series B and series B-1 convertible preferred
stock issued and outstanding respectively.
  Conversion
 
 The
Company issued 14,361,646 of its common shares upon the automatic conversion of
its series A convertible preferred shares after the 304.44-for-1 reverse
stock-split on November 17, 2006. The Company no longer has any series A
convertible preferred shares outstanding.
 
 Each
share of the series B convertible preferred stock will become convertible into
common stock, at the option of its holder after the 304.44-for-1 reverse
stock-split, based on the then applicable conversion rate, which is initially
one share of series B convertible preferred stock for one share of common
stock.
 
 Financing
Transactions
 
 On
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.
  37
 Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 On May
15, 2007, Vision Opportunity Master Fund, Ltd. exercised 1,094,891 shares of
Series J Warrants at $2.74 per share.  The Company received $3,000,000
cash gross proceeds.  In consideration of exercise of Series J
Warrants, 1,094,891 new Series E Warrants and 109,489 Series G Warrants were
issued to Vision and placement agent Kuhns’ Brother
respectively.  Pursuant to the financial advisory agreement between
the Company and the placement agent Kuhns’ Brother, the Company totally
reimbursed $412,241 of the gross proceeds to Kuhns’ Brother, including $146,374
disbursements of Kuhns’ Brother’s legal counsel.  The Company received
$2,587,759 net proceeds.
 
 On
September 7, 2007, the Company entered into a securities purchase agreement with
a series of private placement investors leading by Vision Opportunity Master
Fund, Ltd. for a sale of 8,340,762 shares of the Company’s common
stock.  The Company generated an aggregate of $18,766,700 gross
proceeds.  Simultaneously, the Company entered into a Warrant Purchase
Agreement, Amendment and Waiver (“WPA”) with the holders of its outstanding
Warrants and Series B Preferred Stock, who acquired those securities by private
placement in September and October of 2006. Pursuant to the WPA, all of the
Series A and Series B Warrants issued in 2006 were purchased back by the Company
for $3,500,000; the exercise price of Series C Warrants was changed to $3.375;
all of the Series D Warrants was purchased for a purchase price of issuing
additional 770,897 shares of Series B preferred Stock; all of the outstanding
Series J and Series E Warrants were cancelled; additional 271,074 Series F
Warrants and 271,074 Series R Warrants were issued respectively. Among the
$18,766,700 cash gross proceeds, $3,500,000 was used to purchase back the
Series A and Series B Warrants issued in 2006 from private placement investors;
$1,473,833 was reimbursed to the placement agent Roth Capital, including the
out-of-pocket expenses and $232,028 legal counsel expense. The Company received
$13,792,866 net proceeds.
 
 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
  38
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 The
following table depicts the issued and outstanding shares of Common Stock,
Preferred Stock, and Warrants at March 31, 2010.
 
 Authorized Shares
                    
                    
                    Shares issued and
    outstandingCommon
      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
 
 Strike Price
                          
                          Contractual Life
                          
                          Expiration
                            Date
                          
                          Shares issued and
                            outstanding
                          
                          
                          Weighted Average
                            Fair ValueSeries
      A Warrants
                          
                          $
                          3.84
                          
                          60
      Months
                          
                          9/6/2011
                          
                          
                          241,708
                          
                          
                          $
                          0.70Series
      C Warrants
                          
                          $
                          3.38
                          
                          60
      Months
                          
                          9/6/2011
                          
                          
                          3,083,589
                          
                          
                          $
                          0.81Series
      F Warrants
                          
                          $
                          4.84
                          
                          36
      Months
                          
                          9/6/2010
                          
                          
                          271,074
                          
                          
                          $
                          0.20Series
      G Warrants
                          
                          $
                          3.84
                          
                          48
      Months
                          
                          9/6/2011
                          
                          
                          109,489
                          
                          
                          $
                          0.44Series
      R Warrants
                          
                          $
                          4.84
                          
                          36
      Months
                          
                          9/6/2010
                          
                          
                          271,074
                          
                          
                          $
                          0.20IR
      CCG Elite’s Option
                          
                          $
                          3.00
                          
                          48
      Months
                          
                          11/1/2010
                          
                          
                          100,000
                          
                          
                          $
                          0.925.3
      M Convertible Bonds Detachable Warrants
                          
                          $
                          0.744
                          
                          36
      Months
                          
                          11/30/2012
                          
                          
                          3,451,601
                          
                          
                          $
                          0.05692K
      Convertible Bonds Detachable Warrants
                          
                          $
                          0.744
                          
                          36
      Months
                          
                          12/23/2012
                          
                          
                          447,086
                          
                          
                          $
                          0.11
 
 The
Company used the Black-Scholes model to calculate the values of Warrants. The
following shows the assumptions that were employed in the model:
  Warrants
                    A
                  
                  
                  Warrants
                    C
                  
                  
                  Warrants
                    F
                  
                  
                  Warrants
                    G
                  
                  
                  Warrants
                    R
                  
                  
                  CCG
      Elite’s
                    Option
                  
                  
                  5.3M
      CB
                    Warrants
                  
                  
                  692K CB
                    WarrantsWeighted-average
      fair value of warrants
                  
                  $
                  0.70
                  
                  
                  $
                  0.81
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.44
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.92
                  
                  
                  $
                  0.05
                  
                  
                  $
                  0.11Strike
      price
                  
                  $
                  3.84
                  
                  
                  $
                  3.38
                  
                  
                  $
                  4.84
                  
                  
                  $
                  3.84
                  
                  
                  $
                  4.84
                  
                  
                  $
                  3.00
                  
                  
                  $
                  0.744
                  
                  
                  $
                  0.744Risk-free
      interest rate
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  4.18
                  %
                  
                  
                  1.12
                  %
                  
                  
                  1.51
                  %Expected
      volatility
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  40.00
                  %
                  
                  
                  12.84
                  %
                  
                  
                  12.84
                  %Years
      to maturity
                  
                  
                  5.00
                  
                  
                  
                  5.00
                  
                  
                  
                  3.00
                  
                  
                  
                  4.00
                  
                  
                  
                  3.00
                  
                  
                  
                  4.00
                  
                  
                  
                  3.00
                  
                  
                  
                  3.00
 
 Since
there is no net cash settlement arrangement for the warrants, they should be
classified as equity instrument in accordance with EITF 00-19. Thus, subsequent
changes in fair value should not be recognized.
  39
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (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 March 31, 2010:
 
 Preferred
      Stock B
                      
                      
                      Preferred
      Stock B-1
                      
                      
                      Common
      StockName of Shareholders
                      
                      Number
      of Shares
                        outstanding
                      
                      
                      Capital
                      
                      
                      Number
      of Shares
                        outstanding
                      
                      
                      Capital
                      
                      
                      Number
      of Shares
                        outstanding
                      
                      
                      Capital
                      
                      
                      Additional
      Paid
                        in
      Capital
                      
                      
                      %
      of Equity
                        HoldingsManager
      / Insider
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      12,653,662
                      
                      
                      $
                      12,654
                      
                      
                      
                      4,064,862
                      
                      
                      
                      47
                      %Minority
      Investor
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,428,551
                      
                      
                      
                      3,428
                      
                      
                      
                      747,457
                      
                      
                      
                      13
                      %Private
      Placement - Investor
                      
                      
                      4,579,839
                      
                      
                      
                      4,580
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      10,687,100
                      
                      
                      
                      10,687
                      
                      
                      
                      23,848,122
                      
                      
                      
                      40
                      %Beneficial
      Conversion Feature
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      8,094,814
                      
                      
                      
                      -4,579,839
                      
                      
                      $
                      4,580
                      
                      
                      
                      95,418
                      
                      
                      $
                      95
                      
                      
                      
                      26,769,313
                      
                      
                      $
                      26,769
                      
                      
                      
                      36,755,255
                      
                      
                      
                      100
                      %
  40
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (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 was granted by
the PRC government a 10% income tax exemption. The exemption is the result of
Beijing Gas new recognition as a high-tech green energy enterprise. In
accordance with this exemption, Beijing Gas will enjoy a 15% tax rate.
Consequently, the PRC government has refunded $229,527, (a 10% income tax
provision) to Beijing Gas from its 2008 payment. The Company has accounted for
this transaction as a reduction of its 2009 income tax expense.
 
 The
following table details the difference between the actual tax provisions and the
amounts of tax exemption obtained from PRC government for the three-month and
twelve-month periods ended March 31, 2010 and December 31, 2009
respectively.
 
 3/31/2010
                          
                          
                          12/31/2009Provision
      for Income Tax - PRC Subsidiaries
                          
                          $
                          239,334
                          
                          
                          $
                          1,324,184Tax
      Exemption - Granted by PRC Government
                          
                          
                          -
                          
                          
                          
                          (229,527
                          )Income
      Tax
                          
                          $
                          239,334
                          
                          
                          $
                          1,094,657
 
 Income
before taxes and provision for taxes consisted of the following for the
three-month periods ended March 31, 2010 and 2009:-
 
 3/31/2010
                            
                            
                            3/31/2009Income
      (loss) before taxes:US
                            
                            $
                            (954,050
                            )
                            
                            $
                            (55,318
                            )BVI
                            
                            
                            (118,054
                            )
                            
                            
                            (12,363
                            )PRC
                            
                            
                            1,102,854
                            
                            
                            
                            571,472Total
      income before tax
                            
                            
                            30,750
                            
                            
                            
                            503,791Provision
      for taxesUS
      Federal
                            
                            
                            -
                            
                            
                            
                            -State
                            
                            
                            -
                            
                            
                            
                            -PRC
                            
                            
                            239,334
                            
                            
                            
                            158,155Total
      provision for taxes
                            
                            $
                            239,334
                            
                            
                            $
                            158,155Effective
      tax rate
                            
                            
                            21.70
                            %
                            
                            
                            27.69
                            %
  41
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 The
differences between the U.S. federal statutory income tax rates and the
Company's effective tax rate for the three-month periods ended March 31, 2010
and 2009 are shown in the following table:
 
 3/31/2010
                    
                    
                    3/31/2009US
      statutory tax rate
                    
                    
                    34.00
                    %
                    
                    
                    34.00
                    %Lower
      rates in the PRC
                    
                    
                    -9.00
                    %
                    
                    
                    -9.00
                    %Tax
      holiday
                    
                    
                    -10.00
                    %
                    
                    
                    -10.00
                    %Accrual
      and reconciling items
                    
                    
                    6.70
                    %
                    
                    
                    12.68
                    %Effective
      tax rate
                    
                    
                    21.70
                    %
                    
                    
                    27.68
                    %
  42
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 13.
              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 March 31, 2010
 
 Gas
                                  Distribution
                                
                                
                                Gas Pipeline
                                  Installation
                                
                                
                                Shell, BVIs, &
                                  Eliminations
                                
                                
                                TotalAssetsCurrent
      Assets
                                
                                $
                                12,941,833
                                
                                
                                $
                                6,467,390
                                
                                
                                $
                                1,712,289
                                
                                
                                $
                                21,121,512Non-Current
      Assets
                                
                                
                                23,870,862
                                
                                
                                
                                47,767,755
                                
                                
                                
                                -
                                
                                
                                
                                71,638,616Total
      Assets
                                
                                
                                36,812,695
                                
                                
                                
                                54,235,145
                                
                                
                                
                                1,712,289
                                
                                
                                
                                92,760,129LiabilitiesCurrent
      Liabilities
                                
                                
                                1,105,499
                                
                                
                                
                                14,628,403
                                
                                
                                
                                160,154
                                
                                
                                
                                15,894,056Non-current
      Liabilities
                                
                                
                                968,663
                                
                                
                                
                                12,817,728
                                
                                
                                
                                -
                                
                                
                                
                                13,786,391Total
      Liabilities
                                
                                
                                2,074,162
                                
                                
                                
                                27,446,131
                                
                                
                                
                                160,154
                                
                                
                                
                                29,680,447Net Assets
                                
                                
                                34,738,533
                                
                                
                                
                                26,789,014
                                
                                
                                
                                1,552,135
                                
                                
                                
                                63,079,682Liabilities & Equities
                                
                                $
                                36,812,695
                                
                                
                                $
                                54,235,145
                                
                                
                                $
                                1,712,289
                                
                                
                                $
                                92,760,129
 
  43
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 Operation
Result Segment Report
 For
the three months ended March 31, 2010
 
 Gas
                      Distribution
                    
                    
                    Gas Pipeline
                      Installation
                    
                    
                    Shell, BVIs, &
                      Eliminations
                    
                    
                    TotalSales
      Revenue
                    
                    $
                    6,157,019
                    
                    
                    $
                    3,076,832
                    
                    
                    $
                    (2,276,190
                    )
                    
                    $
                    6,957,661Cost
      of Revenue
                    
                    
                    (6,007,746
                    )
                    
                    
                    (1,101,592
                    )
                    
                    
                    2,276,190
                    
                    
                    
                    (4,833,148
                    )Gross
      Profit
                    
                    
                    149,273
                    
                    
                    
                    1,975,240
                    
                    
                    
                    -
                    
                    
                    
                    2,124,513Operating
      Expense
                    
                    
                    (63,706
                    )
                    
                    
                    (842,989
                    )
                    
                    
                    (271,079
                    )
                    
                    
                    (1,177,774
                    )Operating
      Income/(Loss)
                    
                    
                    85,567
                    
                    
                    
                    1,132,251
                    
                    
                    
                    (271,079
                    )
                    
                    
                    946,739Other
      Income/(Loss)
                    
                    
                    (64,359
                    )
                    
                    
                    (50,605
                    )
                    
                    
                    (801,025
                    )
                    
                    
                    (915,989
                    )Earnings
      before tax
                    
                    
                    21,207
                    
                    
                    
                    1,081,647
                    
                    
                    
                    (1,072,104
                    )
                    
                    
                    30,750Income
      tax
                    
                    
                    (4,602
                    )
                    
                    
                    (234,732
                    )
                    
                    
                    -
                    
                    
                    
                    (239,334
                    )Net
      Income
                    
                    $
                    16,605
                    
                    
                    $
                    846,915
                    
                    
                    $
                    (1,072,104
                    )
                    
                    $
                    (208,586
                    )
 
 Financial
Position Segment Report
 As
of December 31, 2009
 
 Gas
                                Distribution
                              
                              
                              Gas Pipeline
                                Installation
                              
                              
                              Shell, BVIs, &
                                Eliminations
                              
                              
                              TotalAssetsCurrent
      Assets
                              
                              $
                              12,361,628
                              
                              
                              $
                              8,090,196
                              
                              
                              $
                              2,247,402
                              
                              
                              $
                              22,699,226Non-Current
      Assets
                              
                              
                              27,839,832
                              
                              
                              
                              42,538,606
                              
                              
                              
                              -
                              
                              
                              
                              70,378,438Total
      Assets
                              
                              
                              40,201,460
                              
                              
                              
                              50,628,802
                              
                              
                              
                              2,247,402
                              
                              
                              
                              93,077,664LiabilitiesCurrent
      Liabilities
                              
                              
                              1,695,239
                              
                              
                              
                              16,762,395
                              
                              
                              
                              441,426
                              
                              
                              
                              18,899,060Non-current
      Liabilities
                              
                              
                              1,002,095
                              
                              
                              
                              9,908,647
                              
                              
                              
                              -
                              
                              
                              
                              10,910,742Total
      Liabilities
                              
                              
                              2,697,334
                              
                              
                              
                              26,671,042
                              
                              
                              
                              441,426
                              
                              
                              
                              29,809,802Net Assets
                              
                              
                              37,504,126
                              
                              
                              
                              23,957,760
                              
                              
                              
                              1,805,976
                              
                              
                              
                              63,267,862Liabilities & Equities
                              
                              $
                              40,201,460
                              
                              
                              $
                              50,628,802
                              
                              
                              $
                              2,247,402
                              
                              
                              $
                              93,077,664
  44
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 Income
Statement Segment Report
 For
the three months ended March 31, 2009
 
 Gas
                        Distribution
                      
                      
                      Gas pipeline
                        Installation
                      
                      
                      Shell, BVIs,
      &
                        Eliminations
                      
                      
                      TotalSales
      Revenue
                      
                      $
                      4,903,116
                      
                      
                      $
                      1,223,736
                      
                      
                      $
                      (1,089,160
                      )
                      
                      $
                      5,037,692Cost
      of Revenue
                      
                      
                      (4,732,385
                      )
                      
                      
                      (129,987
                      )
                      
                      
                      1,089,160
                      
                      
                      
                      (3,773,212
                      )Gross
      Profit
                      
                      
                      170,731
                      
                      
                      
                      1,093,749
                      
                      
                      
                      -
                      
                      
                      
                      1,264,480Operating
      Expense
                      
                      
                      (87,393
                      )
                      
                      
                      (559,866
                      )
                      
                      
                      (68,259
                      )
                      
                      
                      (715,519
                      )Operating
      Income/(Loss)
                      
                      
                      83,338Other
      Income / Expense
                      
                      
                      (6,177
                      )
                      
                      
                      (39,571
                      )
                      
                      
                      578
                      
                      
                      
                      (45,170
                      )Earnings
      before tax
                      
                      
                      77,161
                      
                      
                      
                      494,311
                      
                      
                      
                      (67,681
                      )
                      
                      
                      503,791Income
      tax
                      
                      
                      (21,354
                      )
                      
                      
                      (136,800
                      )
                      
                      
                      -
                      
                      
                      
                      (158,155
                      )Net
      Income
                      
                      $
                      55,807
                      
                      
                      $
                      357,511
                      
                      
                      $
                      (67,681
                      )
                      
                      $
                      345,637
 
 The
Company's operations are located in the PRC. All revenue is from customers in
the PRC. All of the Company’s assets are located in the PRC. Sales of natural
gas and gas pipeline construction are carried out in the PRC. Accordingly, no
analysis of the Company's sales and assets by geographical market is
presented.
  No other
measures of segment profit or loss and assets have been provided or reviewed by
the company's chief operating decision maker.
  45
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 14.
              EARNINGS
      PER SHARE
 
 Components
of basic and diluted earnings per share were as follows:
 
 Ref
                              
                              
                              3/31/2010
                              
                              
                              3/31/2009Net
      Income
                              
                              
                              
                              
                              $
                              (208,586
                              )
                              
                              $
                              345,637Preferred
      Dividends
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -Constructive
      Preferred Dividends
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -Income
      Available to Common Stockholders for Basic EPS
                              
                              
                              
                              
                              $
                              (208,586
                              )
                              
                              $
                              345,637Interest
      Expense for Convertible Bonds, net of
    tax
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -Income
      Available to Common Stockholders for Diluted EPS
                              
                              
                              
                              
                              $
                              (208,586
                              )
                              
                              $
                              345,637Original
      Shares
                              
                              
                              
                              
                              
                              26,769,313
                              
                              
                              
                              25,269,313Addition
      to Common Stock
                              
                              
                              
                              
                              
                              -
                              
                              
                              
                              -Basic
      Weighted Average Shares Outstanding
                              
                              
                              
                              
                              
                              26,769,313
                              
                              
                              
                              25,269,313Potentially
      Dilutive Securities:Addition
      to Common Stock from Conversion of Preferred Stock B
                              
                              (1)
                              
                              
                              
                              -
                              
                              
                              
                              4,579,839Addition
      to Common Stock from Conversion of Preferred Stock B-1
                              
                              (2)
                              
                              
                              
                              -
                              
                              
                              
                              95,418Addition
      to Common Stock from Conversion of Convertible Bonds
                              
                              (3)
                              
                              
                              
                              -
                              
                              
                              
                              N/AAddition
      to Common Stock from Exercise of Warrants
                              
                              (4)
                              
                              
                              
                              -
                              
                              
                              
                              -Diluted
      Weighted Average Shares Outstanding
                              
                              
                              
                              
                              
                              
                              26,769,313
                              
                              
                              
                              29,944,570Earnings
      Per ShareBasic
                              
                              
                              
                              
                              
                              $
                              (0.01
                              )
                              
                              $
                              0.01Diluted
                              
                              
                              
                              
                              
                              $
                              (0.01
                              )
                              
                              $
                              0.01Weighted
      Average Shares OutstandingBasic
                              
                              
                              
                              
                              
                              
                              26,769,313
                              
                              
                              
                              25,269,313Diluted
                              
                              
                              
                              
                              
                              
                              26,769,313
                              
                              
                              
                              29,944,570
 
 (1).
              The
      application of conversions’ of preferred stock B to common stock was
      anti-dilutive for the three-month periods ended March 31,
      2010.
 
 (2).
              The
      application of conversions of preferred stock B-1 to common stock was
      anti-dilutive for the three-month periods ended March 31,
      2010.
  46
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 As
of March 31, 2010 and December 31, 2009
 And
for the three-month periods ended March 31, 2010 and 2009
 (Stated
in US Dollars)
 
 (3).
              The
      average price of the Company’s common stock was $0.89 for the three-month
      periods ended March 31, 2010, which was higher than the conversion price
      $0.62 of the convertible bonds; however the conversion of the convertible
      bonds to common stock would have been anti-dilutive; therefore, theyhave
      been excluded from diluted earnings per
share.
 
 (4).
              The
      exercise of warrants to common stock was anti-dilutive for the three-month
      periods ended March 31, 2010 and
2009.
 
 15.
              CONTINGENT
      LIABILITIES
 
 a.
                Pursuant
      to the warrants purchase agreement related to 2006 private placement
      financing transactions, the Company was required to reach $7.9 million and
      $11 million net income target for the fiscal years ended 2007 and 2008
      respectively. However, the Company did not meet the stipulated 2007 and
      2008 net income target and therefore incurred certain contingent
      liabilities.
 
 On May
26, 2009, the private placement investors led by Vision Opportunity Master Fund,
Ltd. waived the 2007 net income target application. The Company was exempt from
the issuance of 1.2 million shares of contingent common stock. Simultaneously,
1.5 million shares make good stock held in an escrow account were issued to the
private placement investor on May 8, 2009 as compensation for not attaining the
2008 net income target. A cost of $1,500, based on US$0.001 par value, was
debited to additional paid in capital account.
 
 b.
                On
      September 14, 2009, the IRS of United States charged the Company $270,000
      penalty for the failure to file timely Form 5471 on December 31, 2007 tax
      return. However, the Company did not believe it should be subject to this
      liability because of the fact that the Company was only a holding company.
      It did not have any tax liability for the year 2007. The Company appealed
      the penalty by filing protest letter to IRS office on February 12, 2010.
      As of April 30, 2010, the Company has not received any reply from
      IRS.
  47




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, who aim to promote the use
of natural gas to improve local residents’ quality of life.




We have
experienced high growth of our connection activities since inception of our
business due to the Chinese real estate boom in the past years. However, in
2007, the Chinese government implemented a series of policies and regulations to
curb inflation and the property market. These policies, together with the
worldwide financial crisis in 2008, has resulted a slowdown of the real estate
market in China and our business, in turn, has been affected in 2008. Starting
from 2008, in response to a slowdown in its economy in that year, the Chinese
government implemented a wide range of initiatives that prioritized the boosting
of the overall economy。 The key
components of the central government spending are infrastructure and clean
energy. Those help the continuity of increase of both Connection fee and Gas
sale in our business. We saw signs of recovery of the real estate market in
China at the beginning of 2009, and experienced the increased activities in the
3rd
quarter of 4th quarter
of 2009. Starting in April 2010, the Chinese government issued new policies to
curb the precipitous rise of housing prices in some cities and satisfy people's
basic needs for housing.




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




There are
three pillars in 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 year. In 2009, GDP growth rebounded to 7.9 per cent in
the second quarter from 6.1 percent in the first, which represented a 10-year
low. In the third quarter and fourth quarter, China’s economic growth
accelerated to 9.1 per cent and 10.7 per cent respectively. China GDP grows by
8.7 percent in 2009, exceeding the target 8%. The GDP growth is expected to
maintain strong in 2010.




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




Material
Opportunities




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




48


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




Material
Challenges




There are
vast number of small-to-medium sized cities left undeveloped, but the
competition is -growing, as there are many small new players in the market
attracted by the profitability and growth potential of the 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 are
facing limited opportunities in developing into first-tier cities in China, as
most of them have already been taken by other large gas distributors, such as
Xin’ao Gas Co. Ltd (largest in China) in the past decade.




Still,
potential users in small and medium-sized cities need to be educated by the
benefits of natural gas. It takes some time for them to get to know how natural
gas can improve the quality of life. 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 energies than large cities where residents depend more on coal,
rather than natural gas.




China’s
energy market is highly regulated by the government, with regard to purchase
price and sale price of natural gas. Whenever there is an adjustment to purchase
price by the government, gas distributors would increase the sale price
correspondingly, subject to a public hearing and government approval. The
increase of natural gas prices in China is lagging behind that in the
international markets. The Chinese government has seldom adjusted natural gas
and we cannot rule out the possibilities of an increase of natural gas prices by
the government in the future. Even though we can adjust the sale price
accordingly after the increase of purchase price, passing the increase to end
users. However, it 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 the 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 dependence on connection fees, the Company is looking at
opportunities to diversify its business by expanding into related areas, such as
pipeline and gas station business. However, we do not expect to develop into
those areas in large scale any time soon and it may take some time for those
businesses to become our major business.




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.




49




Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
 
 During
the three months ended March 31, 2010, net revenues were $6,957,661,
representing an increase of 38.11 % from the same period of
2009.  Gross profit for the three months ended March 31, 2010 was
$2,124,513, representing an increase of 68.01% from the same period of
2009.  Our operating income for the three months ended March 31, 2010
was $946,739, representing an increase of 72.46% from the same period of
2009.
 
 For the 3 months ended
                    March 31,2010
                  
                  
                  2009
                  
                  
                  ChangeUS$
                  
                  
                  US$%Net
      Revenues
                  
                  
                  6,957,661
                  
                  
                  
                  5,037,692
                  
                  
                  
                  38.11
                  %Gross
      Profit
                  
                  
                  2,124,513
                  
                  
                  
                  1,264,480
                  
                  
                  
                  68.01
                  %Operating
      Income
                  
                  
                  946,739
                  
                  
                  
                  548,961
                  
                  
                  
                  72.46
                  %Net
      Income
                  
                  
                  -208,586
                  
                  
                  
                  345,637Gross
      Margin
                  
                  
                  30.53
                  %
                  
                  
                  25.10
                  %
                  
                  
                  21.65
                  %Net
      Margin
                  
                  
                  -3.00
                  %
                  
                  
                  6.86
                  %
 
 Net
Revenues
 
 We
generate revenues from two sources: connection fees for constructing connections
to our natural gas distribution network, and sales of natural gas.
 
 Total net
revenues for the three months ended March 31, 2010 were $6,957,661, compared to
$5,037,692 for the same period in 2009, representing an increase of 38.11%.
The increase was due to the increase of both gas sales and connection fees.
During this period, we connected 7,204 new residential households to our gas
distribution network, resulting in total connection fees of
$2,745,415.  Gas sales during the same period were $4,212,246. In
comparison, we connected 2,878 new residential households to our gas
distribution network for the same period in 2009, resulting in total connection
fees of $1,223,736. Gas sales during the period in 2009 were
$3,813,956.
 
 For the 3 months ended December 31,2010
                      
                      
                      2009
                      
                      
                      Change(In
      $ million)
                      
                      US$
                      
                      
                      %
                      
                      
                      US$
                      
                      %
                      
                      
                      %Net
      Revenues
                      
                      
                      6.96
                      
                      
                      
                      100
                      %
                      
                      
                      5.04
                      
                      
                      
                      100
                      %
                      
                      
                      38.11
                      %Connection
      Fees
                      
                      
                      2.75
                      
                      
                      
                      40
                      %
                      
                      
                      1.22
                      
                      
                      
                      24
                      %
                      
                      
                      124.35
                      %Gas
      Sales
                      
                      
                      4.21
                      
                      
                      
                      60
                      %
                      
                      
                      3.82
                      
                      
                      
                      76
                      %
                      
                      
                      10.44
                      %
 
 The
increases in our net revenues for the three months ended March 31,
2010 largely resulted from the following factors:
 
 1)
              Increase
      of gas sales. With more customers added into our existing gas network
      system, the gas sales increased significantly compared to the same
      period  of 2009.
 
 2)
              Substantial
      increase of connection fees from residential customers.  We were
      able to connect more residential households in this quarter compared to
      the same period of 2009.
 
 Connection
Fees
 
 Connection
fees during the three months ended March 31, 2010 were $2.75 million,
representing an increase of 124.35% over the same period of 2009,
accounting for 40% of the total net revenue as compared with approximately 24%
of the total net revenue for the same period in 2009. The source of connection
fees was mainly from the development of new residential users.
 
 For the 3 months ended March 31,(in US$ millions)
                  
                  2010
                  
                  
                  2009
                  
                  
                  ChangeUS$
                  
                  
                  %
                  
                  
                  US$
                  
                  
                  %
                  
                  
                  %Connection
      Fees
                  
                  
                  2.75
                  
                  
                  
                  100
                  %
                  
                  
                  1.22
                  
                  
                  
                  100
                  %
                  
                  
                  124.35
                  %Residential
      Users
                  
                  
                  2.75
                  
                  
                  
                  100
                  %
                  
                  
                  1.14
                  
                  
                  
                  92.86
                  %
                  
                  
                  141.61
                  %Industrial
      Users
                  
                  
                  0.00
                  
                  
                  
                  0
                  %
                  
                  
                  0.09
                  
                  
                  
                  7.14
                  %
                  
                  
                  -100%
 
 Due to
seasonality, the first quarter of each year usually generates less revenue for
the Company with regards to connection fees.
  50
  Gas
Sales
 
 Gas sales
were $4.21 million during the three months ended March 31, 2010, accounting for
60% of total net revenue for the three months ended March 31, 2010, representing
an increase of 10.44% over the same period of 2009. Gas sales to residential
users increased 106.46% to $2.15 million for the three months ended March
31, 2010 from $1.04 million in the same period of 2009. Gas sales to industrial
and commercial users decreased 25.63% to $2.06 million for the three months
ended March 31, 2010 from $2.77 million in the same period of 2009.
  For the 3 months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Change($
      million)
                  
                  US$
                  
                  
                  %
                  
                  
                  US$
                  
                  
                  %
                  
                  
                  %Gas
      Sales
                  
                  
                  4.21
                  
                  
                  
                  100
                  %
                  
                  
                  3.81
                  
                  
                  
                  100
                  %
                  
                  
                  10.44
                  %Residential
      Users
                  
                  
                  2.15
                  
                  
                  
                  51
                  %
                  
                  
                  1.04
                  
                  
                  
                  27
                  %
                  
                  
                  106.46
                  %Industrial and
      Commercial Users
                  
                  
                  2.06
                  
                  
                  
                  49
                  %
                  
                  
                  2.77
                  
                  
                  
                  73
                  %
                  
                  
                  -25.63
                  %
  Such
increases were primarily due to the fact that our invested projects maintained
steady development, and more users were added to our gas distribution network.
The significant increase of gas sales from residential users was able to offset
the decrease of gas sales from industrial and commercial users. The severe
weather conditions in China affected the logistics of gas delivery. Chinese
government prioritized the delivery gas to residential users during the severe
weather.
 
 Cost
of Revenues
 
 Cost of
revenues for the three months ended March 31, 2010, which includes cost of
connection and cost of gas sales, was $4.83 million, representing an increase of
28.09% from $3.77 million in the same period of 2009.
 
 For the 3 months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Change($
      million)
                  
                  US$
                  
                  
                  %
                  
                  
                  US$
                  
                  
                  %
                  
                  
                  %Cost
      of Revenues
                  
                  
                  4.83
                  
                  
                  
                  100
                  %
                  
                  
                  3.77
                  
                  
                  
                  100
                  %
                  
                  
                  28.09
                  %Connection
      Cost
                  
                  
                  0.77
                  
                  
                  
                  16
                  %
                  
                  
                  0.13
                  
                  
                  
                  3
                  %
                  
                  
                  492.50
                  %Gas
      Cost
                  
                  
                  4.06
                  
                  
                  
                  84
                  %
                  
                  
                  3.64
                  
                  
                  
                  97
                  %
                  
                  
                  11.52
                  %
 
 Cost of
Connection
  Our cost
of connection during the three months ended March 31, 2010 was $0.77 million, or
16% of our total cost of revenues. By comparison, the cost of connection during
the same period of 2009 was $0.13 million, or 3% of our total cost of revenues.
This increase is mainly due to the increase of connection service activities in
2010 as compared to the same period of 2009.
 
 Cost of
connection includes depreciation of major pipelines, the cost of courtyard
pipelines, valves, gas meters, and installation and maintenance
fees.
 
 Cost of
Gas Sales
  The cost
of gas sales increased 11.52% to $4.06 million during the three months ended
March 31, 2010 from $3.64 million for the same period in 2009. This increase,
which outpaced the 10.44% increase in sales of natural gas during the
same period, is largely due to the higher delivery cost caused by the
severe weather conditions in this quarter.
 
 The cost
of natural gas sales includes the purchase and transportation of natural gas and
depreciation of delivery equipment.
 
 Gross
Profit
 
 During
the three months ended Mar 31, 2010, gross profit was $2.12 million,
representing an increase of approximately 68.01% from the same period of 2009.
Gross profit from connection fees was $1.97 million for the three months ended
March 31, 2010, accounting for 93% of total gross profit. In comparison, gross
profit from connection fees was $1.09 million for the three months ended March
31, 2009, accounting for 87% of total gross profit. Gross profit from gas sales
was $0.15 million for the three months ended March 31, 2010, accounting for 7%
of total gross profit, compared to $0.17 million, accounting for 13% of total
gross profit in the same period of 2009.
  Forthe 3 months ended March 31,2010
                  
                  
                  2009
                  
                  
                  Change($ million)
                  
                  US$
                  
                  
                  %
                  
                  
                  US$
                  
                  
                  %
                  
                  
                  %Gross
      Profit
                  
                  
                  2.12
                  
                  
                  
                  100
                  %
                  
                  
                  1.26
                  
                  
                  
                  100
                  %
                  
                  
                  68.01
                  %Connection
                  
                  
                  1.97
                  
                  
                  
                  93
                  %
                  
                  
                  1.09
                  
                  
                  
                  87
                  %
                  
                  
                  80.59
                  %Gas
                  
                  
                  0.15
                  
                  
                  
                  7
                  %
                  
                  
                  0.17
                  
                  
                  
                  13
                  %
                  
                  
                  -12.57
                  %
  51
  Gross
margin during the three months ended March 31, 2010 was 30.53%, compared to
25.10% during the same period in 2009.
 
 Gross
margin for connection fees for the three months ended Mar 31, 2010, was 71.95%,
compared to 89.38% in the same period of 2009.
 
 Gross
margin for sales of natural gas was 3.54% for the three months ended March 31,
2010, compared to 4.48% during the same period of 2009.
 
 Selling
and Marketing Expenses
 
 Our
selling and marketing expenses in the three months ended March 31, 2010 were
$0.27 million, approximately 3.90% of our net revenues, compared with $0.20
million or 4.03 % of our net revenues in the same period of 2009.
 
 General
and Administrative Expenses and Other Expenses
 
 General
and administrative expenses were $0.91 million for the three months ended March
31, 2010, approximately 13.03% of our net revenues, compared with $0.51 million,
or approximately 10.17% of net revenues for the same period in
2009. Professional fee is higher than the same period of 2009, which
includes approximately $60 thousand for engaging Ernst & Yong on Sox
Compliance and internal control.
 
 Operating
Income
 
 The
operating income for the three months ended March 31, 2010 was $0.95 million,
representing a significant increase of 72.46%, compared to the operating income
of $0.55 million for the same period of 2009. This is largely driven by the
sales increase.
 
 Other Income
(Expense)
 
 Other
expense was $0.92 million for the three months ended Mar 31, 2010, compared with
Other Expense of $0.05 million for the same period of 2009.  The
significant increase was due to the amortization costs of convertible note
interest discount and interest expense of convertible note. We closed a
convertible debt financing in the last quarter of 2009, which resulted in costs
associated with the financing, such as interest discount-warrants, beneficial
conversion feature, debt issuance cost, etc. Included
in interest expense of $924 thousand, was $121 thousand convertible bonds coupon
expense and $680 thousand non-cash flow amortization expense of convertible
bonds interest discount.
 
 Income
tax
  Income
tax was $0.24 million for the three months ended Mar 31, 2010, compared to $0.16
million for the same period of 2009.
 
 Net
Income (loss)
 
 Net loss
for the three months ended March 31, 2010 was $0.21 million, compared
with net income of $0.35 million for the same period of 2009.  Largely
driven by the sales increase, operating income achieved significant improvement
of 72.46% compared to the operating income of $0.55 million for the same period
of 2009.  However, that significant improvement of operating income
was negated by the additions of amortization costs of convertible note interest
discount. Excluding these non-operational items of
amortization expense of
convertible bonds interest discount in the total of $0.68 million, our adjusted
net income in the first quarter of 2010 would have been $0.48 million.
 
 Liquidity
and Capital Resources
  Cash and
cash equivalents were 7.51 million as of March 31, 2010, a decrease of
$2.31 million as compared to $9.82 million of cash and cash equivalents as of
December 31, 2009.
 
 Cash used
in operating activities for the three months ended March 31, 2010 was $2.92
million, a decrease of $3.47 million from $0.55 million during the
same period of 2009. Such decrease was mainly due to the decrease of net income,
adjusted for non-cash expense items and changes in working capital.
 
 Cash used
in investing activities for the three months ended March 31, 2010 was
$1.61 million, a slight decrease from $1.64 million during the same
period of 2009.
 
 Cash
sourced in financing activities for the three months ended March 31, 2010 was
$2.2 million.  We borrowed $2.2 million from local bank in the
first quarter of 2010.
 
 Accounts
Receivable
 
 Accounts
receivable during the three months as of March 31, 2010 were $6.50 million,
an increase of $1.46 million from $5.04 million as of December 31,
2009.
  52
  Notes
Receivable
  There are
notes receivable of $0.2 million as of March 31, 2010.
  Inventory
  Inventory
of $0.58 million as of March 31, 2010 was comprised of spare parts and natural
gas.
  Fixed
Assets
 
 Fixed
Assets as of March 31, 2010 were $53.69 million, representing an increase
of $1.59 million from $52.10 million as of December 31, 2009.  The
table below is a breakdown of our fixed assets at cost:
 
 2010
                  
                  
                  2009At
      CostGas
      Pipelines
                  
                  $
                  39,208,530
                  
                  
                  $
                  37,329,888Motor
      Vehicles
                  
                  
                  5,775,811
                  
                  
                  
                  5,775,903Machinery
      & Equipment
                  
                  
                  1,482,838
                  
                  
                  
                  1,482,599Buildings
                  
                  
                  6,902,741
                  
                  
                  
                  7,194,148Leasehold
      Improvements
                  
                  
                  81,557
                  
                  
                  
                  80,133Office
      Equipment
                  
                  
                  240,155
                  
                  
                  
                  238,673Less
      Accumulated depreciation
                  
                  
                  (4,668,230
                  )
                  
                  
                  (4,329,313
                  )$
                  49,023,402
                  
                  
                  $
                  47,772,011
 
 Bank
Loans
 
 Short-term
Bank loans as of March 31, 2010 were $2.93 million, no change compared to
that as of December 31, 2009.
 
 Long-term
Bank loans as of March 31, 2010 were $8.78 million, an increase of
$2.2 million compared to $6.58 million as of December 31, 2009. We borrowed
additional loan of $2.2 million in the first quarter of 2010.
  Accounts
Payables
 
 Accounts
payables as of March 31, 2010 was $7.22 million, a decrease of $1.34 million
from $8.56 million as of December 31, 2009.
 
 Other
Payables
 
 Other
payables as of March 31, 2010 were $4.89 million, a decrease of
$1.45 million from $6.34 million as of December 31, 2009.
 
 Off-balance Sheet Arrangements
 
 We do not
have any off-balance sheet arrangements.
  53





Item
3. Quantitative and Qualitative Disclosures About Market Risk




Not
required.




Item
4. Controls and Procedures




Disclosure
Controls and Procedures




Disclosure
controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act”)) are designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
This information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures. Our management, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on the evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of March 31, 2010.




Changes
in Internal Control over Financial Reporting




During
the quarter ended March 31, 2010, there was no change in our internal controls
over financial reporting that has materially affected, or that is reasonably
likely to materially affect, our internal control over financial
reporting.




PART
II - OTHER INFORMATION


Item
1. Legal Proceedings




None.




Item
1A. Risk Factors




Not
required.




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




None.




Item
3. Defaults Upon Senior Securities




None.




Item
4. (Removed and Reserved)




Item
5. Other Information




None.




Item
6. Exhibits




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


54





Exhibit
                      Number:
                    
                    Description23.1
                    
                    Consent
      of Samuel H. Wong & Co., LLP31.1
                    
                    Certification
      of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                    
                    Certification
      of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
      Act of 2002.32
                    
                    Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
      Section
1350





SIGNATURES





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




SINO
      GAS INTERNATIONAL HOLDINGS,INC.Date:
      May 14, 2010
              By:
              /s/ Yuchuan LiuYuchuan
      LiuChairman
      and Chief Executive Officer




SINO
      GAS INTERNATIONAL HOLDINGS,INC.Date:
      May 14, 2010
              By:
              /s/ Yugang ZhangYugang
      ZhangChief
      Financial Officer




55