United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the Quarterly Period Ended June 30, 2013

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, PRC	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  x No ¨

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 (§32.405 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  x No ¨

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

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)	Smaller reporting company  x

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

As of June 30, 2013, the Registrant had 31,802,382 shares of common stock outstanding.

Sino Gas International Holdings, Inc.

Table of Contents

		Page
Special Note Regarding Forward-Looking Statements		4
PART I	FINANCIAL INFORMATION	5
Item 1.	Financial Statements (Unaudited)	5
	Notes to Financial Statements (Unaudited)	14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures	49
PART II	OTHER INFORMATION	51
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mining Safety Disclosure	51
Item 5.	Other Information	51
Item 6.	Exhibits	51

2

Except as otherwise indicated by the context, references in this Form 10-Q to:

“SGAS”, the “Company”, “we”, “our”, or “us” are references to Sino Gas International Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.

“U.S. Dollar”, “$”, and “US$” mean the legal currency of the United States of America.

“RMB” means Renminbi, the legal currency of China.

“China” or the “PRC” are references to the People’s Republic of China.

“U.S.” is a reference to the United States of America.

“SEC” is a reference to the Securities & Exchange Commission of the United States of America.

This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement of us by such companies, or any relationship with any of these companies.

3

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and plans and objectives of management for future operations. When used in this filing, the words believe, may, will, estimate, continue, anticipate, intend, expect, and similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (SEC). Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements.

In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.

4

PART I:             FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

Exhibit 31.1

CERTIFICATION

I, Yuchuan Liu, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sino Gas International Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 15, 2013

/s/ Yuchuan Liu

Yuchuan Liu

Chief Executive Officer

 (Principal Executive Officer)

5

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

	Notes	6/30/2013		12/31/2012
ASSETS
Current Assets
Cash & cash equivalents	2(e)	$	10,912,830	$	13,836,027
Restricted cash			-		232,326
Notes receivable			646,392		65,254
Accounts receivable	2(f),3		10,985,628		11,951,962
Other receivables	4		5,875,565		3,228,774
Related party receivable	5		387,496		343,551
Inventory			2,010,685		719,342
Advance to suppliers	2(g)		3,955,983		5,364,552
Prepaid expenses and taxes			1,609,469		969,229
Total Current Assets			36,384,048		36,711,017
Non-Current Assets
Investment	2(h),6		23,511,366		23,213,107
Property, plant & equipment, net	2(j),7		53,661,642		53,267,196
Construction in progress	2(m)		49,420,008		43,384,156
Intangible assets, net	2(k),9		960,627		949,987
Goodwill	2(l),8		4,598,321		1,677,975
Deposit			605,572		562,790
Total Non-current Assets			132,757,536		123,055,211
Total Assets		$	169,141,584	$	159,766,228
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Bank loans	10(a)	$	26,825,248	$	21,810,580
Accounts payable			15,176,006		17,073,587
Other payables - current portion	11(a)		9,532,420		9,578,447
Accrued liabilities			180,723		38,259
Convertible Bonds	12		8,405,679		8,020,825
Unearned revenue	2(n)		6,662,588		3,813,148
Related party payable			187,051		-
Notes payable			113,119		-
Total Current Liabilities			67,082,834		60,334,846
Non-current Liabilities
Long-term bank loans	10(b)		10,439,223		11,557,765
Total Non-current Liabilities			10,439,223		11,557,765
Total Liabilities		$	77,522,057	$	71,892,611

See Accompanying Notes to Financial Statements and Accountant’s Report

6

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

STOCKHOLDERS' EQUITY	Notes	6/30/2013		12/31/2012
Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 200,997 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively.	13	$	201	$	201
Additional paid in capital - Preferred Stock B			233,655		233,655
Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; nil shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively.	13		-		-
Additional paid in capital - Preferred Stock B-1			-		-
Common Stock US$0.001 par value; 250,000,000 shares authorized; 31,802,382 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively.	13		31,801		31,801
Additional paid in capital - Common Stock			38,069,322		38,069,322
Additional paid in capital - Beneficial Conversion Feature			515,851		515,851
Statutory reserve	2(w)		6,738,287		6,150,234
Retained earnings			31,447,895		30,024,006
Minority Interest			7,372,994		7,374,492
Accumulated other comprehensive income	2(x)		7,209,521		5,474,055
Total Stockholders' Equity			91,613,527		87,873,617
Total Liabilities & Stockholders' Equity		$	169,141,584	$	159,766,228

See Accompanying Notes to Financial Statements and Accountant’s Report

7

Sino Gas International Holdings, Inc.

Consolidated Statements of Income

For the three months and six months ended June 30, 2013 and 2012

(Stated in US Dollars)

		Three Months Ended				Six Months Ended
	Note	6/30/2013		6/30/2012		6/30/2013		6/30/2012
Sales revenue	2(q)		14,862,867	$	10,819,666		28,292,758	$	21,573,269
Cost of revenue			9,710,563		6,472,799		19,600,777		14,539,830
Gross Profit			5,152,304		4,346,867		8,691,981		7,033,439
Operating Expense
Selling expense			1,183,255		749,948		2,398,953		1,515,635
General and administrative expense			1,224,119		1,126,767		2,871,477		2,084,131
Total operating expense			2,407,374		1,876,715		5,270,430		3,599,766
Operating Income			2,744,930		2,470,152		3,421,551		3,433,673
Other Income/(Expense)
Investment loss			(2,112)		-		(2,112)		-
Other income			29,983		12,362		31,442		34,699
Other expense			(57,552)		(8,352)		(123,867)		(127,094)
Interest income			58,811		54,647		100,162		155,965
Interest expense			(943,680)		(853,461)		(1,868,552)		(1,625,765)
Total other income/(expense)			(914,550)		(794,805)		(1,862,927)		(1,562,195)
Income before tax			1,830,380		1,675,348		1,558,624		1,871,478
Income tax	2(r),12		(416,059)		(91,182)		(778,683)		(329,439)
Gain/(Loss) from discontinued operations, net of tax			-		-		-		-
Net income			1,414,321	$	1,584,166		779,941	$	1,542,039
Net income (loss) attributable to:
- Common stockholders		$	1,415,111	$	1,584,292	$	781,439	$	1,542,968
- Non-controlling interest			(790)	$	(126)		(1,498)	$	(929)
Earnings per share	2(z),13
Basic		$	0.03	$	0.05	$	0.03	$	0.05
Diluted		$	0.03	$	0.05	$	0.03	$	0.05
Weighted Average Shares Outstanding
Basic			31,802,382		31,793,698		31,802,382		31,793,698
Diluted			31,802,382		31,793,698		31,802,382		31,793,698

See Accompanying Notes to Financial Statements and Accountant’s Report

8

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

	Preferred Stock B			Preferred Stock B-1			Common Stock
			APIC -			APIC -			APIC -
	Shares		Preferred	Shares		Preferred	Shares		Common
	Outstanding	Amount	Stock B	Outstanding	Amount	Stock B-1	Outstanding	Amount	Stock
Balance at January 1, 2012	209,681	210	243,750	-	-	-	31,793,698	31,792	36,302,875
Net Income	-	-	-	-	-	-	-	-	-
Conversion of Preferred Stock B to Common Stock	(8,684)	(9)	(10,095)	-	-	-	8,684	9	68,435
Expiration of Convertible Bond	-		-	-	-	-	-	-	2,584,912
Conversion of Convertible Bonds to Common Stock	-	-	-	-	-	-	-	-	-
Appropriation of Income to Non-controlling Interest	-	-	-	-	-	-	-	-	-
Issuance of Subsidiary’s Common Stock	-	-	-	-	-	-	-	-	(886,900)
Appropriation of Retained Earnings	-	-	-	-	-	-	-	-	-
Foreign Currency Translation Adjustment	-	-	-	-	-	-	-	-	-
Balance at December 31, 2012	200,997	201	233,655	-	-	-	31,802,382	31,801	38,069,322
Balance at January 1, 2013	200,997	201	233,655	-	-	-	31,802,382	31,801	38,069,322
Net Income	-	-	-	-	-	-	-	-	-
Appropriation of Income to Non-controlling Interest	-	-	-	-	-	-	-	-	-
Appropriation of Retained Earnings	-	-	-	-	-	-	-	-	-
Foreign Currency Translation Adjustment	-	-	-	-	-	-	-	-	-
Balance at June 30, 2013	200,997	201	233,655	-	-	-	31,802,382	31,801	38,069,322

See Accompanying Notes to Financial Statements and Accountant’s Report

9

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

	Common Stock
				APIC -
	APIC -	APIC -	APIC -	Convertible	APIC -				Accumulated
	Warrants	Warrants	Warrants	Bonds	Beneficial				Other
	Series:	Series:	Series:	Detachable	Conversion	Statutory	Retained	Minority	Comprehensive
	A,B,J,C,D	E,G	F,R	Warrants	Feature	Reserve	Earnings	Interest	Income	Total
Balance at January 1, 2012	-	-	-	223,367	1,408,648	6,150,234	24,702,285	3,417,981	8,222,939	80,704,081
Net Income	-	-	-	-	-	-	6,383,440	-	-	6,383,440
Conversion of Preferred Stock B to Common Stock	-	-	-	-	(58,340)	-	-	-	-	-
Expiration of Convertible Bond	-	-	-	(223,367)	(1,092,522)	-	-	-	-	1,269,023
Conversion of Convertible Bonds to Common Stock	-	-	-	-	258,065	-	-	-	-	258,065
Appropriation of Income to Non-controlling Interest	-	-	-	-	-	-	(1,061,719)	1,061,719	-	-
Issuance of Subsidiary’s Common Stock	-	-	-	-	-	-	-	2,894,792	-	2,007,892
Appropriation of Retained Earnings	-	-	-	-	-	-	-	-	-	-
Foreign Currency Translation Adjustment	-	-	-	-	-	-	-	-	(2,748,884)	(2,748,884)
Balance at December 31, 2012	-	-	-	-	515,851	6,150,234	30,024,006	7,374,492	5,474,055	87,873,617
Balance at January 1, 2013	-	-	-	-	515,851	6,150,234	30,024,006	7,374,492	5,474,055	87,873,617
Net Income	-	-	-	-	-	-	779,939	-	-	779,939
Appropriation of Income to Non-controlling Interest	-	-	-	-	-	-	1,498	(1,498)	-	-
Appropriation of Retained Earnings	-	-	-	-	-	588,053	642,452	-	-	1,230,505
Foreign Currency Translation Adjustment	-	-	-	-	-	-	-	-	1,735,466	1,735,466
Balance at June 30, 2013	-	-	-	-	515,851	6,738,287	31,447,895	7,372,994	7,209,521	91,619,527

	6/30/2013		12/31/2012		Total
Comprehensive Income
Net Income	$	779,939	$	6,383,440	$	7,163,379
Other Comprehensive Income
Foreign Currency Translation Adjustment		1,735,466		(2,748,884)		(1,013,418)
Total	$	2,515,405	$	3,634,556	$	6,149,961

See Accompanying Notes to Financial Statements and Accountant’s Report

10

Sino Gas International Holdings, Inc.

Consolidated Statements of Cash Flows

For the three months and six months ended June 30, 2013 and 2012

(Stated in US Dollars)

	Three Months Ended			Six Months Ended
	6/30/2013	6/30/2012		6/30/2013	6/30/2012
Cash Flows from Operating Activities
Net Income	1,414,321	$	1,584,165	779,939	$	1,542,039
Bad debt provision	(6,012)		(24,311)	(9,761)		(3,520)
Depreciation expense	425,937		459,908	836,739		756,082
Amortization expense of intangible assets	40,373		5,836	29,794		17,481
Amortization expense of convertible bonds	196,516		205,604	384,853		401,668
Loss/(gain) on disposal of property and equipment	-		-	-
Withdraw/(deposit) in restricted time deposits	-		143,102	232,326		(438,676)
Decrease/(increase) in accounts and other receivables	(2,479,696)		3,984,538	(2,251,834)		2,728,166
Decrease/(increase) in inventory	(269,938)		285,643	(1,291,345)		(866,164)
Decrease/(increase) in prepaid expenses	5,159,628		(1,243,171)	768,330		(1,321,653)
Decrease/(Increase) in related party receivable	(23,910)		508	(43,945)		(3,021)
Increase/(decrease) in accounts and other payables	3,933,927		1,291,210	1,235,348		3,823,659
Cash Sourced/(Used) in Operating Activities of Continued Operation	8,391,146		6,693,032	670,444		6,636,061
Cash Sourced/(Used) in Operating Activities of Discontinued Operation	-		-	-		-
Cash Sourced/(Used) in Operating Activities	8,391,146		6,693,032	670,444		6,636,061
Cash Flows from Investing Activities
Decrease/(Increase) in deposit	74,865		(2,613,479)	(42,782)		(2,305,650)
Proceeds from disposal of discontinued operation	-		-	-		-
Increase of investment in equity	(213,428)		13,473	(298,259)		(80,173)
Purchase of property, plant & equipment	(748,110)		(1,640,425)	(1,231,184)		(4,128,127)
Increase of goodwill	-			(2,920,345)
Purchase of other intangible assets	-		-	-		-
Increase in construction in progress	(2,248,735)		(707,318)	(6,035,852)		(1,172,128)
Cash Sourced/(Used) in Investing Activities of Continued Operation	(3,135,408)		(4,947,749)	(10,528,422)		(7,686,078)
Cash Sourced/(Used) in Investing Activities of Discontinued Operation	-		-	-		-
Cash Sourced/(Used) in Investing Activities	(3,135,408)		(4,947,749)	(10,528,422)		(7,686,078)
Cash Flows from Financing Activities
Increase/(decrease) of bank loans	363,045		2,239,384	3,896,126		4,815,441
Increase of statutory reserve	305,100			1,230,505
Increase of notes payable	113,119			113,119
Cash Sourced/(Used) in Financing Activities	781,264		2,239,384	5,239,750		4,815,441
Net increase in cash & cash equivalents for the periods	6,037,002		3,984,668	(4,618,228)		3,765,424
Effect of currency translation	(491,793)		(222,500)	1,695,031		(236,787)
Cash & cash equivalents at the beginning of periods	5,367,621		2,641,015	13,836,027		2,874,546
Cash & cash equivalents at the end of periods	10,912,830	$	6,403,183	10,912,830	$	6,403,183
Supplementary cash flows information
Interest received	58,811	$	155,965	100,162	$	101,318
Interest paid	961,214		1,362,603	1,726,086		703,916
Income tax paid	484,000		1,416,910	781,853		762,507

See Accompanying Notes to Financial Statements and Accountant’s Report

11

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(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 ultimately 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 Co., Ltd. (“Gas (BVI)”), an International Business Company incorporated in the British Virgin Islands, and its wholly owned subsidiary Beijing Zhong Ran Weiye Gas Co., Ltd. (“Beijing Gas”), involving an exchange of shares whereby the Company issued an aggregate of 14,361,646 shares to the shareholders of Gas (BVI) in exchange for all of the issued and outstanding shares of Gas (BVI). 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’s primary business operations are conducted through Beijing Gas. Beijing Gas 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. Beijing Gas develops its operating subsidiaries, known as project companies. Each project company operates as a local natural gas distributor in a city or county. Pursuant to an exclusive franchise agreement with the local government or entities responsible for administering and/or regulating gas utilities, each project company is granted the exclusive right to develop and operate natural gas distribution systems and distribute natural gas at the operational location.

The Company holds equity interests of 51% each in Sino Gas Construction, Ltd., and Tongyuan International Holding Limited. It holds a 100% interest in Beijing Gas, which in turn holds an equity interest of 90% to 100% in its operating subsidiaries, and an individual shareholder nominally holds the remainder of the equity interest in such project companies. Each such individual shareholder has relinquished any and all rights, power and interest to Beijing Gas in the respective project companies under enforceable contracts. This structure was intended to comply with a PRC law that required a limited liability company to have at least two shareholders.

The Company owns and operates natural gas distribution systems in 34 small and medium size cities serving approximately 293,758 residential and seven industrial customers. The Company’s facilities include approximately 2,039 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 156,000 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”.

12

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

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 People’s Republic of China (“PRC”) 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Method of Accounting

The Company maintains its general ledger and journals with the accrual method of 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.

(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 Financial Statements

As of June 30, 2013 and December 31, 2012

(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 after inception and continued to acquire equity interests throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of June 30, 2013:

	Place of	Date of	Beneficial	Equity	Registered
Name of Company	Incorporation	Incorporation	Interest %	Interest %	Capital
GAS Investment China Co., Ltd.	The British Virgin Islands	6/19/2003	100	100	USD 10,000,000
Sino Gas Construction, Ltd.	The British Virgin Islands	1/9/2007	51	51	USD 98,039
Sino Gas Investment Development, Ltd.	The British Virgin Islands	1/9/2007	100	100	USD 50,000
Tongyuan International Holding Limited	Hong Kong	12/20/2011	51	51	HKD 10,000
Beijing Zhong Ran Weiye Gas Co., Ltd.	PRC	8/29/2001	100	100	RMB 206,000,000
Beijing Chenguang Gas Co., Ltd.	PRC	10/30/2002	100	100	RMB 35,239,600
Guannan Weiye Gas Co., Ltd.	PRC	6/19/2003	100	100	RMB 9,510,000
Ningjin Weiye Gas Co., Ltd.	PRC	12/3/2003	100	100	RMB 3,000,000
Yutian Zhongran Weiye Gas Co., Ltd.	PRC	12/19/2003	100	100	RMB 3,000,000
Xingtang Weiye Gas Co., Ltd.	PRC	2/18/2004	100	100	RMB 3,000,000
Wuqiao Gas Co., Ltd.	PRC	6/30/2004	100	100	RMB 2,000,000
Sihong Weiye Gas Co., Ltd.	PRC	12/3/2004	100	95	RMB 10,000,000
Langfang Weiye Dangerous Goods Transportation Co., Ltd.	PRC	3/22/2005	100	95	RMB 1,000,000
Linzhang Weiye Gas Co., Ltd.	PRC	7/6/2005	100	100	RMB 1,000,000
Jiangsu Weiye Gas Co., Ltd.	PRC	8/22/2005	100	98.9	RMB 45,694,900
Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd.	PRC	9/30/2005	100	100	RMB 2,000,000
Longyao Zhongran Weiye Gas Co., Ltd.	PRC	10/13/2005	100	100	RMB 3,000,000

14

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

Yuxian Jinli Gas Co., Ltd.	PRC	11/8/2005	100	100	RMB 9,500,000
Hengshui Weiye Gas Co., Ltd.	PRC	12/20/2005	100	100	RMB 3,000,000
Changli Weiye Gas Co., Ltd.	PRC	12/8/2006	100	100	RMB 3,000,000
Chenan Chenguang Gas Co., Ltd.	PRC	1/23/2007	100	100	RMB 1,500,000
Wuhe Weiye Gas Co., Ltd.	PRC	1/30/2007	100	100	RMB 3,000,000
Gucheng Weiye Gas Co., Ltd.	PRC	3/21/2007	100	100	RMB 3,000,000
Luquan Chenguang Gas Co., Ltd.	PRC	4/27/2007	100	100	RMB 2,000,000
Shijiazhuang Chenguang Gas Co., Ltd.	PRC	6/14/2007	100	100	RMB 2,000,000
Nangong Weiye Gas Co., Ltd.	PRC	6/25/2007	100	100	RMB 3,000,000
Sixian Weiye Gas Co., Ltd.	PRC	9/3/2007	100	100	RMB 3,000,000
Baishan Weiye Gas Co., Ltd.	PRC	7/13/2007	100	100	RMB 15,000,000
Xinhe Weiye Gas Co., Ltd.	PRC	7/2/2009	100	100	RMB 300,000
Hebei Weiye Gas (Group) Co., Ltd.	PRC	12/18/2009	100	100	RMB 75,439,270
Gaocheng Weiye Gas Co., Ltd.	PRC	1/27/2010	100	100	RMB 200,000
Jiangsu Zhong Ran Weiye Energy Investment Co., Ltd.	PRC	3/10/2011	100	99	RMB 200,000,000
Fusong Weiye Gas Co., Ltd.	PRC	7/29/2011	100	90	RMB 10,000,000
Jize Weiye Gas Co., Ltd.	PRC	9/20/2011	100	100	RMB 1,000,000
Baishan Weiye Cheyong Gas Co., Ltd.	PRC	8/13/2012	100	100	RMB 1,000,000
Baishan Weiye Wuzi Co., Ltd.	PRC	11/5/2012	100	100	RMB 1,000,000
Baishan Liquified Gas Co., Ltd.	PRC	8/31/2012	100	100	RMB 2,000,000

(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 Receivable

Accounts 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.

15

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

(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. A 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.

The Company did not record any goodwill when it acquired its equity positions 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 stakes in their equity securities.

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

The Company has adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), ASC 360-10-35. The Company evaluates its long lived assets for impairment when indicators of impairment are present or annually, whichever occurs sooner. In the event that there are indications of impairment, the Company will record a loss to statements of income equal to the difference between the carrying value and the fair value of the long lived asset. The Company typically, but not exclusively, uses the expected future discounted flows method to determine fair value of long lived asset subject to impairment. The fair value of long lived assets held for disposition will include the cost of disposal.

The Company’s long-lived assets are grouped by their presentation on the consolidated balance sheets, and further segregated by their operating and asset type. Long-lived assets subject to impairment include buildings, equipment, vehicles, accounting software licenses, franchise and land use rights. The Company makes its determinations based on various factors that impact those assets.

(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 Life
Gas Pipelines (Up to December 31, 2007)	25 years
Gas Pipelines (Starting from January 1, 2008)	50 years
Buildings	25 years
Leasehold Improvements	25 years
Machinery & Equipment	20 years
Motor Vehicles	10 years
Office Equipment	8 years

16

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

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 Life
Land use rights	20 - 50 years
Franchises	30 years
Accounting software	3 years

(l) Goodwill

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.  

(m) Construction in Progress

Construction in progress represents the cost of constructing pipelines and is stated at cost. Costs are comprised of direct and indirect incremental costs of acquisition or construction. Completed items are transferred from construction in progress to the gas pipelines of fixed assets when they are ready for their intended use. The major cost of construction relates to construction materials, direct labor wages, and other overhead. Construction of pipeline, through which to distribute natural gas, is one of the Group’s principal businesses. The Group builds city main pipeline networks and branch pipeline networks to make gas connection to residential 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.

(n) 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 prepayments as unearned revenue when the payments are received.

(o) Financial Instruments

The Company adopted ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.

ASC 820-10 includes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

17

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

Level 1 – inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.

The Company’s financial instruments consist mainly of cash, bank notes receivable, and debt obligations. Based on the borrowing rates currently available to the Company for loans and similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following tables present the Company’s financial assets and liabilities at fair value in accordance with ASC 820-10:

At June 30,	Quoted in		Significant
2013:	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Financial assets:
Cash	$	10,912,830	$	-	$	-	$	10,912,830
Notes receivable		646,392		-		-		646,392
Total financial assets	$	11,559,222	$	-	$	-	$	11,559,222
Financial liabilities:
Notes payable	$	-	$	-	$	-	$	-
Total financial liabilities	$	-	$	-	$	-	$	-

At December 31,	Quoted in		Significant
2012:	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Financial assets:
Cash	$	13,836,027	$	-	$	-	$	13,836,027
Restricted cash		65,254		-		-		65,254
Total financial assets	$	13,901,281	$	-	$	-	$	13,901,281
Financial liabilities:
Notes payable	$	-	$	-	$	-	$	-
Total financial liabilities	$	-	$	-	$	-	$	-

18

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

(p) Foreign Currency Translation

The accompanying financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (“RMB”). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

	6/30/2013	12/31/2012
Years end RMB : US$ exchange rate	6.1882	6.3161
Average yearly RMB : US$ exchange rate	6.2479	6.3198

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.

(q) Revenue Recognition

The Company has two sources of revenue: (a) sales of natural gas and (b) connection fees for constructing connections to the natural gas distribution network. In accordance with FASB ASC 605-10, the Company recognizes gas distribution revenue when natural gas is rendered to customers, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Connection fees are 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.

Payments received before all of the relevant criteria for revenue recognition satisfied are recorded as unearned revenue.

(r) Cost of Revenue

The cost for distribution of natural gas is comprised of raw materials, delivery cost, and other overhead. The cost of connection fees consists of construction materials, direct labor wages, and other overhead.

(s) Investment Income

Investment income represents the Company’s share of post-acquisition results of its investment in equity securities for the year.

19

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

(t) 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 tax laws are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes primarily related to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets, whether it is more likely than not that these items will expire either before the Company is able to realize that tax benefit, or that future realization is uncertain.

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

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

Subsidiary	Country of Domicile	Income Tax Rate
PRC Operating Companies (per Note 2. (d) Principals of Consolidation)	PRC	25.0	%
i.      GAS Investment China Co., Ltd.	BVI	0.00	%
ii.      Sino Gas Construction, Ltd.	BVI	0.00	%
iii.      Sino Gas Investment Development, Ltd.	BVI	0.00	%
iv.      Tongyuan International Holdings Limitied	Hong Kong	16.5	%

⋅ Effective January 1, 2008, the PRC government implemented a new 25% tax rate for all enterprises regardless of whether it was a 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, the standard 15% tax rate preference terminated as of December 31, 2007. However, the PRC government has established a set of transition rules to allow enterprises that utilized the tax holidays prior to January 1, 2008 to continue utilizing the tax preference.

⋅ 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 six months ended June 30, 2013.

(u) Advertising

The Company expensed all advertising costs as incurred.

20

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

(v) Risk

⋅ 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.

⋅ Environmental risks

The Company has procured environmental licenses required by the PRC government. The Company has both a water treatment facility for water used in its production process and secure transportation to remove waste off site. In the event of an accident, the Company has purchased insurance to cover potential harm to employees, equipment, and the local environment.

⋅ Inflation Risk

Management monitors changes in prices levels. Historically inflation has not materially impacted the Company’s financial statements; however, significant increases in the price of raw materials and labor that cannot be passed on to the Company’s customers could adversely impact the Company’s results of operations.

⋅ 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 changes in the political, economic, and legal environments in the PRC.

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 laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

(w) Statutory Reserves

As stipulated by the Company Law of the People's Republic of China 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.

21

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(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

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

In October, 2012, the FASB issued ASU No. 2012-04, “Technical Corrections and Improvements” (“ASU 2012-04”). The amendments cover a wide range of topics in the FASB ASC. The amendments are incorporated into two sections: a. Technical corrections and improvements, and b. Conforming amendments related to fair value measurements.

a. The amendments in the technical corrections and improvements section are categorized as follows:

⋅ Source literature amendments. These amendments are considered necessary due to differences between source literature and the FASB ASC. The amendments primarily carry forward legacy document guidance and/or subsequent amendments into the FASB ASC. Often, either writing style or phrasing in the legacy documents did not directly relate to the FASB ASC format and style so that the meaning of certain guidance might have been unintentionally altered.

⋅ Guidance clarification and reference corrections. These amendments include updated wording or corrected references, or a combination of both.

⋅ Relocated guidance. These amendments primarily move authoritative literature guidance from one location to another location that is deemed more appropriate within the FASB ASC.

b. On the fair value measurements issue, the guidance in ASU 2012-04 identifies when the use of the term “fair value” should be linked to the definition of fair value included in FASB ASC 820, entitled Fair Value Measurement. Most of the amendments are of a nonsubstantive nature. Many of the amendments relate to conforming wording to be consistent with the terminology in FASB ASC 820 for example, references to market value and current market value have been changed to appropriately refer to fair value so that the literature is consistent throughout.

22

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

In October 2012, the FASB issued ASU No. 2012-06, “Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution” (“ASU 2012-06”). This amendment requires that indemnification assets recognized in accordance with Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, as a result of a government-assisted acquisition of a financial institution involving an indemnification agreement should be subsequently measured on the same basis as the asset subject to indemnification. For public and nonpublic entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Management does not expect the adoption of this standard has a significant effect on the Company’s consolidated financial position or results of operations.

In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”). The Update clarifies that ordinary trade receivables and receivables are not in the scope of Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. Specifically, Update 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification® or subject to a master netting arrangement or similar agreement. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Management does not expect the adoption of this standard has a significant effect on the Company’s consolidated financial position or results of operations.

As of June 30, 2013, there are no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements.

(z) Earnings per Share

The Company computes earnings per share (“EPS”) in accordance with FASB ASC 260 “Earnings per share”. SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., contingent shares, convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

(aa) Subsequent Events

The Company evaluates subsequent events that have occurred after the consolidated balance sheet date but before the consolidated financial statements are issued. There are two types of subsequent events:  (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. The Company has identified no subsequent events that would require disclosure to the consolidated financial statements.

23

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

3. ACCOUNTS RECEIVABLE

For natural gas sales, revenue is due when the gas is sold. Most residential customers settle their accounts via prepayments with debit cards, while industrial customers are billed and pay according to the contract terms ranging from 10 days to one month.

For construction projects, connection fees are generally collected in installments. First deposits of 30% of the total contract sum are received from the client when the project commences. A second payment of 30% is received at a milestone set out in the contracts. A third payment of 30% is received after construction is completed. The remaining 10% is typically held back by the client and acts as a warranty on the quality of the project. The retained money is usually received by the company after the 1 year warranty period.

The Company believes it has provided adequate provisions for doubtful accounts. Doubtful allowance accounts at June 30, 2013 and December 31, 2012 were approximately 1% of gross account receivables. To collect on doubtful accounts, the Company uses all of its efforts, such as having internal staff call for payment, filing legal pledges, or even hiring collection agents to collect the outstanding balance. If the collection is no longer probable, the Company will write off the balance against the allowance for doubtful accounts.

The Company has not experienced any material delinquent accounts that were uncollectible and has not written off a material balance against the allowance for doubtful accounts.

Accounts Receivable
	6/30/2013		12/31/2012
Accounts receivable	$	11,096,594	$	12,072,689
Less: Allowance for bad debt		(110,966)		(120,727)
Accounts receivable, net	$	10,985,628	$	11,951,962

Allowance for Bad Debt
	6/30/2013		12/31/2012
Beginning balance	$	(120,727)	$	(104,323)
Allowance provided		-		(16,404)
Charge against allowance		9,761		-
Reversals		-		-
Ending balance	$	(110,966)	$	(120,727)

Accounts Receivable Aging Analysis
	6/30/2013		12/31/2012
<30 Days	$	4,711,099	$	4,264,620
30-60 Days		609,519		1,122,384
60-90 Days		1,538,761		2,253,942
90-180 Days		643,209		480,993
180-360 Days		2,466,820		95,569
>360 Days		1,127,186		3,855,181
Total	$	11,096,594	$	12,072,689

The increase in accounts receivable aged 180-360 days primarily reflects sales recorded during the current year. The decrease in accounts receivable aged over 360 days reflects receipt of payments of amounts that had been due.

Top ten customers accounted for 55.38% of the total accounts receivable as of June 30, 2013:

24

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

Hebei Natural Gas Co., Ltd.	$	476,145	4.29	%
Beijing Langfa Oil and Gas Technolody Co., Ltd		290,932	2.62	%
Hebei Zhonggang Steel Co., Ltd.		640,585	5.77	%
Beijing Yinzuo Hezhi Real Estate Development Co., Ltd.		391,583	3.53	%
Beijing Tongzhou Ayou Liquified Gas Station		393,010	3.54	%
Hebei Dihua Real Estate Co., Ltd		589,946	5.32	%
Shanghai DaTun energy co., Ltd. (Jiangsu Branch)		416,521	3.75	%
Jiangsu Zhonghuang Real Estate Co., Ltd.		526,890	4.75	%
Lianyun Port Zhaolong Home Development Co., Ltd.		512,815	4.62	%
Zaoqiang Taihe Real Estate Co., Ltd.		416,923	3.76	%
	$	4,655,350	41.96	%

4. OTHER RECEIVABLES

	6/30/2013		12/31/2012
Employee travel advance	$	722,928	$	323,463
Advance for consultant service		1,241,608		786,404
Short term security deposit for construction pipeline		329,366		186,090
Others		3,581,663		1,932,817
	$	5,875,565	$	3,228,774

5. RELATED PARTY RECEIVABLE

A related party receivable of $387,496 is due from the Company’s founder and CEO Mr. Liu Yuchuan. The Company borrowed $3,024,895 (RMB 20,000,000) from China Development Bank. The loan was secured by the CEO’s personal home property, which carried a $387,496 (RMB 2,283,900) mortgage. Because the Bank required the mortgage loan to be settled before it would collateralize on it, the Company paid the entire mortgage on behalf of the CEO. This payment was interest free.

6. INVESTMENT

Ref.		6/30/2013		12/31/2012
(1)	Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.	$	10,152,122	$	9,938,953
(2)	Qujing City Fuel Gas Co., Ltd.		9,157,282		9,157,282
(3)	Tongshan Hengxin Jiaye Gas Co., Ltd.		4,169,642		4,085,207
(4)	China Construction Bank		32,320		31,665
	Total	$	23,511,366	$	23,213,107

25

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

(1) The Company through its wholly owned subsidiary Beijing Gas invested $1,658,803 (RMB 13,465,648) in the acquisition of a 40% equity position in Xiangke Oil Gas. The $10,152,122 investment as of June 30, 2013 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ operation results.

(2) Along with two local partners in Qujing city, the second largest city in Yunnan province of PRC, Beijing Gas established Qujing City Fuel Gas Co., Ltd. with registered capital of $4,387,761 (RMB 30,000,000). Beijing Gas’ original investment of $1,746,764 (RMB 11,700,000) represented 39% equity ownership of Qujing Gas. 

On December 17, 2010, the Company, along with its wholly owned subsidiaries Gas Construction and Beijing Gas, entered into a Subscription Agreement with AMP Capital Asian Giants Infrastructure Fund (“AGIF”), under the terms of which Gas Construction issued to AGIF 48,039 ordinary shares that represents 49% of the total issued capital of Gas Construction for consideration of US$2.0 million.  In addition, pursuant to the Subscription Agreement, the equity interest in Qujing Gas held by Beijing Gas was transferred to Gas Construction so that Gas Construction became the beneficial holder of a 39% equity interest in Qujing Gas. After the close of the equity subscription, shareholders of Qujing Gas amended the Articles of Incorporation to raise the level of registered capital to $20,425,157 (RMB 130,000,000). The $9,157,282 investment as of June 30, 2013 consisted of principal and accumulated post-acquisition investment income attributed to Qujin Gas’ operational results. 

Investment	Xiangke Oil Gas		Qujing Gas
Investment Cost	$	1,658,803	$	7,766,760
Prior years investment income		4,672,645		232,393
2011 investment income		892,338		512,387
2012 investment income		2,777,386		645,742
	$	10,001,172	$	9,157,282

(3) On April 23, 2008, Beijing Gas entered into an agreement to acquire a 100% equity interest in Tongshan Hengxin Jiaye Natural Gas Co., Ltd. (“Tongshan Gas”), for a purchase price of $4,660,000 (RMB 32,600,000). Tongshan is a regional natural gas distributor and developer of natural gas distribution networks in Jiangsu province of the PRC. As of June 30, 2013, the Company has not finished the registration of the equity transfer with the Tongshan City Industrial and Commercial Administration. Therefore, acquisition payments of $4,169,642 for Tongshan Gas were classified as investment as of that date.

(4) The Company purchased a $32,320 (RMB 200,000) long-term fund with the Bank of Construction in an effort to maintain a favorable relationship and enhance further credit facility.

26

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

7. PROPERTY, PLANT AND EQUIPMENT

Property, Plant, and Equipment consisted of the following as of June 30, 2013 and December 31, 2012:

6/30/2013	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	50,277,069	$	4,430,464	$	45,846,605
Motor Vehicles		6,869,425		3,058,175		3,811,250
Machinery & Equipment		2,151,262		503,211		1,648,051
Buildings		2,519,121		456,157		2,062,964
Leasehold Improvements		176,343		80,665		95,678
Office Equipment		399,893		202,799		197,094
Total	$	62,393,113	$	8,731,471	$	53,661,642

12/31/2012	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	50,028,098	$	3,961,187	$	46,066,911
Motor Vehicles		6,628,442		2,835,134		3,793,308
Machinery & Equipment		2,180,403		484,195		1,696,208
Buildings		1,862,560		378,184		1,484,376
Leasehold Improvements		88,071		68,158		19,913
Office Equipment		374,355		167,875		206,480
Total	$	61,161,929	$	7,894,733	$	53,267,196

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

Depreciation expenses included in the consolidated statements of income for the six months ended June 30, 2013 and 2012 were $836,739 and $756,082, respectively.

8. GOODWILL

Goodwill was related to the acquisitions of Beijing Chenguang Gas Co., Ltd. (“Chengguang Gas”), Yuxian Weiye Gas Co., Ltd. (“Yuxian Gas”) Guannan Weiye Gas Co., Ltd. (“Guannan Gas”) and Baishan Gas Co.(“Baishan Gas”), Ltd. Management annually reviews the carrying value of goodwill using the sum of the discounted cash flows to determine if an impairment charge is necessary. The Company has determined there were no impairments to goodwill as of June 30, 2013 and December 31, 2012.

	6/30/2013		12/31/2012
Yuxian Gas	$	10,954	$	10,954
Guannan Gas		409,963		409,963
Chengguang Gas		1,257,058		1,257,058
Baishan Gas		2,920,346		-
	$	4,598,321	$	1,677,975

27

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

9. INTANGIBLE ASSETS

Intangible assets consisted of the following as of June 30, 2013 and December 31, 2012:

6/30/2013	At Cost		Accumulated Amortization		Net
Land Use rights	$	1,095,685	$	137,996	$	957,689
Franchises		403,995		403,995		-
Accounting Software		50,847		47,909		2,937
	$	1,550,527	$	589,900	$	960,627

12/31/2012	At Cost		Accumulated Amortization		Net
Land Use Rights	$	1,009,020	$	108,115	$	900,905
Franchises		395,813		395,813		-
Accounting Software		105,260		56,178		49,082
	$	1,510,093	$	560,106	$	949,987

Land use rights represent the right to use and develop land granted by the local PRC government in accordance with zoning laws less accumulated amortization. Under PRC law, the company is permitted to sell, transfer, or mortgage its land use rights.

Under exclusive franchises agreements between the Company and the applicable PRC local government and entities in charge of gas utility, the Company operates as a local natural gas distributor in a city or county. Amortization expenses included in the consolidated statements of income for the six months ended June 30, 2013 and 2012 were $29,794 and $17,481 respectively.

28

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

10. LOANS

a. SHORT-TERM BANK LOANS

Name of Bank	Note	Due Date	Interest Rate		6/30/2013		12/31/2012
China Minsheng Banking Corp., Ltd. - Pinganli Branch	1	02/28/2013	9.512	%	$	-	$	1,108,279
China Merchants Bank - Beijing Shouti Branch	5	06/14/2013	7.888	%		-		1,583,255
Bank of China - Baishan Branch	4	06/19/2014	6.650	%		1,939,175		1,424,930
Bank of China - Shijiazhuang Branch	3	06/06/2014	7.200	%		1,615,979		1,583,255
Nanjing Bank	6	01/17/2013	7.500	%		-		357,627
Nanjing Bank	6	01/17/2013	8.800	%		-		799,386
Wuhe Yongtai Bank		06/20/2014	9.900	%		807,989		759,963
Bank of Beijing – Zhongguancun Haidian Park Branch		07/31/2013	7.200	%		484,794		791,628
Baishan Dinghe Small Loan Co., Ltd.		On Demand	43.200	%		-		316,651
Nanjing Bank	6	10/24/2013	7.500	%		1,478,621		1,448,679
Dalian Bank - Beijing Branch	2	12/31/2013	8.100	%		4,847,936		1,345,767
China Development Bank - Beijing Branch	7	12/26/2013	6.900	%		8,079,894		7,916,277
Pudong Development Bank - Shijiazhuang Bruanch		10/30/2013	7.800	%		2,423,968		2,374,883
Pudong Development Bank - Shijiazhuang Bruanch		1/7/2014	7.800	%		807,989		-
Nanjing Bank	6	2/21/2014	7.500	%		1,753,337		-
Industrial and Commercial Bank of China – Zhongguancun Branch		6/25/2014	5.000	%		969,587		-
China Merchants Bank		6/26/2014	8.100	%		1,615,979		-
Total					$	26,825,248	$	21,810,580

Note:

1) The loan provided by China Minsheng Bank Corp., Ltd. was guaranteed by the CEO Mr. Liu Yuchuan’s personal credit.

2) The loans provided by Bank of Dalian were secured by the Company’s subsidiary Chengguang Gas’ registered capital, CEO Mr. Liu Yuchuan and COO Mr. Zhou Zhicheng’s personal home properties, which have been appraised at total fair market value of $933,254 (RMB 6,380,854)

3) The loan provided by Bank of China – Shijiazhuang Branch was guaranteed by Hebei Desheng Guarantee Co., Ltd. (“Hebei Desheng”). In connection with this collateralization, the Company was required to pay approximately $45,000 (RMB 300,000) as a financial service fee to Hebei Desheng.

4) The loan provided by Bank of China – Baishan Branch was secured by the Company’s subsidiary Beijing Zhongran Weiye Gas Co., Ltd. with the authority of gas payment collection and Baishan Weiye Gas Co. Ltd. with liability.

29

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

5) The loan provided by China Merchants Bank was guaranteed by the CEO Mr. Liu Yuchuan with unlimited liability, and the management Mr. Wang Weidong and Ms. Song Erxin with $154,703 (RMB 1,000,000) liabilities each.

6) The loan provided by Nanjing Bank was secured by Beijing Zhongyou Sanhuan Technology Development Co., Ltd and CEO Mr. Liu Yuchuan.

7) The Company obtained the loans from China Development Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd. (the “Guarantor”). The Guarantor guaranteed to the Banks the entire principal and accrued interest. The Company pledged all of Beijing Gas’ subsidiaries and deposited $1,028,464 (RMB 6,800,000), which was classified as non-current asset deposits, with the Guarantor, and was required to pay 2% of the outstanding loans as a financial service fee to the Guarantor per annum. Because the Company lacked the favorable credit history to directly establish a credit facility with the banks, the credit collateralization from Guarantor was chosen as a financing solution.

b. LONG-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate		6/30/2013		12/31/2012
Bank of China - Baishan Branch	06/24/2015	6.650	%	$	1,939,175	$	2,849,860
Peixuan Rural Credit Cooperation	07/18/2014	11.674	%		4,847,936		4,749,766
Baishan Huida Investment Management Co, Ltd.	12/31/2030	6.250	%		3,552,112		3,958,139
Total				$	10,439,223	$	11,557,765

11. OTHER PAYABLES

(a) Current other payables consisted of the following at June 30, 2013 and December 31, 2012:

Ref.		6/30/2013		12/31/2012
(1)	Amount due to Employees	$	4,405,734	$	3,241,752
(2)	Tax Payable		933,606		1,256,502
(3)	Payables to Subcontractors		2,919,200		3,614,959
(4)	Others		1,273,880		1,465,234
	Total	$	9,532,420	$	9,578,447

(1). Amounts due to employees included accrual payroll, welfare payable, continued education training program cost and individual travel advance. All of these amounts were unsecured, interest free, and have no fixed repayment terms.

(2). The tax payable consists of value added tax, sales tax, income tax and local tax payables.

(3). Payables to subcontractors are unbilled liabilities.

30

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

12. CONVERTIBLE BONDS AND BOND WARRANTS

(a) $8,000,000 Convertible Bond

On December 20, 2012, the Company completed a financing transaction with certain purchasers issuing $8,000,000 of the 8% senior secured convertible notes (the “Bonds”) with conversion price of $0.31 to purchase an aggregate of 25,806,452 shares of the Company’s common stock and it will expire on December 20, 2013.

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.

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.

The convertible bonds payable, net consisted of the followings:

		6/30/2013		12/31/2012
Ref.		8M Bonds		8M Bonds
(1)	Convertible Bonds Payable – principal	$	8,000,000	$	8,000,000
(2)	Less: Interest Discount - Warrants		-		-
(3)	Less: Interest Discount - Beneficial Conversion Feature		-		(258,065)
(4)	Less: Bond Discount - Issuance Cost		-		-
(5)	Accretion of Interest Discount - Warrants		-		-
(6)	Accretion of Interest Discount - Beneficial Conversion Feature		-		258,065
(7)	Accretion of Bond Discount - Issuance Cost		-		-
(8)	Accretion of Interest Discount - Redemption		405,679		20,825
(9)	Conversion of Convertible Bonds into Common Stock		-		-
	Convertible Bonds Payable, net	$	8,405,679	$	8,020,825

(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. See Note 13 Capital Stock for the calculation of fair value of convertible bonds detachable warrants.

31

Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

(3) Because the conversion price is $0.31, which is lower than the fair market value of common stock on the date of issuance, the beneficial conversion feature was applied. Since the $8M bond will expire in one year, the beneficial conversion feature was amortized immediately.

(4) The bond has no issuance cost.

(5) Based on a 15% per annum redemption rate, the redemption values were determined to be $800,000.

Included in interest expense of $1,868,552, was $320,000 convertible bonds coupon expense and $384,853 non-cash flow amortization expense of convertible bonds, and $1,163,699 of bank loan interest expense.

13. CAPITAL STOCK

The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 31,802,382 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 of which no shares are issued and outstanding; (b) series B convertible preferred stock, with 5,000,000 shares authorized of which 200,997 shares are issued and outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000 shares authorized of which no share are issued and outstanding.

The following table depicts the Company’s outstanding securities as of June 30, 2013:

	Authorized Shares	Shares issued and outstanding
Common Stock	250,000,000	31,802,382
Convertible Preferred Stock A	20,000,000	-
Convertible Preferred Stock B	5,000,000	200,997
Convertible Preferred Stock B-1	3,000,000	-

There were 95,418 shares preferred stock B-1 and 4,380,413 shares preferred stock B converted into common stock in 2011. There was 8,684 shares preferred stock B converted into common stock in 2012.

32

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

14. INCOME TAX

The following tabulation presents the income tax and deferred tax of the Company and its individual subsidiaries for the six months ended June 30, 2013 and 2012:

	June 30,			June 30,
Description	2013			2012
Income (loss) before taxes:
US	$	(732,054)			(740,518)
BVI		(1,023,472)			(394,731)
PRC		3,314,150			3,006,727
Total income before taxes	$	1,558,624		$	1,871,478
Provision for taxes:-
Current:
US		-			-
BVI		-			-
PRC		(778,683)			(329,439)
		(778,683)			(329,439)
Deferred:
US		-			-
BVI		-			-
PRC		-			-
Valuation allowance		-			-
		-			-
Total provision for taxes		(778,683)			(329,439)
Effective tax rate		49.96	%		17.60	%

The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the six months ended June 30, 2013 and 2012 are shown in the following table:

	June 30,		June 30,
	2013		2012
U.S. federal statutory income tax rate	34.00	%	34.00
Lower rates in PRC, net	(9.00)	%	(9.00)	%
Tax holiday	24.96	%	(7.40)	%
Accruals in foreign jurisdictions	N/A		N/A
Effective tax rate	49.96	%	17.60	%

33

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

15. SEGMENT INFORMATION

The Company has contracted with customers usually in two revenue segments, one is for the construction and installation of gas facilities and the other is for the subsequent sales of natural gas to the customers through the gas facilities the Company constructs. However, construction and installation contracts and gas supply contracts have different terms for the basis of revenue recognition and differ from one another in terms of the relevant cost-and-revenue to be recognized and hence separate calculations and subsequent payments of fees for each segment occur without any interdependence on one another.

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

Financial Position Segment Report

As of June 30, 2013

			Gas Pipeline		Shell, BVIs, &
	Gas Distribution		Installation		Eliminations		Total
Assets
Current Assets	$	23,748,000	$	11,595,768	$	1,040,280	$	36,384,408
Non-Current Assets		41,939,713		85,892,042		4,925,781		132,757,536
Total Assets		65,687,713		97,487,810		5,966,061		163,141,584
Liabilities
Current Liabilities		9,972,902		57,109,932		-		67,082,834
Non-current Liabilities		1,551,952		8,887,271		-		10,439,223
Total Liabilities		11,524,854		65,997,203		-		77,522,057
Net Assets		54,162,859		31,490,607		5,966,061		91,619,527
Liabilities & Equities	$	65,687,713	$	97,487,810	$	5,966,061	$	169,141,584

34

 

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

Operation Result Segment Report

For the six months ended June 30, 2013

			Gas Pipeline		Shell, BVIs, &
	Gas Distribution		Installation		Eliminations		Total
Sales Revenue	$	26,394,280	$	12,887,906	$	(10,989,428)	$	28,292,758
Cost of Revenue		(25,102,083)		(5,488,122)		10,989,428		(19,600,777)
Gross Profit		1,292,197		7,399,784		-		8,691,981
Operating Expense		(626,313)		(3,586,587)		(1,057,530)		(5,270,430)
Operating Income/(Loss)		665,884		3,813,196		(1,057,530)		3,421,551
Other Income/(Loss)		(276,952)		(885,867)		(700,108)		(1,862,927)
Earnings before tax		388,932		2,927,330		(1,757,638)		1,558,624
Income tax		(91,324)		(687,359)		-		(778,683)
Gain/(loss) from discontinued operation, net of tax		-		-		-		-
Net Income	$	297,608	$	2,239,971	$	(1,757,638)	$	779,941

Financial Position Segment Report

As of June 30, 2012

			Gas Pipeline		Shell, BVIs, &
	Gas Distribution		Installation		Eliminations		Total
Assets
Current Assets	$	19,461,208	$	9,324,346	$	616,360	$	29,401,914
Non-Current Assets		33,437,457		69,788,627		8,514,368		111,740,452
Total Assets		52,898,665		79,112,973		9,130,728		141,142,366
Liabilities
Current Liabilities		7,696,025		48,147,938				55,843,963
Non-current Liabilities		420,755		2,632,334				3,053,089
Total Liabilities		8,116,780		50,780,272				58,897,052
Net Assets		44,781,885		28,332,701		9,130,728		82,245,314
Liabilities & Equities	$	52,898,665	$	79,112,973	$	9,130,728	$	141,142,366

 

35

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

Operation Result Segment Report

For the six months ended June 30, 2012

			Gas Pipeline		Shell, BVIs, &
	Gas Distribution		Installation		Eliminations	Total
Sales Revenue	$	21,277,075	$	10,194,373	(9,898,179)	21,573,269
Cost of Revenue		(20,307,776)		(4,130,233)	9,898,179	(14,539,830)
Gross Profit		969,299		6,064,140	-	7,033,439
Operating Expense		(428,306)		(2,679,575)	(491,885)	(3,599,766)
Operating Income/(Loss)		540,993		3,384,565	(491,885)	3,433,673
Other Income/(Loss)		(215,291)		(703,540)	(643,364)	(1,562,195)
Earnings before tax		325,702		2,681,025	(1,135,249)	1,871,478
Income tax		(35,686)		(293,753)	-	(329,439)
Gain/(loss) from discontinued operation, net of tax		-		-	-	-
Net Income	$	290,016	$	2,387,272	(1,135,249)	1,542,039

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 officers.

36

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

16. EARNINGS PER SHARE

		Six months Ended
	Ref	6/30/2013		6/30/2012
Basic Earnings Per Share Numerator:
Net Income		$	779,941		1,542,039
Income from continued operations			779,941
Income/(loss) from discontinued operations			-
Less:
Preferred Dividends			-
Constructive Preferred Dividends			-
income attributed to non-controlling interest			(1,498)		(929)
Net income available to Common Stockholders		$	781,439	$	1,542,968
Income from continued operations available to Common Stockholders		$	781,439	$	1,542,968
Income/(loss) from discontinued operations available to Common Stockholders			-		-
Diluted Earnings Per Share Numerator:
Add:
Interest Expense for Convertible Bonds, net of tax			704,853		643,386
Net income available to Common Stockholders			1,481,834		2,186,355
Income from continued operations available to Common Stockholders			1,486,292		2,186,355
Income/(loss) from discontinued operations available to Common Stockholders			-		-
Original Shares			31,802,382		31,793,698
Addition to Common Stock			-		-
Basic Weighted Average Shares Outstanding			31,802,382		31,793,698
Potentially Dilutive Securities:
Addition to Common Stock from Conversion of Preferred Stock B	(1)		-
Addition to Common Stock from Conversion of Preferred Stock B-1	(2)		-
Addition to Common Stock from Conversion of Convertible Bonds			-
Addition to Common Stock from Exercise of Warrants	(3)		-
Diluted Weighted Average Shares Outstanding			31,802,382		31,793,698
Earnings Per Share
Basic:       - Net income		$	0.03	$	0.05
- Income from continued operation			0.03	$	0.05
- Income from discontinued operation			0.00		0.00
Diluted: - Net income		$	0.03	$	0.05
- Income from continued operation			0.03	$	0.05
- Income from discontinued operation			0.00		0.00
Weighted Average Shares Outstanding
- Basic			31,802,382		31,793,698
- Diluted			31,802,382		31,793,698

37

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

(1). The applications of conversion of preferred stock B into common stock were anti-dilutive for the six months ended June 30, 2013 and 2012.

(2). The applications of conversion of preferred stock B-1 into common stock were anti-dilutive for the six months ended June 30, 2013 and 2012.

(3). The exercises of warrants to common stock were anti-dilutive for the six months ended June 30, 2013 and 2012.

(4). The applications of conversion of convertible bonds into common stock were anit-dilutive for the six months ended June 30, 2013 and 2012.

17. DISCONTINUED OPERATION

The Company through its indirectly wholly owned subsidiary Beijing Gas executed share transfer agreements and other related agreements (the “Agreements”) with Hebei Natural Gas Co., Ltd. (“Hebei Gas”) to sell assets and ownership of three of its subsidiaries, a) Xinji Zhongchen Gas Co., Ltd., (“Xinji Gas”) b) Jinzhou Weiye Gas Co., Ltd., (“Jinzhou Gas”) and c) Shenzhou Weiye Gas Co., Ltd. (“Shenzhou Gas”) for total consideration of RMB 44.8 million (approximately USD $7.04 million). Upon the completion of registered capital transfer filed with local government’s industrial and commercial administration, the disposition took effect on June 8, 2011. In December, 2012, the Company also shut down Sishui Weiye Gas Col, Ltd (“Sishui Gas”), which has had no operating activities since 2007. The Company has accounted for the disposition of the assets of discontinued operation in accordance with SFAS 144 (“FASB ASC 360”), “Accounting for the Impairment or Disposal of Long-Lived Assets”. A total gain of $654,053 was recorded in the Company’s statement of income for the year ended December 31, 2012.

a). The following tabulation presents the calculation of gain from the disposal of the three subsidiaries:

	Valuation of		Buyer’s
	Disposition		Acquisition Price		Gain/(Loss)
Jinzhou Gas	$	3,217,742	$	3,043,930	$	(173,812)
Shenzhou Gas		1,357,326		1,312,914		(44,412)
Xinji Gas		1,334,980		2,681,980		1,347,000
Sishui Gas		474,723		-		(474,723)
	$	6,384,771	$	7,038,824	$	654,053

b). The following tabulation summarizes the operational results of the four disposal subsidiaries for the period ended June 8, 2011 and December 31, 2012, which was also accounted as income from discontinued operations net of tax in the statement of income.

38

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2013 and December 31, 2012

(Stated in US Dollars)

	Condensed Income Statements
			Shenzhou
	Jinzhou Gas		Gas		Xinji Gas		Sishui Gas		Total
Revenue	$	359,787	$	277,453	$	9,569	$	-	$	646,809
Cost of revenue		217,313		224,412		8,224		-		449,949
Gross profit		142,473		53,041		1,346		-		196,860
Operating expenses		18,246		16,009		35,138		-		69,393
Operating income		124,227		37,032		(33,792)		-		127,467
Other income/(expenses)		(241)		(226)		(3,218)		-		(3,685)
Earnings before tax		123,986		36,806		(37,010)		-		123,782
										-
Income tax		(6,197)		(11,167)		(114)		-		(17,477)
Net income	$	117,789	$	25,640	$	(37,124)	$	-	$	106,305

39

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.

Economic & Industrial Trends

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

Due to the Chinese real estate boom in recent years, we experienced high growth in our connection activities. However, in 2007, the Chinese government implemented a series of policies and regulations to curb inflation and to slow the growth of the property market. These policies, together with the worldwide financial crisis in 2008, resulted in a slowdown of the real estate market in China and our business, in turn, was affected. In 2008, the Chinese government changed its policies and prioritized working to boost the economy. In order to address the slowdown in the real estate market, the Chinese government adopted new policies, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies. Also, to boost the overall economy, the Chinese government also decided to inject a stimulus package, which allocated funds for mass housing projects. We saw signs of recovery of the real estate market in China at the beginning of 2009, and we experienced increased business activities in the third and fourth quarters of 2009.

Starting in April 2010, the Chinese government issued new policies to curb the rise of housing prices in certain cities. Since 2011 the overall housing market has remained slow and such trend has carried into 2013. However, in the Tier II and Tier III cities where we operate, housing development has remained solid. That said, our expansion in 2014 may be impacted if the current tight control policies continue to spread from major cities to mid and small sized cities. We continued to capture special development opportunities in certain hot spots, such as the Baishan ski resorts and the Qujing Natural Gas Reserve.

Even with the up and down nature of the Chinese real estate market over the past three years, we believe that the growth trend of the real estate market will continue because of the ongoing urbanization in China. Moreover, the Chinese government, at both the national and the local levels, continues to strongly support the use of clean energy, particularly natural gas.

There are three pillars in the Chinese economy: (i) domestic consumption (both private and public), (ii) net exports, and (iii) domestic investment. China’s GDP grew 7.5% during the second quarter of 2013 and grew 7.6% overall in the first half year of 2013 as compared to the same period of 2012. Although the growth of nationwide GDP has slowed, especially in the large eastern cities, in the less developed regions of China, GDP growth remains strong. The Company has a presence in four such regions. In Jiangsu province GDP grew 9.6%, in Hebei province GDP grew 8.7%, in Yunnan province GDP grew 12.4%, and in Jilin province GDP grew 9.0% in the first half of 2013.

Our gas users are comprised of both industrial and residential users. Gas sales to residential users are much less affected by economic and industrial factors and should maintain stable growth in the future. Gas sales to industrial users, however, are subject to the operating performance of the industrial user. As we develop into more cities in the coming years, we expect to add more industrial users when the opportunities arise and we possess the necessary capital requirements.

Material Opportunities

The gas distribution market is quite fragmented in small (population less than 300,000) to medium (population between 300,000 and 1,000,000) sized cities in China and it is primarily in these markets that we are exploring potential project targets. Many small-sized city markets are still untapped or undeveloped. The development of these markets is generally considered one of the Company’s major growth opportunities.

The natural gas distribution markets of most medium-sized or large cities have already been developed by large distributors or are still operated by state-owned companies. Acquisition opportunities exist for those still run by state-owned companies, as the central government encourages privatization of these companies. Acquisitions in these markets would have a material impact on the Company, potentially increasing the Company’s assets and revenues significantly.

40

Material Challenges

There are many small-to-medium sized cities whose natural gas infrastructure is still undeveloped or underdeveloped and these markets present growth opportunities for the Company. However, competition is growing, as many small new players have been attracted by the profitability and growth potential of the business. In addition, we are also facing competition from stronger competitors, as large city markets are becoming saturated and our competitors from those markets are beginning to expand into smaller cities.

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

Furthermore, potential users in small and medium-sized cities need to be educated about the benefits of natural gas. It takes some time for them to realize how natural gas can improve their quality of life. This is especially true for new markets, where there is no use of natural gas. Correspondingly, small cities tend to be more reluctant to use new energies than large cities and residents of small cities tend to depend more on coal than natural gas.

With respect to purchase price and sale price of natural gas, China’s energy market is highly regulated by the government. Whenever there is an adjustment to the purchase price set by the government, gas distributors increase or decrease the sale price accordingly, and such changes in price are subject to a public hearing and government approval. The natural gas prices in China lag behind those in other international markets. The Chinese government has seldom adjusted the price of natural gas and we cannot rule out the possibility of an increase in natural gas prices by the government in the future. Even though we could adjust our sale price accordingly after the increase in purchase price, thereby passing the increase onto the end users, the fact remains that such price increases would make natural gas more expensive, as compared to other alternative energies, and in turn could hinder our business development.

Risks in Short-Term and Long-Term

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

To reduce the Company’s dependence on connection fees, the Company is looking at opportunities to diversify its business by expanding into related industries, such as pipelines and gas stations. However, we do not expect to develop into those areas in full in the near future.

Liquidity and Capital Resources

Natural gas distribution is a capital-intensive industry that requires large amounts of capital for the construction of pipelines and gas stations and the purchase of transportation vehicles. Without the necessary capital, the Company would be constrained by inadequate capital when developing into larger cities or engaging in merger and acquisition activities, and would require additional fundraising to finance such business activities.

CONSOLIDATED OPERATING RESULTS

Three and Six Months Ended June 30, 2013 Compared to the Three and Six Months Ended June 30, 2012

	For the three months ended June 30
	2013			2012			Change
(in US$ millions)	US$			US$
Net Revenues		14.9			10.8			37.4	%
Gross Profit		5.2			4.3			18.5	%
Operating Income		2.7			2.5			8	%
Net Income		1.4			1.6			-10.7	%
Gross Margin		34.7	%		40.2	%		-5.5	%
Net Margin		9.5	%		14.6	%		-5.1	%

41

During the three months ended June 30, 2013, net revenues increased 37.4% to $14.9 million as compared to the same period of 2012. Gross profit for the three months ended June 30, 2013 increased 18.5% to $5.2 million from the same period of 2012. Our operating income for the three months ended June 30, 2013 increased 8% to $2.7 million from the same period of 2012. Net income for the three months ended June 30, 2013 was $1.4 million, compared to a net income of $1.6 million during the same period of 2012.

	For the six months ended June 30
	2013			2012			Change
	US$			US$
Net Revenues		28.3			21.6			31.2	%
Gross Profit		8.7			7.0			23.6	%
Operating Income		3.4			3.4			0	%
Net Income		0.8			1.5			-49.4
Gross Margin		30.7	%		32.6	%		-1.9	%
Net Margin		2.8	%		7.1	%		-4.3	%

During the six months ended June 30, 2013, net revenues increased 31.2% to $28.3 million as compared to the same period of 2012. Gross profit for the six months ended June 30, 2013 increased 23.6% to $8.7 million from the same period of 2012. Our operating income for the six months ended June 30, 2013 was $3.4 million and almost the same as during the same period of 2012. Net income for the six months ended June 30, 2013 was $0.8 million, compared to a net income of $1.5 million during the same period of 2012.

Net Revenues

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

		For the three months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Net Revenues		14.9		100	%		10.8		100	%		37.4	%
Connection Fees		7.3		48.9	%		5.5		50.5	%		33.1	%
Gas Sales		7.6		50.7	%		5.4		49.5	%		40.5	%

Total net revenues for the three months ended June 30, 2013 increased 37.4% to $14.9 million from the same period in 2012. The increase was due to increases in both gas sales and connection fees, but primarily due to the significant increase in gas sales. Our Beijing Chenguang Gas subsidiary acquired a number of big commercial customers in the areas surrounding Beijing at the end of the 2012 and the gas consumption ramped up from these customers in the second quarter of 2013. During the three months ended June 30, 2013, we connected 16,565 new residential households to our gas distribution network, resulting in total connection fees of $7.3 million. In comparison, we connected 13,163 new residential households to our gas distribution network in the same period of 2012, resulting in total connection fees of $5.5 million. Gas sales during the three months ended June 30, 2013 were $7.6 million. Gas sales during the same period in 2012 were $5.4 million.

		For the six months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Net Revenues		28.3		100	%		21.6		100	%		31.2	%
Connection Fees		10.4		36.7	%		8.3		38.5	%		25	%
Gas Sales		17.9		63.1	%		13.3		61.5	%		34.5	%
Other Sales		0.06		0.2	%

Total net revenues for the six months ended June 30, 2013 increased 31.2% to $28.3 million from the same period in 2012. The increase was due to increases in both gas sales and connection fees, but primarily due to the significant increase in gas sales. The new customers of our Beijing Chenguang Gas subsidiary contributed to the significant growth of gas sales in the first half of 2013. During the six months ended June 30, 2013, we connected 25,240 new residential households to our gas distribution network, resulting in total connection fees of $10.4 million. In comparison, we connected 19,990 new residential households to our gas distribution network for the same period of 2012, resulting in total connection fees of $8.3 million. Gas sales during the six months ended June 30, 2013 were $17.9 million. Gas sales during the same period in 2012 were $13.3 million.

42

Connection Fees

	For the three months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Connection Fees		7.3		100	%		5.5		100	%		33.1	%
Residential Users		7.2		98.6	%		5.0		91.9	%		42.8	%
Industrial and Commercial Users		0.1		1.4	%		0.5		8.1	%		-80	%

Connection fees during the three months ended June 30, 2013 increased 33.1% to $7.3 from $5.5 million during the same period of 2012 and accounted for 48.9% of the total net revenue in the three months ended June 30, 2013 as compared to approximately 50.5% of the total net revenue for the same period in 2012. The connection fees were mainly from the development of new residential users.

	For the six months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Connection Fees		10.4		100	%		8.3		100	%		25	%
Residential Users		10.1		97	%		7.3		88	%		37.9	%
Industrial and Commercial Users		0.3		3	%		1.0		12	%		-69	%

Connection fees during the six months ended June 30, 2013 increased 25% to $10.4 million from $8.3 million during the same period of 2012 and accounted for 36.7% of the total net revenue for the six months ended June 30, 2013 as compared to approximately 38.5% of the total net revenue for the same period in 2012. Connection fees were mainly from the development of new residential users.

Gas Sales

	For the three months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Gas Sales		7.5		100	%		5.4		100	%		40.5	%
Residential Users		2.2		29.1	%		2.2		41.3	%		0	%
Industrial and Commercial Users		5.3		70.9	%		3.2		58.7	%		65.6	%

Gas sales during the three months ended June 30, 2013 increased 40.5% to $7.5 million from the same period of 2012 and accounted for 50.7% of total net revenue for the three months ended June 30, 2013. Gas sales to residential users for the three months ended June 30, 2013 were almost the same as in the same period of 2012. Gas sales to industrial and commercial users during the three months ended June 30, 2013 jumped 65.6% to $5.3 million from $3.2 million in the same period of 2012.

The gas sales to residential users were approximately $2.2 million, almost the same as during the same period of 2012, and accounted for 29.1% of total gas sales during the three months ended June 30, 2013 as compared to 41.3% during the same period of 2012. For the three months ended June 30, 2013, our industrial and commercial customers accounted for 70.9% of our total gas sales as compared to 58.7% of the total gas sales in the same period of 2012, an increase of $2.1 million in dollar amount as compared to the same period of 2012.  The significant gas sales increases to industrial and commercial users in the total gas sales mix reflected the business strategy of focusing on the growth of our industrial and business client base. We were able to see big gas sales surges from the new commercial and industrial customers whose daily gas consumptions exceed 20-30 thousand cubic meters.

	For the six months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Gas Sales		17.9		100	%		13.3		100	%		34.5	%
Residential Users		8.1		45.2	%		8.0		60.2	%		1.0	%
Industrial and Commercial Users		9.8		54.8	%		5.3		39.8	%		84.9	%

43

Gas sales during the six months ended June 30, 2013 increased 34.5% to $17.9 million from the same period of 2012 and accounted for 63.1% of total net revenue for the six months ended June 30, 2013. Gas sales to residential users for the six months ended June 30, 2013 increased 1% to $8.1 million from $8.0 million in the same period of 2012. Gas sales to industrial and commercial users during the six months ended June 30, 2013 increased 84.9% to $9.8 from $5.3 million in the same period of 2012.

The increase in gas sales from residential users was flat and accounted for 45.2% of total gas sales during the six months ended June 30, 2013 as compared to 60.2% during the same period of 2012, an increase of 1% in dollar value compared to the same period of 2012. For the six months ended June 30, 2013, our industrial and commercial customers accounted for 54.8% of our total gas sales as compared to 39.8% of the total gas sales in the same period of 2012, an increase of 84.9% in dollar amount as compared to the same period of 2012.

Cost of Revenues

	For the three months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Cost of Revenues		9.7		100	%		6.5		100	%		50	%
Connection Fee Cost		2.5		25.8	%		1.4		21.2	%		82.4	%
Gas Cost		7.2		74.2	%		5.1		78.8	%		41.3	%

Cost of revenues for the three months ended June 30, 2013, which includes cost of connections and cost of gas sales, increased 50% to $9.7 million from $6.5 million in the same period of 2012.

	For the six months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Cost of Revenues		19.6		100	%		14.5		100	%		34.8	%
Connection Fee Cost		3.0		15.2	%		2.2		15.4	%		33.1	%
Gas Cost		16.6		84.8	%		12.3		84.6	%		35.1	%

Cost of revenues for the six months ended June 30, 2013, which includes cost of connections and cost of gas sales, increased 34.8% to $19.6 million from $14.5 million in the same period of 2012.

Cost of Connection Fees

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

The cost of connection fees during the three months ended June 30, 2013 increased 82.4% to $2.5 million from $1.4 million for the same period in 2012. This unusual increase in comparison to the same period of last year is mainly due to (i) the higher cost associated with the higher sales revenue and (ii) the delayed invoices of a portion of the connection fees cost associated with sales incurred in the first quarter of 2012. During the three months ended June 30, 2013, our revenue increased 33.1% from connection fees.

The cost of connection fees during the six months ended June 30, 2013 increased 33.1% to $3.0 million from $2.2 million for the same period in 2012. This increase in comparison to the same period of last year is mainly due to the higher cost associated with the higher sales revenue growth in the second quarter of 2012. During the six months ended June 30, 2013, our revenue increased 25% from connection fees. We feel viewing the cost structure for the first six months of 2013 as a whole provides a more accurate representation of our business model.

Cost of Gas Sales

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

44

The cost of gas sales during the three months ended June 30, 2013 increased 41.3% to $7.2 million from the same period in 2012. This increase in cost of gas sales is largely due to the proportionate increase in expenses associated with the increase in gas sales and also the higher transportation costs during this quarter.

The cost of gas sales during the six months ended June 30, 2013 increased 35.1% to $16.6 million from the same period in 2012. This increase in cost of gas sales is largely due to the proportionate increase in expenses associated with the increase in gas sales and also the higher transportation costs during this quarter.

Gross Profit

	For the three months ended June 30,
	2013					2012					Change
(in US$ millions)	US$		%			US$		%			%
Gross Profit		5.2		100	%		4.3		100	%		18.5	%
Connection		4.8		92.5	%		4.1		94.1	%		16.6	%
Gas		0.4		6.3	%		0.2		5.9	%		25.2	%

During the three months ended June 30, 2013, gross profit increased 18.5% to $5.2 million from the same period of 2012. Gross profit from connection fees was $4.8 million for the three months ended June 30, 2013, accounting for 92.5% of total gross profit. In comparison, gross profit from connection fees was $4.1 million for the three months ended June 30, 2012, accounting for 94.1% of total gross profit for the three months ended June 30, 2012. Gross profit from gas sales was $0.4 million for the three months ended June 30, 2013, accounting for 6.3% of total gross profit, compared to $0.2 million, accounting for 5.9% of total gross profit, in the same period of 2012.

During the six months ended June 30, 2013, gross profit increased 23.6% to $8.7 million from the same period of 2012. Gross profit from connection fees was $7.4 million for the three months ended June 30, 2013, accounting for 85.1% of total gross profit. In comparison, gross profit from connection fees was $6.1 million for the six months ended June 30, 2012, accounting for 86.2% of total gross profit for the six months ended June 30, 2012. Gross profit from gas sales was $1.2 million for the six months ended June 30, 2013, accounting for 14.2% of total gross profit, compared to $1.0 million accounting for 13.8% of total gross profit in the same period of 2012.

Gross margin during the three months ended June 30, 2013 was 34.7%, compared to 40.2% during the same period in 2012. This decrease is due to the increase of lower margin gas sales in the revenue mix, and the higher connection fees and gas sales costs.

Gross margin for connection fees for the three months ended June 30, 2013 was 65.6%, compared to 74.9% in the same period of 2012. The increase in the cost of connection fees contributed to the lower gross margin for connection fees.

Gross margin for sales of natural gas was 4.3% for the three months ended June 30, 2013, compared to 4.8% during the same period of 2012.  The increase of the cost of gas transportation and the increased natural gas purchasing price contributed to the lower gross margin for gas sales.

Gross margin during the six months ended June 30, 2013 was 30.7%, compared to 32.6% during the same period in 2012.

Gross margin for connection fees for the six months ended June 30, 2013 was 71.4%, compared to 73.1% in the same period of 2012. The increase in the cost of connection fees contributed to the lower gross margin for connection fees.

Gross margin for sales of natural gas was 6.9% for the six months ended June 30, 2013, compared to 7.3% during the same period of 2012.  The increase in the cost of gas transportation and the increased natural gas purchasing price contributed to the lower gross margin for gas sales.

Selling, General and Administrative Expenses

Selling, General and Administrative (“SG&A”) expenses in the three months ended June 30, 2013 were $2.4 million and approximately 16.2% of net revenues, compared with $1.9 million, or 17.3% of net revenues, in the same period of 2012.

45

Selling, General and Administrative (“SG&A”) expenses in the six months ended June 30, 2013 were $5.3 million and approximately 18.6 % of net revenues, compared with $3.6 million, or 16.7% of net revenues, in the same period of 2012.

Operating Income

Operating income for the three months ended June 30, 2013 increased 10.9% to $2.74 million from $2.47 million for the same period of 2012. This increase was due to the higher sales revenue during the three months ended June 30, 2013.

Operating income for the six months ended June 30, 2013 was flat compared with the same period of 2012, $3.42 million in 2013 versus $3.43 million in 2012. The higher sales revenue was offset by the lower gross margin and the higher operating costs.

Other Expense

Other expense was $0.9 million for the three months ended June 30, 2013, compared with $0.8 million for the same period of 2012. 

Other expense was $1.9 million for the six months ended June 30, 2013, compared with $1.6 million for the same period of 2012. 

Income tax

Income tax was $0.4 million for the three months ended June 30, 2013, compared to $0.1 million for the same period of 2012.

Income tax was $0.8 million for the six months ended June 30, 2013, compared to $0.3 million for the same period of 2012.

Net Income

Net income for the three months ended June 30, 2013 was $1.4 million, compared with net income of $1.6 million for the same period of 2012. The decrease in the net income was due to the increase in SG&A cost, interest expenses, the increase in other expenses and the increase in income tax.

Net income for the six months ended June 30, 2013 was $0.8 million, compared with net income of $1.5 million for the same period of 2012. The decreased net income was due to the increase in SG&A cost, interest expenses, the increase in other expenses and the increase in income tax.

Liquidity and Capital Resources

Cash and cash equivalents as of June 30, 2013 decreased $2.9 million to $10.9 million compared to $13.8 million as of December 31, 2012.

Cash sourced in operating activities for the six months ended June 30, 2013 decreased $5.93 to $0.67 million compared to $6.6 million during the same period of 2012.

Cash used in investing activities for the six months ended June 30, 2013 increased $2.8 million to $10.5 million compared to $7.7 million during the same period of 2012.

Cash sourced in financing activities for the six months ended June 30, 2013 increased 0.4 million to $5.2 million compared to $4.8 million during the same period of 2012. This increase was mainly due to the decrease in bank loans and the increase in statutory reserves.

Accounts Receivable

Accounts receivable as of June 30, 2013 decreased $1 million to $11.0 compared to $12.0 million as of December 31, 2012.

Notes Receivable

Notes receivable as of June 30, 2013 were 0.6 million.

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Inventory

Inventory of $2 million as of June 30, 2013 was comprised of spare parts and natural gas.

Fixed Assets

Fixed Assets as of June 30, 2013 increased $1.2 million to $62.4 million compared to $61.2 million as of December 31, 2012. The table below is a breakdown of our fixed assets at cost:

	June 30,		December 31,
	2013		2012
At Cost		62,393,113		61,161,929
Gas Pipelines	$	50,277,069	$	50,028,098
Motor Vehicles		6,869,425		6,628,442
Machinery & Equipment		2,151,262		2,180,403
Buildings		2,519,121		1,862,560
Leasehold Improvements		176,343		88,071
Office Equipment		399,893		374,355
Less Accumulated depreciation		8,731,471		7,894,733
	$	53,661,642	$	53,267,196

Bank Loans

Short-term bank loans as of June 30, 2013 increased $5 million to $26.8 million compared to $21.8 million as of December 31, 2012. For more information concerning our Bank loans, please see the applicable note to our financial statements.

Long-term bank loans as of June 30, 2013 decreased $1.2 million to $10.4 million compared to December 31, 2012.

Accounts Payable

Accounts payable as of June 30, 2013 decreased $2 million to $15.2 million compared to December 31, 2012.

Other Payables

Other payables – current as of June 30, 2013 was $9.53 million compared to $9.58 million as of December 31, 2012.

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 Principal Accounting 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 Principal Accounting 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 Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of June 30, 2013.

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It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2013, 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.

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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. Mining Safety Disclosure

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit Number:	Description
31.1*	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
101.INS†	XBRL Instance Document
101.SCH†	XBRL Taxonomy Extension Schema Document
101.CAL†	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†	XBRL Taxonomy Extension Label Linkbase Document
101.PRE†	XBRL Taxonomy Extension Presentation Linkbase Document

*Filed herewith.

†Furnished herewith.

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SIGNATURES

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

	SINO GAS INTERNATIONAL HOLDINGS, INC.
Date: August 15, 2013	By:	/s/ Yuchuan Liu
		Yuchuan Liu
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

	SINO GAS INTERNATIONAL HOLDINGS, INC.
Date: August 15, 2013	By:	/s/ Baoling Wang
		Baoling Wang
		(Principal Accounting Officer)

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