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CSKI and the Missing Link

|Includes: CCME, CHBT, China Sky One Medical, Inc. (CSKI), ITP
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 (OTCPK: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.

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:
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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
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.

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Disclosure: I am short OTCPK:CSKI, OTCPK:CCME, ONP, OTC:CHBT.