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Waldo Mushman
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At first glance many situations appear obvious. Rigorous examination may reveal that the obvious is in fact impossible. My focus is on companies that unethically sell the impossible and thrive only with financial slight of hand. I am a retired businessman living near Austin Texas and I both... More
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  • CSKI and the Missing Link
    Shaky Structure
    A very common corporate structure used by Chinese reverse mergers is a three tiered stack of holding companies. The US traded entity (Gramps) owns nothing but shares of stock in a second holding company (Dad). Dad is often located in a tax friendly locale such as BVI and also owns nothing but stock in the third tier (The Kid) which owns the Chinese operations. The Kid has title to everything and has effective control over all operations. US shareholders must look to Gramps who must look to Dad before they get up close and personal with the valuable assets they presumably own. This structure is fraught with risk for the simple reason that Gramps has no enforceable legal claim on what The Kid owns. Dad has a claim but even that is tenuous based on the limitations of China-US financial treaties.

    CSKI’s Missing Link
    To exhibit the frailty of this construct let me turn to one of China’s more noted RTO’s, China Sky One Medical (CSKI). In CSKI’s situation; Gramps is Nasdaq traded and domiciled in Nevada, Dad is the non-public holding company American California Pharmaceutical Group (ACPG) domiciled in California and The Kid is Harbin TDR waving hello from the distant windows of Harbin City, China.  As is fairly evident, this chain of ownership depends on Dad (ACPG) taking care of the family business. Ponder for a moment the implications to the US shareholders if that link was missing. Presume Dad died. What does Gramps have to say when The Kid won’t return his phone calls. The Kid never liked Gramps anyway and now that Dad has died The Kid has no obligation to Gramps and decides to keep everything. Gramps can bark at the moon as far as the law (and The Kid) are concerned. Sounds farfetched? CSKI will gladly show you otherwise.

    Good Standing
    California corporations are required to pay franchise taxes and report annually to the state. They are also required to have a registered agent to accept legal documents. To claim “Good Standing” in the state you must comply with these simple rules. Failure to comply, results in suspension or revocation of your charter. You no longer have good standing. This is the corporate equivalent of death. In CSKI’s story Dad has died. ACPG no longer has good standing in California. They had their charter suspended in 2008, briefly revived it in October 2009 but it was immediately resuspended for unpaid taxes. 100% of CSKI’s China assets are owned by a defunct California Corporation.
    A lack of good standing translates into being unable to legally transact any business. You cannot defend yourself in court,  sue anyone, make binding contracts, validly receive or transfer ownership of assets, or conduct recordable business of any kind. Tax collectors in California could attach everything ACPG owns and offer it at public auction to satisfy the unpaid tax bill. The only thing ACPG owns is stock. Just to complicate the matter even more, ACPG no longer employs a registered agent. If the State of California, or anyone else in the world…hmmm, chose to sue ACPG the complaint goes unanswered and a summary judgment would naturally follow.

    Hello? Anybody home?
    Investors might be forgiven if they feel that Dad’s passing was worth noting. Was the omission purposeful? Considering Dad expired in 2008 and three 10-Ks have whistled past his grave, I suspect well planned neglect. It strikes me as beyond negligent for a "healthy" company to let it’s business license lapse and dismiss the registered agent. Maybe The Kid is expecting Gramps to kick off too. Silly to renew National Geo for the geezer when he has less than a month to live. CSKI should serve as a stark warning to investors in these FrankenCorps how unexpectedly a holding company can lose its grip.

    CSKI Implications
    Franchise taxes are normally a trivial item in the life of a corporation. The obvious question is why are these taxes unpaid.  It is not an oversight as evidenced by the October 2009 attempt to revive the charter and the very quick return to suspended status. In January of 2010 the Chinese government required certified evidence from all .cn domain owners that the entity existed. ACPG was the owner of the Harbin TDR domain. Unable to provide a valid corporate charter to the government, that web site was shut down with several hundred thousand other .cn domains.

    My belief is that the IOU to California stems from the PIPE financing completed in April 2008. Funding to China was routed through ACPG. Best guess is that the tax bill for that transaction was ~$60,000. I suspect that CSKI intended to shutter ACPG and never pay the tax but were unable to do so. With penalties and interest the current tax bill is likely in excess of $100,000. CSKI tries to convince investors that they are capable of spending $37,000,000 on forest leases but they can’t convince themselves to pay a seemingly small tax bill.
    As a final thought, consider that ownership records maintained by the Chinese government identify ACPG as the sole owner of Harbin TDR and all its subsidiaries. CSKI is not mentioned anywhere in the official records of China. China has never heard of CSKI and has nothing to indicate that CSKI has legal claim to anything. CSKI cannot prove they own any assets in China.
    Buyer be very wary. I am cheerfully short CSKI and predict the ongoing SEC investigation will shut them down.

    John
     
    Business Entity Detail
     
    Data is updated weekly and is current as of Friday, March 11, 2011. It is not a complete or certified record of the entity.
    Entity Name:
    AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
    Entity Number:
    C2620534
    Date Filed:
    12/16/2003
    Status:
    SUSPENDED
    Jurisdiction:
    CALIFORNIA
    Entity Address:
    RM 1706 DI WANG BLDG, 30 GAN SHUI RD NAN GANG DISTR
    Entity City, State, Zip:
    HARBIN CHINA 150001
    Agent for Service of Process:
    UNITED CORPORATE SERVICES, INC.
    Agent Address:
    608 UNIVERSITY AVE
    Agent City, State, Zip:
    SACRAMENTO CA 95825
     
     
    15 F3d 1086 Lloyd Myers Co Inc v. Department of Agriculture
    Under California law, a corporation, which has been suspended for failure to pay franchise taxes, is prohibited from conveying property or enforcing a contract. Usher v. Henkel, 205 Cal. 413, 417 (1928); Damato v. Slevin, 214 Cal.App.3d 668, 674 (1989); see also Mather Constr. Co. v. United States, 475 F.2d 1152, 1155 (Cl.Ct.1973) ("Under the law of California, a corporation which has been suspended for failure to pay franchise taxes is prohibited from suing, from defending a suit, or from appealing from an adverse decision."). We have stated that upon suspension of a corporate franchise, the business entity "[can] not function as a corporation and [is] incapable of exercising corporate powers for any business purpose." McLaughlin Land & Livestock Co. v. Bank of America, 94 F.2d 491, 493 (9th Cir.1938).
    869 F2d 1235 Community Electric Service of Los Angeles Inc v. National Electrical Contractors Association Inc
    Section 23301 of the California Revenue and Tax Code provides that the Franchise Tax Board may suspend the rights, powers and privileges of a corporation for nonpayment of taxes. A delinquent California corporation may neither bring suit nor defend a legal action. E.g., Reed v. Norman, 48 Cal.2d 338, 309 P.2d 809, 812 (1957). We have repeatedly acknowledged this as the law of California. See United States v. 2.61 Acres of Land, More or Less, 791 F.2d 666, 668 (9th Cir.1985) (reversing refusal to grant continuance in order to enable corporation to revive itself)
    Verification of Non Payment of Franchise Taxes

    ..............................................
    This is to notify you that process service attempt information has been updated for your One Legal Order:

    Order #: 6737346
    Case #: 10-cv-1091
    Party to Serve: American California Pharmaceutical Group, Inc. C/O United Corporate Services

    Updated Service Attempt Information:
    Attempt Time
    Address
    Status
    Description
    1/20/2011 3:54 PM
    608 University Avenue, Sacramento,CA 95825
    Not found
    Per Lauren Morales, they're no longer agent for service for company. They were suspended.


    To view complete details about this order, please click the link below or copy and paste the address into your browser:

    www.onelegal.com

    If you have any questions or need assistance, please send an email to support@onelegal.com, and feel free to contact our Customer Support department Monday through Friday from 8:15 a.m. until 5:30 p.m. at 800-938-8815

    Thank you for choosing One Legal.

    One Legal 116A-SOP Northern Branch Fax 510-873-0984

     
     


    Disclosure: I am short CSKI, CCME, ONP, CHBT.
    Tags: CSKI.PK, CCME.OB, ONP, CHBT.PK, China, Reverse merger
    Mar 19 2:07 PM | Link | 5 Comments
  • Show me the VAT
     
    The Chinese tax system is in large part driven by VAT. Value Added Tax. When you purchase something you pay the price of the product plus 17% VAT. The VAT you pay to a supplier is deductible from the VAT you collect from your customers. VAT is administered by the SAT (State Administration of Taxation). Approximately 80% of all Chinese corporate taxes are generated from VAT. The reported sales amounts inclusive of VAT are confidential and unavailable to the public. But these SAT records are readily available to the tax payer. Requesting and receiving  summaries of net VAT payments is a simple request that should be honored  by the SAT within days.
    ONP has a fury of attention surrounding it and virtually all critics would be satisfied with a irrefutable confirmation of revenue for the years 2008 and 2009. VAT summaries offer the company an easy way to accomplish that objective. When ONP sells $100,000 of product they are required by law to add an additional $17,000 VAT and collect the entire $117,000. ONP is then required to transfer the $17,000 to the government within three days of receipt of payment. Each transaction is electronically reported to the SAT and every transaction has a unique identifying number.
    In 2009 ONP claims revenue of $102mm which would equate to VAT paid to the SAT of ~$17.3mm. They also report cost of goods (which we will assume all qualified for VAT reimbursement) totaling $82mm. The VAT they would have been obligated to pay their suppliers would therefore equal ~$14mm. That amount would be used as a credit against the amounts they collected from the customers. The final result would be that if ONP can document  net payments  to the SAT of ~$3.4mm for 2009 they will have presented an extremely compelling proof to refute the claims of the short selling community. ONP has gone to great lengths attempting to disprove the many charges leveled against them. They have taken the unusual measure of employing Deloitte Financial Advisory Services to “assist” the firm’s counsel Loeb & Loeb. The specific terms of the letter of engagement offered Deloitte and the items subject to  review are undisclosed. It is also undisclosed if Deloitte has begun investigating any of the issues covered in the engagement letter.
    Presentation of the VAT summaries would resolve  the argument conclusively. The SAT would readily accommodate a request to provide relevant documentation to ONP. Any observer would be able to make the simple conversion from taxes to sales. Deloitte could vouch for the legitimacy of the tax records and provide their own "Revenue – Expenses  = Tax Paid" calculations.   The issue could be settled within days and copies of the official tax reports could be presented on the web. I am a short seller of this stock and I would cover my position if SAT records supported ONP revenue claims. The lengthy list of accusations become meaningless if the top line and bottom line are proveably  accurate. The VAT filing can definitively settle the issue .
     SHOW ME THE VAT


    Disclosure: Short ONP
    Tags: ONP, China
    Aug 11 10:20 PM | Link | Comment!
  • CSKI Patents are Valueless
    CSKI Patents are Valueless
    China Sky One Medical may not have many character traits that I admire but they certainly are bold. Imagine the audacity required to inflate the value of patents 30 fold in the space of three years. The same seven patents CSKI valued at less than $500,000 in 2006 now sport a classy $15mm valuation. The really bold part of the equation is that these patents are complete fabrications. The patents don’t exist.
    CSKI also proudly trumpets the groundbreaking work they are doing in cancer research. Endothelin-1 is mentioned dozens of times in the 10-K and represented as a patent or patent application that CSKI owns. They don’t. Unlike the other seven patents though, this one actually exists. The problem is that it is owned by some else, not CSKI. Pretty bold to claim ownership of seven non-existent patents and another that isn’t yours.
    I am short this stock and trying to increase my position.
    Tags: CSKI.PK, china, short, fraud
    Nov 19 1:07 PM | Link | Comment!
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