An extremely well documented research report on RINO International Corporation (NASDAQ: RINO) from Muddy Waters Research LLC was published yesterday. The report outlines how their detailed research and investigation of RINO revealed fabricated customer relationships, exaggerated sales, phony financial statements among other misleading claims made to the investing public, including a $3.2 million Orange County mansion RINO secretly bought for its CEO out of the proceeds of its $100 million financing last December. A copy of the full 29-page research report can be downloaded from Muddy Waters LLC’s website here.
My article today reveals a key piece of documented evidence Muddy Waters missed, proving RINO is a fraud. Original copies of Value Added Taxes (VAT) filings RINO submitted to China’s official revenue collection agency, the State Administration of Taxation (SAT), show RINO reported revenue of only $8.9 million and paid almost no VAT in 2009, compared to $193 million revenue and $14.3 million VAT payment RINO reported in its SEC filings.
The Key Evidence
Each month, companies in China are required to file and pay their VAT by submitting a standardized Tax Declaration Form to the local state tax bureaus. Accordingly, RINO files and pays its VAT to the Jinzhou District State Tax Bureau of Dalian City, the local branch of SAT in Dalian. I hired a Dalian attorney who spent months pressuring Dalian tax officials to release copies of RINO’s VAT Declaration Forms. I have now finally obtained RINO’s electronically filed monthly VAT tax declaration forms as well as a summary of its VAT payment record for 2009. Additionally, I also obtained RINO’s tax record filed with Dalian Jinzhou District Local Tax Bureau. Both records are stamped with the official seal of each tax bureau and I have each record translated; they can be downloaded here
Official VAT filing and payment records contradict SEC filings
In its SEC filings, RINO discloses five PRC entities registered in China. According to Dalian City tax officials, only Dalian RINO Environment Engineering Science and Technology (RINO’s VIE) reports any sales on its tax returns. The other four companies have no record of sales or any type of tax payment at the tax bureaus. RINO disclosed its VAT payment details in its 10-K and 10-Q footnotes as follows:
Based on the VAT information disclosed in its 2009 10-K, RINO paid over $14 million VAT in cash in 2009 (see table above). However, as shown in the payment record from the state tax bureau, RINO in fact did not make any VAT payments in 2009, only making a single payment of RMB 1.2 million (about $175,000) in January, 2010. Tax bureau staff explained to me that while RINO filed zero VAT payable throughout the year, the tax officials disputed RINO’s tax returns and forced RINO to pay RMB 1.2 million in January.
Additionally, for the first six months of 2010, the tax bureau staff disclosed to me that RINO reported sales of only RMB 16,906,636 or $2.5 million and a net loss of RMB (6,213,139) or ($914,000) compared to sales of $113.2 million and net income of $39 million RINO reported to its U.S. investors in its most recent 10-Q.
Questions I would like answered:
- RINO claimed it paid $14.3 million in VAT while in fact it only paid $175,000. Over $14 million of shareholder money is unaccounted for. Where did this money go?
- Why did RINO’s auditor fail to catch this? Did RINO show its auditor alternate VAT tax payment records to hide where the $14 million really went?
- If RINO is evading VAT, as many small Chinese companies do, then how can investors rely on RINO’s financials filed with the SEC when the cash RINO claimed it paid for VAT was actually diverted somewhere other than the SAT?
- The very low sales RINO reported to the SAT strongly support the facts obtained by Muddy Waters showing that many of RINO’s FGD customer contracts are questionable.
- Why didn’t RINO’s auditor (Frazer Frost) go to the tax bureau (as I did) to verify the tax payment records RINO management produced?
Disclosure: Short RINO