UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(MARK
ONE)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED June 30,
  2009.






o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD FROM ________ TO
  __________





COMMISSION
FILE NUMBER: 0-52549





RINO
International Corporation





(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)





NEVADA
                
                26-4551943(STATE
      OR OTHER JURISDICTION OF
                
                (I.R.S.
      EMPLOYER IDENTIFICATION NO.)INCORPORATION
      OR ORGANIZATION




11
Youquan Road, Zhanqian Street, Jinzhou District


Dalian,
People’s Republic of China 116100





(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES) (ZIP
CODE)





REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:+86-411-87661222





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 Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files).Yes  ̈ No  ̈





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





Large accelerated filer  ̈
            
            Accelerated
      filer oNon-accelerated
      filer  ̈
            
            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 o  No x




The
number of shares of Common Stock of the Registrant, par value $.0001 per share,
outstanding on August 6, 2009, was 25,106,081.










RINO
INTERNATIONAL CORPORATION





INDEX
TO JUNE 30, 2009 FORM 10-Q




Part
      I - Financial InformationItem
      1 - Financial Statements
                          
                          
                          3Consolidated
      Balance Sheets as of June 30, 2009 (unaudited) and December 31,
      2008
                          
                          
                          3Consolidated
      Statements of Income and Other Comprehensive Income for the three-month
      and six-month periods ended June 30, 2009 and 2008
    (unaudited)
                          
                          
                          4Consolidated
      Statements of Shareholders’ Equity (unaudited)
                          
                          
                          5Consolidated
      Statements of Cash Flows for the six-month periods ended June 30, 2009 and
      2008 (unaudited)
                          
                          
                          6Notes
      to the Consolidated Financial Statements (unaudited)
                          
                          
                          7Item
      2 - Management's Discussion and Analysis of Results of Operations and
      Financial Condition
                          
                          
                          36Item
      3 - Quantitative and Qualitative Disclosure about Market
    Risk
                          
                          
                          49Item
      4T - Controls and Procedures
                          
                          
                          49Part
      II - Other InformationItem
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
                          
                          
                          51Item
      6–Exhibits
                          
                          
                          53Signature
      Page
                          
                          
                          54




2




PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements


RINO INTERNATIONAL CORPORATION AND
SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 CONSOLIDATED
BALANCE SHEETS
 
 June 30,
                                                                                                  
                                                                                                  
                                                                                                  December 31,2009
                                                                                                  
                                                                                                  
                                                                                                  2008(Unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                                                                  
                                                                                                  $
                                                                                                  51,744,184
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  19,741,982Restricted
      cash
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,030,317Notes
      receivable
                                                                                                  
                                                                                                  
                                                                                                  1,348,884
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,157,957Accounts
      receivable, trade, net of allowance for doubtful accountsof
      $205,588 and $0 as of June 30, 2009 andDecember
      31, 2008, respectively
                                                                                                  
                                                                                                  
                                                                                                  73,019,821
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  51,503,245Inventories
                                                                                                  
                                                                                                  
                                                                                                  1,120,651
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,203,448Advances
      for inventory purchase
                                                                                                  
                                                                                                  
                                                                                                  15,645,759
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  21,981,669Other
      current assets and prepaid expenses
                                                                                                  
                                                                                                  
                                                                                                  648,240
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  517,847Total
      current assets
                                                                                                  
                                                                                                  
                                                                                                  143,527,539
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  98,136,465PROPERTY,
      PLANT AND EQUIPMENT, NET
                                                                                                  
                                                                                                  
                                                                                                  12,729,140
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  13,197,119OTHER
      ASSETSPrepaid
      expenses (non-current)
                                                                                                  
                                                                                                  
                                                                                                  66,323
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  73,350Advances
      for equipment and construction material purchase
                                                                                                  
                                                                                                  
                                                                                                  5,543,399
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,550,966Prepayment
      for land use right
                                                                                                  
                                                                                                  
                                                                                                  457,667
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  458,292Intangible
      assets, net
                                                                                                  
                                                                                                  
                                                                                                  1,176,595
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,211,608Total
      other assets
                                                                                                  
                                                                                                  
                                                                                                  7,243,984
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  7,294,216Total
      assets
                                                                                                  
                                                                                                  $
                                                                                                  163,500,663
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  118,627,800LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                                                                                  
                                                                                                  $
                                                                                                  4,985,670
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  5,816,714Short-term
      loan
                                                                                                  
                                                                                                  
                                                                                                  30,765,000
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  8,802,000Customer
      deposits
                                                                                                  
                                                                                                  
                                                                                                  56,256
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  3,609,407Liquidated
      damages payable
                                                                                                  
                                                                                                  
                                                                                                  20,147
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,598,289Other
      payables and accrued liabilities
                                                                                                  
                                                                                                  
                                                                                                  415,544
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  746,267Notes
      payable
                                                                                                  
                                                                                                  
                                                                                                  88,340
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Due
      to a stockholder
                                                                                                  
                                                                                                  
                                                                                                  439,007
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  596,023Tax
      Payable
                                                                                                  
                                                                                                  
                                                                                                  11,091,981
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  5,062,901Total
      current liabilities
                                                                                                  
                                                                                                  
                                                                                                  47,861,945
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  27,231,601Warrant
      Liabilities
                                                                                                  
                                                                                                  
                                                                                                  3,288,906
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -REDEEMABLE
      COMMON STOCK ($0.0001 par value, 5,464,357 sharesissued
      with conditions for redemption outside the control of the
      company)
                                                                                                  
                                                                                                  
                                                                                                  24,480,319
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  24,480,319COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITYPreferred
      Stock ($0.0001 par value, 50,000,000 shares authorized,none
      issued and outstanding)
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Common
      Stock ($0.0001 par value, 100,000,000 shares authorized,25,090,438,
      shares and 25,040,000 shares issued and outstandingas
      of June 30, 2009 and December 31, 2008, respectively
                                                                                                  
                                                                                                  
                                                                                                  2,509
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,504Additional
      paid-in capital
                                                                                                  
                                                                                                  
                                                                                                  25,105,124
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  25,924,007Retained
      earnings
                                                                                                  
                                                                                                  
                                                                                                  48,003,651
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  28,570,948Statutory
      reserves
                                                                                                  
                                                                                                  
                                                                                                  8,673,905
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6,196,478Accumulated
      other comprehensive income
                                                                                                  
                                                                                                  
                                                                                                  6,084,304
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6,221,943Total
      shareholders' equity
                                                                                                  
                                                                                                  
                                                                                                  87,869,493
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  66,915,880Total
      liabilities and shareholders' equity
                                                                                                  
                                                                                                  $
                                                                                                  163,500,663
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  118,627,800
  The
accompanying notes are an integral part of these statements
  3
  RINO INTERNATIONAL CORPORATION AND
SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (Unaudited)
 
 Three
      Months Ended
                          
                          
                          Six
      Months EndedJune
      30,
                          
                          
                          June
      30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008REVENUES:Contracts
                          
                          $
                          40,469,182
                          
                          
                          $
                          32,187,128
                          
                          
                          $
                          75,835,318
                          
                          
                          $
                          48,484,873Services
                          
                          
                          253,068
                          
                          
                          
                          2,429,986
                          
                          
                          
                          495,051
                          
                          
                          
                          5,177,66640,722,250
                          
                          
                          
                          34,617,114
                          
                          
                          
                          76,330,369
                          
                          
                          
                          53,662,539COST
      OF REVENUEContracts
                          
                          
                          26,123,509
                          
                          
                          
                          17,583,203
                          
                          
                          
                          45,249,005
                          
                          
                          
                          27,845,892Services
                          
                          
                          268,912
                          
                          
                          
                          1,589,775
                          
                          
                          
                          592,830
                          
                          
                          
                          2,492,169Depreciation
                          
                          
                          162,260
                          
                          
                          
                          162,481
                          
                          
                          
                          370,327
                          
                          
                          
                          320,25626,554,681
                          
                          
                          
                          19,335,459
                          
                          
                          
                          46,212,162
                          
                          
                          
                          30,658,317GROSS
      PROFIT
                          
                          
                          14,167,569
                          
                          
                          
                          15,281,655
                          
                          
                          
                          30,118,207
                          
                          
                          
                          23,004,222OPERATING
      EXPENSESSelling,
      general and administrative expenses
                          
                          
                          4,116,479
                          
                          
                          
                          3,638,586
                          
                          
                          
                          7,487,203
                          
                          
                          
                          6,332,596Research
      and development
                          
                          
                          29,815
                          
                          
                          
                          294,473
                          
                          
                          
                          29,815
                          
                          
                          
                          304,956Stock
      compensation expense
                          
                          
                          9,263
                          
                          
                          
                          5,832,960
                          
                          
                          
                          9,263
                          
                          
                          
                          5,832,960TOTAL
      OPERATING EXPENSES
                          
                          
                          4,155,557
                          
                          
                          
                          9,766,019
                          
                          
                          
                          7,526,281
                          
                          
                          
                          12,470,512INCOME
      FROM OPERATIONS
                          
                          
                          10,012,012
                          
                          
                          
                          5,515,636
                          
                          
                          
                          22,591,926
                          
                          
                          
                          10,533,710OTHER
      INCOME (EXPENSE), NETOther
      (expense) income, net
                          
                          
                          3,871
                          
                          
                          
                          (16,207
                          )
                          
                          
                          (5,779
                          )
                          
                          
                          42,843Change
      in fair value of warrants
                          
                          
                          (1,833,745
                          )
                          
                          
                          -
                          
                          
                          
                          (1,810,134
                          )
                          
                          
                          -Interest
      income (expense), net
                          
                          
                          (72,974
                          )
                          
                          
                          (112,062
                          )
                          
                          
                          (191,933
                          )
                          
                          
                          (168,840
                          )Gain
      on liquidated damage settlement
                          
                          
                          1,746,120
                          
                          
                          
                          -
                          
                          
                          
                          1,746,120
                          
                          
                          
                          -TOTAL
      OTHER EXPENSES, NET
                          
                          
                          (156,728
                          )
                          
                          
                          (128,269
                          )
                          
                          
                          (261,726
                          )
                          
                          
                          (125,997
                          )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                          
                          
                          9,855,284
                          
                          
                          
                          5,387,367
                          
                          
                          
                          22,330,200
                          
                          
                          
                          10,407,713PROVISION
      FOR INCOME TAXES
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -NET
      INCOME
                          
                          
                          9,855,284
                          
                          
                          
                          5,387,367
                          
                          
                          
                          22,330,200
                          
                          
                          
                          10,407,713OTHER
      COMPREHENSIVE INCOME(LOSS):Foreign
      currency translation adjustment
                          
                          
                          (10,019
                          )
                          
                          
                          1,452,688
                          
                          
                          
                          (137,639
                          )
                          
                          
                          3,715,593COMPREHENSIVE
      INCOME
                          
                          $
                          9,845,265
                          
                          
                          $
                          6,840,055
                          
                          
                          $
                          22,192,561
                          
                          
                          $
                          14,123,306WEIGHTED
      AVERAGE NUMBER OF SHARES:Basic
                          
                          
                          25,070,356
                          
                          
                          
                          25,000,000
                          
                          
                          
                          25,055,668
                          
                          
                          
                          25,000,000Diluted
                          
                          
                          25,076,940
                          
                          
                          
                          25,183,285
                          
                          
                          
                          25,055,668
                          
                          
                          
                          25,175,890EARNINGS
      PER SHARE:Basic
                          
                          $
                          0.39
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.89
                          
                          
                          $
                          0.42Diluted
                          
                          $
                          0.39
                          
                          
                          $
                          0.21
                          
                          
                          $
                          0.89
                          
                          
                          $
                          0.41
  The
accompanying notes are an integral part of these statements
  4
  RINO INTERNATIONAL CORPORATION AND
SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 Common
      StockPar
      Value $0.0001
                              
                              
                              Additional
                              
                              
                              Retained
      Earnings
                              
                              
                              Accumulated
      otherNumber
                              
                              
                              Common
                              
                              
                              Paid-in
                              
                              
                              Unrestricted
                              
                              
                              Statutory
                              
                              
                              comprehensiveof
      shares
                              
                              
                              stock
                              
                              
                              capital
                              
                              
                              earnings
                              
                              
                              reserve
                              
                              
                              income
                              
                              
                              TotalsBALANCE,
      January 1, 2008
                              
                              
                              25,000,000
                              
                              
                              $
                              2,500
                              
                              
                              $
                              8,221,663
                              
                              
                              $
                              11,376,163
                              
                              
                              $
                              2,109,539
                              
                              
                              $
                              1,987,272
                              
                              
                              $
                              23,697,137Stock
      compensation expense-options issued
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              38,204
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              38,204Stock
      compensation expense-shares placed in escrow
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              5,832,960
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              5,832,960Imputed
      interest on advances from a shareholder
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              10,456
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              10,456Net
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              10,407,713
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              10,407,713Allocation
      to statutory reserve
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (2,252,601
                              )
                              
                              
                              2,252,601
                              
                              
                              
                              
                              
                              
                              
                              -Foreign
      currency translation gain
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,715,593
                              
                              
                              
                              3,715,593BALANCE,
      June 30, 2008, unaudited
                              
                              
                              25,000,000
                              
                              
                              $
                              2,500
                              
                              
                              $
                              14,103,283
                              
                              
                              $
                              19,531,275
                              
                              
                              $
                              4,362,140
                              
                              
                              $
                              5,702,865
                              
                              
                              $
                              43,702,063Stock
      compensation expense-shares placed in escrow
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              11,627,716
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              11,627,716Imputed
      interest on advances from a shareholder
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              13,812
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              13,812Shares
      issued for services
                              
                              
                              40,000
                              
                              
                              
                              4
                              
                              
                              
                              179,196
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              179,200Net
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              10,874,011
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              10,874,011Allocation
      to statutory reserve
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,834,338
                              )
                              
                              
                              1,834,338
                              
                              
                              
                              
                              
                              
                              
                              -Foreign
      currency translation gain
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              519,078
                              
                              
                              
                              519,078BALANCE,
      December 31, 2008
                              
                              
                              25,040,000
                              
                              
                              $
                              2,504
                              
                              
                              $
                              25,924,007
                              
                              
                              $
                              28,570,948
                              
                              
                              $
                              6,196,478
                              
                              
                              $
                              6,221,943
                              
                              
                              $
                              66,915,880Cumulative
      effect of reclassification of warrants
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,058,702
                              )
                              
                              
                              (420,070
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,478,772
                              )Shares
      issued to settle liquidated damage payable
                              
                              
                              48,438
                              
                              
                              
                              5
                              
                              
                              
                              216,999
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              217,004Stock
      compensation expense -shares & options issued
                              
                              
                              2,000
                              
                              
                              
                              -
                              
                              
                              
                              9,263
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              9,263Imputed
      interest on advances from a shareholder
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              13,557
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              13,557Net
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              22,330,200
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              22,330,200Allocation
      to statutory reserve
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (2,477,427
                              )
                              
                              
                              2,477,427
                              
                              
                              
                              
                              
                              
                              
                              -Foreign
      currency translation gain
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (137,639
                              )
                              
                              
                              (137,639
                              )BALANCE,
      June 30, 2009, unaudited
                              
                              
                              25,090,438
                              
                              
                              $
                              2,509
                              
                              
                              $
                              25,105,124
                              
                              
                              $
                              48,003,651
                              
                              
                              $
                              8,673,905
                              
                              
                              $
                              6,084,304
                              
                              
                              $
                              87,869,493
  The
accompanying notes are an integral part of these statements
  5
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (Unaudited)
 
 Six
      Months Ended June 30,2009
                            
                            
                            2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                            
                            $
                            22,330,200
                            
                            
                            $
                            10,407,713Adjusted
      to reconcile net income to cash provided by(used
      in)operating activities:Depreciation
                            
                            
                            478,251
                            
                            
                            
                            389,553Amortization
                            
                            
                            33,377
                            
                            
                            
                            32,300Allowance
      for bad debt
                            
                            
                            205,687
                            
                            
                            
                            -Imputed
      interest
                            
                            
                            13,556
                            
                            
                            
                            10,456Amortization
      of  long term prepaid expense
                            
                            
                            7,329
                            
                            
                            
                            21,276Stock
      compensation expense
                            
                            
                            9,263
                            
                            
                            
                            5,871,164(Gain)
      expense on liquidated damage penalty settlement
                            
                            
                            (1,746,120
                            )
                            
                            
                            500,000Change
      in fair value of warrants
                            
                            
                            1,810,134
                            
                            
                            
                            -Changes
      in operating assets and liabilitiesNotes
      receivable
                            
                            
                            806,516
                            
                            
                            
                            (1,456,847
                            )Accounts
      receivable
                            
                            
                            (21,802,792
                            )
                            
                            
                            (14,715,707
                            )Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                            
                            
                            -
                            
                            
                            
                            2,923,610Inventories
                            
                            
                            81,194
                            
                            
                            
                            (1,291,373
                            )Advances
      for inventory purchase
                            
                            
                            6,308,955
                            
                            
                            
                            (6,282,450
                            )Other
      current assets and prepaid expenses
                            
                            
                            (131,544
                            )
                            
                            
                            153,165Accounts
      payable
                            
                            
                            (823,508
                            )
                            
                            
                            (559,222
                            )Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                            
                            
                            -
                            
                            
                            
                            122,498Customer
      deposits
                            
                            
                            (3,549,925
                            )
                            
                            
                            885,859Other
      payables and accrued liabilities
                            
                            
                            (329,915
                            )
                            
                            
                            (510
                            )Sales
      commission payable
                            
                            
                            -
                            
                            
                            
                            781,273Tax
      payable
                            
                            
                            6,038,867
                            
                            
                            
                            (5,462,952
                            )Net
      cash provided by (used in) operating activities
                            
                            
                            9,739,525
                            
                            
                            
                            (7,670,194
                            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                            
                            
                            (28,051
                            )
                            
                            
                            (610,720
                            )Advances
      for construction materials and equipment purchases
                            
                            
                            -
                            
                            
                            
                            (3,107,868
                            )Net
      cash used in investing activities
                            
                            
                            (28,051
                            )
                            
                            
                            (3,718,588
                            )CASH
      FLOWS FROM FINANCING ACTIVITIESPayment
      on due to shareholder
                            
                            
                            (824,808
                            )
                            
                            
                            -Proceeds
      from shareholder advances
                            
                            
                            668,449
                            
                            
                            
                            670,386Decrease
      (increase)  of restricted cash
                            
                            
                            1,030,317
                            
                            
                            
                            (3,964,579
                            )Proceeds
      from notes payable
                            
                            
                            88,382
                            
                            
                            
                            2,375,971Proceeds
      from short-term loan
                            
                            
                            21,985,500
                            
                            
                            
                            7,092,000Payment
      on liquidated damage penalty
                            
                            
                            (615,018
                            )
                            
                            
                            -Net
      cash provided by financing activities
                            
                            
                            22,332,822
                            
                            
                            
                            6,173,778EFFECT
      OF EXCHANGE RATE ON CASH
                            
                            
                            (42,094
                            )
                            
                            
                            345,621INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                            
                            
                            32,002,202
                            
                            
                            
                            (4,869,383
                            )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                            
                            
                            19,741,982
                            
                            
                            
                            7,390,631CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                            
                            $
                            51,744,184
                            
                            
                            $
                            2,521,248SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the period for:Interest
                            
                            $
                            369,146
                            
                            
                            $
                            213,381Income
      taxes
                            
                            $
                            229,848
                            
                            
                            $
                            5,158,928SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONShares
      issuance for liquidated damage penalty settlement
                            
                            $
                            217,004
                            
                            
                            $
                            -
 
 The
accompanying notes are an integral part of these statements
  6
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
 
 NOTE
1 – ORGANIZATION AND BUSINESS
  RINO
International Corporation (formerly known as “Jade Mountain Corporation” or
“JMC”), (the “Company”) was originally incorporated in 1984 as Applied
Biometrics, Inc. in accordance with the laws of the State of Minnesota. The
Company, through its 100% owned subsidiaries and variable interest entities,
engages in design, development, manufacture and installation of industrial
equipment used mainly for environmental protection purposes in the People’s
Republic of China (PRC).
  Innomind
Group Limited (“Innomind”) was incorporated in the British Virgin Islands
(“BVI”) on November 17, 2006 as an investment holding company. Through its
wholly owned subsidiary, Dalian Innomind Environment Engineering Co., Ltd.
(“Dalian Innomind”) incorporated in the PRC as a wholly owned foreign limited
liability company on July 9, 2007. Dalian Innomind through its variable interest
entity (VIE), Dalian Rino Environment Engineering Science And Technology Co.,
Ltd. (“Dalian Rino”) mainly engages in design, development, manufacture and
installation of industrial equipment used mainly for environmental protection
purposes in the PRC.
 
 Dalian
Rino was incorporated in the PRC on March 5, 2003 as a limited liability
company. On September 24, 2008, Dalian Rino formed Dalian Rino Environmental
Engineering Project Design Co., Ltd. (“Dalian Rino Design”) as a wholly owned
limited liability company.  On October 14, 2008, Dalian Rino formed
Dalian Rino Environmental Construction & Installation Project Co., Ltd.
(“Dalian Rino Installation”) as a wholly owned limited liability
company.  The business activities of Dalian Rino Design and Dalian
Rino Installation focus primarily on research and development, technical design
and installation aspects of the business.
  NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
accompanying consolidated financial statements of RINO International Corporation
reflect the activities of the following subsidiaries and variable interest
entities (“VIE”):
 
 Place
                            incorporated
                          
                          Ownership
                            percentageInnomind
      Group Limited
                          
                          BVI
                          
                          100%Dalian
      Innomind Environment Engineering Co., Ltd.
                          
                          Dalian,
      China
                          
                          100%Dalian
      Rino Environment Engineering Science and Technology Co.,
    Ltd.
                          
                          Dalian,
      China
                          
                          VIEDalian
      Rino Environmental Engineering Project Design Co., Ltd.
                          
                          Dalian,
      China
                          
                          VIEDalian
      Rino Environmental Construction & Installation Project Co.,
      Ltd.
                          
                          Dalian,
      China
                          
                          VIE
  7
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Financial
Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46 (revised
December 2003), “Consolidation of Variable Interest Entities, and Interpretation
of ARB No. 51” (“FIN 46R”), addresses whether certain types of entities referred
to as variable interest entities (“VIEs”), should be consolidated in a company’s
consolidated financial statements.  In accordance with the provisions
of FIN 46R, the Company has determined that Dalian Rino, Dalian Rino Design and
Dalian Rino Construction are VIE and that the Company is the primary
beneficiary, and accordingly, the financial statements of Dalian Rino, Dalian
Rino Design and Dalian Rino Construction are consolidated into the financial
statements of the Company.
 
 The
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America and are
expressed in US dollars. All material intercompany transactions and
balances have been eliminated in the consolidation.
 
 The
Company has included all normal recurring adjustments considered necessary to
give a fair presentation of operating results for the periods
presented.  Interim results are not necessarily indicative of results
for a full year.  The information included in this Form 10-Q should be
read in conjunction with information included in the 2008 annual report filed on
Form 10-K.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites 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 period. Management believes that the estimates used in
preparing its financial statements are reasonable and prudent. Actual results
could differ from those estimates.
 
 Cash and Cash
Equivalents
 
 The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes.  Cash includes cash on hand and demand
deposits in accounts maintained with state owned banks within the PRC and the
United States.
 
 The
Company maintains balances at financial institutions which, from time to time,
may exceed Hong Kong Deposit Protection Board insured limits for the banks
located in Hong Kong.  Balances at financial institutions or state
owned banks within the PRC are not covered by insurance.  As of June
30, 2009 and December 31, 2008, the Company’s cash balances, totaling
$51,491,968 and $19,744,139, respectively at those dates, were not covered by
insurance.  The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risks on its cash in
bank accounts.
  8
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  The cash
held in escrow pursuant to the Board Escrow Holdback as described in Note 10 is
accounted for as other current assets and is not shown as cash or cash
equivalents on the balance sheet until such funds have been released from escrow
pursuant to the terms of the Securities Purchase Agreement and the Escrow
Agreement.  As of June 30, 2009, all restricted has been lifted and
cash in escrow account was accounted for as cash and cash
equivalent.
 
 Restricted
Cash
 
 The
Company records cash deposits in banks or other institutions subject to
restrictions on the withdrawal or use of the fund as restricted
cash.
 
 Accounts
Receivable
 
 Accounts
receivable represents amounts due from customers for contract sales and
services. The Company grants credit to customers without collateral. Accounts
receivable balances are considered past due if payment has not been received
within the payment terms established on the sales contracts or granted by the
Company, typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. When the Company has
exhausted all collection efforts, the receivable and any specific allowance is
written off.
 
 Inventories
 
 Inventories consist
of raw materials and low cost consumption supplies used in the manufacturing
process and work in process. Inventory is valued at the lower of cost or market
value using weighted average cost method. Management reviews its inventories
periodically to determine if any reserves are necessary for potential
obsolescence or if a write down is necessary because the carrying value exceeds
net realizable value.  There are no provisions for obsolete or slow
moving inventories as of June 30, 2009 and December 31, 2008.
  Property, Plant and
Equipment
 
 Property
and equipment are stated at cost, less accumulated
depreciation.  Expenditures for additions, major renewals and
betterments are capitalized while expenditures for maintenance and repairs are
charged to expense as incurred.
  9
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
 
 Construction
in progress represents direct costs of construction as well as acquisition and
design fees and interest expense incurred. Interest incurred during construction
is capitalized into construction in progress. All other interest is expensed as
incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until construction is completed and the asset is
ready for its intended use. Maintenance, repairs and minor renewals are charged
directly to expense as incurred. Major additions and betterments to buildings
and equipment are capitalized.
 
 Depreciation
is provided on a straight-line basis, less estimated residual value over the
assets’ estimated useful lives.  The estimated useful lives are as
follows:
  Buildings
                        30
      YearsPlant
      and machinery
                        15
      YearsMotor vehicles
                        10
      YearsFurniture,
      fixtures and equipment
                        5
      Years
  The
Company evaluates the carrying value of long-lived assets in accordance with FAS
144 “Accounting for Impairment or Disposal of Long Lived Assets.” When estimated
cash flows generated by those assets are less than the carrying amounts of the
asset, the Company recognizes an impairment loss. Based on its review, the
Company believes as of June 30, 2009, there were no impairments of its
long-lived assets.
 
 Intangible
Assets
 
 Intangible
assets consist of land use rights and patents. Land use rights are stated at
cost, less accumulated amortization and are amortized over the term of the
relevant rights of 50 years from the date of acquisition. Patent A and patent B
are stated at cost, less accumulated amortization and are amortized over patent
terms of 15 and 10 years, respectively.
 
 Certain
identifiable intangible assets are reviewed for impairment, at least annually or
more often whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, the recoverability test is performed
using undiscounted net cash flows related to the long-lived assets. As of June
30, 2009, the Company expected these assets to be fully
recoverable.
 
 Fair Value of Financial
Instruments
 
 FAS 107,
“Disclosure About Fair Value of Financial Instruments” defines financial
instruments and requires fair value disclosure of applicable financial
instruments.  FAS 157 “Fair Value Measurements”, adopted on January 1,
2008, defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. The carrying amounts reported in the balance sheets for
current receivables and payables qualify as financial
instruments.  Management concluded the carrying values are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their stated interest rate approximates current rates
available.  The three levels are defined as follows:
  10
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  ·
              Level 1inputs to the valuation methodology are quoted prices (unadjusted)
      for identical assets or liabilities in active
  markets.
 ·
                    Level
      2inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      asset or liability, either directly or indirectly, for substantially the
      full term of the financial
instrument.
  ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”
 
 Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”, which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF 01-6.  Paragraph 11(a) of SFAS 133 specifies
that a contract that would otherwise meet the definition of a derivative but is
both (a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument.  EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or
an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the SFAS 133 paragraph 11(a) scope exception.
 
 As a
result of adopting EITF 07-5, 382,500 warrants previously treated as equity
pursuant to the derivative treatment exemption are no longer afforded equity
treatment because the strike price of the warrants is denominated in US dollars,
a currency other than the Company’s functional currency, the Chinese
Renminbi.  As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expire.
  11
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in October 2007. On January 1,
2009, the Company reclassified $1,058,702 from additional paid-in capital, as a
cumulative effect adjustment, $420,070 to beginning retained earnings and
$1,478,772 to warrant liabilities to recognize the fair value of such warrants.
The fair value of the warrants was $3,288,906 and $1,455,160 on June 30, 2009
and March 31, 2009, respectively.  Therefore, the Company recognized a
$1,833,746 loss and $1,810,134 loss from the change in fair value of
derivative liability for the three and six months ended June 30, 2009,
respectively.
 
 These
common stock purchase warrants do not trade in an active securities market, and
as such, the Company estimate the fair value of these warrants using the
Black-Scholes option pricing model using the following assumptions:
 
 June 30, 2009
                                        
                                        
                                        January 1, 2009(Unaudited)Annual
      dividend yield
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Expected
      life (years)
                                        
                                        
                                        4.27
                                        
                                        
                                        
                                        4.76Risk-free
      interest rate
                                        
                                        
                                        2.23
                                        %
                                        
                                        
                                        1.48
                                        %Expected
      volatility
                                        
                                        
                                        130.68
                                        %
                                        
                                        
                                        138.91
                                        %
 
 In light
of the Company’s thin stock trading history, expected volatility is based on
historical stock pricing data (adjusting for stock splits and dividends) of six
publicly traded peer companies and the Company’s own data.  The
Company-specific volatility is computed annually by taking the base-10 logarithm
of each daily stock closing price divided by the previous stock closing price
(adjusted for stock splits and dividends).  The logarithm smoothes the
daily results so that percentage differences are computed and
tailed.  Each annual volatility calculation is weighted along with the
other (non-excluded) annual volatility result to produce the average historical
volatility for the selected period.   The Company believes
this method produces an estimate that is representative of the Company’s
expectations of future volatility over the expected term of these warrants. The
Company have no reason to believe future volatility over the expected
remaining life of these warrants is likely to differ materially from historical
volatility. The expected life is based on the remaining term of the warrants.
The risk-free interest rate is based on U.S. Treasury securities according to
the remaining term of the warrants.
 
 The
following table sets forth by level within the fair value hierarchy of the
Company’s financial assets and liabilities that were accounted for at fair value
on a recurring basis as of June 30, 2009.
 
 Carrying Value at
                    June 30, 2009
                  
                  
                  Fair Value Measurement at
                    June 30, 2009Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3Warrant
      liability
                  
                  
                  3,288,906
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,288,906
  12
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the balance sheet at fair value in accordance with
SFAS 157.
  Derivative
liability
 
 EITF
00-19 “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in, a Company’s Own Stock,” provides a criteria for
determining whether freestanding contracts that are settled in a company’s own
stock, including common stock warrants, should be designated as either an equity
instrument, an asset or as a liability under SFAS 133. Under the provisions
of EITF 00-19, a contract designated as an asset or a liability must be carried
at fair value on a company’s balance sheet, with any changes in fair value
recorded in a company’s results of operations.  Using the criteria in
EITF 00-19, the Company determines which options, warrants and embedded features
require liability accounting and records the fair values as a derivative
liability. The change in the values of these instruments is shown in the
accompanying consolidated statements of income and other comprehensive income as
“change in fair value of derivative instrument.”
 
 Revenue
Recognition
 
 Contracts.The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1 “Accounting
for Performance of Construction-Type and Certain Production-Type Contracts,”
Under the percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred to date as a percentage of
the total estimated costs to the customer. When total cost estimates exceed
revenues, the Company accrues for the estimated losses immediately. The use of
the percentage-of- completion method requires significant judgment relative to
estimating total contract revenues and costs, including assumptions relative
concerning the length of time to complete the project, the nature and complexity
of the work to be performed, and anticipated changes in estimated costs.
Estimates of total contract revenues and costs are continuously monitored during
the term of the contract, and recorded revenues and costs are subject to
revision as the contract progresses. When revisions in estimated contract
revenues and costs are determined, such adjustments are recorded in the period
in which they are first identified.
 
 Services.In
addition to the Company’s specialty equipment sales, the Company uses heavy
machining equipment to perform machining services for third parties. These
engagements, numbering several hundred per year, are essentially piecework and
are completed in usually less than one month. Accordingly, these heavy machinery
contracts do not fall within the scope of SOP 81-1. Each machining engagement is
governed by a separate contract, indicating existence of an
arrangement.  Revenue is recognized when service is performed, which
is usually concurrent with delivery to the customer, the contract price is set
by contract, and collectability is reasonably assured. Accordingly, these
revenues are recognized under Staff Accounting Bulletin No. 104.
  13
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.
 
 Government
Grant
 
 The
Dalian municipal government approved grants to the Company to encourage
high-technology industry research and development. The grants are netted with
the research and development expenses upon receipt from the local
government.
 
 Shipping and
Handling
 
 Shipping
and handling for raw materials purchased are included in cost of goods sold.
Shipping and handling costs incurred for shipping of finished products to
customers are included in selling expenses. Shipping and handling expenses
included in selling expense for the three months ended June 30, 2009 and 2008
amounted to $15,730 and $63,286, respectively.  Shipping and handling
expenses included in selling expense for the six months ended June 30, 2009 and
2008 amounted to $148,013 and $167,561, respectively.
 
 Research and Development
Costs
 
 Research
and development (or “R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs. Under the guidance of
SFAS 2, “Accounting for Research and Development Costs”, the Company expenses
the costs associated with the R&D activities when incurred.
 
 Stock-based
Compensation
 
 Stock-based
compensation is accounted for at fair value in accordance with SFAS 123(R)
“Accounting for Stock-Based Compensation”. SFAS 123R requires that compensation
cost relating to stock-based payment transactions be recognized in financial
statements. That cost is measured based on the fair value of the equity or
liability instruments issued on the grant date, and is recognized over the
period during which a party is required to provide service in exchange for the
award (typically the vesting period). Stock compensation for stock granted
to non-employees is determined in accordance with SFAS 123R and EITF 96-18,
"Accounting for Equity Instruments that are issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services", as the fair value
of the consideration received or the fair value of equity instruments issued,
whichever is more reliably measured.
  14
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Income
Taxes
 
 The
Company accounts for income taxes pursuant to SFAS 109, “Accounting for Income
Taxes” and FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”).  Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period included the enactment
date.
 
 Under FIN
48, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s financial
statements.
 
 China Income
Taxes
 
 The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).
 
 Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law has replaced the old
laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).
 
 The key
changes are:
 
 a.
              The
      new standard EIT rate of 25% replaces the 33% rate applicable to both DES
      and FIEs, except for High Tech companies that pay a reduced rate of
      15%;
 
 b.
              Companies
      established before March 16, 2007 continue to enjoy tax holiday treatment
      approved by local government for a grace period of either for the next 5
      years following January 1, 2008 or until the tax holiday term is
      completed, whichever is sooner.
 
 In
addition, the new EIT also grants tax holidays to entities operating in certain
beneficial industries, such as the agriculture, fishing, and environmental
protection industries. Entities in beneficial industries enjoy preferential tax
treatment for 5 years with a two-year tax exempt period and thereafter, a
three-year tax reduction period with 50% reduction in the income tax
rates.
  15
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Before
July 2007, Dalian Rino was qualified as a Foreign Invested Enterprise (“FIE”).
On July 12, 2007, Dalian Rino changed its license status from Foreign Invested
Enterprise (“FIE”) to a domestic entity and was subject to an income tax rate of
33%. Starting January 1, 2008, under new EIT law, Dalian Rino is subject to the
new standard EIT rate of 25%
 
 Dalian
Innomind is in the environmental protection industry, which is qualified for the
tax exemption for two years and a 50% reduction for the following three years.
As a result, Dalian Innomind enjoys a 100% tax exemption for the years 2008
through 2009 and a 50% income tax reduction for the years 2010 through
2012.
 
 Foreign Currency
Translation
 
 The
reporting currency of the Company is the US dollar. The functional currency is
the Chinese Renminbi (”RMB”). The Company’s PRC subsidiary and VIEs conduct
business in RMB, and maintain their accounting records in RMB. Innomind
maintains their accounting records in their local currency, Hong Kong
Dollars.
 
 The
financial statements of PRC subsidiary and VIEs are translated into US dollars
using period-end exchange rates ($0.14650 and $0.14670 at June
30, 2009 and December 31, 2008, respectively) as to assets and liabilities
and weighted average exchange rates for the periods ($0.14657 and $0.14184 for
the six months ended June 30 2009 and 2008, respectively) as to income and
cash flow statement.  The equity accounts are translated at their
historical exchange rates.  Resulting translation adjustments are
recorded as a component of accumulated other comprehensive income (loss) within
shareholders’ equity. The resulting translation gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as
incurred.
 
 In
accordance with SFAS 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies using the
average translation rate. As a result, amounts related to assets and liabilities
reported on the consolidated statements of cash flows will not necessarily
agree with changes in the corresponding balances on the consolidated balance
sheets.
 
 Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operations for the periods
presented. For the three months and six months ended June 30, 2009 and 2008, no
material transaction gains and losses occurred.
  In the
PRC, RMB is not freely convertible into foreign currency and all foreign
currency exchange transactions must take place through government authorized
financial institutions. No representation is made that RMB amounts could have
been, or could be, converted into USD at the rates used in
translation.
  16
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Comprehensive
income
 
 SFAS 130,
“Reporting Comprehensive Income,” establishes standards for reporting and
display of comprehensive income and its components in financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in financial
statements that are displayed with the same prominence as other financial
statements. The accompanying consolidated financial statements include the
provisions of SFAS 130.
 
 Earnings Per
Share
 
 The
Company reports earnings per share in accordance with the provisions of SFAS
128, "Earnings Per Share." SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method.
 
 Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the calculation
date.
 
 Segments
 
 The
Company is engaged in designing, developing, manufacturing, and installing
environmental protection and energy saving equipment for the Chinese iron and
steel industry.
 
 Recently issued accounting
pronouncements and adopted accounting
 
 In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
FAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant”
view to a holder’s estimate of whether there has been a “probable” adverse
change in estimated cash flows allows companies to apply reasonable judgment in
assessing whether an other-than-temporary impairment has occurred. The adoption
of FSP EITF 99-20-1 did not have a material impact on the Company’s consolidated
financial statements because all investments in debt securities are classified
as trading securities.
  17
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted.  The adoption of FSP FAS 157-4 did not have a
material impact on the Company’s consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other
comprehensive income and be amortized over the remaining life of the debt
security as an increase in the carrying value of the security. The adoption of
FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s
consolidated financial statements.
 
 In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments.  The adoption of FSP FAS 107-1 and APB 28-1 did not
have a material impact on the Company’s consolidated financial
statements.
  18
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events,” (FAS 165, Subsequent Events [ASC 855-10-05],
which provides guidance to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. FAS
165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was
selected. FAS 165 is effective for interim and annual periods ending after June
15, 2009, and accordingly, the Company adopted this Standard during the
second quarter of 2009. FAS 165 requires that public entities evaluate
subsequent events through the date that the financial statements are
issued. The Company has evaluated subsequent events through the time of filing
these consolidated financial statements with the SEC on August 10,
2009.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets — an amendment of FASB
Statement No. 140 (“FAS 166”) [ASC 860], which requires entities to provide more
information regarding sales of securitized financial assets and similar
transactions, particularly if the entity has continuing exposure to the risks
related to transferred financial assets. FAS 166 eliminates the concept of
a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets and requires additional disclosures. FAS 166
is effective for fiscal years beginning after November 15, 2009. The Company has
not completed the assessment of the impact FAS 166 will have on the
Company’s financial condition, results of operations or cash flows.
 
 In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”) [ASC 810-10], which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should
be consolidated. FAS 167 clarifies that the determination of whether a company
is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance. FAS 167 requires an ongoing reassessment of whether a company is
the primary beneficiary of a variable interest entity. FAS 167 also
requires additional disclosures about a company’s involvement in variable
interest entities and any significant changes in risk exposure due to that
involvement. FAS 167 is effective for fiscal years beginning after November 15,
2009. The Company has not completed the assessment of the impact FAS 167
will have on the Company’s financial condition, results of operations or cash
flows.
  19
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles a Replacement of FASB Statement No. 162 (“FAS
168”). This Standard establishes the FASB Accounting Standards Codification
(the “Codification”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with U.S. GAAP. The
Codification does not change current U.S. GAAP, but is intended to simplify
user access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company in the third quarter
of 2009, and accordingly, the Company’s Quarterly Report on Form 10-Q for
the quarter ending September 30, 2009 and all subsequent public filings will
reference the Codification as the sole source of authoritative
literature.
  Reclassifications
 
 Certain
prior period amounts have been reclassified for consistent presentation. These
reclassifications had no material effect on previously reported net income or
cash flows.
 
 NOTE
3 - ACCOUNTS RECEIVABLE, NET
 
 Accounts
receivable consisted of the following:
 
 June 30,
                    
                    
                    December 31,2009
                    
                    
                    2008(Unaudited)Accounts
      receivable
                    
                    $
                    73,225,409
                    
                    
                    $
                    51,503,245Less:
      allowance for doubtful accounts
                    
                    
                    (205,588
                    )
                    
                    
                    -Accounts
      receivable, net of allowance
                    
                    $
                    73,019,821
                    
                    
                    $
                    51,503,245
 
 The
activity in the allowance for doubtful accounts for trade accounts receivable
for the six months ended June 30, 2009 and for the year ended December 31, 2008
is as follows:
 
 June 30,
                                        2009
                                      
                                      December 31,
                                        2008(Unaudited)Beginning
      allowance for doubtful accounts
                                      $
                                      -
                                      
                                      $
                                      -Additional
      charged to bad debt expense
                                      
                                      205,687
                                      
                                      
                                      -Write-off
      charged against the allowance
                                      
                                      -
                                      
                                      
                                      -Foreign
      currency translation adjustment
                                      
                                      (99)
                                      
                                      
                                      -Ending
      allowance for doubtful accounts
                                      $
                                      205,588
                                      
                                      $
                                      -
  20
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Retentions
held by customers included in the Company’s accounts receivable are
$8,769,930  and $13,227,203 as of June 30, 2009 and December 31, 2008,
respectively.  These balances represent portions of billings made by
the Company but held for payment by the customer pending satisfactory completion
of the project, generally 10% of the contract price.  Retention
payments are generally collected within one year of the completion of the
project.
 
 NOTE
4 – INVENTORIES
 
 Inventories
consisted of the following raw material, work-in-process and
supplies:
 
 June 30,
                        2009
                      
                      
                      December 31,
                        2008(Unaudited)Raw
      material
                      
                      $
                      198,024
                      
                      
                      $
                      223,168Work-in-process
                      
                      
                      864,412
                      
                      
                      
                      921,985Low
      cost consumption supplies
                      
                      
                      58,215
                      
                      
                      
                      58,295Total
                      
                      $
                      1,120,651
                      
                      
                      $
                      1,203,448
 
 For the
three and six months ended June 30, 2009 and 2008, no provision for obsolete
inventories was recorded by the Company.
 
 NOTE
5 – NOTES RECEIVABLE
 
 Notes
receivable represents trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the
receivables.  This amount is non-interest bearing and is normally paid
within three to six months.  The Company has the ability to submit
request for payment to the customer’s bank earlier than the scheduled payment
date, but will incur an interest charge and a processing fee when it submits the
early payment request.  The Company had $1,348,884 and $2,157,957
outstanding as of June 30, 2009 and December 31, 2008,
respectively.
 
 NOTE
6 – COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
 
 Costs and
estimated earnings in excess of billings on uncompleted contracts represents
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize revenue.  As of June
30, 2009 and December 31, 2008, there were no costs and estimated earnings in
excess of billings on uncompleted contracts.
 
 As of
June 30, 2009 and December 31, 2008, total costs amounted to $26,708,937 and
$4,648,357, respectively.
  21
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
    NOTE
7 – BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
 
 Billings
in excess of costs and estimated earnings on uncompleted contracts represents
billings in excess of revenues recognized. As of June 30, 2009 and December 31,
2008, there were no billings in excess of revenues recognized on uncompleted
contracts.
 
 As of
June 30, 2009 and December 31, 2008, total billings amounted to $47,046,284, and
$8,504,838, respectively.
 
 NOTE
8 – PROPERTY, PLANT AND EQUIPMENT, NET
 
 The
following is a summary of property, plant and equipment at June 30, 2009 and
December 31, 2008:
 
 June 30, 2009
                    
                    
                    December 31, 2008(Unaudited)Buildings
                    
                    $
                    3,931,408
                    
                    
                    $
                    3,936,775Equipment
      and machinery
                    
                    
                    9,495,502
                    
                    
                    
                    9,508,465Motor
      Vehicles
                    
                    
                    1,645,269
                    
                    
                    
                    1,647,515Furniture
      and office equipment
                    
                    
                    435,393
                    
                    
                    
                    407,912Construction
      in progress
                    
                    
                    6,758
                    
                    
                    
                    6,768Total
                    
                    
                    15,514,330
                    
                    
                    
                    15,507,435Less:
      accumulated depreciation
                    
                    
                    2,785,190
                    
                    
                    
                    2,310,316Property,
      plant and equipment, net
                    
                    $
                    12,729,140
                    
                    
                    $
                    13,197,119
 
 Depreciation
expense for the three months ended June 30, 2009 and 2008 was $221,917 and
$199,174, respectively. Depreciation expense for the six months ended June 30,
2009 and 2008 was $478,251 and $389,553, respectively. For the three months and
six months ended June 30, 2009 and 2008, no interest was capitalized into
construction in progress.
  22
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
9 – INTANGIBLE ASSETS, NET
 
 The
following is a summary of intangible assets:
 
 June 30,
                    
                    
                    December 31,2009
                    
                    
                    2008(Unaudited)Land
      use rights
                    
                    $
                    650,248
                    
                    
                    $
                    651,136Patents
      and licenses
                    
                    
                    732,500
                    
                    
                    
                    733,5001,382,748
                    
                    
                    
                    1,384,636Less:
      accumulated amortization
                    
                    
                    206,153
                    
                    
                    
                    173,028Intangibles,
      net
                    
                    $
                    1,176,595
                    
                    
                    $
                    1,211,608
  Amortization
expense for the three months ended June 30, 2009 and 2008 amounted to $16,695
and $16,386, respectively.  Amortization expense for the six months
ended June 30, 2009 and 2008 amounted to $33,377 and $32,300,
respectively.  The estimated aggregate amortization expenses for each
of the five succeeding years ended are as the following:
 
 Period Ended
                        
                        Estimated
                          Amortization
                          ExpenseSix
      months ending December 31, 2010
                        
                        $
                        33,361Year
      ending December 31, 2011
                        
                        
                        66,722Year
      ending December 31, 2012
                        
                        
                        66,722Year
      ending December 31, 2013
                        
                        
                        66,722Year
      ending December 31, 2014
                        
                        
                        66,722Thereafter
                        
                        $
                        876,346
 
 As of
June 30, 2009, the Company prepaid $457,667 for purchase of land use rights and
the Company had not obtained the title to the land use right, therefore the
amount has been recorded as a prepayment for land use right in other
assets.
 
 NOTE
10 – LIQUIDATED DAMAGES PAYABLE
 
 Registration
Rights
 
 Pursuant
to the Registration Rights Agreement, entered into by and among the Company and
a group of accredited investors (“Registration Rights Agreement”) on September
27, 2007, the Company was obligated to make efforts to file a registration
statement with the Securities and Exchange Commission (“SEC”) to be declared
effective by the SEC on or before March 3, 2008. After March 3, 2008 and for
each 30 calendar day period thereafter in which the registration statement fails
to be declared effective, the Company shall pay liquidated damages to investors
equal to 1% of the funds raised, or $244,353, subject to a cap of 10% of total
funds raised, or total liquidated damages of $2,443,532.  On the date
of the transaction, the Company determined that the registration statement would
not be filed and declared effective within the required period and accrued
$500,000 as liquidated damages payable. The liquidated damages was treated as
financing cost at the inception and was recorded as a deduction from additional
paid-in capital in accordance with the provisions of FSP EITF 00-19-2. This
amount accrued is based on the penalties due between March 4, 2008 and May 3,
2008, the date before which the Company originally anticipated the registration
statement would be declared effective. The registration statement has been
declared effective on October 2, 2008. Accordingly, the total liquidated damages
the Company recorded for failing to meet the filing deadline as required by
Registration Rights Agreement amounted to $1,971,116.
  23
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Independent
Directors
 
 Pursuant
to the Securities Purchase Agreement, entered into by and among the Company and
a group of accredited investors (the “Securities Purchase Agreement”) on
September 27, 2007, the Company’s Board of Directors must consist of a minimum
of 5 members, a majority of whom must be “independent directors” as defined in
NASDAQ Marketplace Rule 4200(a) (15) not later than 120 days after the date of
the agreement. Failing to comply with this requirement, the Company shall pay
liquidated damages to investors equal to 1% of the funds raised, or $244,353,
for each month or part of a month, pro rata, in which independent directors do
not constitute a majority of the 5-member board.
 
 On the
date of the transaction, the Company determined that this requirement would not
be met within the required period and accrued $500,000 as liquidated damages
payable. The liquidated damages was treated as financing cost at the inception
and was recorded as a deduction from additional paid-in capital in accordance
with the provisions of FSP EITF 00-19-2. This amount accrued is based on the
penalties due between December 8, 2007 and April 8, 2008 on or before which the
Company originally anticipated the Board of Directors would consist of a minimum
of 5 members with a majority being independent directors. The independent
directors were seated on March 20, 2008, curing this delinquency. Total
liquidated damages payable for the independent board member requirement
therefore amounted to $627,173 based on the Securities Purchase
Agreement.
 
 Settlement of Liquidated
Damages
 
 As
amendment to the Securities Purchase Agreement and the Registration Rights
Agreement, on April 3, 2009, the Company entered into a Waiver and Amendment
Agreement (the “Amendment Agreement”) with certain holders of the shares of the
Company’s common stock representing holders of a majority in interest of the
shares of the Company’s common stock issued in the private placement transaction
consummation on October 5, 2007.  The Amendment Agreement amends the
relevant provisions of the Securities Purchase Agreement and the Registration
Rights Agreement, respectively, such that (i) no amount of liquidated damages
shall have been incurred and payable to the investors due to the late
appointment of independent directors, (ii) the liquidated damages incurred due
to the late effectiveness of the registration statement shall be paid in the
form of shares the Company’s common stock of up to 192,045 shares, or at the
election of each investor, in cash of (up to an aggregate of $860,362 for all
investors), each as provided in the Amendment Agreement, and (iii) the Escrow
Agreement to reflect the amendments made to the Securities Purchase Agreement
with regard to the distribution of the Board Holdback Escrow
Amount.
  24
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Upon
effectiveness of the Amendment Agreement, each current holder of the Company’s
common stock issued in the Private Financing is required to elect, by written
notice to the Company, whether to receive shares of the Company’s common stock
or cash as provided by the Amendment Agreement.  As of June 30, 2009,
the Company paid $615,018 to shareholders who elected to receive cash and issued
48,438 shares of common stocks to shareholders who elected to receive shares of
the Company’s common stock.  $1,746,120 of liquidated damage payable
(as described above in this Note 10) that was forgiven was recognized as
other income.  The maximum unpaid liquidated damage payable at June
30, 2009 amounted to $20,147.
 
 NOTE
11 – SHORT-TERM LOANS
 
 Short
term bank loans consist of the following:
 
 June 30,
                                        
                                        
                                        December 31,2009
                                        
                                        
                                        2008(Unaudited)Due
      to Shanghai Pudong Development Bank  interest at 5.31%, due in
      December2009, secured by certain buildings,
      equipment,  and land use rights
                                        
                                        $
                                        8,790,000
                                        
                                        
                                        $
                                        8,802,000Due
      to Shanghai Pudong Development Bank  interest at 4.37%, in
      November2009, secured by the Company’s bank
      deposit
                                        
                                        $
                                        21,975,000
                                        
                                        
                                        $
                                        -Total
                                        
                                        $
                                        30,765,000
                                        
                                        
                                        $
                                        8,802,000
  Total
interest expense on the bank loans for the three months ended June 30, 2009 and
2008 amounted to $253,729 and $146,704, respectively.  Total interest
expense on the bank loans for the six months ended June 30, 2009 and 2008
amounted to $369,146 and $225,408, respectively.
  25
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
12 – INCOME TAXES
 
 Income
Taxes
 
 The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is
domiciled.
 
 The
Company was incorporated in the United States and has incurred a net operating
loss for income tax purpose for the six months ended June 30, 2009. The Company
had loss carry forwards of approximately $235,000 and $223,726 as of June 30,
2009 and December 31, 2008, respectively, for U.S. income tax purposes,
available for offset against future taxable U.S. income expiring in
2028.
 
 Management
believes that the realization of the benefits from the loss carryforward appears
uncertain due to the Company’s historical operating income and continuing
losses. Accordingly, 100% valuation allowance has been provided and no deferred
tax asset benefit has been recorded. The valuation allowance at June 30, 2009
and December 31, 2008 was $80,000 nd $76,000 The net change in the valuation
allowance was an increase of $4,000.
 
 The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $ 69,323,421 as of June 30, 2009, is included in consolidated
retained earnings and will continue to be indefinitely reinvested in
international operations.  Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
 
 Innomind
was incorporated in the BVI and under current law of the BVI; income is not
subject to income tax.  Dalian Innomind, Dalian Rino, Dalian Rino
Design and Dalian Rino Construction were incorporated in the PRC and are subject
to PRC income tax which is computed according to the relevant laws and
regulations in the PRC.
 
 In 2007,
Dalian Innomind was entitled to tax exemption granted to entities qualified as
Foreign Invested Enterprise (“FIE”) so no provision for income tax was
made.
 
 Before
July 2007, Dalian Rino was also qualified as Foreign Invested Enterprise
(“FIE”). On July 12, 2007, Dalian Rino changed its license status from Foreign
Invested Enterprise (“FIE”) to a domestic entity and was subject to an income
tax rate of 33% for the period entitled to tax exemption. Starting January 1,
2008, the new Enterprise Income Tax laws went effective. Under the new law,
Dalian Rino is subjected to the new tax rate of 25%.
 
 As part
of the agreements entered into in connection with the Purchase Agreement between
Dalian Rino and Dalian Innomind, Dalian Rino and its shareholders agreed to
entrust the operations and management of the Business to Dilian Innomind and
Dalian Innomind is entitled to Dalian Rino’s net profit as an entrusted
management fee, which resulted in no income tax provision for Daliann
Rino.
  26
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Dalian
Innomind is entitled to a two-year income tax exemption and a 50% income tax
reduction for the following three years.  No provision for income tax
was made for three and six months ended June 30, 2009 and 2008.
 
 The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate to income before income taxes.
The following table reconciles the statutory rates to the Company’s effective
tax rate for the three and six months ended June 30, 2009 and 2008:
 
 2009
                        
                        
                        2008U.S.
      Statutory rate
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %Foreign
      income not recognized in USA
                        
                        
                        (34.0
                        )
                        
                        
                        (34.0
                        )China
      income taxes
                        
                        
                        25.0
                        
                        
                        
                        25.0China
      income tax exemption
                        
                        
                        (25.0
                        )
                        
                        
                        (25.0
                        )Effective
      income tax rate
                        
                        
                        0.0
                        %
                        
                        
                        0.0
                        %
 
 Value Added
Tax
 
 Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
and export goods in the PRC are subject to a value added tax, VAT, in accordance
with Chinese laws. The VAT standard rate is 17% of the gross sales price. A
credit is available whereby VAT paid on the purchases of semi-finished products
or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished product.
 
 VAT on
sales and VAT on purchases amounted to $12,376,832 and $9,948,262 for the three
months ended June 30, 2009 and $10,673,689 and $8,017,526 for the three months
ended June 30, 2008, respectively. VAT on sales and VAT on purchases amounted to
$23,938,124 and $18,807,298 for the six months ended June 30, 2009 and
$15,730,506 and $11,367,453 for the six months ended June 30, 2008,
respectively.  Sales and purchases are recorded net of VAT collected
and paid as the Company acts as an agent because the VAT taxes are not impacted
by the income tax holiday. As of June 30, 2009 and December 31, 2008, the VAT
payable amounted to $10,446,139 and $4,186,822, respectively.
 
 NOTE
13 – RELATED PARTY TRANSACTIONS
 
 The
Company owed $439,007 and $596,023 to a stockholder as of June 30, 2009 and
December 31, 2008, respectively, for advances made on an unsecured basis,
payable on demand and interest free. The ultimate manner of settlement will be
in cash. Imputed interest is charged per annum on the amount due at
approximately 5.24% and 7.47% for the six months period ended June 30, 2009 and
2008, respectively. Total imputed interest recorded as additional paid-in
capital amounted to $13,557 and $10,456 for the six months periods ended June
30, 2009 and 2008, respectively.
  27
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
14 – REDEEMABLE COMMON STOCK
 
 On
October 5, 2007, the Company received $24,480,319 (or $21,253,722 net proceeds
after deducting the offering expenses) from a group of accredited investors and
issued 5,464,357 shares of restricted common stock at $4.48 per share. The
Securities Purchase Agreement contained a transferrable provision such that if
any governmental agency in the PRC takes action that adversely affects the
Restructuring Agreements or the Share Exchange Agreement and the company doesn’t
mitigate the adverse effect to the investors’ reasonable satisfaction within 60
days of the PRC action, then the company is required to pay liquidated damages
in an amount equal to the initial investment without interest and the
shareholder must return the shares acquired under the agreement. Consequently,
the total amount of the gross proceeds has been excluded from permanent equity
and recorded as redeemable common stock in accordance with Rule 5-02.28 of
Regulation S-X and Section 211 of the Codification of Financial Reporting
Policies. Although there is no fixed redemption requirement in any of the next
five years, the entire amount of $24,480,319 could become redeemable in any of
the next five years. These shares are included as outstanding common stock for
purposes of earnings per share.
 
 NOTE
15 – COMMON STOCK AND OTHER SHAREHOLDERS’ EQUITY
 
 Statutory
Reserves
 
 The
Company is required to make appropriations to the statutory surplus reserve
based on the after-tax net income determined in accordance with the laws and
regulations of the PRC.  Prior to January 1, 2006 the appropriation to
the statutory surplus reserve should be at least 10% of the after tax net income
determined in accordance with the laws and regulations of the PRC until the
reserve is equal to 50% of the entities’ registered
capital.  Appropriations to the statutory public welfare fund are at
5% to 10% of the after tax net income determined by the Board of
Directors.  Effective January 1, 2006, the Company is only required to
contribute to one statutory reserve fund at 10 % of net income after tax per
annum, such contributions not to exceed 50% of the respective company’s
registered capital.  As of June 30, 2009 and December 31, 2008, the
remaining reserve needed to fulfill the 50% registered capital requirement
totaled $5,286,461 and $7,773,303, respectively.
 
 The
statutory reserve funds are restricted for use to offset against prior period
losses, expansion of production and operation, or for the increase in the
registered capital of the Company. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation.
  28
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Common Stock and
Warrants
 
 Issuance
of Common Stock in Private Placement
 
 In
connection with the private placement, 250,000 shares of common stock were
issued to a consultant for advisory services. This expense is recorded as
additional paid-in capital in the accompanying financial
statements.
 
 In
connection with the private placement and pursuant to the Engagement Agreement
Providing for Investment Banking Services, dated October 5, 2007 by and between
the Company and a placement agent, as amended, the placement agent received the
following compensation: (i) $80,000 cash as an engagement and documentation fee;
(ii) $1,750,000 as a placement commission; (iii) 875,000 shares of Common Stock,
and (iv) warrants to purchase 382,500 shares of Common Stock at an exercise
price of $5.376 per share, exercisable within 6 years of the date of issue. The
exercise price of the warrant is subject to adjustments under certain
circumstances and the warrants permit cashless exercise by the holders. This
expense is recorded as additional paid-in capital in the accompanying financial
statements.
 
 The
warrants issued to the placement agent, initially qualified as permanent equity
under EITF 00-19, the value of such warrants has created offsetting debit and
credit entries to additional paid-in capital.
 
 Effective
January 1, 2009, the adopted the provisions of EITF 07-5, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock”, which is effective for financial statements for fiscal years
beginning after December 15, 2008 and which replaced the previous guidance on
this topic in EITF 01-6.  As a result of adopting EITF 07-5, 382,500
warrants are not considered indexed to the Company’s own stock, and as such, all
future changes in the fair value of these warrants will be recognized currently
in earnings until such time as the warrants are exercised or
expire.  A discussion of the valuation techniques used to measure fair
value for the liabilities listed above and activity for these liabilities for
the three and six months ended June 30, 2009 is provided elsewhere in this
footnote and in Note 2.
 
 Liquidated
damage payable settlement
 
 Upon
effectiveness of the Amendment Agreement, each current holder of the Company’s
common stock issued in the Private Financing is required to elect, by written
notice to the Company, whether to receive shares of the Company’s common stock
or cash as provided by the Amendment Agreement.  As of June 30, 2009,
the Company issued 48,438 shares of common stocks for a total $217,004 to
shareholders who elected to receive shares of the Company’s common
stock.
  29
 
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
 Warrants
 
 Following
is a summary of the warrant activity:
 Number of SharesOutstanding
      as of January 1, 2008
                      
                      
                      382,500Granted
                      
                      
                      -Forfeited
                      
                      
                      -Exercised
                      
                      
                      -Outstanding
      as of December 31, 2008
                      
                      
                      382,500Granted
                      
                      
                      -Forfeited
                      
                      
                      -Exercised
                      
                      
                      -Outstanding
      as of June 30, 2009 (Unaudited)
                      
                      
                      382,500
 
 Following
is a summary of the status of warrants outstanding at June 30,
2009:
 
 Outstanding Warrants
                      
                      Exercisable WarrantsExercise Price
                      
                      Number of
                        Shares
                      
                      Average
                        Remaining
                        Contractual Life
                      
                      Average
                        Exercise Price
                      
                      
                      Number of
                        Shares
                      
                      Average
                        Remaining
                        Contractual Life$5.376
                      
                      
                      382,500
                      
                      4.27
      years
                      
                      $
                      5.376
                      
                      
                      
                      382,500
                      
                      4.27
      yearsTotal
                      
                      
                      382,500
                      
                      
                      
                      
                      
                      
                      
                      
                      382,500
 
 Stock
Options
 
 On June
30, 2009, pursuant to an employment agreement by and between the Company and Yi
(Jenny) Liu, the Company granted to Yi (Jenny) Liu, the Chief Financial Officer,
a non-qualified stock option to purchase 50,000 shares of its Common Stock at an
exercise price of $6.15 per share, vesting in 3 equal annual installments
beginning on June 30, 2010, with a term life of five years.
 
 The fair
values of stock options granted to the executive were estimated at the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
 
 Expected
                                      
                                      Expected
                                      
                                      Dividend
                                      
                                      Risk Free
                                      
                                      Grant DateLife
                                      
                                      Volatility
                                      
                                      Yield
                                      
                                      Interest Rate
                                      
                                      Fair ValueExecutives
                                      
                                      
                                      3.3
      yrs
                                      
                                      121.7
                                      %
                                      0
                                      %
                                      1.64
                                      %
                                      $
                                      9.80
 
 Volatility:
In light of the Company’s thin stock trading history, expected volatility is
based on historical stock pricing data (adjusting for stock splits and
dividends) of six publicly traded peer companies and the Company’s own
data.  The Company-specific volatility is computed annually by taking
the base-10 logarithm of each daily stock closing price divided by the previous
stock closing price (adjusted for stock splits and dividends).  The
logarithm smoothes the daily results so that percentage differences are computed
and tailed.  Each annual volatility calculation is weighted along with
the other (non-excluded) annual volatility result to produce the average
historical volatility for the selected period.    The
Company believes this method produces an estimate that is representative of the
Company’s expectations of future volatility over the expected term of these
warrants.
  30
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Dividend
Yield: The expected dividend yield is zero. The Company has not paid a cash
dividend and does not anticipate paying cash dividends in the foreseeable
future.
 
 Risk Free
Rate: Risk-free interest rate of 1.64% was used. The risk-free interest rate was
based on U.S. Treasury yields with a remaining term that corresponded to the
expected term of the option calculated on the granted date.
 
 Expected
Life: Because the Company has no historical share option exercise experience to
estimate future exercise patterns, the expected life was determined using the
simplified method as these awards meet the definition of "plain-vanilla" options
under the rules prescribed by Staff Accounting Bulletin No. 107.
 
 Stock
compensation expense is recognized based on awards expected to vest. There were
no estimated forfeitures as the Company has a short history of issuing options.
SFAS No. 123R requires forfeitures to be estimated at the time of grant and
revised in subsequent periods, if necessary, if actual forfeitures differ from
those estimates.
 
 The
50,000 options granted in 2009 had fair value of approximately $397,222. The
Company recognized $303 of compensation expense in general and administrative
expenses for the three months and six months ended June 30, 2009.
 
 As of
June 30, 2009, the total compensation cost related to stock options not yet
recognized was $396,919 and will be recognized over the weighted average life of
3 years.
 
 The
following is a summary of the stock options activity:
 
 Number of
                                          Options
                                          Outstanding
                                        
                                        Weighted-
                                          Average
                                          Exercise
                                          Price
                                        
                                        Aggregate
                                          Intrinsic
                                          ValueBalance, January
      1, 2009
                                        
                                        -
                                        
                                        $
                                        -
                                        
                                        -Granted
                                        
                                        50,000
                                        
                                        
                                        6.15
                                        
                                        182,500ForfeitedExercisedBalance,
      June 30, 2009 (Unaudited)
                                        
                                        50,000
                                        
                                        $
                                        6.15
                                        
                                        182,500
  31
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  Following
is a summary of the status of options outstanding at June 30, 2009:
 
 Outstanding Options
                    
                    
                    Exercisable OptionsExercise
                      Price
                    
                    Number
                    
                    
                    Average Remaining
                      Contractual Life
                    
                    
                    Average Exercise
                      Price
                    
                    
                    Number
                    
                    
                    Average Remaining
                      Contractual Life$6.15
                    
                    
                    50,000
                    
                    
                    
                    5.00
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    50,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -
 
 Issuance
of Common Stock to Chairman of Audit Committee
 
 On May
13, 2009, the Company issued 2,000 shares of common stock to the chairman of the
Audit Committee for his service provided based upon the agreement dated April 4,
2008. The shares were valued at $4.48, yielding an aggregate fair value of total
$8,960. This expense was recorded as stock compensation expense.
 
 NOTE
16 - EARNINGS PER SHARE
 
 The
following demonstrates the calculation for earnings per share for the three
months ended June 30, 2009 and 2008:
  2009
                                      
                                      
                                      2008Net
      income
                                      
                                      $
                                      9,855,284
                                      
                                      
                                      $
                                      5,387,367Adjustments
      for diluted EPS calculation
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Adjusted
      net income for calculating EPS-diluted
                                      
                                      $
                                      9,855,284
                                      
                                      
                                      $
                                      5,387,367Weighted
      average number of common stock – Basic
                                      
                                      
                                      25,070,356
                                      
                                      
                                      
                                      25,000,000Effect
      of dilutive securities:Warrants
                                      
                                      
                                      6,584
                                      
                                      
                                      
                                      183,285Weighted
      average number of common stock – Diluted
                                      
                                      
                                      25,076,940
                                      
                                      
                                      
                                      25,183,285Earnings
      per share:Basic
                                      
                                      $
                                      0.39
                                      
                                      
                                      $
                                      0.22Diluted
                                      
                                      $
                                      0.39
                                      
                                      
                                      $
                                      0.21
  The
following demonstrates the calculation for earnings per share for the six months
ended June 30, 2009 and 2008:
 
 2009
                      
                      
                      2008Net
      income
                      
                      $
                      22,330,200
                      
                      
                      $
                      10,407,713Adjustments
      for diluted EPS calculation
                      
                      
                      -
                      
                      
                      
                      -Adjusted
      net income for calculating EPS-diluted
                      
                      $
                      22,330,200
                      
                      
                      $
                      10,407,713Weighted
      average number of common stock – Basic
                      
                      
                      25,055,668
                      
                      
                      
                      25,000,000Effect
      of dilutive securities:Warrants
                      
                      
                      -
                      
                      
                      
                      175,890Weighted
      average number of common stock – Diluted
                      
                      
                      25,055,668
                      
                      
                      
                      25,175,890Earnings
      per share:Basic
                      
                      $
                      0.89
                      
                      
                      $
                      0.42Diluted
                      
                      $
                      0.89
                      
                      
                      $
                      0.41
  32
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
17 – CONCENTRATIONS AND RISKS
 
 Customers
 
 During
the three months ended June 30, 2009, three customers accounted for 44% of the
Company’s total sales, and accounts receivable from those three customers
totaled $13,946,800 and $0 as of June 30, 2009 and December 31, 2008,
respectively.
 
 During
the three months ended June 30, 2008, five customers accounted for 45% of the
Company’s total sales.
 
 During
the six months ended June 30, 2009, four customers accounted for 44% of the
Company’s total sales, and accounts receivable from those four customers totaled
$23,199,447 and $0 as of June 30, 2009 and December 31, 2008,
respectively.
 
 During
the six months ended June 30, 2008, five customers accounted for 47% of the
Company’s total sales.
 
 Suppliers
 
 Two major
suppliers provided approximately 100% of the Company’s purchases of raw
materials for the three months ended June 30, 2009. The same two major suppliers
provided approximately 98% of the Company’s purchases of raw materials for the
six months ended June 30, 2009 and the amount of advance to these suppliers
as of June 30, 2009 and December 31, 2008 were $14,904,902 and $21,376,932,
respectively.
 
 Two major
suppliers provided approximately 100% of the Company’s purchases of raw
materials for the three months ended June 30, 2009. The same two major suppliers
provided approximately 100% of the Company’s purchases of raw materials for the
six months ended June 30, 2009.
 
 PRC
Risks
 
 The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the economy in the regions where the Company’s customers are located. The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
  33
 RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the
PRC.  Under existing PRC foreign exchange regulations, payment of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements.  However, approval
from appropriate governmental authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses, such as the repayment of bank loans denominated in foreign
currencies.  The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.
 
 NOTE
18 – COMMITMENTS AND CONTINGENCIES
 
 Employee
Benefits
 
 The full
time employees of the Company are entitled to employee benefits including
medical care, welfare subsidies, unemployment insurance and pension benefits
through a Chinese government mandated multi-employer defined contribution plan.
The Company is required to accrue for those benefits based on certain
percentages of the employees’ salaries and make contributions to the plans out
of the amounts accrued for medical and pension benefits.  The total
provisions and contributions made for such employee benefits were $30,436 and
$123 for the three months ended June 30, 2009 and 2008,
respectively.  The total provisions and contributions made for such
employee benefits were $57,057 and $913 for the six months ended June 30, 2009
and 2008, respectively. The Chinese government is responsible for the medical
benefits and the pension liability to be paid to these employees.
 
 Capital
Commitments
 
 As of
June 30, 2009 and December 31, 2008, the Company had firm purchase commitments
for capital projects in progress of $5,184,635 and $10,594,674
respectively.
  34
  RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES
 (FORMERLY
KNOWN AS JADE MOUNTAIN CORPORATION)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 
 JUNE 30,
2009
 (UNAUDITED)
  NOTE
19 – SUBSEQUENT EVENT
 
 In July
2009, the Board of Directors of the Company adopted RINO International
Corporation 2009 Stock Incentive Plan (the “Plan”) toenhance the
profitability and value of the Company for the benefit of its shareholders by
enabling the Company to offer certain eligible employees, consultants and
non-employee directors cash and stock-based incentives in the Company to
attract, retain and reward such individuals and strengthen the mutuality of
interests between such individuals and the Company’s
shareholders.  The aggregate number of shares of our common stock that
may be issued under the Plan is 2,500,000 shares, subject to adjustment under
the Plan.
  35




Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations





Disclaimer
Regarding Forward-looking Statements





Certain
statements made in this report, and other written or oral statements made by or
on behalf of RINO International Corporation and its direct and indirect
subsidiaries and controlled affiliates (collectively, the “Company”),
may constitute “forward-looking statements” under the Private Securities
Litigation Reform Act of 1995, which represent the expectations or beliefs
of the Company. Such “forward-looking statements” include, but are not limited
to, statements concerning the operations, performance, financial condition and
growth of the Company. For this purpose, any statements contained in this report
that are not statements of historical fact may be deemed forward-looking
statements. Without limiting the generality of the foregoing, when used in this
report, the word “believes,” “expects,” “estimates,” “intends,” “will,” “may,”
“anticipate,” “could,” “should,” “can,” or “continue” or the negative or other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Examples of such statements in this report include
descriptions of our plans and strategies with respect to developing certain
market opportunities, our overall business plan, our plans to develop additional
strategic partnerships, our intention to develop our products and
platform technologies, our continuing growth and our ability to contain our
operating expenses. All forward-looking statements are subject to certain risks
and uncertainties that could cause actual events to differ materially from those
projected, including those described under Item 1.A. of Part I of our Annual
Report on Form 10-K for the fiscal year ended on December 31,
2008  and matters described in this report generally. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.





The
following is management’s discussion and analysis of certain significant factors
that have affected aspects of our financial position and results of operations
during the periods included in the accompanying unaudited financial
statements.  You should read this in conjunction with discussion under
“Management’s Discussion and Analysis of Financial Conditions and Results of
Operations” and the audited consolidated financial statements and accompanying
notes for the year ended December 31, 2008 included  in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 and the
unaudited consolidated financial statements and accompanying notes and the other
financial information appearing in Item 1 of this report and elsewhere in this
report.





Except
as otherwise specifically stated or unless the context otherwise requires, the
"Company", "we," "us," "our," and the "Registrant" refer to, collectively, (i)
RINO International Corporation (formerly Jade Mountain Corporation), (ii)
Innomind Group Limited (“Innomind”), organized under the laws of the British
Virgin Islands and a wholly-owned subsidiary of RINO International Corporation,
Dalian Innomind Environment Engineering Co., Ltd. (“Dalian Innomind”), organized
under the laws of the People’s Republic of China (the “PRC”) and a wholly-owned
subsidiary of Innomind, Dalian RINO Environment Engineering Science and
Technology Co., Ltd. (“Dalian Rino”), organized under the laws of the PRC and a
contractually controlled affiliate of Dalian Innomind,  and Dalian
Rino’s wholly owned subsidiaries, Dalian Rino Environmental Engineering
Project Design Co., Ltd. (“Dalian Rino Design”) and Dalian Rino Environmental
Construction & Installation Project Co., Ltd. (“Dalian Rino Installation”),
each organized under the laws of the PRC.




36




Company
Overview





We are
engaged in designing, developing, manufacturing, and installing environmental
protection and energy saving equipment for the Chinese iron and steel
industry.  Our customers are large, state-owned iron and steel
companies. Our business operations are conducted throughout China.





Following
the expansion of China’s economy and growth in the size of the manufacturing
sector particularly China’s iron and steel industry, the total volume of
waterborne and airborne industrial waste and pollution has grown
significantly.  As a consequence, corporations face increasingly
stringent governmental mandates to reduce or eliminate sulphur dioxide emissions
and untreated wastewater discharges. Failure to meet mandated emission and
discharge standards can result in financial penalties. Consequently, despite the
recent global financial crisis, our revenues, gross profit, income from
operations and net income continue to grow across our major product
lines.  During the six months ended June 30, 2009, our revenues
reached $76.3 million, representing an increase of 42.2% from the total revenues
of $53.7 million for the same period ended June 30, 2008. Our gross profit
increased from $23.0 million for the six months ended June 30, 2008 to $30.1
million for the same period ended June 30, 2009, representing an increase of
30.9%.  Our income from operations reached $22.6 million for the six
months ended June 30, 2009 from $10.5 million for the same period ended June 30,
2008, representing an increase of 114.5%.  Our net income for the six month
period ended June 30, 2009 grew to $22.3 million from $10.4 million for the same
period ended June 30, 2008, representing an increase of 114.6%.





Traditionally,
we have three principal products and product lines:





·
            Lamella
      Inclined Tube Settler Waste Water Treatment System, a highly efficient
      wastewater treatment system that incorporates our proprietary and patented
      ‘Lamella Inclined Tube Settler’
  technology.


·
            Circulating,
      Fluidized Bed, Flue Gas Desulphurization System, a highly effective system
      that removes particulate sulphur from flue gas emissions generated by the
      sintering process in the production of iron and steel (a process in which
      sulphur and other impurities are removed from iron ore by heating, without
      melting, pulverized iron ore) with the resulting discharge meeting all
      relevant PRC air pollution standards,
and


·
            High
      Temperature Anti-Oxidation System for Hot Rolled Steel, a set of products
      and a mechanized system that substantially reduce oxidation-related output
      losses in the production of continuous cast, hot rolled
    steel.





In the
first quarter of 2008, the Company introduced a new integrated dust catching
system which removes up to 99% of the dust from sintering iron during the
production process and which complements its current desulphurization equipment.
To date, the Company’s integrated dust catchers have been installed in the flues
of several steelmakers in China. The Company anticipates the average selling
price will be around $2.0 million and the time from contract signing to final
installation will equate to approximately two to three months.





In
November 2008, we successfully developed a new sludge treatment system through
cooperation with the Dalian University of Technology. The new sludge treatment
system can be used to treat sludge generated by municipal wastewater treatment
processes, industrial sludge generated by the chemical industry and oil sludge
generated by the oil industry. We estimate that there is a market of
approximately $28.8 billion for the treatment of sludge generated by various
municipal wastewater and industrial processing systems in the PRC
market.





All our
products are custom-built to our customers’ specific requirements. We enter into
fixed price equipment sales contracts with our customers that are performed in
engineering, manufacturing, construction and installation phases. Equipment and
components are engineered and manufactured primarily at our Dalian facilities.
Generally, we fulfill our contractual obligations within twelve
months.





Our
project-based revenue is affected directly by our customers’ capital budgets and
their need to build new plants. Because most of our customers are
state-owned-enterprises, their budgeting decisions are influenced by the Chinese
central government’s environmental protection and pollution control policies,
which presently are favorable to our business and products. We believe that such
policy emphasis will continue for the foreseeable future.




37




The cost
of revenue for our products includes direct materials, direct labor, and
manufacturing overhead, with a significant portion allocated to materials costs,
which are subject to fluctuation.





Recent
Developments




Appointment
of new Chief Financial Officer





Effective
June 30, 2009, the Company’s Board of Directors approved the appointment of
Yi (Jenny) Liu as its Chief Financial Officer.  Pursuant to an
employment agreement dated June 30, 2009, Yi (Jenny) Liu is employed by the
Company as its Chief Financial Officer for a term of 3 years at a monthly salary
of $10,000. In addition, Ms. Liu will be granted 50,000 options to purchase the
Company’s common stock at an exercise price of $6.15 per share, vesting in 3
annual installments beginning on June 30, 2010. Under the agreement, Ms. Liu is
entitled to 4-weeks of paid vacation per year. Such options will expire on the
5th
anniversary date of their grant.  The agreement is terminable on 30
day’s notice, and contains non-competition and non-disclosure
covenants.





Waiver
and Reduction of Liquidated Damages





On April
3, 2009, the Company entered into a Waiver and Amendment Agreement (the
“Amendment Agreement”) with certain holders of the shares of the Company’s
common stock representing holders of a majority in interest of the shares of the
Company’s common stock issued in the private placement transaction consummation
on October 5, 2007 (the “Private Financing”).  The Amendment Agreement
amends the relevant provisions of the Securities Purchase Agreement and the
Registration Rights Agreement that the Company entered into with the investors
in the Private Financing, such that (i) no amount of liquidated damages shall
have been incurred and payable to the investors due to the late appointment of
independent directors, (ii) the liquidated damages incurred due to the late
effectiveness of the registration statement shall be paid in the form of shares
of the Company’s common stock of up to 192,045 shares, or, at the election of
each investor, in cash of (up to an aggregate of $860,362 for all
investors).  Pursuant to the Amendment Agreement, as of June 30, 2009,
the Company paid an aggregate of $615,018 to shareholders who elected to receive
cash and issued an aggregate of 48,438 shares of the Company’s common stocks to
shareholders who elected to receive shares of the Company’s common
stock.





Listing
on the Nasdaq Global Market





On July
13, 2009, our common stock, par value of $0.0001 per share (“Common Stock”),
started trading under the symbol "RINO" on the Nasdaq Global
Market.





Adoption
of 2009 RINO International Stock Incentive Plan





In July
2009, the Board of Directors of the Company adopted RINO International
Corporation 2009 Stock Incentive Plan (the “Plan”) toenhance the
profitability and value of the Company for the benefit of its shareholders by
enabling the Company to offer certain eligible employees, consultants and
non-employee directors cash and stock-based incentives in the Company to
attract, retain and reward such individuals and strengthen the mutuality of
interests between such individuals and the Company’s shareholders.





The
aggregate number of shares of our common stock that may be issued under the Plan
is 2,500,000 shares, subject to adjustment under the Plan.





Qualified
to Do Business in California





The
Company is a corporation organized and existing under the laws of
Nevada.  Effective June 23, 2009, the Company complied with the
requirements of California law and is now qualified and authorized to transact
intrastate business in the State of California.  The purpose of the
California office is to provide improved communications and administrative
support of Dalian RINO, as well as research and development of US business
opportunities as they arise. The development of the California office provides
an the Company excellent vehicle to survey the US markets for corporate growth
and technology acquisition opportunities.




Recent
policy guideline on FGD set agenda for implementation through 2011.
 
 On July
31, 2009, China’s Ministry of Industry and Information Technology (MIIT)
released the“Iron and Steel Industry Flue Gas Desulphurization Implementation
Guideline,” as a supplement to the iron and steel industry stimulus released
earlier in 2009. The guideline sets forth a detailed agenda for stringent
control in industrial pollutions, primarily sulfur dioxide. Specifically, the
guideline mandates the addition of new sintering desulphurization equipment with
total coverage area of 15,800 square meters and new capacity of 200,000 tons by
2011. Detailed progress reports are required for submission in February every
year.
  The new
policy carries important implications for RINO’s business as it prioritizes the
steel sinter FGD as a priority environmental project, sets specific
desulphurization targets, and enables both the central and local governments to
provide priority funding for the installation of FGD equipment, while offering
further support for domestic based technology.  The government plan
calls for the number of sinters to be equipped with FGD systems to double
annually through 2011. Specifically, the government aims to install FGD for an
additional 15,800m2 of sintering bed capacity with a total of 200,000 tons of
annual desulphurization capacity. To support adoption, the government will
encourage the build-out through BOT (build-operate-transfer) ownership
structures which would allow the financier to operate the system for up to 20
years and then transfer ownership to the steel producer. The government will
increase its ongoing inspection of SO2 emission by steel companies and plans to
install on-line, real time monitoring devices to ensure
compliance.




38




Results
of Operations





Three
Months Ended June 30, 2009 And June 30, 2008.





Results
of Operations





Net
Sales





Net sales
increased by $6.1 million to $40.7 million or an increase of 17.6% for the three
months ended June 30, 2009, as compared to the net sales of $34.6 million for
the three months ended June 30, 2008. Such increase was due to continued growth
in demand across our three major product lines in 2009. Since June 2008, the
Chinese government tightened gas emission control and all coal-fired sinters are
required to have desulphurization equipment installed.  The
breakdown of the revenue growth is as follows:





For the three months ended June
      30,2009
                                            
                                            
                                            2008Net Sales
                                              (in
      thousand)
                                            
                                            
                                            % to
                                              Total
                                            
                                            
                                            Net Sales
                                              (in
      thousand)
                                            
                                            
                                            % to
                                              Total
                                            
                                            
                                            %
                                              IncreaseWastewater
      treatment equipment
                                            
                                            $
                                            9,258
                                            
                                            
                                            
                                            22.7
                                            %
                                            
                                            $
                                            6,035
                                            
                                            
                                            
                                            17.5
                                            %
                                            
                                            
                                            53.4
                                            %Flue
      gas desulphurization
                                            
                                            
                                            30,083
                                            
                                            
                                            
                                            73.9
                                            %
                                            
                                            
                                            25,000
                                            
                                            
                                            
                                            72.2
                                            %
                                            
                                            
                                            20.3
                                            %Anti-oxidation
      equipment and coatings
                                            
                                            
                                            1,128
                                            
                                            
                                            
                                            2.8
                                            %
                                            
                                            
                                            1,153
                                            
                                            
                                            
                                            3.3
                                            %
                                            
                                            
                                            -2.2
                                            %Machining
      services
                                            
                                            
                                            253
                                            
                                            
                                            
                                            0.6
                                            %
                                            
                                            
                                            2,429
                                            
                                            
                                            
                                            7.0
                                            %
                                            
                                            
                                            -89.6
                                            %Total
      Net Sales
                                            
                                            $
                                            40,722
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            $
                                            34,617
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            
                                            17.6
                                            %





The
revenues generated from our Lamella Wastewater System increased 53.4% to $9.3
million for the three months ended June 30, 2009, as compared to $6.0 million
for the three months ended June 30, 2008.





Our
Desulphurization System, which we introduced in late 2006, utilizes proprietary
technology we jointly developed with the Research Institute of the Chinese
Academy of Sciences, and can reduce flue gas sulphur dioxide levels by more than
90%. We anticipate strong demand from the iron and steel industry for the
solutions that our Desulphurization System offers for airborne sulphur dioxide
emissions. For the three months ended June 30, 2009, we recorded revenues of
$30.1 million, as compared to revenues of $25.0 million for the three months
ended June 30, 2008, representing an increase of 20.3%. The increase was mainly
attributable  to substantial increase in the numbers of the contracts
and size of the contracts.





Our
Anti-Oxidation System, which we introduced in January 2007, materially reduces
oxidation loss in the production of hot rolled steel plates. Anti-oxidation is a
long-sought solution in the iron and steel industry. We believe our
Anti-Oxidation System, including coatings and spraying equipment, is the only
online system that prevents or reduces oxidation without needing to first cool
down the steel slab. For the three months ended June 30, 2009, we recorded
revenues of $1.1 million for anti-oxidation equipment and related coatings
sales, as compared to revenues of $1.2 million for the three months ended June
30, 2008, representing a decrease of 2.2%. Despite our increased pricing for
Anti-Oxidation contracts and demand, the size of the contracts were relatively
small, which contributed to the decrease in revenue for the three months ended
June 30, 2009.




39




In
addition to the foregoing, we provide machining services to third parties,
utilizing our heavy machine tools’ idle time to generate contract manufacturing
revenue. The revenue generated from our machining services fluctuates based on
the level of our using our heavy machining equipment to produce more of our own
products rather than for third-party contract work. For the three months ended
June 30, 2009, revenues accounted for 0.6% of the total revenue as compared to
7.0% for the corresponding period in 2008, reflecting a higher level of our own
production and reduced level of contractual work.




Cost
of Sales





The cost
of sales for the three months ended June 30, 2009 increased by $7.2 million to
$26.6 million from $19.3 million for the three months ended June 30, 2008,
representing an increase of 37.3%.  The increase was largely due to
increased sales. As a percentage of sales, the cost of sales increased to 65.2%
for the three months ended June 30, 2009 compared to 55.9% for the same period
of 2008.  The breakdown of the cost of sales is as
follows:





For
      the three months ended June 30,2009
                                    
                                    
                                    2008Total
                                      (in
      thousand)
                                    
                                    
                                    %
      of Sales
                                    
                                    
                                    Total
                                      (in
      thousand)
                                    
                                    
                                    %
      of SalesRevenuesContracts
                                    
                                    $
                                    40,469
                                    
                                    
                                    
                                    
                                    
                                    $
                                    32,187Machining
      Services
                                    
                                    
                                    253
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,430Cost
      of SalesContracts
                                    
                                    $
                                    26,286
                                    
                                    
                                    
                                    65.0
                                    %
                                    
                                    $
                                    17,746
                                    
                                    
                                    
                                    55.1
                                    %Machining
      Services
                                    
                                    
                                    269
                                    
                                    
                                    
                                    106.3
                                    %
                                    
                                    
                                    1,590
                                    
                                    
                                    
                                    65.4
                                    %Gross
      Profit
                                    
                                    $
                                    14,167
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    15,281





Following
the growing in our business, our capacity in terms of production and
installation directly impacted how we operate and can change from period to
period, depending on demand level, production efficiency, size of the contracts
and location of the contractors. When the capacity is approaching to peak level
through increased demand, we tend to outsource certain contracts or products,
and consequently resulted in higher cost and lower profit
margin.  During the six months ended June 30, 2009, the outsource
capacity was the main cause for 9.9% increase in cost of contract sales as
percentage of total contract sales.





Operating
Expense





Operating
expenses for the three months ended June 30, 2009 decreased to $4.2 million from
$9.8 million for the same period ended June 30, 2008, representing a decrease of
57.4%. The $5.6 million decrease in our operating expenses was largely the
result of (i) a decrease of $5.8 million charge for stock compensation expense
related to the 2008 earnings target or “Make Good” provision pursuant to the
Securities Purchase Agreement entered into between the Company and a group of
accredited investors (“Securities Purchase Agreement”) on October 5, 2007 and
(ii) a decrease of $0.3 million in R&D expenses.  This was offset
by a $0.2 million increase in commission expenses which is in line with our
increase in revenue, and a $0.2 million reserve made for allowance for bad
debts.





Compensation
expenses related “Make Good Escrow Shares”





According
to the Securities Purchase Agreement, a total of 5,580,000 shares of our common
stock beneficially owned by our founders Mr. Zou Dejun and his wife, Ms. Qiu
Jianping, through the Innomind Trust, were subject to escrow in order to secure
the Company’s obligation under the Securities Purchase Agreement to deliver
additional Common Stock to the private placement investors in the event the
Company fails to achieve certain after-tax net income targets for fiscal years
2007 and 2008 (“Make Good Escrow Shares”). Those targets are $16,000,000 in
after-tax net income for the fiscal year ended December 31, 2007, and
$28,000,000 in after-tax net income for the fiscal year ending December 31,
2008.  The shares held in escrow as Make Good Escrow Shares will not
be accounted for on our books until such shares became releasable from escrow
pursuant to the terms of the Securities Purchase Agreement. If any Make Good
Escrow Shares are released to the company’s management or employees, the value
of such shares at the time of release will be recorded as compensation expense
with a corresponding offset to additional paid-in capital in accordance with
SFAS 123(R) paragraph 11. Based on the performance for the year ended December
31, 2008, the Company achieved the 2008 after-tax net income target. Therefore,
the Company accrued $17.5 million of compensation expense for the year ended
December 31, 2008. The Company allocated one-third of that amount to selling,
general and administration expenses in the second quarter of
2008.  There were no such compensation expenses recorded for the three
months ended June 30, 2009.




40




Other
Expense, net




Other
Expense, net, for three months ended June 30, 2009 increased by $28,459 to
$156,728 from $128,269 in 2008. The increase in other expenses, net, was mainly
due to (i) an increase in other losses in the amount of $1,833,745 as result of
adoption of new accounting pronouncement EITF 07-5; and offset by (ii) a gain on
a liquidated damages settlement in the amount of $1,746,120 and (iii) a $0.04
million increase in interest income, net.  The interest income
increased by $0.16 million as the result of a higher interest rate on the
Company’s cash term deposit.  This was offset during the three months
ended June 30, 2009, by a $0.12 million increase in interest expenses as the
result of an increased bank loan.  The net change in interest expenses
appeared to be immaterial.





Six
Months Ended June 30, 2009 And June 30, 2008.





Results
of Operations





Net
Sales





Net sales
increased by $22.7 million to $76.3 million or an increase of 42.2% for the six
months ended June 30, 2009, as compared to $53.7 million net sales for the six
months ended June 30, 2008. Such increase was due to continued growth in demand
across our three major product lines in 2009.  The breakdown of
the revenue growth is as follows:





For the six months ended June
      30,2009
                                      
                                      2008Net Sales
                                        (in
      thousand)
                                      
                                      % to
                                        Total
                                      
                                      Net Sales
                                        (in
      thousand)
                                      
                                      % to
                                        Total
                                      
                                      %
                                        IncreaseWastewater
      treatment equipment
                                      
                                      $
                                      16,496
                                      
                                      21.6
                                      %
                                      $
                                      8,213
                                      
                                      15.3
                                      %
                                      100.9
                                      %Flue
      gas desulphurization
                                      
                                      
                                      55,787
                                      
                                      73.1
                                      %
                                      
                                      37,471
                                      
                                      69.8
                                      %
                                      48.9
                                      %Anti-oxidation
      equipment and coatings
                                      
                                      
                                      3,552
                                      
                                      4.7
                                      %
                                      
                                      2,801
                                      
                                      5.2
                                      %
                                      26.8
                                      %Machining
      services
                                      
                                      
                                      495
                                      
                                      0.6
                                      %
                                      
                                      5,178
                                      
                                      9.7
                                      %
                                      -90.4
                                      %Total
      Net Sales
                                      
                                      $
                                      76,330
                                      
                                      100.0
                                      %
                                      $
                                      53,663
                                      
                                      100.0
                                      %
                                      42.2
                                      %





Demand
for our Lamella Wastewater System, increased 100.9% to $16.5 million for the six
months ended June 30, 2009, as compared with $8.2 million for the six months
ended June 30, 2008.




41




Our
Desulphurization System, which we introduced in late 2006, utilizes proprietary
technology we jointly developed with the Research Institute of the Chinese
Academy of Sciences, and can reduce flue gas sulphur dioxide levels by more than
90%. We anticipate strong demand from the iron and steel industry for the
solutions that our Desulphurization System offers for airborne sulphur dioxide
emissions. For the six months ended June 30, 2009, we recorded revenues of $55.8
million, as compared to revenues of $37.5 million for the six months ended June
30, 2008, representing an increase of 48.9%.  The increase was
primarily due to the fact that majority of the new contracts were started in
January and February and were substantially completed as of June 30, 2009 as the
normal duration for each contracts varied from three to eight
months.  For the six months ended June 30, 2008, contracts starting
date spreaded from January to May, with substantial lower percentage of
completion for contracts started late, and consequently resulted in lower sales
recognized.  The overall increase of the size of the projects was also
a contributing factor for the increase of the revenue.





Our
Anti-Oxidation System, which we introduced in January 2007, materially reduces
oxidation loss in the production of hot rolled steel plates. Anti-oxidation is a
long-sought solution in the iron and steel industry. We believe our
Anti-Oxidation System, including coatings and spraying equipment, is the only
online system that prevents or reduces oxidation without needing to first cool
down the steel slab. For the six months ended June 30, 2009, we recorded
revenues of $3.6 million for anti-oxidation equipment and related coatings
sales, as compared to revenues of $2.8 million for the six months ended June 30,
2008, representing an increase of 26.8%. The increase in revenues largely
reflects our increased pricing and demand as the value of the anti-oxidation
technology has been proven in commercial practice.





In
addition to the foregoing, we provide machining services to third parties,
utilizing our heavy machine tools’ idle time to generate contract manufacturing
revenue. The revenue generated from our machining services fluctuates based on
the level of our using our heavy machining equipment to produce more of our own
products rather than for third-party contract work. For the six months ended
June 30, 2009, revenues accounted for 0.6% of the total revenue as compared to
9.7% for the corresponding period in 2008, reflecting a higher level of our
own production and reduced level of contractual work.





Cost
of Sales





The cost
of sales for the six months ended June 30, 2009 increased by $15.5 million to
$46.2 million from $30.7 million for the six months ended June 30, 2008,
representing an increase of 50.7%.  The increase was largely due to
increased sales. As a percentage of sales, the cost of sales increased to 60.2%
for the six months ended June 30, 2009 compared to 58.1% for the same period of
2008.  The breakdown of the cost of sales is as follows:





For
      the six months ended June 30,2009
                          
                          
                          2008Total
                            (in
      thousand)
                          
                          
                          %
      of Sales
                          
                          
                          Total
                            (in
      thousand)
                          
                          
                          %
      of SalesRevenuesContracts
                          
                          $
                          75,835
                          
                          
                          
                          
                          
                          $
                          48,485Machining
      Services
                          
                          
                          495
                          
                          
                          
                          
                          
                          
                          5,178Cost
      of SalesContracts
                          
                          $
                          45,619
                          
                          
                          
                          60.2
                          %
                          
                          $
                          28,166
                          
                          
                          
                          58.1
                          %Machining
      Services
                          
                          
                          593
                          
                          
                          
                          119.8
                          %
                          
                          
                          2,492
                          
                          
                          
                          48.1
                          %Gross
      Profit
                          
                          $
                          30,118
                          
                          
                          
                          
                          
                          
                          $
                          23,005





Following
the growing in our business, our capacity in terms of production and
installation directly impacted how we operate and can change from period to
period, depending on demand level, production efficiency, size of the contracts
and location of the contractors. When the capacity is approaching to peak level
through increased demand, we tend to outsource certain contracts or products,
and consequently resulted in higher cost and lower profit
margin.  During the six months ended June 30, 2009, the outsource
capacity was the main cause for 2.1% increase in cost of contract sales as
percentage of total contract sales.




42




Operating
Expense





Operating
expenses for the six months ended June 30, 2009 decreased to $7.5 million from
$12.5 million for the same period ended June 30, 2008, representing a decrease
of 39.6%. The $5.0 million decrease in our operating expenses was largely a
result of (i) decrease of $5.8 million charge for stock compensation expense
related to the 2008 earnings target or “Make Good” provision pursuant to
Agreement entered in October 2007, (ii) $0.5 million decrease in liquidated
damages expenses; (iii) decrease of 0.3 million in R&D expenses; and offset
by (iv) $1.3 million increase in commission expenses which is in line with our
increase in revenue; and (v) $0.2 million reserved for allowance for bad
debts.





Compensation
expenses related “Make Good Escrow Shares”





See the
discussion above regarding the results of operations for three months ended June
30, 2009 and June 30, 2008, under the caption “Compensation expenses related
“Make Good Escrow Shares”.





Liquidated
Damages Expenses





In
connection with the consummation of the Private Financing, and pursuant to the
Registration Rights Agreement entered into between the Company and a group of
accredited investors (the “Registration Rights Agreement”) on October 5, 2007,
we are required to register for resale shares of our common stock issued to the
investors and cause the registration statement to be declared effective by the
SEC on or before March 3, 2008. In addition, under the Securities Purchase
Agreement dated October 5, 2007, by and among the Company and such investors, we
are required to appoint a 5 member board and a majority of the board members
must be “independent directors” as defined in NASDAQ Marketplace Rule 4200(a)
(15) not later than 120 days after the date of the agreement.  The
Securities Purchase Agreement requires us to pay liquidated damages to the
investors if we do not timely comply with these requirements.  We were
late in complying with both requirements. As a result, we accrued liquidated
damages on both accounts in the aggregate amount of $0.5 million in the first
half of 2008.





On April
3, 2009, the Company entered into a Waiver and Amendment Agreement (the
“Amendment Agreement”) with certain holders of the shares of the Company’s
common stock representing holders of a majority in interest of the shares of the
Company’s common stock issued in the Private Financing.  The Amendment
Agreement amends the relevant provisions of the Securities Purchase Agreement
and the Registration Rights Agreement, respectively, such that (i) no amount of
liquidated damages shall have been incurred and payable to the investors due to
the late appointment of independent directors, (ii) the liquidated damages
incurred due to the late effectiveness of the registration statement shall be
paid in the form of shares of the Company’s common stock of up to 192,045
shares, or, at the election of each investor, in cash of (up to an aggregate of
$860,362 for all investors).  Pursuant to the Amendment Agreement, as
of June 30, 2009, the Company paid an aggregate of $615,018 to shareholders who
elected to receive cash and issued an aggregate of 48,438 shares of the
Company’s common stocks to shareholders who elected to receive shares of the
Company’s common stock.





Other
Expense, net




Other
Expense, net, for the six months ended June 30, 2009 increase by $135,729 to
$261,726 from $125,997 in 2008. The increase in other expenses, net, was mainly
due to an increase in other losses in the amount of $1,810,134 as result of
adoption of new accounting pronouncement EITF 07-5 and an increase of $0.02
million interest expense, net.  This was offset by (iii) a gain on the
liquidated damages settlement in the amount of $1,746,120 as a result of the
Amendment Agreement.  The interest income increased $0.14 million and
was the result of the increased interest rate on the Company’s cash term
deposits.  The Company also obtained an additional loan in the amount
of $22 million, which resulted in an increase in interest expenses of $0.16
million.  The net change in interest expenses appeared to be
immaterial.




Liquidity
and Capital Resources





We have
historically funded our working capital needs from operations, advance payments
from customers, bank borrowings, and capital from shareholders. Our working
capital requirements are influenced by the level of our operations, the
numerical and dollar volume of our project contracts, the progress of our
contract execution, and the timing of accounts receivable
collections.




43




In
connection with the Securities Purchase Agreement, we agreed to a provision
which provides that in the event that the legal structure of our Company is
challenged by Chinese authorities and we do not mitigate the adverse effect to
the investors’ reasonable satisfaction within 60 days of the Chinese
government’s action, then we are required to redeem the investors’ common stock
for $24.4 million. Consequently, this amount has been excluded from permanent
equity and recorded as redeemable common stock in accordance with Rule 5-02.28
of Regulation S-X and Section 211 of the Codification of Financial Reporting
Policies. While we believe that the possibility of such redemption is remote, we
may not continuously hold adequate cash on hand for such redemption and the
requirement to pay this amount would result in our having to borrow funds
or raise additional capital. There can be no assurance that loans or additional
capital would be available, if necessary, or that they would be available on
terms acceptable to us.





Without
the redemption, we believe that we have sufficient cash, along with projected
cash to be generated by our business to support operations for at least the next
12 months.





Cash
and Cash Equivalents





Our
liquidity position remains strong, supported by approximately $51.7 million cash
and cash equivalents as of June 30, 2009, representing an increase of 162.1% as
compared to $19.7 million as of December 31, 2008. Cash generated from
operations and financing activities fully supported the needs of our working
capital, and capital investments in 2009. We believe that our cash position is
adequate to meet future short-term and mid-term liquidity
requirements.





Cash
provided by operations totaled $9.7 million in the six months ended June 30,
2009, representing an increase of 227.0% as compared to $7.7 million cash used
in operations in the same period of 2008. The major components of cash provided
by operations are net earnings from operations adjusted for non-cash income and
expense items and changes in working capital. Cash provided by operations
increased by $17.4 million in the six months ended June 30, 2009 as compared to
the same period of 2008.





The
following tables present our net cash flows for the six months ended June 30,
2009 and for the same period ended June 30, 2008.




For
      the six months ended
                        June
      30,US$
      thousands
                      
                      2009
                      
                      
                      2008Cash
      provided by (used in) operating activities
                      
                      $
                      9,740
                      
                      
                      $
                      (7,670
                      )Cash
      provided by (used in) investing activities
                      
                      $
                      (28
                      )
                      
                      $
                      (3,719
                      )Cash
      provided by (used in) financing activities
                      
                      $
                      22,333
                      
                      
                      $
                      6,174




Cash
flow from operating activities





Net cash
provided by operating activities was $9.7 million for the six months ended June
30, 2009 as compared to net cash used in operations of $7.7 million in the
same period ended June 30, 2008. An increase in net income, decrease in advances
for inventory purchases and increase in tax payable contributed to increased
cash flows from operations. These increases to cash flow from operations were
offset by an increase in accounts receivable and a decrease in customer
deposits.




Accounts
Receivable




Our
accounts receivable at June 30, 2009 increased to $73.02 million from $51.5
million at December 31, 2008, representing an increase of 42.2%. As a percentage
of total sales, our accounts receivable increased to 48.0% (as a percentage of
total annualized sales) at June 30, 2009, as compared to that of 37% at December
31, 2008.  The increase was mainly due to the fact that most of the
accounts receivable represented either newly completed contracts or ongoing
contracts, with aging less than its historical accounts receivable turnover
period.  Approximately 41% of the accounts receivables are related to
contracts started in 2009 and are still ongoing as of June 30, 2009
and 30% of the accounts receivable are related to the contracts that were just
completed.




44




The
Company grants credit to customers without collateral. Accounts receivable
balances are considered past due if payment has not been received within the
payment terms established on the sales contracts or granted by the Company,
typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. Allowance for bad debts amounted to $205,588
and $0 as of June 30, 2009 and December 31, 2008, respectively.





Cash
used by investing activities





For the
six months ended June 30, 2009, net cash used in investing activities decreased
to $28,051 as compared to $3.7 million used for the same period ended June 30,
2008, representing a decrease of 99.2%. This decrease primarily resulted from no
additional advances payments made for equipment and construction material
purchase in the six months ended June 30, 2009, as compared to $3.1
million prepayment made in the same period of 2008.





Cash
provided by financing activities





For the
six months ended June 30, 2009, net cash provided by financing activities
increased to $22.3 million as compared to cash provided by financing of $6.2
million for the same period ended June 30, 2008, representing an increase of
261.8%.  The increase was primarily due to the additional bank loan
received in the amount of $22.0 million for the six months ended June 30,
2009.





Related
Party Transactions





The
Company owed $439,007 and $596,023 to a stockholder as of June 30, 2009 and
December 31, 2008, respectively, for advances made on an unsecured basis,
payable on demand and interest free. Imputed interest is charged per annum on
the amount due at 5% and 8% for the six months periods ended June 30, 2009 and
2008, respectively.  Total imputed interest recorded as additional
paid-in capital amounted to $13,557 and $10,456 for the six months ended June
30, 2009 and 2008, respectively.





Off-Balance
Sheet Arrangements





The
Company does not have any off-balance sheet arrangements.





CRITICAL
ACCOUNTING POLICIES




We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method used to apply the accounting
principle.





Accounts
Receivable





Accounts
receivable represents amounts due from customers for products sales and
services. The Company grants credit to customers without collateral. Accounts
receivable balance are considered past due if payment has not been received
within the payment terms established on the sales contract or granted by the
Company, typically up to one year. Management periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. An estimate for doubtful accounts is made when
collection of the full amount is no longer probable. When the Company has
exhausted all collection efforts, the receivable and any specific allowance is
written off.




45




Inventories





Inventory
consists of raw materials and low cost consumption supplies used in the
manufacturing process. Inventory is valued at the lower of cost or market value
using a weighted average cost method. Management reviews its inventories
periodically to determine if any reserves are necessary for potential
obsolescence or if a write down is necessary because the carrying value exceeds
net realizable value.





Fair Value of Financial
Instruments





FAS 107,
“Disclosure about Fair Value of Financial Instruments” defines financial
instruments and requires fair value disclosure of applicable financial
instruments.  FAS 157 “Fair Value Measurements”, adopted on January 1,
2008, defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosure requirements for
fair value measures. The carrying amounts reported in the balance sheets for
current receivables and payables qualify as financial
instruments.  Management concluded the carrying values are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and if
applicable, their stated interest rate approximates current rates
available.  The three levels are defined as follows:





·
                    Level
      1 inputs
      to the valuation methodology are quoted prices (unadjusted) for identical
      assets or liabilities in active
markets.


·
                    Level
      2 inputs
      to the valuation methodology include quoted prices for similar assets and
      liabilities in active markets, and inputs that are observable for the
      asset or liability, either directly or indirectly, for substantially the
      full term of the financial
instrument.





·
                      Level
      3 inputs
      to the valuation methodology are unobservable and significant to the fair
      value
measurement.




The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”





Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock”, which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF 01-6.  Paragraph 11(a) of FAS 133 specifies that
a contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument.  EITF 07-5 provides a new two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the FAS
133 paragraph 11(a) scope exception.





Revenue
Recognition





Contracts.The Company enters
into long-term fixed-price contracts with customers to manufacture and install
industrial equipment. Revenue on long-term fixed-price contracts is recognized
under the percentage-of-completion method in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1 “Accounting
for Performance of Construction-Type and Certain Production-Type Contracts”.
Under the percentage-of-completion method, management estimates the
percentage-of-completion based upon costs incurred to date as a percentage of
the total estimated costs to the customer. When total cost estimates exceed
revenues, the Company accrues for the estimated losses immediately. The use of
the percentage-of-completion method requires significant judgment relative to
estimating total contract revenues and costs, including assumptions concerning
the length of time to complete the project, the nature and complexity of the
work to be performed, and anticipated changes in estimated costs. Estimates of
total contract revenues and costs are continuously monitored during the term of
the contract, and recorded revenues and costs are subject to revision as the
contract progresses. When revisions in estimated contract revenues and costs are
determined, such adjustments are recorded in the period in which they are first
identified.




46




Services.In
addition to our specialty equipment sales, the Company uses heavy machining
equipment to perform machining services for third parties. These engagements,
numbering several hundred per year, are essentially piecework and are completed
in usually less than one month. Accordingly, these heavy machinery contracts do
not fall within the scope of SOP 81-1. Each machining engagement is governed by
a separate contract, indicating existence of an arrangement.  Revenue
is recognized when service is performed, which is usually concurrent with
delivery to the customer, the contract price is set by contract, and
collectability is reasonably assured. Accordingly, these revenues are recognized
under Staff Accounting Bulletin No. 104.





The
Company also provides technical professional services to its customers based on
a fixed-price time contract. The Company recognizes services-based revenue from
all of its contracts when the services have been performed, the customers have
approved the completion of the services and invoices have been issued and
collectability is reasonably assured.





Stock-based
Compensation





Stock-based
compensation is accounted for at fair value in accordance with SFAS 123(R)
“Accounting for Stock-Based Compensation”. SFAS 123R requires that compensation
cost relating to stock-based payment transactions be recognized in financial
statements. That cost is measured based on the fair value of the equity or
liability instruments issued on the grant date and is recognized over the period
during which a party is required to provide service in exchange for the
award (typically the vesting period).  Stock compensation for stock
granted to non-employees is determined in accordance with SFAS 123R and the EITF
96-18, "Accounting for Equity Instruments that are issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services", as
the fair value of the consideration received or the fair value of equity
instruments issued, whichever is more reliably measured.





Foreign Currency
Translation





The
Company and Innomind maintain their accounting records in their functional
currency in United States dollars and Hong Kong Dollars, respectively, whereas
the Company’s PRC subsidiaries maintain their accounting records in their
functional currency, Chinese Renminbi (“RMB”). The reporting currency of the
Company is the United States dollar.





The
financial statements of PRC subsidiaries are translated into United States
dollars using period-end exchange rates ($0.14650 and $0.14670 at June 30, 2009
and December 31, 2008, respectively) as to assets and liabilities and weighted
average exchange rates for the periods ($0.14657 and $0.14184 for the
six months ended June 30, 2009 and 2008, respectively) as to revenue and
expenses.  Capital accounts are translated at their historical
exchange rates when the capital transaction occurred.  Resulting
translation adjustments are recorded as a component of accumulated other
comprehensive income (loss) within shareholders’ equity. The resulting
translation gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred.





Items in
the cash flow statement are translated at the average exchange rate for the
period. As a result, amounts related to assets and liabilities reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.




47




Recently issued accounting
pronouncements and adopted accounting





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
FAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant”
estimates of future cash flows used in determining fair value. Changing the cash
flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been
a “probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the
Company’s consolidated financial statements because all investments in debt
securities are classified as trading securities.





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted.  The adoption of FSP FAS 157-4 did not have
a material impact on the Company’s consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The adoption of FSP FAS 115-2
and FAS 124-2 did not have a material impact on the Company’s consolidated
financial statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments not measured on
the balance sheet at fair value in interim financial statements as well as in
annual financial statements. Prior to this FSP, fair values for these assets and
liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments.  The adoption of FSP FAS 107-1 and APB 28-1 did
not have a material impact on the Company’s consolidated financial
statements.





48




In May
2009, the FASB issued Statement of Financial Accounting Standards No. 165,
“Subsequent Events,” (FAS 165, Subsequent Events [ASC 855-10-05], which provides
guidance to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. FAS 165 also requires entities to
disclose the date through which subsequent events were evaluated as well as the
rationale for why that date was selected. FAS 165 is effective for interim and
annual periods ending after June 15, 2009, and accordingly, the Company adopted
this Standard during the second quarter of 2009. FAS 165 requires that public
entities evaluate subsequent events through the date that the financial
statements are issued. The Company has evaluated subsequent events through the
time of filing these consolidated financial statements with the SEC on August
10, 2009.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 166,
Accounting for Transfers of Financial Assets — an amendment of FASB Statement
No. 140 (“FAS 166”) [ASC 860], which requires entities to provide more
information regarding sales of securitized financial assets and similar
transactions, particularly if the entity has continuing exposure to the risks
related to transferred financial assets. FAS 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets and requires additional disclosures. FAS 166 is effective for
fiscal years beginning after November 15, 2009. The Company has not completed
the assessment of the impact FAS 166 will have on the Company’s financial
condition, results of operations or cash flows.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (“FAS 167”) [ASC 810-10], which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. FAS 167 clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s
purpose and design and a company’s ability to direct the activities of the
entity that most significantly impact the entity’s economic performance. FAS 167
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. FAS 167 also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. FAS 167 is effective for
fiscal years beginning after November 15, 2009. The Company has not completed
the assessment of the impact FAS 167 will have on the Company’s financial
condition, results of operations or cash flows.





In June
2009, the FASB issued Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles a Replacement of FASB Statement No. 162 (“FAS 168”). This
Standard establishes the FASB Accounting Standards Codification (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. The Codification does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place. The Codification is effective for interim and
annual periods ending after September 15, 2009, and as of the effective date,
all existing accounting standard documents will be superseded. The Codification
is effective for the Company in the third quarter of 2009, and accordingly, the
Company’s Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all subsequent public filings will reference the Codification as the
sole source of authoritative literature.





Item
3. Quantitative and Qualitative Disclosure About Market Risk





Not
applicable.





Item
4T. Controls and Procedures.





Disclosure
Controls and Procedures




The
Company’s management, with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this
report.




49




The term
“disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e)
means controls and other procedures of the Company that are designed to ensure
that information required to be disclosed by a company in reports, such as this
reports, that it files, or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
U.S. Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.





Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, management concluded that our disclosure controls and
procedures were not effective as of June 30, 2009.





Changes
in internal control over financial reporting




In the
fiscal quarter ended June 30, 2009, the Company has taken the following steps to
remediate the material weaknesses that we identified and described in our Annual
Report on Form 10-K for the fiscal year ended on December 31, 2008:





•
Effective June 30, 2009, the Company’s Board of Directors approved the
appointment of Yi (Jenny) Liu as its Chief Financial
Officer.





• In the
fiscal quarter ended June 30, 2009, the Company engaged PricewaterhouseCoopers
as the Company SOX 404 compliance consultants.





• The
Company instituted formal contract review process to establish and document the
revenue recognition events and methodology at the inception of revenue
generating contracts.





• The
Company delivered training on revenue recognition principles and budgeting to
sales and operational members of our divisions.





Except as
described above, there were no changes in our internal control over financial
reporting during the fiscal quarter ended June 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





Management
believes that the actions described above will remediate the material weaknesses
we have identified in our Annual Report on Form 10-K for the fiscal year ended
on December 31, 2008 and strengthen our internal control over financial
reporting. We expect the material weakness will be remediated prior to
December 31, 2009. As we improve our internal control over financial
reporting and implement remediation measures, we may supplement or modify the
remediation measures described above.





A company's "internal
control over financial reporting" is a process designed by, or under the
supervision of, a company's principal executive and principal financial
officers, and effected by a company's board of directors, management and other
personnel, 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. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.




50




Our
management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent or detect 100% of all errors and fraud that may
occur. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Due to the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been
detected.





PART
II - OTHER INFORMATION





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





Issuance
of Common Stock in Acquisition of Innomind





In a
share exchange transaction that was signed on October 3, 2007 and closed on
October 5, 2007 (the “Share Exchange”), the Company acquired Innomind, and
through that acquisition also acquired Innomind’s wholly-owned subsidiary,
Dalian Innomind, as well as some of the assets and the business of Dalian
Innomind’s PRC affiliate, RINO. In the Share Exchange the Company issued
17,899,643 shares of our common stock (the “Control Shares”) to Zhang Ze,
Innomind’s sole shareholder, in exchange for 10 shares of capital stock of
Innomind, which represented all of the issued and outstanding shares of
Innomind, which were owned by Zhang Ze. At the completion of that share
exchange, Innomind became the Company’s wholly owned subsidiary. The Share
Exchange was accomplished in reliance upon Section 4(2) of the Securities Act of
1934, as amended (the “Securities Act”). Immediately after this Share Exchange,
Zhang Ze placed the Jade Mountain shares he received in exchange for all his
shares in Innomind into a Trust. The sole beneficiaries of this Trust are Zou
Dejun and Qiu Jianping, the founders of Dalian Rino.




Issuance
of Common Stock in Private Placement





On August
16, 2007, the Company issued 125 (12,500 post-forward split) common shares in a
private placement for cash of $5,532. The Company relied on the exemption from
registration provided under Section 4(2) of the Securities Act.





On
October 5, 2007, in a private placement through Douglas Financial, LLC, an NASD
and SEC registered broker-dealer (“Douglas Financial”), we sold 5,464,357 shares
of our common stock for $24,480,319 gross proceeds (or $21,250,109 net proceeds
after deducting the offering expenses) under a Securities Purchase Agreement by
and among the Company and a group of accredited investors (as defined under Rule
501(a) of Regulation D promulgated under the Securities Act) named therein dated
as of September 27, 2007 (the “Securities Purchase Agreement”). In the private
placement we sold the common stock and issued warrants in reliance upon the
exemption from registration provided by Rule 506 of Regulation D promulgated
under the Securities Act of 1933 and Section 4(2) of the Securities
Act.





Under the
Securities Purchase Agreement, we are required to register for resale each share
of common stock sold therein as well as the shares of common stock underlying
the above, placement agent warrants.





In
connection with the private placement, 250,000 shares of common stock were
issued to Chief Capital, Ltd., for advisory services. We relied on the exemption
from registration provided by Regulation S of the Securities Act for such
issuance.




51




In
connection with the private placement and pursuant to the Engagement Agreement
Providing for Investment Banking Services, dated January 19, 2007 by and between
RINO and Douglas Financial, Douglas Financial, as placement agent, received the
following compensation: (i) $80,000 cash as an engagement and documentation fee;
(ii) $1,750,000 as a placement commission; (iii) 875,000 shares of our Common
Stock, and (iv) warrants to purchase 382,500 shares of Common Stock at an
exercise price of $5.376 per share, exercisable within 6 years of the date of
issue. The exercise price of the warrant is subject to adjustments under certain
circumstances and the warrants permit cashless exercise by the holders. We
relied on the exemption from registration provided by Section 4(2) of the
Securities Act for the issuance of common stock and warrants to Douglas
Financials.




Issuance
of Common Stock to Former Majority Shareholder





On August
8, 2007, the Company issued 2,950 (295,000 post-forward split) common shares to
Glenn A. Little for cash of $14,750. The Company relied on the exemption from
registration provided under Section 4(2) of the Securities Act.




On
September 11, 2007, the Company issued 928 pre- Forward Split shares (or 92,800
shares post-Forward Split) of its common stock to Glenn A. Little (the “Little
Shares”) for an aggregate of $4,168. At that time and immediately prior to the
consummation of the Share Exchange, Mr. Little was the Company’s majority
shareholder and its sole director and executive officer. The Company relied on
the exemption from registration provided under Section 4(2) of the Securities
Act.




Issuance
of Common Stock to Former Chief Financial Officer of RINO





At the
Closing of the Share Exchange and the private placement, the Company issued
20,000 shares of common stock to Eric Gan (“Gan”), RINO’s former chief financial
officer, in full satisfaction of RINO’s obligations to Gan under a Compensation
Agreement dated July 30, 2007. The Company relied on the exemption from
registration provided under Section 4(2) of the Securities Act.





Issuance
of Common Stock to Investors in lieu of Cash Payment as Liquidated
Damages





On April
3, 2009, the Company, entered into a Waiver and Amendment Agreement (the
“Amendment Agreement”) with certain holders of the shares of the Company’s
common stock representing holders of a majority in interest of the shares of the
Company’s common stock issued in the private placement transaction consummated
on October 5, 2007 (the “Private Financing”).  The Amendment Agreement
amends certain liquidated damages provisions of the Securities Purchase
Agreement and the Registration Rights Agreement that the Company entered into
with such investors in connection with the Private Financing, such that no
amount of liquidated damages shall have been incurred and payable to the
investors due to the late appointment of independent directors, and the
liquidated damages incurred due to the late effectiveness of the registration
statement shall be paid in the form of shares of the Company’s common stock of
up to 192,045 shares, or, at the election of each investor, in cash of (up to an
aggregate of $860,362 for all investors).  Pursuant to the Amendment
Agreement, as of June 30, 2009, the Company paid an aggregate of $615,018 to
shareholders who elected to receive cash and issued an aggregate of 48,438
shares of the Company’s common stocks to shareholders who elected to receive
shares of the Company’s common stock.  The Company issued these shares
in reliance on the exemption from registration provided by Regulation D
promulgated under the Securities Act.





Issuance
of Common Stock to Chairman of Audit Committee





On May
13, 2009, the Company issued 2,000 shares of our common stock to Mr. Kenneth
Johnson, the Chairman of the Audit Committee, for the service
provided  by him in his capacity as the Chairman of the Audit
Committee.  The Company relied on the exemption from registration
provided under Section 4(2) of the Securities Act.





Issuance
of Stock Options to the Chief Financial Officer





Pursuant
to the employment agreement dated June 30, 2009, between the Company and the
Company’s Chief Financial Officer, Yi (Jenny) Liu, Ms. Liu was granted 50,000
options to purchase our common stock at an exercise price of $6.15 per share,
vesting in 3 annual installments beginning on June 30, 2010.  The
options will expire on the 5th
anniversary date of their grant The Company relied on the exemption from
registration provided under Section 4(2) of the Securities Act.




52




Item
6. Exhibits





(a)
              Exhibits10.1
              
              RINO
      International Corporation 2009 Stock Incentive Plan31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002




53





SIGNATURES





Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.





RINO
      INTERNATIONAL CORPORATIONDate:
      August 10, 2009
              BY:
              /s/ Zou DejunZou
      DejunChief
      Executive Officer




RINO
      INTERNATIONAL CORPORATIONDate:
      August 10, 2009
              BY:
              /s/ Jenny Y. LiuJenny
      Y. LiuChief
      Financial Officer




54





INDEX TO
EXHIBITS





Exhibit
                Number
              
              Description10.1
              
              RINO
      International Corporation 2009 Stock Incentive Plan31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002




55