UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM 10-K




x
            Annual report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934.





For
the fiscal year ended December 31, 2009





 ̈
            Transition report pursuant to
      Section 13 or
      15(d) of the Securities Exchange Act of
  1934.





Commission
file number 0-52549




RINO
International Corporation


(Exact
name of registrant as specified in its charter)




Nevada
              
              41-1508112(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer Identification No.)




11
Youquan Road, Zhanqian Street, Jinzhou District


Dalian,
China 116100


(Address
of principal executive offices)




00186
411 8766 1222


(Registrant’s
telephone number)




Securities
registered pursuant to Section 12(b) of the Act:




None




Securities
registered pursuant to Section 12(g) of the Act:




Title
      of each class
                Name
      of each exchange on which registeredCommon stock, par value $.0001 per
      share
                NASDAQ Global
  Market





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes  ̈   Nox




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes  ̈
  No x




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x
    No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10-K.  x




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
definition of “accelerated filer,” “large accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):




Large Accelerated Filer  o    Accelerated
Filer  o    Non-


Accelerated Filer  o
   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
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant (assuming for these purposes, but without
conceding, that all executive officers and directors and 10% stockholders are
“affiliates” of the Registrant) as of June 30, 2009 (based on the closing
sale price on such date of the Registrant’s common stock, on the
Over-the-Counter Bulletin Board as reported on Yahoo Finance) was
$70,469,791.





As of
March 31, 2010, there are 28,603,321 shares of common stock of the
registrant, par value 0.0001 per share issued and outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




None









RINO
International Corporation


Annual
Report on Form 10-K


For
the Year Ended December 31, 2009




Table
of Contents




PART
      IItem
      1.
                Business
                3Item
      1A.
                Risk
      Factors
                14Item
      1B.
                Unresolved
      Staff Comments
                26Item
      2.
                Properties
                26Item
      3.
                Legal
      Proceedings
                27Item
      4.
                Removed
      and Reserved
                27PART
      IIItem 5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                27Item
      6.
                Selected
      Financial Data
                28Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                28Item
      8.
                Financial
      Statements and Supplementary Data
                40Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                40Item 9A.
                Controls
      and Procedures
                40PART
      IIIItem 10.
                Directors,
      Executive Officers and Corporate Governance
                43Item
      11.
                Executive
      Compensation
                46Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                49Item 13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                51Item 14.
                Principal
      Accountant Fees and Services
                51PART
      IVItem
      15.
                Exhibits
      and Financial Statement Schedules
                52Signatures
                54




2




PART I.




Disclosure
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, may constitute
“forward-looking statements” under the Private Securities Litigation
Reform Act of 1995, which represent the expectations or beliefs of,
including, but not limited to, statements concerning the operations,
performance, financial condition and growth of RINO International Corporation,
together with its direct and indirect subsidiaries and controlled-affiliates.
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 the caption “Risk Factors” in Item 1A of this report. We
believe that these forward-looking statements are reasonable; however, you
should not place undue reliance on such statements. These statements are based
on current expectations and speak only as of the date of such statements. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of future events, new information or
otherwise.





Except
as otherwise specifically stated or unless the context otherwise requires, the
"Company", "we," "us,"and "our" refer to (i) RINO International Corporation
(formerly Jade Mountain Corporation), (ii) Innomind Group Limited (“Innomind
Group”), a wholly-owned subsidiary of RINO International Corporation organized
under the laws of the British Virgin Islands, (iii) Dalian Innomind Environment
Engineering Co., Ltd. (“Dalian Innomind”), a wholly-owned subsidiary of Innomind
Group organized under the laws of the People’s Republic of China (the “PRC” or
“China”), (iv) RINO Investment (Dalian) Co., Ltd. (“RINO Investment”),
a wholly-owned subsidiary of RINO International organized under the PRC
law,  (v) Dalian RINO Heavy Industries Co., Ltd. (“RINO Heavy
Industries”), a wholly-owned subsidiary of RINO Investment, organized under
the PRC laws, (vi) Dalian RINO Environment Engineering Science and Technology
Co., Ltd., a contractually controlled affiliate of Dalian Innomind organized
under the laws of the PRC (“Dalian Rino”); (vii) RINO Technology Corporation
(“RINO Technology”), a wholly-owned subsidiary of Dalian Rino under the
laws of Nevada, and (viii) 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”).




ITEM 1.         BUSINESS





Through
our contractually controlled affiliates in the People’s Republic of China, since
October 5, 2007, we have been engaged in the business of environmental
protection and remediation. Our business consists of designing, manufacturing,
installing and servicing wastewater treatment and flue gas desulphurization
equipment principally for use in China’s iron and steel industry, and
anti-oxidation products and equipment designed for use in the manufacture of hot
rolled steel plate products. At the present, RINO International’s sole business
activities are acting as a holding company of our direct and indirect
subsidiaries, Innomind Group Limited, a company organized under the laws of the
British Virgin Islands, RINO Investment (Dalian) Co., Ltd. (“RINO Investment”),
a wholly-owned subsidiary of the Company under the PRC law with its wholly-owned
subsidiary in China, Dalian RINO Heavy Industries Co., Ltd.
(“RINO Heavy Industries”), and Dalian Innomind Environment Engineering
Co., Ltd. (“Dalian Innomind”), a limited liability company organized under the
laws of the People’s Republic of China (“PRC”), which contractually controls and
operates our affiliate Dalian Rino Engineering Science and Technology Co., Ltd.
(“Dalian Rino”), a limited liability company organized under the laws of the
PRC, and its subsidiaries Dalian Rino Environmental Engineering Design Co.,
Ltd.(“Dalian Rino Design”), Dalian Rino Environmental Construction and
Installation Engineering Project Co., Ltd., (“Dalian Rino Installation”) and
RINO Technology Corporation, a Nevada
corporation (“RINO Technology”).




Our
History





We were
originally incorporated in Minnesota in 1984 as Applied Biometrics, Inc. In
October 2007, through a share exchange transaction, a private financing
transaction and a restructuring transaction, we, through our subsidiaries and
variable interest entities (VIEs), currently engage in design, development,
manufacture and installation of industrial equipment used mainly for
environmental protection purposes in China.




3




The
Company’s current structure is set forth in the diagram below:











Organizational
History of Innomind Group Limited (“Innomind Group”) and Dalian Innomind
Environment Engineering Co., Ltd. (Dalian Innomind”)





Innomind
Group.





Innomind
Group Limited was incorporated under the laws of the British Virgin Islands on
November 17, 2006. Until the consummation of the Share Exchange Transaction,
Innomind Group’s sole shareholder was Zhang Ze, a citizen and resident of the
PRC.




Dalian Innomind
Environment Engineering Co., Ltd. (“Dalian
Innomind”).





On July
9, 2007, Innomind Group incorporated Dalian Innomind under the laws of the PRC.
All of Dalian Innomind’s outstanding capital stock is held by Innomind, and by
virtue of such ownership Dalian Innomind is a “wholly foreign owned enterprise
(“WFOE”) under PRC law.





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.




4




Organizational
History of Dalian Rino Engineering Science and Technology Co., Ltd (“Dalian
Rino”), Dalian Rino Environmental Engineering Project Design Co.,
Ltd. (“Dalian Rino Design”),  Dalian Rino Environmental Construction
& Installation Project Co., Ltd. (“Dalian Rino Installation”) and Rino
Technology Corporation (“RINO Technology”)





Dalian
Rino Engineering Science and Technology Co., Ltd (“Dalian Rino”)




Dalian
Rino Engineering Science and Technology Co., Ltd. (unless the context indicate
otherwise, together with its subsidiaries, collectively, “Dalian Rino”) was
formed on March 5, 2003, under PRC law. Its initial registered capital was RMB
7,000,000 (approximately US $922,327), which was increased to RMB 30,500,000
(approximately US $4,018,711) on April 18, 2006. Dalian Rino is owned by its two
founders, Zou Dejun (90%) and his wife, Qiu Jianping (10%). Since its founding,
Dalian Rino has been engaged in developing, marketing and selling its three
principal products: the Lamella Inclined Tube Settler Wastewater Treatment
System (also called the “Lamella Wastewater System”), the Circulating Fluidized
Bed Flue Gas Desulphurization System (also called the “Desulphurization
System”), and the High Temperature Hot Rolled Steel Anti-Oxidation System (also
called the “Anti-Oxidation System”).





Dalian
Rino Environmental Engineering Project Design Co., Ltd. (“Dalian Rino
Design”)





On
September 24, 2008, Dalian Rino formed Dalian Rino Environmental Engineering
Project Design Co., Ltd. (“Dalian Rino Design”), as a wholly owned subsidiary
under the laws of the PRC, to focus on research, development and the technical
design aspects of our business. Pursuant to the business permits, Dalian Rino
Design’s right of operation expires on September 23, 2018 and its business
permit is renewable upon expiration.





Dalian
Rino Environmental Construction & Installation Project Co., Ltd. (“Dalian
Rino Installation”)





On
October 14, 2008, Dalian Rino formed Dalian Rino Environmental Construction
& Installation Project Co., Ltd. (“Dalian Rino Installation”), as a
wholly-owned subsidiary under the laws of the PRC.  Pursuant to its
business license, Dalian Rino Installation is permitted and will focus primarily
on installation of environmental protection and energy saving equipment. Dalian
Rino Installation’s right of operation expires on October 13, 2018 and its
business permit is renewable upon expiration.





Rino
Technology Corporation (“Rino Technology”)





On August
19,2009, Daian RINO, incorporated by Rino Technology Corporation as its
wholly owned subsidiary under the laws of Nevada, to focus on corporate business
development activities. Rino Technology will assist the business of Dalian
Rino by providing access to the contacts of innovative environmental
pollution control technologies and companies.





Organizational
History of Rino Investment (Dalian) Co., Ltd. (“Rino Investment”) and
Dalian RINO Heavy Industries Co., Ltd. (“Rino Heavy Industries”)





Rino
Investment (Dalian) Co., Ltd. (“Rino Investment”)





On
November 30, 2009, the Company incorporated Rino Investment ( Dalian ) Co., Ltd.
(“Rino Investment”) under the laws of the PRC. All of Rino Investment’s
outstanding capital stock is held by Rino International Corporation, and by
virtue of such ownership Rino Investment is a “wholly foreign owned enterprise
(“WFOE”) under PRC law. Rino Investment has its office within the Dalian
Development Zone, engaged in professional investment and business
development.





Dalian
RINO Heavy Industries Co., Ltd. (“Rino Heavy Industries”)





To expand
the production capacity, Dalian Rino Heavy Industries Co., Ltd. (“Rino Heavy
Industries”), as a foreign wholly owned subsidiary under the laws of PRC, was
incorporated on December 4, 2009 by RINO Investment. Rino Heavy
Industries, located in the Dalian Changxing Island Harbor Industrial Zone,
is a heavy machinery processing enterprise, with a large scale (450m × 290m
large) heavy industrial plant, capable of processing a wide range of mainframe
parts. Rino Heavy Industries also focuses on the research and development,
manufacturing, installing and maintaining environmental protection
equipments.





Description of the
Business





We are an
industrial technology-based, PRC environmental protection and remediation
company. Specifically, through our subsidiaries and controlled affiliates in
China, we are engaged in the business of designing, manufacturing, installing
and servicing wastewater treatment and exhaust emission desulphurization
equipment principally for use in China’s iron and steel industry, and
anti-oxidation products and equipment designed for use in the manufacture of hot
rolled steel plate products. All of our products are custom-built for specific
project installations, and we execute supply contracts during the design phase
of our projects. Our products are all designed to reduce either or both
industrial pollution and energy utilization, and comply with ISO 9001 Quality
Management System and ISO 14001 Environment Management System requirements, for
which RINO received certificates in 2004 and 2008.





Since
1978, the PRC has undergone a substantial economic transformation and rapid
economic growth, becoming the world’s fourth largest national economy, with the
world’s largest and most rapidly growing iron and steel market. Through its
continuous focus on nation-wide economic development, China’s overall industrial
pollution output has become a central issue for the national government, and a
priority in the PRC’s eleventh five-year plan. For example, in 2006 China’s
industrial enterprises emitted 25.9 million tons of sulphur dioxide, the
principal cause of “acid-rain,” and the PRC has become the world’s largest
emitter of sulphur dioxide pollution. As a consequence of this and other
industrially-based environmental challenges, Dalian Rino’s customer base -
the Chinese iron and steel industry - faces governmental mandates to decrease or
eliminate water pollution and sulphur emissions, which are key applications for
our technologies.




5




Accordingly,
environmental protection and remediation is a relatively new industry in the
PRC. Nonetheless, like the Chinese economy, it is rapidly growing – we estimate
that in the next 5 years, there is a wastewater remediation market of $260
million per year and the desulphurization market will grow at approximately 5%
annually.  Further, the market for the Company’s products is highly
regulated by the central PRC government, which sets specific pollution output
targets for industrial enterprises. For this reason, we believe that the demand
for our products is predictable, and will follow the growth of the PRC’s iron
and steel industry and government-mandated pollution control standards that are
being made more stringent annually. We also believe that our revenue and
profitability growth to date arises from these same factors. Our revenues
increased by 38.3% to $192.6million in fiscal year 2009 and by 119.8% to
$139.3 million for fiscal year 2008 from $63.4 million in fiscal year 2007. Our
gross profit increased by 33.1% to $72.3million in fiscal year 2009, compared to
an increase of 78.3% to $54.3 million in fiscal year 2008 and the gross
profit of $30.5 million for fiscal year 2007. Our income from operations
increased by 142.9% to $55.3million in fiscal year 2009 and by 44.0%
to $22.8 million in fiscal year 2008 from $15.8 million. Our after-tax net
income increased by 165.0% to $56.4million and 108.3% to $21.3 million in fiscal
years 2009 and 2008, respectively, compared to that of $10.2 million
in fiscal year 2007.





Principal
Products




We have
three principal products and product lines: the “Lamella Inclined Tube Settler
Waste Water Treatment System,” the “Circulating, Fluidized Bed, Flue Gas
Desulphurization System,” and the “High Temperature Anti-Oxidation System for
Hot Rolled Steel.”





Lamella Inclined Tube
Settler Waste Water Treatment System





Our core
product, the Lamella Inclined Tube Settler Waste Water Treatment System (the
“Waste Water System”), is a highly efficient wastewater treatment system that
incorporates our proprietary and patented ‘Lamella Inclined Tube Settler’
technology. We believe that the System is among the most technologically
advanced wastewater treatment systems presently in use in China’s iron and steel
industry. It includes industrial water treatment equipment, complete sets of
effluent-condensing equipment, highly efficient solid and liquid abstraction
dewatering equipment and coal gas dust removal and cleaning equipment. The
technology has received numerous regional and national design awards, and has
been successfully installed and used at some of the largest steel mills in
China, including Jinan Iron & Steel Group Co., Ltd., Benxi Iron & Steel
(Group) Co., Ltd., Handan Iron & Steel Group Co., Ltd., Tianjin Tiangang
Group Co., Ltd., Shijiazhuang Iron & Steel Group Co., Ltd., Panzhihua
Iron & Steel Group Co., Ltd., Anyang Iron & Steel Group Co., Ltd.,
Nanchang Changli Steel Co., Ltd., Shaogang Steel Co., Ltd., Linggang Steel Co.,
Ltd. Weifang Steel Group Co.,Ltd and Puyang Steel.




Our
combination of proprietary system design and patented technology allows
wastewater to flow through the system in layers while at the same time settling
particulate matter without disturbing the water flow. Operating results of the
above, Lamella Wastewater System installations, show that our technology
improves the stability of the settling deposition, increases the available
settling area, shortens the settling distance for waste particles, reduces the
settling time, and results in particle removal efficiency rates of up to 99%.
After treatment with our technology and system, coal gas wastewater and
wastewater containing iron mineral powder can be reused and returned to the
production process without further treatment, allowing users to create a
closed-loop. This lowers the overall use of industrial water for the enterprises
utilizing our technology, reduces the output of solid industrial waste, and
improves the efficient use of resources.





Compared
with alternative inclined plate technology, the Lamella Wastewater System has
several important advantages as shown in the following table:





Normal Inclined Plate Settling Pool
              
              Lamella Inclined Tube SettlerWater
      power staying time 30 min, surface load 3m3/m2·h, small volume, small
      space use coefficient, short waterpower process (with short current in
      winter).
              
              Water
      power staying time 45 min with surface load 8m3/m2·h, large
      use coefficient, long water power process.First
      settling, is not fit for a wide range wave of floats, affected by the
      stability and effect of the water outlet
              
              Tertiary
      settling (with sludge abstraction collection system in every layer)
      anti-pump load, no interference between water inlet and sludge outlet,
      water outlet stable.





Water
      inlet float content: SS3000 ~ 5000mg/L, water outlet float content: SS100
      ~ 200 mg/L, low treatment efficiency.
                      
                      Water
      inlet float content: SS3000 ~ 16000mg/L water outlet float content: SS50 ~
      80 mg/L, high treatment efficiency.Inclined
      plate, inclining angle 60 degree, small settling deposition
      area.
                      
                      Inclined
      plate, inclined tube inclining angle 450, results show that the
      smaller the inclining angle of the inclined tube or plate, the smaller the
      settling particles removed, the higher settling efficiency for removal of
      particulate
matter.




6




Adopt
      glass steel and compound Nylon Ether ketone, easy to age degrade and
      become clogged with sludge, needs to be changed often, has high operation
      and maintenance costs.
                        
                        Compound
      new material plate, PP inner Surface Coating, resistant corrosion, smooth
      and clean surface, minimal sludge collection.Small
      sludge abstraction area, bad sludge water abstraction efficiency, short
      life cycle of the sludge outlet, high and unstable water content of
      sludge, adds difficulty to the next sludge treatment
    process.
                        
                        With
      sludge water abstraction area and dust collection transmission device,
      long sludge outlet circle, special sludge disposal equipment sludge
      outlet, lower water content of sludge, convenient for new process to
      recycle.
 
 The
      low carbon steel structures - such as pool surface frame - exposed to
      humidity and high temperature, easily corrode, which greatly reduces the
      life of equipment.
                
                Lamella
      Inclined Tube Settler system is enclosed, the high humidity of the tank
      will not cause corrosion of the equipment.Occupies
      large area - large footprint, strict requirement for
      placement.
                
                Occupying
      small area - small footprint - equipment can save over 30% area to treat
      same amount of water and is flexible for installation.Complicated
      system technique, complicated equipment configuration, high maintenance,
      inconvenient for use with automated control, often creates secondary
      pollution.
                
                Short
      technical process, simple equipment, low failure rate - high MTBF, easy
      maintenance, highly automated, low operational cost, closed-end
      circulating treatment, without secondary
  pollution.




Circulating, Fluidized Bed,
Flue Gas Desulphurization System





The
Circulating, Fluidized Bed, Flue Gas Desulphurization System (the
“Desulphurization System”) is 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.
Without treatment, flue gasses that result from sintering contain high content
of sulphur dioxide which reacts with atmospheric water and oxygen to produce
sulphuric acid that precipitates as “acid rain.”  As illustrated
below, the Desulphurization System is comprised of a desulphurization agent
inlet system, circulating fluidized bed desulphurization reactor, dust removal
system, desulphurization dust removal treatment system, desulphurization wind
pump system, monitoring system, electrical control system, and smoke flue
system.











The
Desulphurization System utilizes proprietary technology jointly developed by
RINO and the Chinese Academy of Sciences. We have the right to acquire certain
related technology from the Chinese Academy of Sciences for RMB 1,000,000
pursuant to a technology transfer agreement dated May 18, 2007.





As
compared with equipment using other desulphurization technologies, our
proprietary technology has the following advantages: our equipment has a smaller
footprint, a shorter circulation process and a low calcium sulphur ratio, the
cost of operating the system is lower; the system is more efficient with higher
desulphurization rates (for coal with a high (i.e., 6%) sulphur content,
desulphurization rates can reach 92%). Our desulphurization process does not
generate wastewater, dust or other secondary pollutants. In addition, the costs
for the manufacturing and installation of the equipment are relatively
affordable to the targeted iron and steel mills.





Although
historically we have concentrated our marketing and efforts for this system in
the PRC iron and steel industry, the technology also can be widely used in
fields such as metallurgy, electrical power generation, rubbish treatment. We
plan to expand our sales and marketing to such additional applications both in
the PRC and internationally.




7




High Temperature
Anti-Oxidation System for Hot Rolled Steel





Our High
Temperature Anti-Oxidation System for Hot Rolled Steel (the “Anti-Oxidation
System”) is a set of products and a mechanized system that substantially
reduces oxidation-related output losses in the production of continuous cast,
hot rolled steel.   In the process of continuous cast, hot rolled
steel, oxidation-related output loss ranges from 2% -5% on average. This
translates into a loss of production output or throughput of
2%-5%.  Our Anti-Oxidation System reduces oxidation-related output
loss by over 60%, from the current level of approximately 3% to around
1.2%.  In addition, oxidation in high-temperature steel production
results in the waste of water and energy and generates pollution.  In
the United States, Japan, and Europe, technology has been developed to
ameliorate this problem, but the cost of the coating used in the process and the
inability of the equipment to be utilized in high temperature environments
limits its application to specialty steel products such as stainless steel, and
silicon and carbide steel products.





Our
Anti-Oxidation System is specifically designed to work effectively with hot
rolled steel product in high temperature environment.  As illustrated
below, our system operates at significantly higher product temperatures than its
competitors, thereby increasing its general utility and its range of steel
product applications.  We believe that in design and technology the
Anti-Oxidation System is the only anti-oxidation process available for the iron
and steel industry (both in the PRC and internationally) that can be applied in
high temperature environments, and is a unique solution to the loss of
production output due to high-temperature oxidation, which is a long-standing
problem in the world-wide iron and steel industry.











The
technology used in our Anti-Oxidation System is jointly developed by Dalian RINO
and the Chinese Academy of Sciences. In March, 2006, Dalian Rino acquired the
technology from the Chinese Academy of Sciences under an agreement that provides
for the co-ownership of the intellectual property rights to the formula for
the anti-oxidizing paint used in the system and to the spray system for applying
the paint, co-ownership of any patents granted, and the transfer to Dalian Rino
of all commercialization rights.





As hot
rolled steel consists of approximately 90% of the PRC steel production and 90%
of world-wide production, we believe that our technology has a far broader
market both in China and internationally than is the case for competing systems
and technologies.





Each unit
of our Anti-Oxidation System services one steel line and costs approximately
$1.4 million installed.  The coating material developed by Dalian Rino
for use with the anti-oxidation equipment can be produced at relatively low cost
at approximately $1,264 per ton which covers approximately 1180 tons of steel.
The coating material is usable in high temperature environments and is easily
applied in a uniform manner. That coating can be directly sprayed onto hot steel
slabs at temperatures of 600°-1000° C, thereby saving the increased costs and
energy utilization that all other anti-oxidation equipment entails.





In July
2007, our Anti-Oxidation System has first been installed, tested and accepted by
Jinan Iron & Steel Group Co., a major PRC steel manufacturer. The
installation results show that the coating system fully conforms to the hot
rolling mill environment, effectively reduces oxidation loss by 60%, saves
energy, and increases production throughput.





Contract
Machining Services





In
addition to the environmental remediation and protection systems above, since
late 2005 we have also being using our over capacity during “down time” to
perform contract machining services for third-party industrial
enterprises.





The
specialized heavy machinery and equipment that we use to produce our Lamella
Wastewater System, Desulphurization System and Anti-Oxidation System also
provides us with a substantial capacity to undertake the machining of
large, high-precision and advanced structures. To this end, Dalian Rino
established and the Company maintains strategic cooperation relationships
with Dalian Heavy Industry (Zhonggong) and China First Heavy Industries with
which we contract to provide production time on our heavier machine tools,
during “down time” on our own production. For fiscal years 2007, 2008 and 2009,
such contract manufacturing business has provided the Company with $21,313,500,
$19,422,523 and $5,169,434 in revenues, respectively, and $13,134,648,
$9,322,907 and $2,311,315 in gross profit, respectively.




We expect
that as sales of its own products increase, we will reduce or eliminate
contracting the use of our machines and equipment to third parties.




New
Products and Product Development





Sludge Treatment
System





In
November 2008, Dalian University of Technology successfully developed a new
sludge treatment system with our cooperation. The new sludge treatment system
can be used to treat sludge generated by the municipal wastewater treatment
process, industrial sludge generated by the chemical industry and oil sludge
generated by 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.  To
treat the sludge, the first and most critical step is to remove water from the
sludge through a dehydration process, which will reduce the quantity of the
sludge and make it easier to be incinerated. Depending on the heavy metal
content of the desiccated sludge, the final product can be used as agricultural
fertilizer if the heavy metal content is low, or, after further processing, as a
component in various construction materials if
the heavy metal content is high.




8




We
believe the current best sludge treatment technology available in the PRC market
(provided by third parties) allows for a 30% reduction of water in the sludge
while our technology, using superheated steam to dehydrate sludge, provides an
improvement of 10% in water reduction.  In addition, our new sludge
treatment system costs approximately 50% less than imported products and the
costs of daily operation are approximately 45% less. The Chinese government
recently promulgated a new regulation requiring at least 60% of municipal
wastewater be treated by 2010, the implementation of which is expected to
significantly increase the amount of sludge generated by the wastewater
treatment process in China in the next several years. We estimate the profit to
process one ton of sludge generated by municipal wastewater treatment process
varies between $12 and $19 depending on the steam source. Currently,
approximately 27.8 million metric tons of sludge is being generated by the
wastewater treatment process annually with a water content of approximately
80%.





We
believe Northeastern China, where Dalian RINO is located, is the oil industry
center and this region generates approximately 2 million tons of oil sludge
annually. We estimate the profit to process one ton of oil sludge averages
$30.





Dalian
University of Technology has made a patent application for this technology in
China (Application number: 200710011115.0).  Based our agreement with
Dalian University of Technology, Dalian Rino will pay an ongoing royalty of
approximately 5% of sales to the university. As of the date of this Report,
Dalian Rino has not paid out any royalty to Dalian University of
Technology.





DXT
System





In early
September 2009, we commenced installation of our new proprietary ammonia-based
desulphurization system (the "DXT system") on a 280 m2 sinter system at Hunan
Lianyuan Iron and Steel Company.  The total contract value is
approximately $10 million with the installation scheduled to be completed during
the second quarter of 2010.  The DXT system  utilizes a
technology, through a contractual arrangement , that has been applied by
Baosteel Group Co., China's largest steel producer, to its manufacturing process
during the past 10 years.  Our DXT system applies such technology, to
the best of our knowledge for the first time, in the desulphurization process in
China's iron and steel industry.  Our new DXT operating system
utilizes coking waste ammonia in the flue gas to effectively remove the sulphur
dioxide from the sinter flue gas and produces ammonia sulfate as a by-product,
which can be used as fertilizer.  We believe that in addition to our
commitment to filtering out up to 99% of the harmful sulphur
emissions, the DXT system utilizes less energy, decreases operating and
maintenance costs, and creates a sustainable revenue generating activity through
the production of fertilizer.  The Chinese government strongly
supports technologies which are both environmentally friendly and
economical.  Our customers in the iron and steel manufacturing
industry that use the DXT system will be eligible for tax credits and government
subsidies to offset the costs.




Environmental
Challenges in the PRC





China
currently had been in the midst of extraordinarily rapid economic growth and
reform that is closely tied to its pace of industrial development. In 2004, the
PRC’s total industrial output reached RMB 7,238.7 billion (US $934 billion).
Since 1978, China’s real GDP has grown at an average rate of approximately 11.3%
per year, while its share of world trade has risen from less than 1% to almost
8% in the same timeframe. Foreign trade growth has averaged nearly 15% over the
same period, or more than 2,700% in the aggregate. Over the last decade the PRC
has become a preferred destination for direct foreign investment, and in
2005 attracted $72.4 billion in foreign direct investment, according to the
Chinese Ministry of Commerce. China also is competitive in many advanced
technologies and continues to be a preferred destination for the relocation of
global manufacturing facilities in virtually every manufacturing sector. China
is now the fourth largest economy and the third largest trader in the
world.




With the
PRC’s rapid industrial expansion has come its inevitable by-product:
industrially generated pollution of water, the air and the environment,
generally. It is estimated that approximately 80% of China’s environmental
pollution results from industry-produced solid waste, waste water and waste gas
emissions. During the 1990’s the extent of and dangers posed by China’s
increasing levels of environmental pollution became widely perceived and
developed into a priority for the PRC’s central government. During the 2000-2005
period, China expended over $90 billion on environmental protection efforts.
Prior to the global financial crisis, for the eleventh five-year plan
(2006-2010), the PRC is expected to spend approximately $193 billion on such
efforts. The reduction or elimination of waste water and airborne pollutants has
become a key element in the country’s next five year economic plan.





In
addition, in response to the recent global financial crisis, the PRC government
introduced a 4 trillion RMB stimulus program on November 27, 2008. The stimulus
package - to be spread over a period of two years - aimed to boost the
slowing Chinese economy by spurring domestic spending and demand, as its GDP
growth slid to 9% in 2008 after years of double-digit growth. On February
26, 2009, China’s State Council reinforced China’s 2008 stimulation package by
further measures to stimulate specific industries in 2009. Specifically, 5.3% of
the total stimulus package will be spent on sustainable development that
promotes energy saving and environmental control.





Based on
the breakdown of the stimulus spending unveiled by China’s top economic planner,
the National Development and Reform Commission (NDRC), the percentage allocation
of the total stimulus package is as follows: approximately 38% to public
infrastructure (such as railway, road, irrigation, and airport construction),
25% to post-quake reconstruction (construction of low-cost housing,
rehabilitation of slums, and other social safety net projects), 9% to
technology advancement (projects to upgrade the Chinese industrial sector,
gearing towards high-end production to move away from the current
export-oriented and labor-intensive mode of growth),  5% to
sustainable development (projects to promote energy saving and cuts in harmful
gas emissions, and environmental engineering projects), 4% to educational &
cultural projects and 9% to rural development (building public facilities,
resettling nomadic people, supporting agriculture works, and providing safe
drinking water).




9




Serving
the environmental control needs for the iron and steel industries, we believe we
stand to benefit from the stimulus spending on both environment control related
projects and from the growth of the iron and steel industries which will be
beneficiaries of the infrastructural spending under the stimulus
package.





PRC
Markets for Dalian Rino’s Products and Technologies





Wastewater Treatment
Market.





China is
a country that has limited water resources, with approximately 2,200 cubic
meters per person, or one-fourth the world average. Conservation through the
improvement of usage efficiency is the fundamental way to resolve this tension
between water supply and demand. China’s very high rate of industrial water
consumption (as compared to that of developed countries) offers great potential
for water conservation and re-usage programs. Our principal target market, the
iron & steel industry, consumes large quantities of water by the nature of
the processes employed, and, therefore, has an inherent need to increase
efficiency and thereby reduce its usage costs, as well as reclamation costs and
governmental penalties.





Today,
there are approximately 730 iron-making blast furnaces over 300 cubic meters in
size operating in China. Of these, 495 have already adopted wastewater treatment
facilities, some of which are utilizing the traditional inclined plate settling
pool technology, while 235 have no wastewater treatment whatsoever. The average
cost of equipment for wastewater treatment of a blast furnace of this size is
$2,000,000. Additionally, there are 670 steel-making converters in China with a
capacity of over 75 tons. 360 of these converters have existing wastewater
treatment equipment, while 310 converters have no wastewater treatment
facilities whatsoever.   The average cost of equipment for a
converter of this size is $1,700,000. The PRC government has mandated that all
blast furnaces and converters have wastewater treatment facilities in place by
2012. Accordingly, these mandates have created a $216 million annual market for
the next several years.





In
addition to the blast furnaces and converters with no wastewater treatment
facilities, we believe that there is a large replacement market potential for
those operations with wastewater treatment systems that utilize the traditional
inclined plate settling pool technology. This is older technology introduced by
the former Soviet Union in the late 1970s and applied in iron and steel industry
in the 1980s. Compared with our proprietary Lamella Wastewater System
technology, wastewater treatment systems using the traditional inclined plate
settling pool technology has lower throughput capability, a much larger
footprint and involves high maintenance requirements and expenses. Based on our
market research with our end-use customers as well as market investigation with
other iron and steel foundries and mills, we believe there will be a substantial
need to replace this aging technology in 10 years, thereby creating an
additional market of $87,900,000 for blast furnace and converter retrofits based
on an average cost of $2 million to retrofit a blast furnace and $1.7 million to
retrofit a converter.





Using
proprietary and patented technology which removes up to 98% of particulates,
producing 100-150 m3 of effluent water per hour with an average of 50mg/L of
particulates, we believe our Lamella Wastewater System has been a market leader
for wastewater treatment in the iron & steel industry.  For fiscal
years 2008 and 2009, revenues generated from our wastewater treatment business
was $14.4 million and $46.0million, respectively, representing 10.4% and 23.9%
of our total revenues for fiscal years 2008 and 2009, respectively.




Desulphurization
Market





In China,
the main cause of airborne pollution is sulfur dioxide emissions from coal.
According to joint research by the Chinese Institute of Environmental Science
and Tsinghua University, sulphur dioxide-induced acid rain costs China over
$13.3 billion annually in various losses, and atmospheric pollution results in
an annual loss equivalent to two or three percent of China's GDP.





In 2005,
the latest year for which statistics are available, the Chinese iron & steel
industry discharged 1.24 million metric tons of sulphur dioxide into the
atmosphere. Decades of lightly monitored growth in this industry sector, with
little or no consequences attached to sulphur dioxide emissions, combined with
mandatory, industry-wide sulphur dioxide reductions over the next few years,
presents the industry with a pressing need to remediate these emissions from
iron & steel sinters.





Based on
government mandates, over the next few years, coal-fired sinters and other like
furnace operations must install desulphurization equipment or face stiff,
monthly penalties or, possibly, have their operations shut down. We believe
that, because our Desulphurization System is the only sinter processing
equipment available in the PRC market that is specifically designed for flue gas
desulphurization applications that are larger than 90 square meters - the
standard size for sinter operations in the PRC iron & steel industry - the
Company has a substantial competitive advantage over its international
competitors.




Today,
there are around 200 coal-fired sinters in China without flue gas
desulphurization equipment (this number is expected to rise along with the
expansion of China’s iron and steel industry).  Prior to June 2008,
government policy only capped total gas emissions in a geographic area and there
was no restriction on the gas emissions of any individual coal-fired sinter.
Accordingly, some coal-fired sinters only had desulphurization equipment that
partially treated their gas emissions and some had no desulphurization equipment
installed so long as the emission cap in the area was not
exceeded.  After June 2008, the government tightened gas emission
control and is now requiring all coal-fired sinters to have desulphurization
equipment installed.  This translates into a cumulative market for our
desulphurization technology of more than $1 billion in the next few years based
on our estimate. We plan to penetrate this market aggressively by marketing the
Desulphurization System as a turn-key solution for the Chinese iron & steel
industry’s sulphur dioxide emission problems.




10




Our
desulphurization system has been installed in steel mills such as Jinan Iron
and Steel Co., Panzhihua Iron & Steel, Shengfeng Iron & Steel,
Handan Iron & Steel, Chongqing Iron & Steel.  and Kunming Iron
& Steel, Hulingnianyuan Iron and Steel, Nanchangchangli Iron & Steel,
Qianjing Iron & Steel ,Yuhua Iron & Steel, Zhuhai Yueyufeng Iron &
Steel,Hefei Iron &Steel, Jiangsu Xigang Iron &Steel, Zhangdian Iron
& Steel and Hunan Lianyuan Iron &Steel .  For fiscal
years 2008 and 2009, revenues generated from our desulphurization business was
$105.3 million and $116.4 million, respectively, representing 75.6% and 60.4% of
our total revenues for fiscal years 2008 and 2009, respectively.





Anti-Oxidation
Market




The
oxidation of hot rolled steel results, on average, in the loss of 3% of the
output in steel production. Although a number of U.S. and European
anti-oxidation systems are available internationally, the high costs of the
paints and coatings they use, as well as their ineffectiveness at high
temperatures, have limited their application and utility to low temperature,
specialty steel products. The suppliers of these anti-oxidation systems include
America Advanced Technical Products, ATP Metallurgical, Duffy, Condursal, and
Berktekt. Because of the high cost of usage, these paint/coating systems are all
applied on only specialty steel and additionally, have limitations of low
temperature application - they cannot be used on-line.




Importantly,
the temperature range limitations of these systems prevent them from being used
“on-line” in the high temperature ranges of hot rolled steel products, which
historically account for over 90% of the PRC’s crude steel production. China is
estimated to have produced approximately 500 million tons of steel in 2008, of
which the expected output of hot rolled steel is estimated at 450 million tons.
On this basis, it can be expected that, if not treated, China would lose
approximately 13.5 million tons from its 2008 hot rolled steel production - a
volume that is equal to a large steel producer’s annual output. Unlike its
international competition, our Anti-Oxidation System is specifically designed to
use less costly coating material and to operate effectively at temperatures
ranging from 600° - 1,000° C - the environment of hot rolled steel plate. Based
on the confirmed results of the installation of our anti-oxidation equipment and
technology at Jinan Iron & Steel in 2007, we believe that the Anti-Oxidation
System reduces hot rolled steel oxidation loss by a minimum of 60%. This would
have resulted in an increase of 8.1 million tons of China’s 2008 output, and
estimated commensurate savings in coal (6.4 million tons) and water (80 million
tons) consumption for processing and throughput.




Using the
PRC hot rolled steel estimate for 2008 as a benchmark, we estimate that the full
application of the Anti-Oxidation System to that projected production output
would result in approximately $567,000,000 in water and cost savings per
year.





With
these factors in mind, we believe that our Anti-Oxidation System can achieve a
significant degree of penetration in the PRC market, as it addresses a domestic
production need which is beyond the applicability of presently available U.S.
and European technologies and systems.





For
fiscal years 2009 and 2008, revenues generated from our anti-oxidation business
was $25.1 million and $5.7 million, respectively, representing 13.0% and 4.1% of
our total revenues for fiscal years 2009 and 2008, respectively.





Raw
Materials Supply





The
principal raw materials used in our business are steel and steel products,
ancillary components used in our final products (such as motors), electrical
cable, lubricants, cutting and welding material, and special plastic tubes used
in our wastewater treatment system.  Our principal suppliers, Dalian
Shuntongda Trading Co., Ltd. and Dalian Shuangying Trading Co., Ltd., provided
approximately 93% of the Company’s purchases of raw materials for the year ended
December 31, 2009 and 88% of the Company’s purchase of raw materials for the
year ended December 31, 2008. Dalian Shuntongda is well connected in the iron
and steel industries and can obtain steel and steel products from numerous
suppliers in the PRC market at favorable (often below market)
prices.  In addition, we are able to purchase steel and steel products
from other suppliers and we intend to work with other qualified suppliers if the
supply terms are more competitive than the existing terms available to
us.





Intellectual
Property





Set forth
below is a list of the patents that we own or with regard to which we have
submitted applications for patent approval:




11




Jurisdiction
                          
                          Project description
                          
                          Patent No.
                          
                          Patenttype
                          
                          Patent Status
                          
                          Expiration
                            DateChina
                          
                          Desilting
      Inclined Plate and Tube Settler in Full Automation
                          
                          200920010319.7
                          
                          Practical
      new
                          
                          Granted
                          
                          January
      2010China
                          
                          Inclined
      Plate and Tube Settler of Deposition with Three Continuous
      Processes
                          
                          200920010318.1
                          
                          Practical
      new
                          
                          Granted
                          
                          January
      2019China
                          
                          Slurry
      Cleaning Equipment
                          
                          032119135
                          
                          Practical
      new
                          
                          Granted
                          
                          March 13, 2013China
                          
                          Wastewater
      comprehensive treatment system and method
                          
                          ZL03111178.5
                          
                          Invention
      patent
                          
                          Granted
                          
                          March
      13, 2023PCT
      International
                          
                          Antioxidation
      Coating for Steel and Antioxidation Method Using the Same
                          
                          7494692
                          
                          Invention
      patent
                          
                          Granted
                          
                          April
      3, 2028China
                          
                          Desulphurization
      Process of Sintering Flue Gas
                          
                          200810128193.3
                          
                          Invention
      patent
                          
                          Application
      under reviewPCT
      International
                          
                          Inorganic
      Composite Binders with High-temperature Resistance
                          
                          PCT/CN2007/000568
                          
                          Invention
      patent
                          
                          Application
      under reviewPCT
      International
                          
                          Anti-oxidation
      Spray Methods and Spray Equipment for Steel Billets
                          
                          PCT/CN2007/001475
                          
                          Invention
      patent
                          
                          Application
      under reviewChina
                          
                          Sintering
      Flue Gas Desulphurization Process
                          
                          200810128193.3
                          
                          Invention
      patent
                          
                          Application
      under reviewChina
                          
                          Desulphurizing
      Tower Used in Ammonia Method Desulphurization
                          
                          200920168767.X
                          
                          Practical
      new
                          
                          Application
      under reviewChina
                          
                          Municipal
      Solid Waste Incineration Process and System Based on Mechanical-Biological
      Pre-treatment
                          
                          200910010923.4
                          
                          Practical
      new
                          
                          Application
      under reviewChina
                          
                          Municipal
      Solid Waste Incineration System Based on Mechanical-Biological
      Pre-treatment
                          
                          200920012515.8
                          
                          Invention
      patent
                          
                          Application
      under review





International
patent applications are administered under the Patent Cooperation Treaty (the
“PCT”). A PCT application covers all the PCT member countries, which include
most major industrialized countries. The PRC became a member of the PCT in
1994.





There are two phases in a
PCT application. The first phase is the International Phase. Under this phase,
an applicant like the Company can file an application using Chinese language in
the PRC. Then it will have one year to claim the priority of its PRC filing date
in other member countries. The main benefit of filing under the PCT instead of
directly in the member countries is to allow an applicant to delay the “National
Phase” filing in the member countries up to 30 months from the initial filing,
which is 18 months more than the applicant would normally have when filing
directly in foreign countries. During this International Phase, the applicant
can gather more market information and have more time to make decisions about
where to file patent applications. At the end of the International Phase period,
it will enter the National Phase by filing national applications in each country
in which the applicant desires a patent. The Trade-Related Aspects of
Intellectual Property Rights (the “TRIPS”) determine the term of a patent
applied under the PCT in the member countries.





Trademark and
Logo.





The
Chinese version of the “RINO” trademark,绿诺,and associated
logo are both registered by Dalian Rino in the PRC. Their perpetual,
royalty-free use by Dalian Innomind is authorized as part of the Restructuring
Agreements.





Other Intellectual Property Rights
Protections in the PRC.




In
addition to patent protection law in the PRC, we also rely on contractual
confidentiality provisions to protect our intellectual property rights and our
brand. The Company’s research and development personnel and executive officers
are subject to confidentiality agreements to keep our proprietary information
confidential. In addition, they are subject to a three-year covenant not to
compete following the termination of employment with our Company. Further, they
agree that any work product belongs to our Company.




12




Customers





Historically,
we generate revenues from large scale projects based on long-term fixed price
contracts with customers for the manufacturing and installation of customized
industrial equipment.  Due to the size of our projects, we generally
work on a limited number of projects with a limited number of customers at any
given period of time.  Generally, each of our projects involves the
manufacturing, installation and testing of the equipment we sell. Due to the
size of our projects and the length of time to complete our projects (averaging
six to eight months), it appears that our revenues are generated from a limited
number of customers at any given period of time.  However, we do not
rely on a limited number of customers for revenue generation over time, as they
constantly change.   Nevertheless, given the cost of our Lamella
Wastewater System, Desulphurization System and Anti-Oxidation System products,
we believe that for the foreseeable future the Company will continue to rely on
large customers for a substantial portion of its gross revenues. There are
approximately 34 iron and steel companies in the PRC of a size and with annual
production levels that make our products feasible for sale and
installation.  In order to expand our sales, we plan to capture
increasing numbers of these potential customers for primary product sales, and
aggressively cross-sell our products to each customer. In fiscal
years 2009 and 2008, we enlarged our customer base and revenue generation
was much less concentrated.  As a result, 2009 revenues generated from
our top customers in prior years did not account for a large percentage of
total revenues in fiscal year 2009. In fiscal years 2009 and 2008, revenues
generated from our top six customers accounted for 33.38% and 34.78% of our
total gross revenues, respectively.





During
the year ended December 31, 2009 and 2008, the Company has no customer accounted
for more than 10% of the Company’s total sales.





Competition





Lamella
Wastewater System.





Prior to
Dalian Rino’s introduction of its Lamella Wastewater System, the typical
industrial wastewater treatment technology used in China relied on an inclined
“plate settling pool” process. Such systems continue to be generally available
in the PRC, and a substantial portion of them are self-installed by iron and
steel companies. The Lamella Wastewater System’s advanced technology
results in the following competitive advantages: lower installation and usage
costs, increased throughput, smaller equipment footprint, and lower ongoing
maintenance costs. We know of no comparable technology presently available in
China, and we will emphasize the foregoing cost and efficiency advantages as we
compete for customers.




Desulphurization
System.





In the
PRC, the sulphur dioxide emitted in flue gases from the sintering of iron
during steel-making, is a major component of the environmental pollution that
has followed China’s industrial expansion. Sintering is a step in steel-making,
in which sulphur and other impurities are removed from raw iron by heating
(without melting) pulverized iron ore. Removing the sulphur dioxide from a steel
mill’s hot flue gas emissions is, therefore, a principal way of controlling acid
rain.


Presently
in China, major companies engaged in the desulphurization equipment market
include: Beijing Guodian Longyuan Environmental Company, Zhejiang Feida Company,
Fujian Longjing Environmental Company, Wuhan Kaidi Electric Power Company,
Jiulong Electric Power Company, and Qinghua Tongfang Company. To the best of our
knowledge, these companies have little or no production and installation
experience in the iron and steel industry, and do not currently design or
manufacture equipment that is applicable to sintering processes. We believe we
are the first company to design, manufacture and complete an iron and steel
sinter machine desulphurization installation in the PRC. Accordingly, we do not
expect to have any direct competitors in this sector for approximately 2-3 years
- the minimum time necessary for potential competitors to complete product
development.





Anti-Oxidation
System.





We
believe that the Company’s Anti-Oxidation System is unique and virtually without
competition in the China market. We know of no entity other than the Company
that is engaged in developing or supplying anti-oxidation technology that can
operate on-line at the high temperatures (600° - 1,000° C) involved in hot
rolled steel production - which represents 90% of China’s steel output. A number
of anti-oxidation technologies are available internationally from suppliers that
include: Advanced Technical Products Company, ATP Metallurgical Coatings, Duffy
Company, Condursal and Berktekt. However, the high costs of the anti-oxidizing
coatings these technologies rely on, and most especially their ineffectiveness
at high temperatures, have limited their market to specialty steels, and have
made them ill-suited to China’s iron and steel industry.




Research
and Development; Growth Strategy





In 2009,
we expended approximately $0.22 million for product research and development,
approximately $0.22 million of which was directed at flue gas
desulphurization.  In 2008, we expended approximately $0.7 million for
product research and development, approximately $0.6 million of which was
directed at flue gas desulphurization and approximately $0.1 million was
directed at the sludge treatment system. The Company’s continuing research and
development program is linked to our growth strategy directed towards 2010 and
several years thereafter, during which time we will develop export markets for
our products in the United States and Western Europe and seek to develop new
applications for our products suited to and targeted at these new, international
markets.  In conducting our research and development, the Company
expects to continue its collaborative relationship with the Chinese Academy of
Sciences, and also collaborate with Dalian Technology University.




13




Recent
Development





Changxing Island
Land





On March
2, 2010, Rino Heavy Industry entered into a Purchase Agreement for Land Use
Right of State-Owned Construction Site (the “Agreement”) with Dalian City Land
Resources and Housing Bureau of Liaoning Province of PRC (the “Seller”) for the
land located at Enterprise District, Lingang Industrial District, Changxing
Island, Dalian (the “Changxing Island Land”). Such land is intended for
industrial use only. The purchase price for the land use right is in an
aggregate amount of RMB 51,239,320 (or approximately $ 7,516,808 based on the
exchange rate of ) (the “Purchase Price”). Under the Agreement, the Purchase
Price shall be paid off in a lump sum payment within 60 days after execution of
the Agreement. Rino Heavy Industry will be subject to penalties of 1‰ of the
Purchase Price for each day of late payment. Rino
Heavy Industry also covenants under the Agreement that total investment of the
projects to be constructed on the Changxing Island Land shall be no less than
RMB 636,532,098 (or approximately $ 93,379,259).


2009 Registered Direct
Offering





On
December 7, 2009, the Company consummated a registered direct offering (the
“2009 Registered Direct Offering”) to select investors of an aggregate of
3,252,032 shares of common stock of the Company, par value $0.0001 per share
(the “Common Stock”), Series A Common Stock Warrants, which are exercisable
within six months of the closing date, to purchase up to an aggregate of
1,138,211 shares of Common Stock at an exercise price of $34.50 per Warrant (the
“Series A Warrants”) and the Series B Common Stock Warrants, which are
exercisable beginning on the six month one day anniversary of the closing date
until the one year one day anniversary of the closing date, to purchase up to an
aggregate of 1,138,211 shares of Common Stock at an exercise price of $34.50 per
Warrant (the “Series B Warrants”; together with the Series A Warrants, the
“Warrants”). Rodman & Renshaw, LLC served as sole placement agent in the
2009 Registered Direct Offering.





Establishment of New
Subsidiaries





During
the fiscal year of 2009, we incorporated three new subsidiaries: (i) Daian
RINO incorporated Rino Technology Corporation, a Nevada corporation, (ii) Rino
Investment (Dalian) Co., Ltd. (“Rino Investment”) a PRC company; and (iii)
Dalian Rino Heavy Industries Co., Ltd. (“Rino Heavy Industries”), a PRC company.
For more details, please refer to the “Organizational History” of our
subsidiaries under Item 1”Our Business” herein.





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 “2007 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).





Upon
effectiveness of the Amendment Agreement, each 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.  Pursuant to the
Amendment Agreement, as of the date of this report, the Company issued an
aggregate of 47,854 shares of the Company’s common stock and paid an aggregate
of $606,300.66 to the investors.




ITEM
1A. RISK FACTORS





An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this report before deciding to invest in our common stock.





If any of
the following risks, or any other risks not described below because they are
currently unknown to us or we currently deem such risks as immaterial but they
later become material, actually occurs, it is likely that our business,
financial condition, and operating results could be seriously harmed. As a
result, the trading price of our common stock could decline and you could lose
part or all of your investment.





Risks
Related to our Business





The
recent global financial crisis could negatively affect our business,
results of operations, and financial condition.





The
recent credit crisis and turmoil in the global financial system may have an
adverse impact on our business and our financial condition, and we may face
challenges if conditions in the financial markets do not improve.  Our
ability to access the capital markets may be restricted at a time when we would
like, or need, to raise capital, which could have an impact on our flexibility
to react to changing economic and business conditions.  In addition,
these economic conditions also impact levels of commercial and
consumer spending, which have recently deteriorated significantly and may remain
depressed for the foreseeable future.  It is uncertain how long the
global crisis in the financial services and credit markets will continue and how
much of an impact it will have on the global economy in general or the Chinese
economy in particular.  If demand for our products and services
fluctuates as a result of economic conditions or otherwise, our revenue and
gross margin could be harmed.




14




Pollution
control for China’s iron and steel sector is a relatively immature and growing
sector, but we do not know how sensitive we might be to a slowdown in economic
growth or other adverse changes in the PRC economy which might affect demand for
iron and steel pollution control equipment. A slowdown in overall economic
growth, an economic downturn, a recession or other adverse economic
developments in the PRC could significantly reduce the demand for our products
and harm our business.





Although
compliance with environmental regulations suggests continued growth with respect
to our target market, we believe that the success and growth of our business for
the foreseeable future will continue to depend upon the sustained presence of
clients in our target markets, primarily associated with the iron and steel
industries.  Our client's need to comply with government
regulations extends only to the degree that they survive the current economic
crisis.  As such, many of our customers may be subject to
budgetary constraints and our continued performance under our contracts
could be jeopardized by spending reductions or budget cutbacks at these
clients.





Our limited operating history may
not serve as an adequate basis to judge our future prospects and results of
operations.




Dalian
Rino began its operations in 2003. Our limited operating history in the
environmental protection industry may not provide a meaningful basis on which to
evaluate our business. Although Dalian Rino’s revenues have grown rapidly since
its inception, we cannot assure you that we will maintain our
profitability or that we will not incur net losses in the future. We expect
that our operating expenses will increase as we expand. Any significant failure
to realize anticipated revenue growth could result in significant operating
losses. We will continue to encounter risks and difficulties frequently
experienced by companies at a similar stage of development, including our
potential failure to:





·
            maintain
      our cutting edge proprietary
technology;





·
            expand
      our product offerings and maintain the high quality of our
      products;





·
            manage
      our expanding operations, including the integration of any future
      acquisitions;





·
            obtain
      sufficient working capital to support our expansion and to fill customers’
      orders in time;





·
            maintain
      adequate control of our expenses;





·
            implement
      our product development, marketing, sales, and acquisition strategies and
      adapt and modify them as needed;





·
            anticipate
      and adapt to changing conditions in the iron and steel
      industry markets in which we operate as well as the impact of any
      changes in government regulation, mergers and acquisitions involving our
      competitors, technological developments and other significant competitive
      and market dynamics.





If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.





We
may encounter substantial competition in our business and our failure to compete
effectively may adversely affect our ability to generate revenue.





We
believe that existing and new competitors will continue to improve the design
and performance of their products and to introduce new products with competitive
price and performance characteristics. We expect that we will be required to
continue to invest in product development and productivity improvements to
compete effectively in our markets. Our competitors could develop a more
efficient product or undertake more aggressive and costly marketing campaigns
than ours, which may adversely affect our marketing strategies and could have a
material adverse effect on our business, results of operations and financial
condition.




Our major
competitors may be better able than us to successfully endure downturns in our
industrial sector. In periods of reduced demand for our products, we can either
choose to maintain market share by reducing our selling prices to meet
competition or maintain selling prices at the expense of our market share. Sales
and overall profitability would be reduced in either case. In addition, we
cannot assure you that additional competitors will not enter our existing
markets, or that we will be able to compete successfully against existing or new
competition.





Our
inability to fund our capital expenditure requirements may adversely affect our
growth and profitability.





Our
continued growth is dependent upon our ability to raise capital from outside
sources. Our ability to obtain financing will depend upon a number of factors,
including:




15




·
            our
      financial condition and results of
operations,





·
            the
      condition of the PRC economy and the environmental protection product
      industry in the PRC, and





·
            conditions
      in relevant financial markets





As a
result of slowing global economic growth, the credit market crisis, declining
consumer and business confidence, fluctuating commodity prices, and other
challenges currently affecting the global economy, our ability to raise
financing from outside sources is adversely affected. If we are unable
to obtain financing, as needed, on a timely basis and on acceptable terms,
our financial position, competitive position, growth and profitability may be
adversely affected.





We
may not be able to effectively control and manage our growth





Our total
revenues of $192.6 million for the year ended December 31, 2009, representing an
increase of 38.3% from the total revenues of $139.3 million for the same period
ended December 31, 2008. If our business and markets continue to grow and
develop, it will be necessary for us to finance and manage expansion in an
orderly fashion. In addition, we may face challenges in managing expanding
product offerings and in integrating acquired businesses with our own. These
eventualities will increase demands on our existing management, workforce and
facilities. Failure to satisfy these kinds of increased demands could interrupt
or adversely affect our operations and cause production backlogs, longer product
development time frames and administrative inefficiencies.





If
we are unable to successfully complete and integrate strategic acquisitions in a
timely manner, our growth strategy may be adversely impacted.





An
important element of our growth strategy is expected to be the pursuit of
acquisitions of other businesses that increase our existing market share and
expand our production capacity.  However, integrating businesses
involves a number of special risks, including the possibility that management
may be distracted from regular business concerns by the need to integrate
operations, unforeseen difficulties in integrating operations and systems,
problems relating to assimilating and retaining the employees of the acquired
business, accounting issues that arise in connection with the acquisition,
challenges in retaining customers, and potential adverse short-term effects on
operating results. In addition, we may incur debt to finance future
acquisitions, and we may issue securities in connection with future acquisitions
that may dilute the holdings of our current or future stockholders. If we are
unable to successfully complete and integrate strategic acquisitions in a timely
manner, our growth strategy may be adversely impacted.





Due
to the large size of our projects, we may depend on a concentration of customers
at a given period of time.





Historically,
we generate revenues from large scale projects based on long-term fixed price
contracts with customers for the manufacturing and installation of customized
industrial equipment.  Five major customers accounted for 88% of the
sales for the year ended December 31, 2007. In fiscal years 2009 and 2008,
revenues generated from our top six customers accounted for 33.38% and 34.7% of
our total gross revenues, respectively. Due to the size of our projects, we
generally work on a limited number of projects with a limited number of
customers at any given period of time.  Generally, each of our
projects involves the manufacturing, installation and testing of the equipment
we sell. Due to the size of our projects and the length of time to complete our
projects (averaging six to eight months), it appears that our revenues are
generated from a limited number of customers at any given period of
time.  However, we do not rely on a limited number of customers for
revenue generation over time, as they constantly
change.   Nevertheless, given the cost of our Lamella Wastewater
System, Desulphurization System and Anti-Oxidation System products, we believe
that for the foreseeable future we will continue to rely on large customers for
a substantial portion of our gross revenues. Our inability to continue to
secure and maintain a sufficient number of large customers would have a material
adverse effect on our business, operating results and financial condition.
Moreover, our success will depend in part upon our ability to obtain orders
from new customers, as well as the financial condition and success of our
customers and general economic conditions.





Any
significant fluctuation in price of our raw materials may have a material
adverse effect on the manufacturing cost of our products.





The
prices of steel, electronic components and power systems, valves, machine tools,
paints and welding rods, our principal raw materials, are subject to market
conditions and generally we do not, and do not expect to, have long-term
contracts with our suppliers for those items. While these raw materials are
generally available and we have not experienced any raw material shortage in the
past, we cannot assure you that the necessary materials will continue to be
available to us at prices currently in effect or acceptable to us. The prices
for these raw materials have varied significantly and may vary significantly in
the future. Numerous factors, most of which are beyond our control, influence
prices of our raw material. These factors include general economic conditions,
industry capacity utilization, vendor backlogs and transportation delays and
other uncertainties.




We may
not be able to adjust our product prices, especially in the short-term, to
recover cost increases in these raw materials. Our future profitability may be
adversely affected to the extent we are unable to pass on higher raw material
costs to our customers.




16




We
may engage in future acquisitions that could dilute the ownership interests of
our stockholders, cause us to incur debt and assume contingent
liabilities.





As part
of our business strategy, we review acquisition and strategic investment
prospects that we believe would complement our current product offerings,
augment our market coverage or enhance our technological capabilities, or
otherwise offer growth opportunities. From time to time we review investments in
new businesses and we expect to make investments in, and to acquire, businesses,
products, or technologies in the future. In the event of any future
acquisitions, we could:





·
            issue
      equity securities which would dilute current stockholders’ percentage
      ownership;





·
            incur
      substantial debt;





·
            assume
      contingent liabilities; or





·
            expend
      significant cash.





These
actions could have a material adverse effect on our operating results or the
price of our common stock. Moreover, even if we do obtain benefits in the form
of increased sales and earnings, there may be a lag between the time when the
expenses associated with an acquisition are incurred and the time when we
recognize such benefits. Acquisitions and investment activities also entail
numerous risks, including:




·
            difficulties
      in the assimilation of acquired operations, technologies and/or
      products;





·
            unanticipated
      costs associated with the acquisition or investment
      transaction;





·
            the
      diversion of management’s attention from other business
      concerns;





·
            adverse
      effects on existing business relationships with suppliers and
      customers;





·
            risks
      associated with entering markets in which we have no or limited prior
      experience;





·
            the
      potential loss of key employees of acquired organizations;
    and





·
            substantial
      charges for the amortization of certain purchased intangible assets,
      deferred stock compensation or similar
items.





We cannot
ensure that we will be able to successfully integrate any businesses, products,
technologies, or personnel that we might acquire in the future, and our failure
to do so could have a material adverse effect on our business, operating results
and financial condition.





We
may not be able to prevent others from unauthorized use of our patents, which
could harm our business and competitive position.





Our
success depends, in part, on our ability to protect our proprietary
technologies. We own three patents in the PRC covering our waste water treatment
technology. We also have two international invention patents pending and have
applied for an additional international invention patent for our anti-oxidation
technology under the International Patent Cooperation Treaty. The process of
seeking patent protection can be lengthy and expensive and we cannot assure you
that our patent applications will result in patents being issued, or that our
existing or future issued patents will be sufficient to provide us with
meaningful protection or commercial advantages.





We also
cannot assure you that our current or potential competitors do not have, and
will not obtain, patents that will prevent, limit or interfere with our ability
to make, use or sell our products in either the PRC or other
countries.





The
implementation and enforcement of PRC intellectual property laws historically
has not been vigorous or consistent, primarily because of ambiguities in the PRC
laws and a relative lack of developed enforcement mechanisms. Accordingly,
intellectual property rights and confidentiality protections in the PRC are not
as effective as in the United States and other countries. Policing the
unauthorized use of proprietary technology is difficult and expensive, and we
might need to resort to litigation to enforce or defend patents issued to us or
to determine the enforceability, scope and validity of our proprietary
rights or those of others. Such litigation will require significant expenditures
of cash and management efforts and could harm our business, financial condition
and results of operations. An adverse determination in any such litigation will
impair our intellectual property rights and may harm our business, competitive
position, business prospects and reputation.




17




We may need additional capital to
fund our future operations and, if it is not available when needed, we may need
to reduce ourplanned
development and marketing efforts, which may reduce our sales revenues
..





We
believe that our existing working capital and cash available from operations
will enable us to meet our working capital requirements for at least the next 12
months. However, if cash from future operations is insufficient, or if cash is
used for acquisitions or other currently unanticipated uses, we may need
additional capital. The development and marketing of new products and the
expansion of distribution channels and associated support personnel requires a
significant commitment of resources. In addition, if the markets for our
products develop more slowly than anticipated, or if we fail to establish
significant market share and achieve sufficient net revenues, we may continue to
consume significant amounts of capital. As a result, we could be required to
raise additional capital. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution of the shares held by existing stockholders.
If additional funds are raised through the issuance of debt securities, such
securities may provide the holders certain rights, preferences, and privileges
senior to those of common stockholders, and the terms of such debt could impose
restrictions on our operations. We cannot assure you that additional capital, if
required, will be available on acceptable terms, or at all. If we are unable to
obtain sufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which could
harm our business, financial condition and operating results.





We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.





The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC.  As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.




Our
recognition of revenue could prove inaccurate.





We use
percentage completion to recognize revenue. The inherent difficulty of measuring
completed output in our projects prior to full completion requires us to
estimate percentage completion by measuring actual inputs in a given period
relative to total estimated inputs required for a project. An incorrect estimate
of total inputs required for a project, or an inaccurate accounting of actual
inputs in any given period could cause us to misstate revenues by a material
amount. If revenues were overestimated or underestimated, net income would also
be over- or underestimated, as would accounts receivable.





Our
accounts receivable have historically been high.





We record
our revenue based on percentage completion, but are paid according to contract
terms which only indirectly use percentage completion, causing leads and lags
between our recording of revenue and our customers’ repayment of receivables.
Moreover, we sell to large steel manufacturers which require time to fulfill
internal control procedures before effecting payment. Finally, performance
retainages of 10% of contract value are recorded at project commissioning and
remain in our accounts receivable until one year after project commissioning.
These factors all combine to raise our receivables as days sales outstanding.
While to date we have only recordedde minimis bad debt, we
cannot guarantee that all our accounts receivable will be collected or that they
will be collected in a timely manner.





We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be adequate.





We are
constantly striving to improve our internal accounting controls. We hope to
develop an adequate internal accounting control to budget, forecast, manage and
allocate our funds and account for them. There is no guarantee that such
improvements will be adequate or successful or that such improvements will be
carried out on a timely basis. As disclosed in Item 9A Controls and Proceduresof this Annual Report, if we do not have adequate internal accounting
controls, we may not be able to appropriately budget, forecast and manage our
funds, we may also be unable to prepare accurate accounts on a timely basis to
meet our continuing financial reporting obligations and we may not be able
to satisfy our obligations under US securities laws. .





Our
internal controls over financial reporting was ineffective as of December 31,
2009, and management’s report was not subject to attestation by the Company’s
independent auditor  as to their effectiveness for the fiscal year
ended December 31, 2009, which could have a significant and adverse effect on
our business.




The
Company’s management, with the participation of our Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control—Integrated Framework
..  A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or
interim financial statements will not be prevented or detected on a timely
basis.  Management assessed and evaluated our internal controls over
financial reporting as of December 31, 2009 and has so far identified the
material weaknesses in Item 9A
Controlsand Proceduresof this Annual Report. As a result of the material weaknesses described
above, management has concluded that our internal control over financial
reporting was ineffective as of December 31, 2009 based on the “Internal
Control— Integrated Framework” set forth in COSO.




Management
intends to implement the following measures to remediate the material weaknesses
that had a material impact on our internal control over financial
reporting:





· Hire
finance personnel with experience with complex revenue recognition rules
including accounting for multiple element contracts.




18




·
            Institute
      a formal contract review process to establish and document the revenue
      recognition events and methodology at the inception of revenue generating
      contracts.





·
            Institute
      a new process for review of multiple element contracts with standardized
      documentation which allows for both allocation of revenue based on
      available objective evidence of fair value as well as the associated
      billing schedule.





·
            Deliver training
      on revenue recognition principles to sales and operational members of our
      divisions.





·
              Enhance
      reconciliations, analysis and related reviews for all accounts that give
      rise to income tax effects in the financial
  statements.





·
            Hire
      more qualified and experienced accounting personnel to perform the month
      end review and closing processes as well as provide additional oversight
      and supervision within the accounting
  department.




Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our company's independent registered public
accountants. We believe that the attestation requirement of management's
assessment by our independent registered public accountants will first apply to
our annual report for the 2010 fiscal year. The standards that must be met for
management to assess the internal control over financial reporting as effective
are new and complex, and require significant documentation, testing and possible
remediation to meet the detailed standards.  Even though we intend to
adopt measures to remediate the weaknesses that management has already
identified as of December 31, 2009, there is no guarantee that these remedial
measures will be effective. Our lack of familiarity with Section 404 may unduly
divert management’s time and resources in executing the business plan. If, in
the future, management identifies one or more material weaknesses, or our
external auditors are unable to attest that our management’s report is fairly
stated or to express an opinion on the effectiveness of our internal controls,
this could result in a loss of investor confidence in our financial reports,
have an adverse effect on our stock price and/or subject us to sanctions or
investigation by regulatory authorities.




We
may have inadvertently violated Section 402 of the Sarbanes-Oxley Act of 2002
and Section 13(k) of the Exchange Act and may be subject to sanctions for such
violations.





Section
13(k) of the Exchange Act provides that it is unlawful for a company such as
ours, which has a class of securities registered under Section 12(g) of the
Exchange Act, to directly or indirectly, including through any subsidiary,
extend or maintain credit in the form of a personal loan to or for any director
or executive officer of the company. Issuers violating Section 13(k) of the
Exchange Act may be subject to civil sanctions, including injunctive remedies
and monetary penalties, as well as criminal sanctions. The imposition of any of
such sanctions on the Company may have a material adverse effect on our
financial position, results of operations or cash flows.





On December 7,
2009, the Company made a loan of approximately $3,500,000 to Mr. Dejun Zou and
Ms. Jianping Qiu on an unsecured and interest free basis. As of the date of
this Report, $300,000 has been repaid Mr. Zou and Mrs. Qiu are directors and
officers of the Company. There was no written loan agreement entered into
by the parties regarding the foregoing.




The
making of this loan and the continuation of such indebtedness thereafter until
it is fully repaid create a contingent liability for a possible violation of
Section 13(k) of the Exchange Act (Section 402(a) of the Sarbanes-Oxley Act of
2002). Section 13(k) provides that it is unlawful for a company, such as the
Company, which has a class of securities registered under Section 12 of the
Exchange Act, to directly or indirectly, including through any subsidiary,
extend or maintain credit in the form of a personal loan to or for any director
or executive officer of the company. Issuers violating Section 13(k) of the
Exchange Act may be subject to civil sanctions, including injunctive remedies
and monetary penalties, as well as criminal sanctions. The imposition of any of
such sanctions on the Company may have a material adverse effect on our
financial position, results of operations or cash flows.





Potential
environmental liability could have a material adverse effect on our operations
and financial condition.





To the
knowledge of our management team, neither the production nor the sale of our
products constitutes activities, or generates materials that create any
environmental hazards or requires our business operations to comply with PRC
environmental laws. Although it has not been alleged by PRC government officials
that we have violated any current environmental regulations, we cannot assure
you that the PRC government will not amend the current PRC environmental
protection laws and regulations. Our business and operating results may be
materially and adversely affected if we were to be held liable for violating
existing environmental regulations or if we were to increase expenditures to
comply with environmental regulations affecting our operations.





We
rely on our Chairman and CEO, the founders of Dalian Rino for the management of
our business.





We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Zou Dejun our CEO, and
Ms. Qiu Jianping, our Chairman of the Board. The loss of the services of Mr. Zou
or Ms. Qiu, for any reason, may have a material adverse effect on our business
and prospects. We cannot assure you that the services of Mr. Zou and Ms. Qiu
will continue to be available to us, or that we will be able to find a suitable
replacement for either of them. We carry key man life insurance of $5.0 million
each for Mr, Zou and Ms. Qiu but do not carry key man life insurance for any
other key personnel.




19




We
may not be able to hire and retain qualified personnel to support our growth and
if we are unable to retain or hire such personnel in the future, our ability to
improve our products and implement our business objectives could be adversely
affected.





If one or
more of our senior executives or other key personnel are unable or unwilling to
continue in their present positions, we may not be able to replace them easily
or at all, and our business may be disrupted and our financial condition and
results of operations may be materially and adversely affected. Competition for
senior management and senior technology personnel is intense, the pool of
qualified candidates is very limited, and we may not be able to retain the
services of our senior executives or senior technology personnel, or attract and
retain high-quality senior executives or senior technology personnel in the
future. Any failure for us to attract or retain high-quality senior executives
or senior technology personnel could materially and adversely affect our
future growth and financial condition.





We
do not presently maintain product liability insurance, and our property and
equipment insurance does not cover the full value of our property and equipment,
which leaves us with exposure in the event of loss or damage to our properties
or claims filed against us.





We
currently do not carry any product liability or other similar insurance. Unlike
in the U.S. and other countries, product liability claims and lawsuits are
relatively rare in the PRC. However, we cannot assure you that we would not face
liability in the event of the failure of any of our products. We cannot assure
you that, especially as China’s domestic consumer economy and industrial economy
continues to expand, product liability exposures and litigation will not become
more commonplace in the PRC, or that we will not face product liability exposure
or actual liability as we expand our sales into international markets, like the
United States, where product liability claims are
more prevalent.





Except
for property and automobile insurance, we do not have other insurance such as
business liability or disruption insurance coverage for our operations in the
PRC.





Rapid
technological changes in our industry could render our products non-competitive
or obsolete and consequently affect our ability to generate
revenues.





The
environmental protection and remediation industry is subject to rapid
technological change. Our future success will depend on our ability to respond
to rapidly changing technologies and improve the quality of our products. Our
failure to adapt to these changes could harm our business. Our future plans to
market our products require them to be innovative. If we are slow to develop new
products and technologies that are attractive to and useful solutions for the
PRC iron and steel industry, we may not be successful in capturing an
increasingly significant share of this market.





Risks
Related to Doing Business in the PRC.





We
face the risk that changes in the policies of the PRC government could have a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.





The PRC’s
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on economic conditions in China. The PRC government has
confirmed that economic development will follow the model of a market economy,
such as the United States. Under this direction, we believe that the PRC will
continue to strengthen its economic and trading relationships with foreign
countries and business development in the PRC will follow market forces. While
we believe that this trend will continue, we cannot assure you that this will be
the case. Our interests may be adversely affected by changes in policies by the
PRC government, including:





·
            changes
      in laws, regulations or their
interpretation





·
            confiscatory
      taxation





·
            restrictions
      on currency conversion, imports or sources of
  supplies





·
            expropriation
      or nationalization of private
enterprises.





Although
the PRC government has been pursuing economic reform policies for more than two
decades, we cannot assure you that the government will continue to pursue such
policies or that such policies may not be significantly altered, especially in
the event of a change in leadership, social or political disruption, or other
circumstances affecting the PRC's political, economic and social
life.




20




The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may harm our
business.





There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing our business, and the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We and any future subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These
laws and regulations are sometimes vague and may be subject to future changes,
and their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our businesses.





The
restructuring of Dalian Rino may affect Dalian Rino’s existing customer
relationships and result in additional transactional costs that may adversely
impact our profitability.





We are
conducting our business out of Dalian Innomind after we completed the asset
purchases and leases as contemplated in the Restructuring Agreements. The
restructuring of Dalian Rino’s business through assets transfers and leases to
Dalian Innomind may affect Dalian Rino’s existing customer relationships. To the
extent the existing customers do not want to assign their purchase orders to a
newly formed entity (i.e., Dalian Innomind) the Restructuring Agreements provide
a mechanism to allow Dalian Rino to continue its operations under Dalian
Innomind’s control. However, we cannot assure you that the customers will
continue their business relationships with us or Dalian Rino after this
complicated restructuring. Any loss of Dalian Rino’s existing customers will
have an adverse impact on our revenues and net profits.





Our
Restructuring Agreements with Dalian Rino and its shareholders may not be as
effective in providing control over these entities as direct ownership and
potential conflicts of interest may occur in the performance and enforcement of
the Restructuring Agreements in the future.





We
operate our business through Dalian Innomind, our indirect wholly-owned
subsidiary in the PRC, and rely on the Restructuring Agreements with Dalian Rino
and its shareholders to control the operations of Dalian Rino. While we own
and/or lease substantially all of Dalian Rino’s manufacturing assets through
Dalian Innomind, and to the extent that any aspect of Dalian Rino’s business
needs to be conducted through Dalian Rino in the future, the Restructuring
Agreements provide Dalian Innomind with the legal right and power to control
Dalian Rino and any of its remaining assets and operations, the Restructuring
Agreements may not be as effective in providing control over Dalian Rino as
direct ownership.  as we depend on the shareholders of Dalian Rino to
perform their obligations under the Restructuring Agreements and the effective
enforcement of these agreements when necessary.




Consequently,
if Dalian Rino or any of its shareholders fails to perform its or his respective
obligations under the Restructuring Agreements, we may have to incur substantial
costs and resources to enforce those agreements, and rely on legal remedies
under PRC law, including seeking specific performance or injunctive relief, and
claiming damages, which may not be effective. For example, if the shareholders
of Dalian Rino refuse to transfer their equity interest in Dalian Rino to us or
our designee if we exercise the equity purchase option under the Restructuring
Agreements, then we will have to pursue available remedies under PRC law for
them to fulfill their contractual obligations.





The terms
of the Restructuring Agreements were negotiated between Dalian Rino and the
investors in the private placement that we completed on October 5, 2007 on
behalf of the Company at an arms-length, the approval of which by the Company
was a condition precedent to closing of the private placement. However, there
may be potential conflicts of interest in the performance and enforcement of the
Restructuring Agreements because our CEO and director, Mr. Zou, who, together
with his wife, are the sole beneficiaries of The Innomind Trust which 100% of
Daliano Rino’s equity interest. As such, we can not assure you that Mr.
Zou, in his capacity as our CEO and director, will act in the best interest of
the Company when a conflict between us and Dalian Rino arises because of his
ownership interest in Dalian Rino. For example, if Dalian Rino violates the
Restructuring Agreement because of its failure to pay any management fee to
Dalian Innomind, the fact that Mr. Zou has a 90% ownership interest in Dalian
Rino may affect his decision as to whether and/or how vigorously the Company
will seek to enforce its rights under the Restructuring Agreements.





The
Restructuring Agreements are governed by PRC law and provide for the resolution
of disputes through arbitration in the PRC. Accordingly, these agreements would
be interpreted in accordance with PRC law and any disputes would be resolved in
accordance with PRC legal procedures. The legal environment in the PRC is not as
developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce the
Restructuring Agreements. If we are unable to enforce the Restructuring
Agreements, we may not be able to exert effective control over our operating
entities, and our ability to conduct our business may be negatively
affected.





A
slowdown or other adverse developments in the PRC economy may harm our customers
and the demand for our services and our products.





All of
our operations are conducted in the PRC and all of our revenues are generated
from sales in the PRC. Although the PRC economy has grown significantly in
recent years, we cannot assure you that this growth will continue. Pollution
control for China’s iron and steel sector is a relatively immature and growing
sector, but we do not know how sensitive we might be to a slowdown in economic
growth or other adverse changes in the PRC economy which might affect demand for
iron and steel pollution control equipment. A slowdown in overall economic
growth, an economic downturn, a recession or other adverse economic developments
in the PRC could significantly reduce the demand for our products and harm
our business.Please refer to the Risk Factor
entitled “The recent
global financial crisis could negatively affect our business, results of
operations, and financial condition”under this section for more
information regarding
the recent economic development and the impact on our
business.”




21




Inflation in the
PRC could negatively affect our profitability and growth.





While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth could lead to growth in the money supply and
rising inflation. If prices for our products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may harm our
profitability.





In order
to control inflation in the past, the PRC government has imposed controls on
bank credit, limits on loans for fixed assets and restrictions on state bank
lending. Such an austere policy can lead to a slowing of economic growth. In
October 2004, the People's Bank of China, the PRC's central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products.





Dalian
Innomind and RINO are subject to restrictions on paying dividends and making
other payments to us; therefore we might in turn be unable to pay dividends to
you.





We are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investments in our
subsidiaries and affiliates, Innomind, Dalian Innomind, Dalian Rino and the
subsidiaries of Dalian Rino. As a result of our holding company structure, we
rely entirely on dividend payments from Dalian Innomind, our subsidiary in
China. PRC regulations currently permit payment of dividends only out of
accumulated profits, as determined in accordance with PRC accounting standards
and regulations. Our subsidiary and affiliated entity in the PRC also are
required to set aside a portion of their after-tax profits according to PRC
accounting standards and regulations to fund certain reserve funds. The PRC
government also imposes controls on the conversion of RMB into foreign
currencies and the remittance of currencies out of the PRC. We may experience
difficulties in completing the administrative procedures necessary to obtain and
remit foreign currency. Furthermore, if Dalian Innomind or Dalian Rino incurs
debt on its own in the future, the instruments governing the debt may restrict
its ability to pay dividends or make other payments. If we or Innomind
Group are unable to receive all of the revenues from Dalian
Innominds’s operations, we may be unable to pay dividends on our common
stock.





Governmental
control of currency conversion may affect the value of your
investment.





The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenues in Renminbi, which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing PRC
foreign exchange regulations, payments 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 Renminbi is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.





The PRC
government may also in the future restrict access to foreign currencies for
current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay certain of our expenses as they come due.





The
fluctuation of the Renminbi may harm your investment.





The value
of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in the PRC's political and economic
conditions. As we rely entirely on revenues earned in the PRC, any significant
revaluation of the RMB may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into RMB for
our operations, appreciation of the RMB against the U.S. dollar would diminish
the value of the proceeds of the offering and this could harm our business,
financial condition and results of operations. Conversely, if we decide to
convert our RMB into U.S. dollars for the purpose of making payments for
dividends on our common shares or for other business purposes and the U.S.
dollar appreciates against the RMB, the U.S. dollar equivalent of the RMB we
convert would be reduced. In addition, the depreciation of significant U.S.
dollar denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.





On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in significant appreciation of
the RMB against the U.S. dollar. There remains significant international
pressure on the PRC government to adopt an even more flexible currency policy,
which could result in a further and more significant appreciation of the RMB
against the U.S. dollar.





If
the PRC were to eliminate the “grandfathered” preferential tax benefits
currently enjoyed by Dalian Innomind, we would have to pay more taxes in the
PRC, which could have a material and adverse effect on our financial condition
and results of operations.





Recent
changes in the PRC’s tax laws have, effective January 1, 2008, made wholly
foreign-owned enterprises (“WFOEs”) subject to standard enterprise income tax
rates, which as of January 1, 2008, will be 25%. Prior to these changes, WFOEs
enjoyed tax preferences consisting of multi-year exemptions followed by a period
of reduced rate taxation and ending with the application of standard tax
rates.




22




Because
Dalian Innomind was incorporated before the effective date of these recent tax
law changes, it has been “grandfathered” into the pre-change scheme. As a
consequence, as a WFOE, Dalian Innomind is entitled to: (i) a two-year exemption
from enterprise income taxation beginning in its first year of operations; (ii)
a 12% enterprise income tax rate for the next three years; and (iii) application
of the standard enterprise income tax rate (which will be 25% as of January 1,
2008) thereafter.





If the
PRC were to eliminate these “grandfathered” tax preferences, Dalian Innomind
would immediately be subject to the standard statutory tax rate. The loss of
these preferential tax treatments and the resulting acceleration of the
application of standard PRC tax rates to our business, could have a
material and adverse effect on our financial condition and results of
operations.





The
Restructuring Agreements we have entered into among our subsidiaries and
affiliated entities or persons may be subject to scrutiny by the PRC tax
authorities and a finding that we owe additional taxes or are ineligible for our
tax exemption, or both, could substantially increase our taxes owed, and reduce
our net income and the value of your investment.




Dalian
Innomind has purchased assets from Dalian Rino, our affiliated company, at their
book value and leased the remaining assets from Dalian Rino at nominal amount.
Under PRC law, arrangements and transactions among related parties may be
subject to audit or challenge by the PRC tax authorities. If any of the
transactions we have entered into between Dalian Innomind and Dalian RINO are
found not to be on an arm’s-length basis, or to result in an unreasonable
reduction in tax under PRC law, the PRC tax authorities have the authority to
disallow our tax savings, adjust the profits and losses of Dalian Innomind
and Dalian Rino, and assess late payment interest and penalties. A finding by
the PRC tax authorities that we are ineligible for the tax savings achieved in
the past, or that Dalian Rino or Dalian Innomind are ineligible for preferential
tax benefits, would substantially increase our taxes owed and reduce our net
income and the value of your investment.





PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents, if applied to us, may subject the PRC resident shareholders of
us or our parent company to personal liability and limit our ability to acquire
PRC companies or to inject capital into our PRC subsidiary, limit our PRC
subsidiary's ability to distribute profits to us or otherwise materially
adversely affect us.





In
October 2005, the PRC State Administration of Foreign Exchange (“SAFE”) issued a
public notice, the Notice on Relevant Issues in the Foreign Exchange Control
over Financing and Return Investment Through Special Purpose Companies by
Residents Inside China (the “SAFE Notice”), which requires PRC residents,
including both legal persons and natural persons, to register with the competent
local SAFE branch before establishing or controlling any company outside
of China, referred to as an “offshore special purpose company,” for the
purpose of overseas equity financing involving onshore assets or equity
interests held by them. In addition, any PRC resident that is the shareholder of
an offshore special purpose company is required to amend its SAFE registration
with the local SAFE branch with respect to that offshore special purpose company
in connection with any increase or decrease of capital, transfer of shares,
merger, division, equity investment or creation of any security interest over
any assets located in China. Moreover, if the offshore special purpose company
was established and owned the onshore assets or equity interests before the
implementation date of the SAFE notice, a retroactive SAFE registration is
required to have been completed before March 31, 2006. If any PRC shareholder of
any offshore special purpose company fails to make the required SAFE
registration and amendment, the PRC subsidiaries of that offshore special
purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions. After the SAFE notice, an implementation rules on the SAFE notice
was issued on May 29, 2007 which provides for implementation guidance and
supplements the procedures as provided in the SAFE notice. For an offshore
special purpose company which was established and owned the onshore assets or
equity interests before the implementation date of the SAFE notice, a
retroactive SAFE registration requirement is repeated.





Due to
lack of official interpretation, some of the terms and provisions of the SAFE
Notice and its implementation rules remain unclear, and the implementation of
the SAFE Notice by central SAFE and local SAFE branches has been inconsistent
since its adoption. Based on the advice of our PRC counsel, Global Law Offices,
located in Beijing, and after consultation with relevant SAFE officials, we
believe that the PRC resident shareholders of our parent company, RINO
International Corporation, were required to complete their respective SAFE
registrations pursuant to the SAFE Notice.





Moreover,
because of uncertainty over how the SAFE Notice will be interpreted and
implemented, and how or whether the SAFE Notice and implementation rules will
apply to us, we cannot predict how SAFE will affect our business operations or
future strategies. For example, our present and prospective PRC subsidiaries’
ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to
compliance with the SAFE Notice by our or our parent company’s PRC resident
shareholders. In addition, such PRC residents may not always be able to complete
registration procedures required by the SAFE Notice. We also have little control
over either our present or prospective direct or indirect shareholders or the
outcome of such registration procedures. A failure by our or our parent
company’s PRC resident shareholders or future PRC resident shareholders to
comply with the SAFE Notice, if SAFE requires it, could subject us to fines or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary’s ability to make distributions or pay dividends or affect
our ownership structure, which could adversely affect our business and
prospects.




23




Ambiguities
in the merger and acquisition regulations implemented on September 8, 2006
relating to acquisitions of assets and equity interests of Chinese companies by
foreign persons may present risks in our compliance status under the
regulations.





On
September 8, 2006, the Ministry of Commerce (“MOFCOM”), together with several
other government agencies, promulgated a comprehensive set of regulations
governing the approval process by which a Chinese company may participate in an
acquisition of its assets or its equity interests and by which a Chinese company
may obtain public trading of its securities on a securities exchange outside the
PRC. Although there was a complex series of regulations in place prior to
September 8, 2006 for approval of Chinese enterprises that were administered by
a combination of provincial and centralized agencies, the new regulations have
largely centralized and expanded the approval process to the MOFCOM, the State
Administration of Industry and Commerce, the SAFE or its branch offices, the
State Asset Supervision and Administration Commission, and the China Securities
Regulatory Commission. Depending on the structure of the transaction as
determined once a definitive agreement is executed, these regulations will
require the Chinese parties to make a series of applications and supplemental
applications to the aforementioned agencies. The merger and acquisition
regulations set forth many specific requirements that have to be followed, but
there are still many ambiguities in the meaning of many material
provisions.





The
transactions contemplated under the Restructuring Agreements are structured in a
manner such that consummation of such transactions would not bring these
transactions within the regulatory scope of the September 8, 2006 regulations.
However, due to the ambiguities in the meaning of many provisions, until there
has been clarification either by pronouncements, regulation or practice, there
is some uncertainty in the scope of the regulations. Moreover, the ambiguities
give the regulators wide latitude in the enforcement of the regulations and the
transactions to which they may or may not apply. Therefore, it is not
inconceivable that future issuance of new regulations and pronouncement for the
purposes of clarifying the application of September 30, 2006 regulations may
retroactively make it apparent that the consummation of the transactions
contemplated under the Restructuring Agreements are subject to September 8, 2006
regulations and failure to obtain approval required under the September 8, 2006
regulations may cause the PRC government to take actions that adversely affect
the Restructuring Agreements including requiring us to unwind the Restructuring
Agreements. If this occurs, and if we do not mitigate the adverse effect to
the investors’ reasonable satisfaction within 60 days of such PRC government
actions, then we are required, within 30 days from the date of a written demand
from the investor, 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. If we are obligated to pay liquidated damages of the entire
investment amount, we would be forced to raise more capital or incur additional
debt to satisfy such obligations and our liquidity will be materially and
adversely affected. If we do not have sufficient liquidity to satisfy our short
working capital requirements and long-term capital expenditure requirements, our
operating results would be materially adversely affected which will likely
adversely affect the value of our common stock.





However,
according to the legal opinion issued by the Company’s PRC counsel, the
Restructuring Agreements and the organizational structure resulted thereunder
are legal and enforceable under current PRC law and that changes to current law
would need to be enacted in order for the PRC government or any of its entities
to challenge the structure of the Company. Therefore, the Company believes that
the chances of the restructuring structure being successfully challenged are
remote.





Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.





A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of our revenue is derived, could have an adverse effect on our operations.
Our operations may be impacted by a number of health-related factors, including
quarantines or closures of some of our offices that would adversely disrupt
our operations.





Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.





Because
our principal assets are located outside of the United States and some of our
directors and all our officers reside outside of the United States, it may be
difficult for you to use the United States Federal securities laws to enforce
your rights against us and our officers and some directors in the United States
or to enforce judgments of United States courts against us or them in the
PRC.





All of
our present officers and some of our directors reside outside of the United
States. In addition, our operating subsidiary, Dalian Innomind and controlled
affiliate Dalian Rino and its subsidiaries, are located in the PRC and
substantially all of their assets are located outside of the United States. It
may therefore be difficult for investors in the United States to enforce their
legal rights based on the civil liability provisions of the United States
Federal securities laws against us in the courts of either the United States or
the PRC and, even if civil judgments are obtained in courts of the United
States, to enforce such judgments in PRC courts. Further, it is unclear if
extradition treaties now in effect between the United States and the PRC would
permit effective enforcement against us or our officers and directors of
criminal penalties, under the United States Federal securities laws or
otherwise.





The
PRC’s legal and judicial system may not adequately protect our business and
operations and the rights of foreign investors





The PRC
legal and judicial system may negatively impact foreign investors. In 1982, the
National People's Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in the PRC. However, the PRC's system of laws is not yet
comprehensive. The legal and judicial systems in the PRC are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in the PRC lack
the depth of legal training and experience that would be expected of a judge in
a more developed country. Because the PRC judiciary is relatively inexperienced
in enforcing the laws that do exist, anticipation of judicial decision-making is
more uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist, or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. The PRC's legal system is based on the civil law regime, that is,
it is based on written statutes; a decision by one judge does not set a legal
precedent that is required to be followed by judges in other cases. In addition,
the interpretation of Chinese laws may be varied to reflect domestic political
changes.




24




The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that a
change in leadership, social or political disruption, or unforeseen
circumstances affecting the PRC's political, economic or social life, will not
affect the PRC government's ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business and
prospects.





The
practical effect of the PRC legal system on our business operations in the PRC
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full enjoyment of the benefits of corporate Articles and contracts
to Foreign Invested Enterprise participants. These laws, however, do impose
standards concerning corporate formation and governance, which are qualitatively
different from the general corporation laws of the United States. Similarly, the
PRC accounting laws mandate accounting practices, which are not consistent with
U.S. generally accepted accounting principles. PRC’s accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises are
maintained in accordance with Chinese accounting laws. Article 14 of the
People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly
foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. While the enforcement of substantive rights may appear less
clear than United States procedures, the Foreign Invested Enterprises and Wholly
Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same
status as other Chinese registered companies in business-to-business dispute
resolution. Any award rendered by an arbitration tribunal is enforceable in
accordance with the United Nations Convention on the Recognition and Enforcement
of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no
assurances can be given, the Chinese legal infrastructure, while different in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.





We
may face obstacles from the communist system in the PRC.





Foreign
companies conducting operations in PRC face significant political, economic and
legal risks. The Communist regime in the PRC, which includes a cumbersome
bureaucracy, may hinder Western investment.





We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.





The PRC
historically has not adopted a Western style of management and financial
reporting concepts and practices, as in modern banking, computer and other
control systems. We may have difficulty in hiring and retaining a sufficient
number of qualified employees to work in the PRC. As a result of these factors,
we may experience difficulty in establishing management, legal and financial
controls, collecting financial data and preparing financial statements, books of
account and corporate records and instituting business practices that meet
Western standards. Therefore, we may, in turn, experience difficulties in
implementing and maintaining adequate internal controls as will be required
under Section 404 of the Sarbanes Oxley Act of 2002.Please refer to the risk factors
entitled “We may
not have adequate internal accounting controls. While we have certain internal
procedures in our
budgeting, forecasting and in the management and allocation of funds, our
internal controls may not be adequate,”and “Our internal controls over financial
reporting was ineffective as of December 31, 2008, and management’s report was not subject to
attestation by the Company’s independent
auditoras
to their effectiveness for the fiscal year ended December 31, 2008, which could
have a significant and adverse effect on our business”for more information regarding our
financial controls and management.




The
relative lack of public company experience of our management team may put us at
a competitive disadvantage.





Ourmanagement team lacks
public company experience, which could impair our ability to comply with legal
and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002.
The individuals who now constitute our senior management have never had
responsibility for managing a publicly traded company. Such responsibilities
include complying with federal securities laws and making required disclosures
on a timely basis. Our senior management may not be able to implement programs
and policies in an effective and timely manner that adequately responds to such
increased legal, regulatory compliance and reporting requirements. Our failure
to comply with all applicable requirements could lead to the imposition of fines
and penalties and distract our management from attending to the growth of our
business.





Risks
Related to Our Common Stock.





Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other stockholders.


Our
officers and directors beneficially own approximately 62.5% of our Common Stock.
As a result, they are able to control the outcome of stockholder votes on
various matters, including the election of directors and extraordinary corporate
transactions, including business combinations. The interests of our directors
and officers may differ from other stockholders. Furthermore, the current ratios
of ownership of our common stock reduce the public float and liquidity of our
common stock which can, in turn, affect the market price of our common
stock.




25




We
are not likely to pay cash dividends in the foreseeable future.





We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary. In addition, our operating
subsidiary, Dalian Innomind, from time to time, may be subject to restrictions
on its ability to make distributions to us, including as a result of
restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions.





We
are authorized to issue "blank check" preferred stock, which, if issued without
stockholder approval, may adversely affect the rights of holders of our common
stock.





We are
authorized to issue 50,000,000 shares of preferred stock, none of which have
been issued. Our Board of Directors is authorized under our Articles of
Incorporation to provide for the issuance of shares of preferred stock by
resolution, and by filing a certificate of designations under Nevada law, to fix
the designation, powers, preferences and rights of the shares of each such
series of preferred stock and the qualifications, limitations or restrictions
thereof without any further vote or action by the stockholders. Any shares of
preferred stock so issued are likely to have priority over our common stock with
respect to dividend or liquidation rights. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control, which could have the
effect of discouraging bids for the Company and thereby prevent stockholders
from receiving the maximum value for their shares. We have no present intention
to issue any shares of our preferred stock in order to discourage or delay a
change of control or for any other reason. However, there can be no assurance
that preferred stock will not be issued at some time in the future.





We are responsible for the
indemnification of our officers and directors.





Our
Bylaws provide for the indemnification of our directors, officers, employees,
and agents, under certain circumstances, against costs and expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on our behalf. Consequently, we may be required
to expend substantial funds to satisfy these indemnity obligations.





ITEM 1B. UNRESOLVED
STAFF COMMENTS.





None.





ITEM
2. PROPERTIES





Principal
Office and Manufacturing Facilities





The
Company’s principal office and its manufacturing facilities are located in the
Jinzhou Industry Cooperation Zone of Dalian, PRC. In 2003, Dalian Rino acquired
from the government the right to use 287,117 square feet of land in the Jinzhou
Industry Cooperation Zone for a 50 year period that expires in 2053 (the “Land
Use Rights”). Instead of periodic rent, Dalian Rino paid a one-time fee of
$580,203 for the Land Use Rights.





Dalian
Facilities





Our
Dalian facilities have a full-time staff of 360 managerial, technical, clerical
and manufacturing employees, who cover the Company’s national operations,
generally. If necessary, we also hire temporary local workers for our
engineering projects for miscellaneous work.





We raised
funds in October 2007 in part to fund expansion of our Dalian factory. Delays in
the fundraising, however, imposed a disproportionate effect on our plant
expansion as weather conditions in Dalian basically prohibit outdoor
construction in the late fourth and early first quarters of each
year.





In
addition to weather delays, we have experienced additional delays in removing
the original tenants from the land we contracted to use for the factory
expansion. The original tenants engage in small-scale agriculture, an activity
which still enjoys protection under Chinese law. We recently applied
successfully to rezone the property for industrial use but are still in
negotiations with the original tenants. We cannot state with certainty when
the original tenants will leave, nor can we estimate what amounts we might need
to pay them as an incentive to leave the property.




Branch
Offices





In
addition to the head office in Dalian, the Company leases a branch office in
Beijing in year 2009. Our Beijing branch office has an area of 180 square
meters and it covers and is responsible for the Company’s operations in a
specific territory in China. The annual rent for our Beijing branch office in
2009 is approximately $9,774.




On July
31, 2009, the Company leases a branch office in Rancho Santa Margarita,
California. The lease term from August 1, 2009 to July 31, 2010 with monthly
rent amounted to $1,695.00.


26




Changxing
Island Land





On March
2, 2010, Rino Heavy Industry entered into a Purchase Agreement for Land Use
Right of State-Owned Construction Site (the “Agreement”) with Dalian City Land
Resources and Housing Bureau of Liaoning Province of PRC (the “Seller”) for the
land located at Enterprise District, Lingang Industrial District, Changxing
Island, Dalian (the “Changxing Island Land”). Such land is intended for
industrial use only. The purchase price for the land use right is in an
aggregate amount of RMB 51,239,320 (or approximately $ 7,516,808) (the “Purchase
Price”). As of March 31, 2010, the Purchase Price has been paid off by Rino
Heavy Industry to the Seller, and the title of the Changxing Island Land will be
conveyed to Rino Heavy Industry in April 2010.




ITEM
3. LEGAL PROCEEDINGS





Neither
we nor any of our subsidiaries is a party to any pending legal proceedings
(other than ordinary routine litigation incidental to our business), nor are we
aware of any such proceedings threatened against us or our
subsidiaries.





ITEM
4. REMOVED AND RESERVED




PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





Market
Information





Our
common stock is currently quoted on the NASDAQ Global Market under the trading
symbol “RINO.”





As of
March 31, 2010, we had 28,603,321 shares of common stock, par value 0.0001 per
share issued and outstanding, Series A Warrants (subject to adjustment) to
purchase 1,138,211 shares of our common stock issued and outstanding and Series
B Warrants (subject to adjustment) to purchase 1,138,211 shares of our common
stock issued and outstanding.





As of
March 29, 2010, the last reported close price of our common stock was $23.43 per
share.





Before
July 13, 2009, our common stock was quoted on the Over-the-Counter Bulletin
Board (“OTCBB”) under the symbol "JDMC". There was no established public market
for shares of our common stock before July 13, 2009.




The
following table sets forth the high and low daily sale prices of our common
stock as reported on NASDAQ Global Market and summarized by Yahoo Finance
(http://finance.yahoo.com), for each fiscal quarter during each of the fiscal
years ended December 31, 2009 and December 31, 2008. These prices are based on
inter-dealer prices, without retail markup, markdown or omissions and may not
represent actual transactions.





Quarter
      Ended
                
                High
                
                
                Low03/31/2008
                
                $
                9.00
                
                
                $
                7.7506/30/2008
                
                $
                11.50
                
                
                $
                11.5009/30/2008
                
                $
                8.25
                
                
                $
                8.2512/31/2008
                
                $
                3.70
                
                
                $
                3.5003/31/2009
                
                $
                2.50
                
                
                $
                2.5006/30/2009
                
                $
                10.00
                
                
                $
                9.6009/30/2009
                
                $
                22.31
                
                
                $
                20.4512/31/2009
                
                $
                28.31
                
                
                $
                27.63





Holders





As of
March 31, 2010, there were approximately 104 holders of record of our
outstanding common stock, 8 holders of our outstanding Series A Warrants and 8
holders of our outstanding Series B Warrants. This does not reflect the number
of persons or entities who held stock in nominee or "street" name through
various brokerage firms.





Dividends





We have
not declared or paid any cash dividends on our common stock during either of our
last two fiscal years. The payment of dividends, if any, is at the discretion of
the Board of Directors and is contingent on the Company's revenues and earnings,
capital requirements, financial conditions and the ability of our operating
subsidiary, Dalian Rino to obtain approval to send monies out of the PRC. We
currently intend to retain all earnings, if any, for use in business operations.
Accordingly, we do not anticipate declaring any dividends in the near
future.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
following table summarizes the equity compensation plans under which our
securities may be issued as of the date of this report.




27




Plan Category
                    
                    Number of
                      securities to be
                      issued upon
                      exercise of
                      outstanding
                      options,
                      warrants and
                      rights
                    
                    
                    Weighted-
                      average exercise
                      price of
                      outstanding
                      options,
                      warrants
                      and rights
                    
                    
                    Number of
                      securities
                      remaining
                      available for
                      future issuance
                      under equity
                      compensation
                      plans
                      (excluding
                      securities
                      reflected in
                      column (a))Equity
      compensation plans approved by security holders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Equity
      compensation plan not approved by security holders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,500,000Total
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,500,000





In July
2009, our Board of Directors 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 Plan is
incorporated by reference to the Company’s quarterly report on Form 10-Q for the
period ended June 30, 2009.





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.





Recent
Sales of Unregistered Securities





None.





ITEM
6. SELECTED FINANCIAL DATA





Not
applicable.




ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION





Disclaimer
Regarding Forward-looking Statements




Certain
statements made in this report, and other written or oral statements made by or
on behalf of the Company, may constitute “forward-looking statements” under
the Private Securities Litigation Reform Act of 1995, which represent the
expectations or beliefs of, including, but not limited to, statements concerning
the operations, performance, financial condition and growth of the Company,
together with its direct and indirect subsidiaries and controlled affiliates.
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 the Item 1A “Risk Factors” of
Part I of our Annual Report on Form 10-K for the fiscal year ended December
31, 2009 and in the Company’s other filings with the Securities and Exchange
Commission. 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 discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes and the other financial information appearing in Part IV,
Item 15 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”), a wholly-owned subsidiary of RINO
International Corporation organized under the laws of the British Virgin
Islands; (iii) Rino Investment Co., Ltd., a wholly-owned subsidiary of
RINO International Corporation under the laws of the People’s Republic of China
(the “PRC”); (iv) Dalian Innomind Environment Engineering Co., Ltd. (“Dalian
Innomind”), a wholly-owned subsidiary of Innomind organized under the laws
of PRC; ; (v) Dalian RINO Heavy Industries Co., Ltd. (“RINO Heavy
Industries”), a wholly-owned subsidiary of RINO Investment, organized under
the PRC laws; (vi)Dalian RINO Environment Engineering Science and Technology
Co., Ltd., a contractually controlled affiliate of Dalian Innomind organized
under the laws of the PRC (“Dalian Rino”); (vii) Dalian Rino’s
wholly owned subsidiaries, Dalian Rino Environmental Engineering Project Design
Co., Ltd., organized under the PRC laws (“Dalian Rino Design”); (viii)
Dalian Rino Environmental Construction & Installation Project Co., Ltd.,
organized under the PRC laws (“Dalian Rino Installation”) and (viv) Rino
Technology Corporation, a wholly-owned subsidiary of Dalian Rino organized
under the laws of the state of Nevada (“Rino Technology”).




28




Company
Overview





We were
incorporated under the laws of the state of Nevada and, along with our
wholly-owned subsidiaries and contractually controlled affiliates, are
headquartered in Dalian, China. We are engaged in designing, developing,
manufacturing, installing and servicing proprietary and patented sinter flue gas
desulphurization equipment (FGD), waste water treatment and high temperature
anti-oxidation systems to the large, state-owned iron and steel industry
manufacturers in the People’s Republic of China.  Our business
operations are conducted throughout China.





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.





All of
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.





We are
subject to risks common to companies operating in China, including risks
inherent in our distribution and commercialization efforts, uncertainty of
foreign regulatory and marketing approvals and laws, reliance on key customers,
enforcement of patent and proprietary rights, the need for future capital and
retention of key employees. We cannot provide assurance that we will generate
revenues or achieve and sustain profitability in the future.





The
following is a summary of key 2009 financial and non-financial
information:





Key
2009 financial information





We had a
strong year in 2009. Despite weak economic conditions early on in 2009,
continued industrialization, increasingly stringent environmental standards and
the massive government stimulus program created a positive environment for our
business. The Company achieved total revenues of $192.6 million for the
year ended December 31, 2009, representing an increase of 38.3% from the total
revenues of $139.3 million for the same period ended December 31, 2008. Our
gross profit increased from $54.3 million for the year ended December 31,
2008 to $72.3 million for the same period of 2009, representing an increase
of 33.1%.  Our income from operations reached $55.3 million for the
year ended December 31, 2009 from $22.8 million for the same period in
2008, representing an increase of 142.9%.  Our net income for the
year ended December 31, 2009 grew to $56.4 million from $21.3 million
for the same period in 2008, representing an increase of
165.0%.





2009
Registered Direct Offering




On
December 7, 2009, the Company closed sales of 3,252,032 shares of its common
stock, Series A Warrants to purchase 1,138,211 common stock and Series B
Warrants to purchase 1,138,211 shares of common stock with the gross proceeds of
$99,999,984 (the “2009 Registered Direct Offering”). The Company plans to use
the proceeds from this financing for working capital as more fully described in
the financing documents.




Adoption
of ASC 815 Derivatives and Hedging





On
January 1, 2009, the Company adopted ASC 815 Derivatives and Hedging and treated
warrants as derivative liability since their issuance date and change in the
fair value of the warrants are recognized in earnings until such time as the
warrants are exercised or expired. As such, the Company recognized warrant
liabilities of $15,172,712 as of December 31, 2009.




29




Formation
of Subsidiaries





On August
18, 2009, Dalian Rino formed Rino Technology Corporation (“Rino Technology”), as
a wholly owned subsidiary under the laws of the U.S. The Company is a
corporation organized and existing under the laws of
Nevada.   The purpose of Rino Technology is to provide improved
communications and administrative support for Dalian Rino, as well as research
and development of U.S. business opportunities as they arise.




In
November 2009, the Company formed Rino Investment Co., Ltd. (“Rino Investment”),
a wholly-owned subsidiary, to pursue selective strategic acquisitions, focusing
on product line extensions and access to new markets. It will also provide
services to its investing enterprises in the areas of technical support,
technical staff training and setting up domestic research development center
which helps to engage in the leading industrial technology development. Pursuant
to the business permits, Rino Investment’s right of operation expires on
November 29, 2029 and its business permit is renewable upon
expiration.





In
December 2009, Rino Investment formed Dalian Rino Heavy Industry Co., Ltd.
(“Rino Heavy Industry”), a wholly owned subsidiary of Rino Investment, to expand
the production capacity. Rino Heavy Industry, located in Dalian Changxing Island
Harbor Industrial Zone, is a heavy machinery processing enterprise, with a large
scale (450m × 290m large) heavy industrial plant, capable of processing a wide
range of mainframe parts. Rino Heavy Industry is also focused on R&D,
manufacturing, installing and maintaining environmental protection
equipments.





Qualified
to Do Business in California





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





Appointment
of Yu Li as Controller (principal accounting officer)





On
November 14, 2009, the Board of Directors of RINO International Corporation
approved and confirmed the appointment of Yu Li as its Controller (principal
accounting officer).  Prior to her appointment to such position, Ms.
Yu had been the Company’s accounting manager since the Company’s
inception.





New
Products





1)
            DXT
      System





In early
September 2009, we commenced installation of our new proprietary ammonia-based
desulphurization system (the "DXT system") on a 280 square meter sinter
system at Hunan Lianyuan Iron and Steel Company. The total contract value is $14
million with the installation scheduled to be completed during the
second quarter of 2010. We designed our DXT system based on a technology
that we licensed from Baosteel Group Co., China's largest Steel Producer, which
has been applying this technology to its manufacturing process during the past
10 years. Our new DXT operating system utilizes coking waste ammonia in the flue
gas to effectively remove the sulphur dioxide from the sinter flue gas and
produces ammonia sulfate as a by-product which can be used as fertilizer. In
addition to filtering out more than 99% of harmful sulphur emissions, the DXT
system utilizes considerably less energy, decreases operating and maintenance
costs, and creates a sustainable revenue generating activity through the
production of fertilizer. The Chinese government strongly supports technologies
which are both environmentally friendly and economical. Our customers in the
iron and steel manufacturing industry that use the DXT system will be eligible
for tax credits and government subsidies to offset the costs.





2)
            DWM
      Sludge Treatment Equipment





On
October 20, 2009 we entered into a two-phased contract valued at $18.4 million
with the government of Dalian Development District. The new sludge
treatment system, which should be installed during the $9.6 million first phase
of the contract, is expected to initiate operations by August 2010 and will
achieve a processing capacity of 200 tons per day. After the $8.8 million second
phase installation, which will commence in September 2010 and is expected to be
online by February 2011, the processing capacity of the sludge treatment system
will increase by an additional 200 tons per day.




The new
Rotary Drum Film Dryer ("DWM") sludge treatment system, which was used in this
contract, was successfully developed through cooperation with the Dalian
University of Technology in November 2008. The new sludge treatment system
can be used to treat sludge generated by the municipal wastewater treatment
process, industrial sludge generated by 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.




30




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 of industrial pollutants, primarily sulfur dioxide.
Specifically, the guideline mandates the addition of new sintering
desulphurization equipment with a 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 our 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 15,800 square meters 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 sulphur dioxide emissions by steel
companies and plans to install on-line, real time monitoring devices to ensure
compliance.





Results
of Operations





Comparison
of the Year Ended December 31, 2009 and 2008





Net
Sales





Net sales
increased by $53.3 million to $192.6 million or an increase of 38.3% for the
year ended December 31, 2009, as compared to $139.3 million net sales for the
year ended December 31, 2008. Such increase was driven by the stringent
environmental regulation, which has significantly increased our product sales
and service demand.  The breakdown of the Company’s revenue growth is
as follows:





For the years ended December 31,2009
                  
                  
                  2008Net Sales
                    (in thousand)
                  
                  
                  % to
                    Total
                  
                  
                  Net Sales
                    (in thousand)
                  
                  
                  % to
                    Total
                  
                  
                  %
                    IncreaseWastewater
      treatment equipment
                  
                  $
                  45,979
                  
                  
                  
                  23.9
                  %
                  
                  $
                  14,444
                  
                  
                  
                  10.4
                  %
                  
                  
                  218.3
                  %Flue
      gas desulphurization
                  
                  
                  116,403
                  
                  
                  
                  60.4
                  %
                  
                  
                  105,288
                  
                  
                  
                  75.6
                  %
                  
                  
                  10.6
                  %Anti-oxidation
      equipment and coatings
                  
                  
                  25,092
                  
                  
                  
                  13.0
                  %
                  
                  
                  5,747
                  
                  
                  
                  4.1
                  %
                  
                  
                  336.6
                  %Machining
      services
                  
                  
                  5,169
                  
                  
                  
                  2.7
                  %
                  
                  
                  13,864
                  
                  
                  
                  9.9
                  %
                  
                  
                  -62.7
                  %Total
      Net Sales
                  
                  $
                  192,643
                  
                  
                  
                  100.0
                  %
                  
                  $
                  139,343
                  
                  
                  
                  100.0
                  %
                  
                  
                  38.3
                  %





Demand
for our Lamella Wastewater System, increased 218.3% to $46.0 million for the
year ended December 31, 2009, as compared with $14.4 million for the year
ended December 31, 2008.   This increase was mainly attributable
to the increase in the numbers of the projects and our successful execution of
larger-size projects. We were working on much larger size wastewater treatment
contracts, almost double the size of contracts executed in 2008. China continues
to face severe water pollution. It is expected that total water waste will
continue growing due to rapid urbanization and industrialization, reaching 79
billion tons by 2015. Moreover, the current wastewater treatment
infrastructure is still inadequate and many wastewater treatment systems used
have reached its service life, we anticipate there will be continued growing in
the demand of our products and services.





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 over
90%. For the year ended December 31, 2009, we recorded revenues of $116.4
million, as compared to revenues of $105.3 million for the year ended December
31, 2008, representing an increase of 10.6%. The increase was mainly due to
the increase in the size of the project. Compared the average contract
price of all the contracts completed in 2009 and 2008, we see an increase of
39%.





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. We recorded revenues of $25.1 million anti-oxidation
equipment and related coatings sales from 9 contracts executed for the year
ended December 31, 2009, as compared to revenues of $5.7 million with 2
contracts completed for the year ended December 31, 2008, representing an
increase of $19.3 million or 336.6%. The increase in revenues largely reflects
our increased numbers of the projects as result of the expansion of our customer
base during the period.




31




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 year ended
December 31, 2009, machining service revenue accounted for 2.7% of the total
revenue as compared to 9.9% for the corresponding period in 2008. The
decrease was largely attributable to the increasing demand from our own
contracts, which left us with less capacity to provide machining services to
third parties.





Costof
Sales





The cost
of sales for the year ended December 31, 2009 increased by $35.3 million to
$120.3 million from $85.0 million for the year ended December 31, 2008,
representing an increase of 41.5%.  Following the growing in our
business, our capacity directly impacted how we operate and can change from
period to period, depending on demand level, production efficiency and location
of the contracts. When the capacity is approaching peak level by the increasing
demand, we tend to outsource the capacity to subcontractors and consequently
resulted in higher cost and lower profit margin. The increase in our cost
of revenues was mainly driven by the increase in our revenue as well as the
increase in our subcontractor costs. As a percentage of sales, the cost of
sales increased to 62.5% for the year ended December 31, 2009 compared to 61.0%
for the same period of 2008.  The breakdown of the cost of sales is as
follows:





For the years ended December 31,2009
                  
                  
                  2008Total
                    (in thousands)
                  
                  
                  % of Sales
                  
                  
                  Total
                    (in thousands)
                  
                  
                  % of SalesRevenuesContracts
                  
                  $
                  187,473
                  
                  
                  
                  
                  
                  $
                  119,921Machining
      Services
                  
                  
                  5,169
                  
                  
                  
                  
                  
                  
                  19,423Cost
      of SalesContracts
                  
                  
                  117,471
                  
                  
                  
                  62.7
                  %
                  
                  
                  74,910
                  
                  
                  
                  62.5
                  %Machining
      Services
                  
                  
                  2,858
                  
                  
                  
                  55.3
                  %
                  
                  
                  10,100
                  
                  
                  
                  52.0
                  %Gross
      Profit
                  
                  $
                  72,313
                  
                  
                  
                  
                  
                  
                  $
                  54,334





Our gross
profit has increased by $18.0 million or 33.1%. The increase was mainly as
result of increase in revenue. Gross margin decreased from 39.0% in 2008 to
37.5% in 2009, reflecting an increase in cost of sales due to the increase in
the numbers of the contracts using subcontractors.





Operating
Expense





Operating
expenses for the year ended December 31, 2009 decreased to $17.0 million
from $31.6 million for the same period ended December 31, 2008, representing a
decrease of 46.2%. The $14.6 million decrease in our operating expenses was
largely result of a decrease of $17.5 million in charges for stock compensation
expense which was partially offset by a $3.0 million increase in commission
expenses and a $0.7 million increase in salary expenses, which is in line with
our increase in revenue.





Liquidated
Damage 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 were 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 required 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 $2.6 million as of December 31, 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 and (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 Stock to shareholders who elected to receive shares of the
Company’s Common Stock.




32




Other
Income, net





Net other
income for the year ended December 31, 2009 increased by $2.6 million to $1.1
million from $1.5 million net other expense in 2008. The increase in net other
income was mainly due to fact that the Company recorded a gain on liquidated
damage settlement in the amount of $1.7 million in 2009. In 2008, the Company
recorded $1.6 million liquidated damage expenses related to the 2008 earnings
target or “Make Good” provision pursuant to Agreement entered in October
2007. The change of the fair value of the warrant liability in the amount
of $0.8 million as a loss was also a contributing factor to the net change in
other income.





Liquidity
and Capital Resources





A major
factor in the Company’s liquidity and capital resource planning is its
generation of operating cash flow, which is strongly dependent on the demand for
our services and products. Historically, we funded our working capital
needs from operations, advance payments from customers, bank borrowings, and
capital from shareholders. This is supplemented by our financing activities in
the capital markets including potentially debt and equity, which supports major
capital investments for future business growth.





In
connection with our Securities Purchase Agreement with the investors entered
into and consummated in October, 2007, 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
$24.5 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 holding 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 $134.5 million
cash and cash equivalents as of December 31, 2009, representing an increase of
581.2% as compared to $19.7 million as of December 31, 2008. The increase in
cash and cash equivalents was mainly driven by cash generated from operations
and net cash proceeds of $94.9 million from issuance of 3,252,032 shares of
common stock at $30.75 per share in public offering during the fourth quarter.
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 $31.0 million in the year ended December 31,
2009. 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.




The
following tables present our net cash flows for the year ended December 31, 2009
and for the same period ended December 31, 2008.




For the years ended
                  December 30,US$ (in thousands)
                
                2009
                
                
                2008Cash
      provided by operating activities
                
                $
                30,931
                
                
                $
                5,975Cash
      used in investing activities
                
                $
                (573
                )
                
                $
                (3,459
                )Cash
      provided by financing activities
                
                $
                84,379
                
                
                $
                8,845





Cash
flow from operating activities





Net cash
provided by operating activities was $31.0 million for the year ended
December 31, 2009 as compared to net cash provided from operations of $6.0
million in the same period ended December 31, 2008. Increase in net cash
provided by operating activities was largely due to the $56.4 million net income
and was offset by $6.6 million increase in accounts receivable, $12.1 million
increase in advances for inventory purchases, $4.2 million increase in
inventories and $3.3 million increase in costs and estimated earnings in excess
of billings on uncompleted contracts.





Accounts
Receivable





Our
accounts receivable at December 31, 2009 increased to $57.8 million from
$51.5 million at December 31, 2008, representing an increase of 12.2%. As a
percentage of total sales, our accounts receivable decreased to 30.0% at
December 31, 2009, as compared to that of 37.0% at December 31, 2008.  The
increase in our accounts receivable was in line with our growth in
revenue.




33




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
$273,446 and $0 as of December 31, 2009 and 2008, respectively.





Costs
and estimated earnings in excess of billings on uncompleted
contracts





Costs and
estimated earnings in excess of billings on uncompleted contracts increased to
$3.3 million at December 31, 2009, from $0 at December 31,
2008.   All related costs and estimated earnings were timely
billed, which resulted in $0 in costs and estimated earnings in excess of
billings as of December 31, 2008. Among the two contracts remaining open as
of December 31, 2009, one contract has the terms allowing the customer to
make payments in installments after the construction are fully completed, which
resulted in $3.3 million increase in costs and estimated earnings in excess of
billings.





Advances
for inventory purchase





Our
advances for inventory purchase increased to $34.1 million at December 31, 2009,
an increase of $12.1 million or 54.9%, from the $22.0 million recorded at
December 31, 2008.  The increase was our response to the continuous growth
in sales and our effort to ensure timely delivery of raw materials needed to
execute existing production contracts.





Cash
used in investing activities





For the
year ended December 31, 2009, net cash used in investing activities
decreased to $0.6 million as compared to $3.5 million used for the same period
ended December 31, 2008, representing a decrease of $2.9 million or
83.4%. This decrease primarily resulted from less capital expenditure in
2009.





Cash
provided by financing activities





For the
year ended December 31, 2009, net cash provided by financing activities
increased to $84.4 million as compared to cash provided by financing of
$8.8 million for the same period ended December 31, 2008, representing
an increase of $75.5 million or 854.0%.  The increase was
primarily result of cash proceeds of $94.9 million from issuance of 3,252,032
shares of common stock at $30.75 per share in public offering during the fourth
quarter offset by $16 million net increase in bank loan payment in 2009 compared
to 2008.





On
December 7, 2009, the Company closed a public offering of 3,252,032 shares of
its common stock; Series A Common Stock Warrants, which are exercisable within
six months of the closing date, to purchase up to an aggregate of 1,138,211
shares of Common Stock at an exercise price of $34.50 per Warrant; and Series B
Common Stock Warrants, which are exercisable beginning on the six month one day
anniversary of the closing day until the one year one day anniversary of the
closing date, to purchase up to an aggregate of $1,138,211 shares of Common
Stock at an exercise price of $34.50 per Warrant. The Company received net
proceeds of approximately $94.9 million from the offering, after deducting
underwriting discounts and estimated offering expenses. The offering was
underwritten by Rodman & Renshaw, LLC (“Rodman”), pursuant to the
Underwriting Agreement by and between the Company and Rodman dated as of
December 2, 2009.




Fair
Value of Financial Instruments





On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. 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 assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.





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





Effective
January 1, 2009, warrants to purchase 382,500 shares of the Company’s
common stock 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 the U.S. dollar, 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 expired.




34




As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to a liability, as if these warrants were treated as a
derivative liability since their issuance in October, 2007 (“2007 Warrants”). On
January 1, 2009, the Company reclassified $1,058,702 from additional
paid-in capital, as a cumulative effect adjustment, $420,070 from beginning
retained earnings and $1,478,772 to warrant liabilities to recognize the fair
value of such warrants. In July, August and October of 2009, warrants to
purchase 382,500 shares of the Company’s common stock were exercised through
cashless conversion. The fair value of the exercised warrants amounted to
$5,881,107.   Therefore, the Company recognized
$4,402,335 of loss from the change in fair value of these warrants for the
year ended December 31, 2009.





On
December 7, 2009, the Company closed sales of 3,252,032 shares of its common
stock; Series A Common Stock Warrants, which are exercisable within six months
of the closing date; to purchase up to an aggregate of 1,138,211 shares of
Common Stock at an exercise price of $34.50 per Warrant (the “2009 Series A
Warrants”); and Series B Common Stock Warrants, which are exercisable beginning
on the six month one day anniversary of the closing date until the one year one
day anniversary of the closing date, to purchase up to an aggregate of 1,138,211
shares of Common Stock at an exercise price of $34.50 per Warrant (the “2009
Series B Warrants”). These warrants were treated as a derivative
liability because the strike price of the warrants is denominated in the
U.S. dollar, 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 expired. The fair value of the warrants on
grant date and as of December 31, 2009 amounted to $18,743,862 and $15,172,712.
Therefore, the company recognized $3,571,150 of gain from the change in fair
value of warrants for the year ended December 31, 2009 on these
warrants.




Warrants
referred to in the preceding paragraphs do not trade in an active securities
market, and as such, the Company estimates the fair value of these warrants
using the Black-Scholes option pricing model. Details of the assumptions used to
estimate the fair value of the warrants are described in Note 2 to the
Consolidated Financial Statements.




The
following table sets forth by level within the fair value hierarchy of the
Company’s financial assets and liabilities that was accounted for at fair value
on a recurring basis as of December 31, 2009.





Carrying Value at
                        December 31,
                      
                      
                      Fair Value Measurement at
                        December 31, 20092009
                      
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3Warrant
      liability
                      
                      $
                      15,172,712
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      15,172,712





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.





Related
Party Transactions





The
Company owed $494,614 and $596,023 to a stockholder as of December 31, 2009 and
2008, respectively, for advances made on an unsecured basis, payable on demand
and interest free. Imputed interest is charged per annum on the amount with loan
in nature due at 5.24% and 7.47% for the years ended December 31, 2009 and 2008,
respectively.  Total imputed interest recorded as additional paid-in
capital amounted to $13,557 and $24,268 for the years ended December 31, 2009
and 2008, respectively.





On
December 7, 2009, the Company made a loan of approximately $3,500,000 to Mr.
Dejun Zou and Ms. Jianping Qiu on an unsecured and interest free basis. Mr.
Zou and Mrs. Qiu are directors and officers of the Company. There was no written
loan agreement entered into by the parties regarding the foregoing.




The
making of this loan and the continuation of such indebtedness thereafter until
it is fully repaid create a contingent liability for a possible violation of
Section 13(k) of the Exchange Act (Section 402(a) of the Sarbanes-Oxley Act of
2002). Section 13(k) provides that it is unlawful for a company, such as the
Company, which has a class of securities registered under Section 12 of the
Exchange Act, to directly or indirectly, including through any subsidiary,
extend or maintain credit in the form of a personal loan to or for any director
or executive officer of the company.




Issuers
violating Section 13(k) of the Exchange Act may be subject to civil sanctions,
including injunctive remedies and monetary penalties, as well as criminal
sanctions. The imposition of any of such sanctions on the Company may have a
material adverse effect on our financial position, results of operations or cash
flows.





Mr. Zou
and Ms. Qiu have repaid $300,000 as of the date of this Report have agreed to
repay the loan on or before May 10, 2010.




35




Contractual
Obligations





On March
2, 2010, Rino Heavy Industry entered into a Purchase Agreement for Land Use
Right of State-Owned Construction Site (the “Agreement”) with Dalian City Land
Resources and Housing Bureau of Liaoning Province of PRC (the “Seller”) for the
land located at Enterprise District, Lingang Industrial District, Changxing
Island, Dalian (the “Changxing Island Land”). Such land is intended for
industrial use only. The purchase price for the land use right is in an
aggregate amount of RMB 51,239,320 (or approximately $ 7,516,808) (the “Purchase
Price”). Under the Agreement, the Purchase Price shall be paid off in a lump sum
payment within 60 days after execution of the Agreement. Rino Heavy Industry
will be subject to penalties of 1‰ of the Purchase Price for each day of late
payment. Rino
Heavy Industry also covenants under the Agreement that total investment of the
projects to be constructed on the Changxing Island Land shall be no less than
RMB 636,532,098 (or approximately $ 93,379,259).




As of
December 31, 2009, the Company has deposited $341,673 (RMB2.3 million) for this
land use right and reclassified as advances for non-current assets. In March
2010, the Purchase Price of the land use right was fully paid.





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 are presented net of an allowance for doubtful account. The Company
maintains reserves for potential credit losses on accounts receivable. 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 reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reverses. The estimated loss rate is
based on our historical loss experience and also contemplates current market
conditions. Delinquent account balances are written-off after management has
determined that the likelihood of collection is not probable, and known bad
debts are written off against allowance for doubtful accounts when
identified.





Cost and
Estimated Earnings in Excess of Billings on Uncompleted Contracts




Costs and
estimated earnings in excess of billings on uncompleted contracts represent
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize contract
revenue.





Billings
in Excess of Cost and Estimated Earnings on Uncompleted Contracts




Billings
in excess of costs and estimated earnings on uncompleted contracts represent
billings in excess of revenues recognized pursuant to the
percentage-of-completion method.





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 the 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.





Property,
Plant and Equipment





Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When assets are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of plant and equipment is
provided using the straight-line method for substantially all assets with
estimated lives as follows:




36




Buildings
              30
      YearsPlant
      and machinery
              15
      YearsMotor
      vehicles
              10
      YearsFurniture,
      fixtures and equipment
              5
      Years





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.





The
Company recognizes an impairment loss when estimated cash flows generated by
those assets are less than the carrying amounts of the asset.




Fair
Value of Financial Instruments





On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. 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 assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.





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





Effective
January 1, 2009, 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 the U.S. dollar, 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 expired.





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.  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 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. 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.





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.




37




Enterprise
Wide Disclosure





The
Company’s chief operating decision-makers (i.e. chief executive officer and his
direct reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by business lines for
purposes of allocating resources and evaluating financial performance. There are
no segment managers who are held accountable for operations, operating results
and plans for levels or components below the consolidated unit level. Based on
qualitative and quantitative criteria established by “Disclosures about Segments
of an Enterprise and Related Information”, the Company considers itself to
be operating within one reportable segment





Stock-based
Compensation





We are
required to estimate the fair value of share-based awards on the date of grant.
The value of the award is principally recognized as expenses ratably over the
requisite service periods. The fair value of our restricted stock units is based
on the closing market price of our common stock on the date of grant. We have
estimated the fair value of stock options and stock purchase rights as of the
date of grant or assumption using the Black-Scholes option pricing model, which
was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the
expected volatility of our stock price. We evaluate the assumptions used to
value stock options and stock purchase rights on a quarterly basis. The fair
values generated by the Black-Scholes model may not be indicative of the actual
fair values of our equity awards, as it does not consider other factors
important to those awards to employees, such as continued employment, periodic
vesting requirements and limited transferability.





The
Company is required to measure the costs of the equity instruments issued in
exchange for the receipt of goods or services from other than employees at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably
determinable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or
services.





Stock
compensation expense is recognized based on awards expected to
vest.  GAAP requires forfeitures to be estimated at the time of grant
and revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates.  There were no estimated forfeitures as the
Company has a short history of issuing options.





Recently
Adopted Accounting Standards




In
January 2009, the FASB’s accounting standard regarding other investments
providing additional guidance which amended the impairment model to remove the
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 this guidance did
not have a material impact on the Company’s consolidated financial
statements.





In April
2009, the FASB’s accounting standard regarding fair value measurements and
disclosures providing additional guidance for estimating fair value 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 guidance shall be
applied prospectively with retrospective application not permitted. The adoption
of this guidance did not have a material impact on the Company’s consolidated
financial statements.





In April
2009, the FASB’s
accounting standard regarding debt and equity securities requires 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 guidance 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 guidance 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 guidance 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 this guidance
did not have a material impact on the Company’s consolidated financial
statements.





In April
2009, the FASB issued an accounting standard that requires 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 guidance, fair values for these assets and liabilities were only
disclosed annually. This guidance applies to all financial instruments and
requires all entities to disclose the method(s) and significant assumptions used
to estimate the fair value of financial instruments. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial
statements.




38




In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets.  This
guidance is effective for the Company beginning in 2010. Should the Company’s
accounts receivable securitization programs not qualify for sale treatment under
the revised rules, future securitization transactions entered into on or
after January 1, 2010 would be classified as debt and the related cash flows
would be reflected as a financing activity. The adoption of this guidance did
not have a material impact on the Company’s consolidated financial
statements.





In June
2009, the FASB updated an accounting standard regarding consolidation guidance
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. This guidance 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.
This guidance requires an ongoing reassessment of whether a company is the
primary beneficiary of a variable interest entity. This guidance also requires
additional disclosures about a company’s involvement in variable interest
entities and any significant changes in risk exposure due to that involvement.
This guidance is effective for fiscal years beginning after November 15, 2009.
The adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The adoption of this guidance did not have a material impact on
the Company’s consolidated financial statements.





In
November 2009, the FASB issued an ASU regarding accounting for stock dividends,
including distributions to shareholders with components of stock and cash. This
ASU clarifies that the stock portion of a distribution to shareholders that
contains components of cash and stock and allows shareholders to select their
preferred form of the distribution (with a limit on the amount of cash that will
be distributed in total) should be considered a stock dividend and included in
EPS calculations as a share issuance. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial
statements





In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166,Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No.
140. The amendments in this Accounting Standards Update improve financial
reporting by eliminating the exceptions for qualifying special-purpose entities
from the consolidation guidance and the exception that permitted sale accounting
for certain mortgage securitizations when a transferor has not surrendered
control over the transferred financial assets. In addition, the amendments
require enhanced disclosures about the risks that a transferor continues to be
exposed to because of its continuing involvement in transferred financial
assets. Comparability and consistency in accounting for transferred financial
assets will also be improved through clarifications of the requirements for
isolation and limitations on portions of financial assets that are eligible for
sale accounting. The Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.





In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167,Amendments to FASB Interpretation
No. 46(R) . The amendments in this Accounting Standards Update replace
the quantitative-based risks and rewards calculation for determining which
reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity
has the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.




In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.




39




In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity.  The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company does not expect the adoption of
this ASU to have a material impact on the Company’s consolidated financial
statements.





In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2.  A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers.  2)  Activity in
Level 3 fair value measurements.  In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in
either Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.





ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





Not
applicable.




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
Company's Consolidated Financial Statements, together with the independent
registered public accounting firm reports thereon appear at pages starting
from F-1of this Form 10-K.





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING AND FINANCIAL
DISCLOSURE





The
disclosure required by Item 304(b) of Regulation S-K is incorporated herein by
reference to the Company’s current report on Form 8-K, filed with the Securities
and Exchange Commission on January 7, 2010.




ITEM
9A. 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.
  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. Based on that evaluation, management concluded that
because of the material weakness in internal control over financial reporting
described below, our disclosure controls and procedures were not effective as of
December 31, 2009, to satisfy the objectives for which they are
intended.
  40
 
 Management
Report on Internal Control over Financial Reporting
  Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. The Company’s internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
 
 The
Company’s internal control over financial reporting includes those policies and
procedures that:
  ·
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;
  ·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that the receipts and expenditures of the
      Company are being made only in accordance with authorizations of its
      management and directors of the Company;
and
  ·
              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 its financial
  statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness of internal control over financial reporting to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may
deteriorate.
  The
Company’s management, with the participation of our Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control—Integrated Framework . The
COSO framework summarizes each of the components of a company’s internal control
system, including (i) the control environment, (ii) risk assessment, (iii)
control activities, (iv) information and communication, and (v) monitoring. A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
 
 Management
assessed and evaluated our internal controls over financial reporting and
concluded that the Company’s disclosure controls and procedures over financial
reporting were not effective as of December 31, 2009 because of the following
identified material weaknesses in our internal control:
 
 1)
Insufficient controls over related party transactions and cash disbursement
management
 
 During
the fiscal year ended December 31, 2009, the Company made a loan to certain
officers and directors (the “Loan”) which created a contingent liability for a
possible violation of Section 13(k) of the Exchange Act (Section 402(a) of the
Sarbanes-Oxley Act of 2002). Section 13(k) provides that it is unlawful for a
company, such as the Company, which has a class of securities registered under
Section 12 of the Exchange Act, to directly or indirectly, including through any
subsidiary, extend or maintain credit in the form of a personal loan to or for
any director or executive officer of the company.
 
 The lack
of adequate cash disbursement management by the Company and lack of adequate
procedures and controls with respect to related party transactions which allowed
for the Loan to occur are material weaknesses in the Company’s internal
controls. which existed during the fiscal year ended December 31,
2009.
  41
 
 2)  Ineffective
controls over accounting for revenues and billing process
 
 We did
not design and maintain effective controls over the accounting for assets.
Specifically, the controls over our billing system were not designed and
operating effectively to ensure the completeness and accuracy of related
revenues. As of December 31, 2009, the management noticed that our accounting
department was not timely notified about the entry of certain subcontracted
projects.
 
 Further,
during its evaluation, management determined that a material weakness existed
with respect to our process of estimating the allowance for uncollectible
accounts at December 31, 2009. The Company’s process for determining its
allowance for uncollectible accounts focused primarily on evaluating the
appropriate percentage of gross revenues to record during a particular period.
However, as of December 31, 2009, the Company did not have processes or controls
in place that would enable management to appropriately evaluate, document and
review the adequacy of the allowance for uncollectible accounts as of a
particular period-end.
 
 3)Lack of controls
over fixed assets management
 
 We did
not maintain effective controls over recording of fixed assets. Specifically, we
mistakenly recorded the receipt of certain fixed assets, which resulted in
significant adjustment between the fixed assets and the advance to suppliers.
The lack of timely reconciliation procedures and deficient recordkeeping
controls result in material weakness in this area such that there is a
reasonable possibility that due to these control deficiencies a material
misstatement will not be prevented or detected on a timely basis.
 
 4)Lack of internal
audit function
 
 We lack
qualified resources to perform the internal audit functions properly, and the
scope and effectiveness of the internal audit function are yet to be
developed.  Specifically, the reporting mechanism between the
accounting department and the Board of Directors and the CFO was not effective,
therefore resulting in the delay of recording, reporting and the failure to
comply with the Company’s Code of Ethics.
 
 Remediation
Initiatives
 
 As a
result of the foregoing material weaknesses, as of March 30, 2010, the Company’s
audit committee of its Board of Directors has undertaken to further review
internal controls along with management and in cooperation with outside
consultants in order to remediate all existing material weaknesses and internal
control deficiencies.
 
 42
  Management
intends to take the following further specific actions to address the
deficiencies that are identified during the fiscal year 2009 and strengthen our
internal control over financial reporting:
 
 •
              to
      implement proper procedures of cash disbursement approval-control
      management under the supervision of the Audit Committee of the Board of
      Directors
 
 •
              to
      create positions in our accounting department to segregate duties of
      recording, authorizing and testing,
 
 •
              to
      increase our accounting and financing personnel resources, by retaining
      more U.S. GAAP knowledgeable financial
  professionals
 
 •
              to
      allocate sufficient resources to achieve an effective internal audit
      function
 
 •
              to
      establish direct reporting procedures from the Chief Accounting Officer to
      the Chief Financial Officer to ensure a better overview of the Company’s
      financial reporting system by the
CFO.
 
 •
              to
      reemphasize to all the officers and employees of the Company the Code of
      Ethics and to ensure all officers and employees’ full compliance of the
      Code of Ethics
 
 •
              to
      adopt policies and procedures regarding related party transactions and to
      ensure Audit Committee’s review of all interested
    transactions
 
 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. And management believes that the steps we are taking are necessary for
remediation of the material weaknesses identified above, and we will continue to
monitor the effectiveness of these steps and to make any changes that our
management deems appropriate.
 
 Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
 
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
 
 Changes
in Internal Control over Financial Reporting
 
 During
fiscal  2009, we took the following steps to improve our internal
control over financial reporting:
 
 •
                Effective
      November 14, 2009, the Company’s Board of Directors approved the
      appointment of Li Yu as its Chief Accounting
      Officer.
 
 •
                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.






PART
III





Item
10. Directors, Executive Officers and Corporate Governance





The
directors and executive officers of RINO International Corporation as of the
date of this report are as follows:




Name
              
              Position
              
              AgeZou
      Dejun
              
              Director
      and CEO
              
              49Qiu
      Jianping
              
              Director
      and Chairman of the Board
              
              43Quan
      Xie
              
              Director
              
              48Zhang
      Weiguo
              
              Director
              
              52Kennith
      C. Johnson, CPA
              
              Director
              
              56Yi
      (Jenny) Liu
              
              CFO
              
              38Li
      Yu
              
              Controller
              
              51




43




Mr. Zou Dejun has been a
Director and the Chief Executive Officer of the Company since October 2007. Mr.
Zou is the founder of Dalian Rino and has been a Director and its Chief
Executive Officer since 2003. He has also been a Director and the Chief
Executive Officer of Dalian Innomind since July 2007. Prior to founding Dalian
Rino, from 1993 until 1996 Mr. Zou served as Vice President of Yingkou Special
Valve Manufacturing Co., and from 1996 until 2003 he served as the chief
executive officer of Dalian Yingkun Energy and Environmental Engineering, Ltd.
Mr. Zou graduated from Liaoning Broadcast University, majoring in Electronic
Automation.





Ms. Qiu Jianping has been the
Chairman of the Board of the Company since March 2008. Ms.Qiu has been acting as
our CFO since the resignation of our former CFO in September 2008. Ms. Qiu has
been a Director and Chairman of the Board of Dalian Rino since 2003. Ms. Qiu is
also a Director and Chairman of the Board of Dalian Innomind since July
2007. From 1988 to 1994, Ms. Qiu was the Director of the Finance Department of
the Water & Electricity No. 5 Engineering Bureau. From 1994 through 1996 Ms.
Qiu was engaged in studies at the Dalian University of Foreign Languages, and
from 1996 to 2003, she served as the Chairman of the Board of Dalian Yingkun
Energy and Environmental Engineering, Ltd. Ms. Qiu has won the prestigious
‘Entrepreneur of the Year’ award in the Jinzhou District of Dalian and is the
holder of three patents. She currently chairs the Association of Industry and
Commerce in Dalian.





Professor Quan Xie has been a
Director of the Company since March 2008. Prof. Quan is the Director of the
Institute for Environmental and Life Sciences of Dalian University of Technology
(DUT). Prof, Quan began lecturing at DUT in 1986 and has participated in
visiting scholar programs at major universities and research centers in Germany,
Austria, and England. He is a Senior Fellow of the China Society of
Environmental Science and has authored and co-authored over 200 papers in his
career. Prof. Quan earned his doctorate in chemistry from Karl-Franzens
University in Graz, Austria.




Mr. Kennith Johnson, CPA, has
been a Director of the Company since March 2008. Mr. Johnson’s career in public
and corporate accounting stretches back to the mid-1970’s when he worked for
Arthur Andersen’s New York audit practice. Since 2005, Mr. Johnson has served as
Senior Vice President - CFO of Fairfax/MFX, an insurance and financial
conglomerate. From 2001 to 2005 he served as Principal - Management Consultant
at Johnson & Scanlon Associates. Beginning in 2004 through the present, Mr.
Johnson has served as Chairman of the Audit and Compensation Committee of
Interpharm Holdings, an AMEX listed company. Mr. Johnson holds an MBA in
International Corporate Finance from the Stern School of
Management.





Mr. Zhang Weiguo has been a
Director of the Company since March 2008. In 2001 Mr. Weiguo Zhang joined
Synutra, Inc. as President to oversee its U.S. operations. In June 2005, he was
appointed President and Chief Operating Officer of Synutra, to help develop the
company's growth strategy and take the company public. In addition to Synutra's
U.S. business operations, Mr. Weiguo Zhang is responsible for the company's
financial market operations, including investor relations, corporate
development, and international strategic development. Mr. Zhang holds an M.A. in
American Foreign Policy and International Economics from the School of Advanced
International Studies at John Hopkins University.





Ms.Yi (Jenny)Liu, served as Principal
Financial Officer and Chief Accounting Officer of China Direct, Inc., a NASDAQ
listed company from 2006 to March 2009. From 2002 to 2005, Ms. Liu served as
Audit Supervisor of Hill, Taylor LLC, one of the biggest minority-owned CPA
firms in Chicago. From 1995 to 2000, Ms. Liu worked for Mitsui Co., Ltd., a
Fortune Global 500 company, as the accounting manager. In 1995, Ms. Liu
graduated from Shanghai University of Engineering Science with a BA in Business
Administration and in 2002 she obtained her MBA from the University of Illinois
at Chicago.





Ms. Li Yu was appointed
as the Chief Accounting Officer of the Company in November 2009 and has
been the Company’s accounting manager since its inception. She graduated from
Northeast Financial and Economic University in year 2008. Ms. Yu received a CFO
Qualification Certificate issued by China Enterprise Confederation in January
2008.





The
directors will serve until our next annual meeting, or until their successors
are duly elected and qualified. The officers serve at the pleasure of the
Board.





To our
knowledge, during the last five years, none of our directors and executive
officers (including those of our subsidiaries) has:





·
            Had
      a bankruptcy petition filed by or against any business of which such
      person was a general partner or executive officer either at the time of
      the bankruptcy or within two years prior to that
  time.




·
            Been
      convicted in a criminal proceeding or been subject to a pending criminal
      proceeding, excluding traffic violations and other minor
      offenses.




·
            Been
      subject to any order, judgment or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking
      activities.




44




·
            Been
      found by a court of competent jurisdiction (in a civil action), the SEC,
      or the Commodities Futures Trading Commission to have violated a federal
      or state securities or commodities law, and the judgment has not been
      reversed, suspended or vacated.





Family
Relationship




There are
no family relationships among our directors or executive officers except that
Mr. Zou Dejun and Ms. Qiu Jianping are married to each other.





Nomination
of Directors by Security Holders





We do not
currently have procedures by which our security holders may recommend nominees
to our Board of Directors. In connection with the private placement that we
completed on October 5, 2007, Blue Ridge Investments LLC, an investor in the
private placement, used to retain the right to designate one member of the
Company’s (or at their election, Dalian Innomind’s or Dalian Rino’s) Board of
Directors. On July 14, 2009, Blue Ridge Investments LLC entered into a letter
agreement with the Company whereby it waived and relinquished such board
designation right. As of the date of this Report, Blue Ridge Investments LLC has
not designated any member of the Board.




Section 16(a)
Beneficial Ownership Reporting Compliance





Section 16(a)
of the Exchange Act requires the Company’s directors, executive officers and
persons who own more than 10% of the Company’s Common Stock to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Directors,
executive officers and greater than 10% stockholders are required by SEC rules
to furnish the Company with copies of Section 16(a) forms they file. Based upon
a review of the filings made on their behalf during the fiscal year ended
December 31, 2009, as well as an examination of the SEC’s EDGAR system Form 3,
4, and 5 filings and the Company’s records, the following table sets forth
exceptions to timely filings:




Name
                                        
                                        Date of Event Requiring
                                          Filing of Form 3
                                        
                                        Required Filing Date
                                          of Form 3
                                        
                                        Date Form 3 to be Filed
                                          with SECYi
      (Jenny) Liu
                                        
                                        06/01/2009
      (1)
                                        
                                        06/01/2009
                                        
                                        To
      be filed by 04/09/2010Li
      Yu
                                        
                                        11/14/2009
      (1)
                                        
                                        9/12/2008
                                        
                                        To
      be filed by
04/09/2010




(1) Date
of appointment as an officer and/ or a director of the Company.





Code
of Ethics





The
Company does not permit activities that give rise to conflicts of interest by
directors, executive officers or employees. In this regard, the Company adopted
a Code of Ethics in March 2008, a copy of which was previously filed as Exhibit
14.1 to our Annual Report on Form 10-K for the fiscal year ended December 31,
2007.  The Code of Ethics is also available at our website:
www.rinogroup.com.





Our Code
of Ethics applies to Directors, our Chief Executive Officer, Chief Financial
Officer and all of the other employees. Our Code of Ethics include standards
that are reasonably designed to deter wrongdoing and to promote (i) honest and
ethical conduct, (ii) full, fair, accurate, timely, and understandable
disclosure in reports and documents that we file or submit to the SEC and in our
other public communications, (iii) compliance with applicable governmental laws,
rules and regulations, (iv) the prompt internal reporting of violation of the
code to an appropriate person or person identified in the code, and (v)
accountability for adherence to the code.





Meetings
and Committees of the Board of Directors





The Board
of Directors met six times through teleconferencing during fiscal year 2009. In
addition to meetings of the full Board, directors attended meetings of Board
committees on which they served. The Board’s standing committees are the Audit,
Compensation and Nominating Committees.





Committee
Membership





The
following table shows the current membership on the standing
committees:





Name
                    
                    Audit Committee
                    
                    Compensation
                      Committee
                    
                    Nominating CommitteeKennith
      Johnson
                    
                    Chair
                    
                    Member
                    
                    MemberQuan
      Xie
                    
                    Member
                    
                    Chair
                    
                    MemberZhang
      Weiguo
                    
                    Member
                    
                    Member
                    
                    Chair




45




Audit
Committee





Our board
of directors established an Audit Committee on April 4, 2008 and appointed
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo as our audit committee
members. Mr. Johnson was appointed as the Chairman of our audit committee. Each
of our audit committee members is determined by our Board of Directors to be
“independent” under the Rules of NASDAQ, Marketplace Rule
4200(a)(15).





Audit
Committee Financial Expert





Our board
of directors had determined that our Chairman of the Audit Committee, Mr.
Kennith Johnson, qualifies as an “audit committee financial expert” as defined
in Item 407(d) of Regulation S-K and is “independent” as the term is used in
Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act.





The
committee assists the Board in fulfilling its oversight responsibilities
relating to:





· our
auditing, accounting and reporting practices;


· the
adequacy of our systems of internal controls;


· and the
quality and integrity of publicly reported financial disclosures.





In this
role, the committee appoints the independent auditors and reviews and approves
the scope of the audit, the financial statements and the independent auditors’
fees.




The Audit
Committee exercises the powers of the Board of Directors in connection with our
accounting and financial reporting practices, and provides a channel of
communication between the Board of Directors and independent registered public
accountants.





Nominating
Committee of the Board of Directors





Our board
of directors established a Nominating Committee on July 15, 2008 and appointed
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo as our Nominating Committee
members. Mr. Zhang Weiguo was appointed as the Chairman of our Nominating
Committee. Each of our nominating committee members is determined by our Board
of Directors to be “independent” under the Rules of NASDAQ, Marketplace Rule
4200(a)(15).





Our
Nominating Committee adopted a charter on July 15, 2008. A copy of the
Nominating Committee charter is available to our securities holders on the
Company’s website at: www.rinogroup.com. The Nominating Committee identifies and
considers candidates for board membership. The Nominating Committee has the
power and authority to review candidates proposed by our stockholders for
nomination to the Board of Directors, and to conduct appropriate inquiries into
the background and qualifications of any such candidates. In connection with the
private placement that we completed on October 5, 2007, Blue Ridge Investments
LLC., an investor in the private placement, had the right to designate one
member of the board of directors of the Company (or at their election, the board
of directors of Dalian Innomind or Dalian Rino). On July 14, 2009, Blue Ridge
Investments LLC entered into a letter agreement with the Company whereby it
waived and relinquished such board designation right. As of the date of this
Report, Blue Ridge Investments LLC has not designated any member of the
Board.





Compensation
Committee of the Board of Directors





Our board
of directors established a Compensation Committee on July 15, 2008 and appointed
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo as our Compensation Committee
members. Mr. Quan Xie was appointed as the Chairman of our Compensation
Committee. Each of our Compensation Committee members is determined by our Board
of Directors to be “independent” under the Rules of NASDAQ, Marketplace Rule
4200(a)(15).





Our
Compensation Committee oversees and administers our executive compensation
programs. The Compensation Committee seeks to ensure that the total compensation
paid to our named executive officers is fair, reasonable and competitive. The
Compensation Committee’s complete roles and responsibilities are set forth in
the written charter adopted by the Board of Directors on July 15, 2008. A copy
of the Compensation Committee charter is available to our securities holders on
the Company’s website at: www.rinogroup.com.





Compensation
Committee Interlocks and Insider Participation





None of
the Compensation Committee members is, or was ever, an officer or employee of
the Company or any of its subsidiaries, nor did any of the Compensation
Committee members have any relationship requiring disclosure by the Company
under any subsection of Item 404 of Regulation S-K promulgated by the
SEC. During the last fiscal year, none of the executive officers of the
Company served on the board of directors or on the compensation committee of any
other entity, any of whose executive officers served on the Board.





Item
11. Executive Compensation





The
following table sets forth information concerning the compensation of the named
executive officers for each of fiscal years 2008 and 2009:




46




Name and
                                    principal
                                    position
                                  
                                  Year
                                  
                                  Salary
                                    ($)
                                  
                                  
                                  Bonus
                                    ($)
                                  
                                  
                                  Stock
                                    awards
                                    ($)
                                  
                                  
                                  Option
                                    awards ($)
                                  
                                  
                                  Non-equity
                                    incentive plan
                                    compensation
                                    ($)
                                  
                                  
                                  Change in
                                    pension
                                    value and
                                    nonqualified
                                    compensation
                                    earnings ($)
                                  
                                  
                                  All other
                                    compensation
                                    (4)
                                  
                                  
                                  Total
                                    ($)Zou
      Dejun (1)
                                  
                                  2008
                                  
                                  
                                  69,192
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  15,748,992
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -2009
                                  
                                  
                                  99,192
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Qiu
      Jianping (1)(2)
                                  
                                  2008
                                  
                                  
                                  69,192
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,749,888
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -2009
                                  
                                  
                                  99,178
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Jenny Liu
      (3)
                                  
                                  2008
                                  
                                  
                                  0
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  (3
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -2009
                                  
                                  
                                  70,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  (3
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Li
      Yu (4)
                                  
                                  2008
                                  
                                  
                                  7,941
                                  
                                  
                                  
                                  21,972
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -2009
                                  
                                  
                                  7,941
                                  
                                  
                                  
                                  29,281
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Bruce
      Richardson (5)
                                  
                                  2008
                                  
                                  
                                  155,682
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -2009
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -





Notes to
“Summary Compensation
Table”





(1)
Escrowed Share Arrangement





Pursuant
to the Securities Purchase Agreement, dated October 5, 2007, 5,580,000 shares of
our common stock beneficially owned by our founders Zou Dejun and Qiu Jianping -
who, through The Innomind Trust, were required to be subject to escrow in order
to secure our obligation under the Securities Purchase Agreement to deliver
additional common stock to the private placement investors in the event we fail
to achieve certain after-tax net income targets for fiscal years 2007 and
2008. If any Make Good Escrow Shares are released to the company 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.





As a result of us
achieving the 2007 earnings targets, presently, there are 3,906,000 shares
remaining in escrow.  For fiscal year 2008, the earnings targets are
$28.0 million in after-tax net income and $1.12 in earnings per share on a fully
diluted basis.  We met these earnings targets for fiscal year 2008,
and as a result, the 3,906,000 shares currently in escrow were released to the
Innomind Trust with Mr. Zou and Ms. Qiu as the sole
beneficiaries.   Under U.S. generally accepted accounting
principles, the release of any of such escrow shares to any of our employees
based on our fulfillment of stated performance thresholds constitutes a
compensatory plan to such employees, which requires us to record a corresponding
compensation expense in our financial statements.  The key provisions
of SFAS-123R require that share-based compensation awards to employees be
measured at the grant-date fair value and the cost recognized over the period
during which the employee is required to provide service in exchange for the
award. The grant date of the escrowed share agreement is October 5, 2007 and the
grant date fair value is $4.48 per share. The 3,515,400 shares of our common
stock were released to the Innomind Trust, which are deemed as beneficially
owned by Mr. Zou were recognized as a stock award to him in 2008 with a value of
$15,748,992. The 390,600 shares of our common stock were released to the
Innomind Trust, which are deemed beneficially held by Ms. Qiu were recognized as
a stock award to her in 2008 with a value of $1,749,888.




(2)
Chairman of the Board is an executive office in Dalian Rino, Dalian
Innomind.





(3)
Pursuant to the employment agreement dated June 30, 2009, by and between the
Company and Yi (Jenny) Liu, Ms. Liu shall serve as the Company’s Chief
Financial Officer for a term of 3 years at a monthly salary of $10,000, and Ms.
Liu shall be granted the Company’s 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. Such options are
evaluated based on the assumptions disclosed in the consolidated financial
statements Note 15.




(4)Pursuant to certain
employment agreement dated February 28, 2010, Yu Li is employed by Dalian Rino
as its Chief Accounting Officer at an annual compensation of $7,941
with annual bonus of $29,281.




(5) Mr.
Richardson was the Company’s Chief Financial Officer and Secretary from
September 27, 2007 through September 5, 2008.




Employment
Agreements





We have
employment agreements with each of our executive officers, which are summarized
below.




47




·
            Zou
      Dejun. Pursuant to an employment agreement dated August 1, 2007,
      Zou Dejun is employed by Dalian Innomind as its Manager at a monthly
      salary of 40,000 RMB (approx. $5,230). The employment agreement expires on
      December 31, 2010. Under the agreement, Mr. Zou’s salary is subject to
      adjustment commensurate with Dalian Innomind’s revenues, but in no event
      less than the lowest standard salary prescribed by the Dalian city
      government. In addition, Mr. Zou is entitled to annual vacation in
      compliance with PRC rules pertaining to the same. The agreement is
      terminable by Dalian Innomind for cause, on 30 days
  notice.





Mr. Zou
has also signed a non-competition/non-disclosure agreement with the
Company.





·
            Qiu
      Jianping. Pursuant to an employment agreement dated August 1, 2007,
      Qiu Jianping is employed by Dalian Innomind as its Chairman of the Board
      at a monthly salary of 40,000 RMB (approx. $5,230). In the PRC, this
      position is an executive officer position, instead of directorship. The
      employment agreement expires on December 31, 2010. Under the agreement,
      Ms. Qiu’s salary is subject to adjustment commensurate with Dalian
      Innomind’s revenues, but in no event less than the lowest standard salary
      prescribed by the Dalian city government. In addition, Ms. Qiu is
      entitled to annual vacation in compliance with PRC rules pertaining to the
      same. The agreement is terminable by Dalian Innomind for cause, on 30 days
      notice.




Ms. Qiu
has also signed a non-competition/non-disclosure agreement with the
Company.





·
            Jenny
      Liu.
      Pursuant to an employment agreement dated June 30, 2009, Jenny Liu is
      employed by RINO International Corporation as the Company’s Chief
      Financial Officer for a term of 3 years at a monthly salary of $10,000. In
      addition, Ms. Liu was granted 50,000 options to purchase common stock
      at an exercise price of $6.15 per share, vesting in 3 equal annual
      installments beginning on June 30, 2010. The options will be issued as
      soon as practical after July 1 , 2010. Under the agreement, Ms. Jenny Liu
      is entitled to 20 days of paid vacation per year. The agreement is
      terminable on 30 days notice, and contains non-competition and
      non-disclosure covenants.





·
            LiYu.
      Pursuant to employment agreements dated September 11, 2008 and February
      28, 2010, Yu Li is employed by Dalian Rino as the its Chief Accounting
      Officer at an annual compensation of $7,941 Under the
      employment agreement, Ms. Yu Li is entitled to 20 days of paid vacation
      per year. The agreement is terminable on 30 days notice, and contains
      non-competition and non-disclosure covenants. During year 2009, Ms. Yu
      also received a bonus of $29,281. Ms. Yu also has signed a
      confidentiality agreement with the
Company.




Director
Compensation




Commencing
in 2008, each of our independent directors is paid a $2,000 cash retainer per
quarter and $500 for each board meeting or committee meeting attended. We also
reimburse our directors for actual, reasonable and customary expenses incurred
in connection with the performance of their duties as board members. Set forth
below is information concerning the compensation of the directors for fiscal
years 2009 and 2008.





For the
fiscal year ended December 31, 2009


Name
                
                Fees
                  earned or
                  paid in
                  cash ($)
                
                
                Stock
                  awards ($)
                
                
                Option
                  awards ($)
                
                
                Non-equity
                  incentive plan
                  compensation
                  ($)
                
                
                Nonqualified
                  deferred
                  compensation
                  earnings ($)
                
                
                All other
                  compensation
                  ($)
                
                
                Total ($)Zou
      Dejun
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0Qiu
      Jianpine
                
                
                0
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                0Zhang
      Weiguo
                
                
                8,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,000Quan
      Xie
                
                
                8,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,000Kennith
      Johnson
                
                
                28,112
                
                
                $
                8,960
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                40,112








For the
fiscal year ended December 31, 2008


Name
                
                Fees
                  earned or
                  paid in
                  cash ($)
                
                
                Stock
                  awards ($)
                
                
                Option
                  awards ($)
                
                
                Non-equity
                  incentive plan
                  compensation
                  ($)
                
                
                Nonqualified
                  deferred
                  compensation
                  earnings ($)
                
                
                All other
                  compensation
                  ($)
                
                
                Total ($)Zou
      Dejun
                
                
                0
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0Qiu
      Jianpine
                
                
                0
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                0Zhang
      Weiguo
                
                
                6,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,000Quan
      Xie
                
                
                6,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,000Kennith
      Johnson
                
                
                24,076
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24,076




48




Compensation
Discussion and Analysis





Overview





We intend
to provide our named executive officers (as defined in Item 402 of Regulation
S-K) with a competitive base salary that is in line with their roles and
responsibilities when compared to peer companies of comparable size in similar
locations.





It is not
uncommon for PRC private companies in northeastern China to have base salaries
as the sole form of compensation. The base salary level is established and
reviewed based on the level of responsibilities, the experience and tenure of
the individual and the current and potential contributions of the individual.
The base salary is compared to the list of similar positions within comparable
peer companies and consideration is given to the executive’s relative experience
in his or her position.  Base salaries are reviewed periodically and at the
time of promotion or other changes in responsibilities.





In July
2008, our board of directors established a compensation committee comprised of
independent directors. The compensation committee will perform periodically a
strategic review of the compensation program for our executive officers to
determine whether it provides adequate incentives and motivation to our
executive officers and whether it adequately compensates our executive officers
relative to comparable officers in other companies with which we compete for
executives.  Those companies may or may not be public companies or
companies located in the PRC or even, in all cases, companies in a similar
business.





2009
Stock Incentive Plan





In July
2009, our Board of Directors 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 Plan is
incorporated by reference to the Company’s quarterly report on Form 10-Q for the
period ended June 30, 2009.





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.





Outstanding
Equity Awards





As of
December 31, 2009, Ms. Yi (Jenny) Liu had options to purchase 50,000 shares
of the Company’s common stock at an exercise price of $6.15 per share, to vest
in 3 equal annual installments beginning on June 30, 2010. In addition, during
the fiscal year 2009, Mr. Kennith Johnson received a grant of 2,000 shares of
the Company’s common stock as compensation for his services as Chairman of the
Company’s Audit Committee.




Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





Securities
ownership of certain beneficial owners and management





The
following table sets forth certain information with respect to the beneficial
ownership of our common stock as of March 31, 2010 by (i) any person or
group with more than 5% of our voting securities, (ii) each director, (iii) each
executive officer and (iv) all executive officers and directors as a
group.





As of
March 31, 2010, we had 28,603,321 shares of common stock outstanding. In
determining the percent of common stock owned by a stockholder on March 31,
2010, (a) the numerator is the number of shares of common stock beneficially
owned by such stockholder, including shares the beneficial ownership of which
may be acquired, within 60 days upon the conversion of convertible securities or
the exercise of warrants held by such stockholder, and (b) the denominator is
the sum of (i) 28,603,321, the number of shares outstanding on March 31, 2010,
and (ii) the total number of shares underlying the convertible securities and
warrants, which such stockholder has the right to acquire within 60 days
following March 31, 2010.





Unless
otherwise stated, each beneficial owner has sole power to vote and dispose of
the shares and the address of such person is c/o the Company, at 11 Youquan
Road, Zhanqian Street, Jinzhou District, Dalian, People’s Republic of China
116100.




49




Title of Class
                Name and Address of
                  Beneficial Owner
                
                Amount and
                  Nature of
                  Beneficial
                  Ownership
                
                
                Percent of
                  ClassCommon
      Stock
                Zou
      Dejun, Director and CEO
                
                
                16,109,679
                (1)(2
      )
                
                
                58.32
                %Common
      Stock
                Qiu
      Jianping, Director and Chairman
                  of
      the Board
                
                
                1,789,964
                (1)(2
      )
                
                
                6.26
                %Common
      Stock
                Quan
      Xie, Director
                
                
                0
                
                
                
                0
                %Common
      Stock
                Kennith
      C. Johnson, Director
                
                
                2,000
                (3)
                
                
                *
                %Common
      Stock
                Zhang
      Weiguo, Director
                
                
                0
                
                
                
                0
                %Common
      Stock
                Yi
      (Jenny) Liu, CFO
                
                
                0
                (4)
                
                
                0
                %Common
      Stock
                Li
      Yu, Controller
                
                
                0
                
                
                
                0
                %Common
      Stock
                MOG
      Capital, LLC
                  2
      Rector Street, 3rd
      Fl,
                  New
      York, NY 10006
                
                
                2,195,120
                (5)(6)
                
                
                7.52
                %Common
      Stock
                All
      Directors and Officers of the
                  Company
      as a group (3 people )
                
                
                17,901,643
                
                
                
                62.59
                %




* Less
than 1%




(1)
17,899,643 shares of our common stock are owned of record by the Innomind Trust,
a British Virgin Islands trust, of which Zou Dejun, the Company’s Chief
Executive Officer, is the beneficiary of 16,109,679 shares (the “ Zou Shares ”
), and Qiu Jianping, the Company’s Chairman of the Board, is the beneficiary of
1,789,964 shares (the “Qiu Shares”). Each retains voting and investment power
over his/her respective shares. Mr. Zou and Ms. Qiu are married. Mr. Zou
disclaims beneficial ownership of the Qiu Shares, and Ms. Qiu disclaims
beneficial ownership of the Zou Shares.




(2) As a
closing condition to the private placement completed on October 5, 2007, Zou
Dejun and Qiu Jianping agreed to place in escrow for the benefit of the private
placement investors 5,580,000 shares of common stock, some or all of which is
distributable to the investors in the event the Company fails to attain
specified financial performance milestones.  During the fiscal year
2009, 3,906,000 shares were released to the Innomind Trust because the
Company has achieved the earnings threshold for 2008 required under the
Securities Purchase Agreement. As of the date of this Report, all 5,580,000
shares in escrow have been released to the Innomind Trust.




(3) Mr.
Johnson received this grant of 2,000 shares of the Company’s common stock as
compensation for his services as Chairman of the Company’s Audit
Committee.




(4) Not
including options to purchase 50,000 common stock at an exercise price of
$6.15 per share, to vest in 3 equal annual installments beginning on June 30,
2010.





(5)
Including an aggregate of 569,105 shares of Common Stock issuable upon the
exercise of immediately exercisable Series A Warrant held by MOG Capital,
LLC.





(6) MOG
Capital, LLC is a proprietary trading firm owned 100% by Alphabet Partners, L.P.
Alphabet Partners, L.P. (the "Partnership") is a private investment partnership,
the general partner of which is Alphabet Advisors, LLC and investment manager of
which is Alphabet Management, LLC. Alphabet Management, LLC is also the manager
of MOG Capital, LLC. Alphabet Advisors, LLC is the sole general partner of the
Partnership and has the power to vote and dispose of the Common Stock.
Accordingly, it may be deemed the "beneficial owner" of such Common Stock. As
the investment manager of the Partnership and manager of MOG Capital, LLC,
Alphabet Management, LLC has the power to vote and dispose of the Common Stock
owned by MOG Capital, LLC and, accordingly, may be deemed the beneficial owner
of the Common Stock. The Managing Members of Alphabet Management, LLC and
Alphabet Advisors, LLC are Jason Adler and Andrew Garnock. Messrs. Adler and
Garnock share investment management duties.




50




Changes
in Control





We do not
currently have any arrangements which if consummated may result in a change of
control of our Company.





Securities
Authorized for Issuance under Equity Compensation Plans





In July
2009, the Board of Directors of the Company adopted the RINO International
Corporation 2009 Stock Incentive Plan (the “Plan”) to enhance 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 Plan is
incorporated by reference to the Company’s quarterly report on Form 10-Q for the
period ended June 30, 2009.





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.




ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Certain
Relationships and Related Transactions





Loans
from Related Party





As of
December 31, 2009, the Company owed Mr. Zou Dejun an aggregate of $494,614 for
advances he made on an unsecured and interest free basis, and such loan is
repayable on demand.  Imputed interest expense of 5.24% per annum was
credited to additional paid-in capital in the amount of $13,557 for the year
ended December 31, 2009. There was no written loan agreement entered into by the
parties regarding the foregoing.





Loans
to Related Party





On
December 7, 2009, the Company made a loan of approximately $3,500,000 to Mr.
Dejun Zou and Ms. Jianping Qiu on an unsecured and interest free basis. As
of the date of this Report, $300,000 has been repaid. Mr. Zou and Mrs. Qiu are
directors and officers of the Company. There was no written loan agreement
entered into by the parties regarding the foregoing.




The
making of this loan and the continuation of such indebtedness thereafter until
it is fully repaid create a contingent liability for a possible violation of
Section 13(k) of the Exchange Act (Section 402(a) of the Sarbanes-Oxley Act of
2002). Section 13(k) provides that it is unlawful for a company, such as the
Company, which has a class of securities registered under Section 12 of the
Exchange Act, to directly or indirectly, including through any subsidiary,
extend or maintain credit in the form of a personal loan to or for any director
or executive officer of the company.




Issuers
violating Section 13(k) of the Exchange Act may be subject to civil sanctions,
including injunctive remedies and monetary penalties, as well as criminal
sanctions. The imposition of any of such sanctions on the Company may have a
material adverse effect on our financial position, results of operations or cash
flows.





Mr. Zou
and Ms. Qiu have agreed to repay the loan on or before May 10,
2010.





Director
Independence





Each of
Messrs. Quan Xie, Kennith Johnson and Zhang Weiguo is an “independent director”
under the Rules of NASDAQ, Marketplace Rule 4200(a)(15).





ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES





Independent
Public Accountants





On April 29, 2008, our board of
directors approved our termination of Jimmy c.H. Cheung & Co. CPAs as our
independent auditors. At the same time, Moore, Stephens Wurth Frazer and Torbet,
LLP(“MSWFT”), located at 135 South State College
Blvd., Suite 300, Brea, CA 92821was approved by our audit
committee and board of directors to be our new independent
accountant.Effective
on January 1, 2010, certain partners of MSWFTand Frost, PLLC (“Frost”) formed Frazer
Frost, LLP, which became the Company’s new independent accounting
firm.




51




Fees
and Services of Independent Public Accountants





1.Jimmy C.H. Cheung &
Co.





Fiscal Year EndedDecember 31, 2008Audit
      Fees*
                  
                  $
                  1,200Audit
      Related Fees
                  
                  
                  -Tax
      Fees
                  
                  
                  -All
      Other Fees
                  
                  
                  -Total
                  
                  $
                  1,200





* The
$1,200 audit fee was incurred in connection with the issuance of the audit
report by Jimmy C. H. Cheung & Co. on the Company’s annual financial
statements for fiscal year 2007.





2.Frazer Frost (successor entity ofMoore Stephens
Wurth Frazer and Torbet, LLP)


Fiscal Year
                        Ended
                      
                      
                      Fiscal Year
                        EndedDecember 31,
                        2009
                      
                      
                      December 31,
                        2008Audit
      Fees**
                      
                      $
                      190,000
                      
                      
                      $
                      190,000Audit
      Related Fees
                      
                      $
                      50,000
                      
                      
                      
                      -Tax
      Fees
                      
                      $
                      43,000
                      
                      
                      
                      -All
      Other Fees
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      283,000
                      
                      
                      $
                      190,000





** The
$190,000 and $190,000audit fee was incurred in connection with the audit of the
Company’s annual financial statements and review of the financial statements
included in the Company’s Form 10-K and 10-Qs for fiscal
years 2009 and 2008.




In the
event that we should require substantial non-audit services, the Audit Committee
of the Board of Directors would approve such services and the fees
therefore.


All of
the above services were pre-approved by the Company’s audit
committee.




Part
IV





Item
15. Exhibits and Financial Statement Schedules.





3.1
                Certificate
      of Incorporation (Incorporated herein by reference to Exhibits 3.1.1 and
      3.1.2 to the Registration Statement on Form 10-SB filed with the SEC on
      April 5, 2007, as amended by Exhibit 3.1 to the Current Report on Form 8-K
      filed with the SEC on May 15, 2008)3.2
                Bylaws
      (Incorporated herein by reference to Exhibit 3.2.1 to the Registration
      Statement on Form 10-SB filed with the SEC on April 5,
    2007)4.1
                Common
      Stock Specimen (Incorporated herein by reference to Exhibit 4.1 to the
      Registration Statement on Form SB-2 filed with the SEC on November 19,
      2007)




4.2
                Form
      of Series A Warrant ( (Incorporated herein by reference to Exhibit 4.1 to
      the Current Report on Form 8-K filed with the SEC on December 2,
      2009)4.3
                Form
      of Series B Warrant ( (Incorporated herein by reference to Exhibit 4.1 to
      the Current Report on Form 8-K filed with the SEC on December 2,
      2009)
  52
  10.1
                    Securities
      Purchase Agreement dated December 2, 2009 by and among the Company and
      investors named therein (Incorporated herein by reference to Exhibit 10.1
      to the Current Report on Form 8-K filed with the SEC on December 2,
      2009)10.2
                    Side
      Letter Agreement, dated July 14, 2009, between the Company and Blur Ridge
      Investments LLC. (Incorporated herein by reference to Exhibit 10.1 to the
      Current Report on Form 8-K filed with the SEC on July 20,
      2009)10.3
                    Employment
      Agreement dated June 30, 2009, by and between the Company and Yi (Jenny)
      Liu (Incorporated herein by reference to Exhibit 10.1 to the Current
      Report on Form 8-K filed with the SEC on July 1, 2009).10.4
                    Waiver
      and Amendment Agreement, dated April 3, 2009, among the Company and the
      investors named therein (Incorporated herein by reference to Exhibit 10.1
      to the Current Report on Form 8-K filed with the SEC on April 8,
      2009).10.5
                    Employment
      Agreement between Dalian Rino and Li Yu, dated September 11, 2009.
      *10.6
                    Employment
      Agreement between Dalian Rino and Li Yu, dated February 21, 2010.
      *
 
 14.1
                    Code
      of Ethics (Incorporated herein by reference to Exhibit 14.1 to the Annual
      Report on Form 10-K for the fiscal year ended December 31,
      2007)21.1
                    List
      of subsidiaries *23.1
      (a) and (b)
                    Consent
      of Independent Registered Public Accounting Firm
*
  31.1
                    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 Sarbanes-Oxley
      Act of 2002*31.3
                    Certification
      of Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*32.1
                    Certification
      of Chief Executive Officer, Chief Financial Officer and Chief
      Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*




* Filed
herewith





53




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused


this
report to be signed on March 31, 2010 on its behalf by the undersigned,
thereunto duly authorized.




RINO
      INTERNATIONAL CORPORATIONBy
              /s/
      Zou DejunZou
      DejunChief
      Executive Officer
                (Principal
      Executive Officer)By
              /s/
      Jenny LiuJenny
      LiuChief
      Financial Officer
                (Principal
      Financial Oficer)




By
              /s/Yu LiYu
      LiChief
      Accounting Officer
                (Principal
      Accounting Officer)





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




SIGNATURE
              
              TITLE
              
              DATE/s/
      Zou Dejun
              
              Director
              
              March
      31, 2010Zou
      Dejun/s/
      Qiu Jianping
              
              Chairman
      of the Board
              
              March
      31, 2010Qiu
      Jianping/s/
      Zhang Weiguo
              
              Director
              
              March
      31, 2010Zhang
      Weiguo/s/
      Quan Xie
              
              Director
              
              March
      31, 2010Quan
      Xie/s/
      Kennith Johnson
              
              Director
              
              March
      31, 2010Kennith
      Johnson




54


Index to
Consolidated Financial Statements
 
 Report
      of Independent Registered Public Accounting Firm
                  
                  F-2Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  
                  F-3Consolidated
      Statements of Income and Other Comprehensive Income for the Years Ended
      December 31, 2009 and 2008
                  
                  F-4Consolidated
      Statements of Changes in Equity
                  
                  F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009 and
      2008
                  
                  F-6Notes
      to Consolidated Financial Statements
                  
                  F-7
 
 F-1
  
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and
 Stockholders
of Rino International Corporation
  We have
audited the accompanying consolidated balance sheets of Rino International
Corporation and Subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows for each of the years in the two-year period ended
December 31, 2009. Rino International Corporation’s management is responsible
for these consolidated financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Rino International Corporation and
Subsidiaries as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for each of the years in the two-year period ended December
31, 2009 in conformity with accounting principles generally accepted in the
United States of America.
  /s/
      Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and
      Torbet, LLP, see Form 8-K filed on January 7, 2010)Brea,
      CaliforniaMarch
      29, 2010


F-2




RINO INTERNATIONAL CORPORATION AND
SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


AS OF
DECEMBER 31, 2009 AND 2008




2009
                          
                          
                          2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                          
                          $
                          134,487,611
                          
                          
                          $
                          19,741,982Restricted
      cash
                          
                          
                          -
                          
                          
                          
                          1,030,317Notes
      receivable
                          
                          
                          440,100
                          
                          
                          
                          2,157,957Due
      from shareholders
                          
                          
                          3,005,386
                          
                          
                          
                          -Accounts
      receivable, trade, net of allowance for doubtful accounts of $273,446 and
      $0 as of December 31, 2009 and 2008, respectively
                          
                          
                          57,811,171
                          
                          
                          
                          51,503,245Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                          
                          
                          3,258,806
                          
                          
                          
                          -Inventories
                          
                          
                          5,405,866
                          
                          
                          
                          1,203,448Advances
      for inventory purchases
                          
                          
                          34,056,231
                          
                          
                          
                          21,981,669Other
      current assets and prepaid expenses
                          
                          
                          629,506
                          
                          
                          
                          517,847Total
      current assets
                          
                          
                          239,094,677
                          
                          
                          
                          98,136,465PROPERTY,
      PLANT AND EQUIPMENT, NET
                          
                          
                          12,265,389
                          
                          
                          
                          13,197,119OTHER
      ASSETSAdvances
      for non current assets
                          
                          
                          6,570,378
                          
                          
                          
                          6,082,608Intangible
      assets, net
                          
                          
                          1,144,796
                          
                          
                          
                          1,211,608Total
      other assets
                          
                          
                          7,715,174
                          
                          
                          
                          7,294,216Total
      assets
                          
                          $
                          259,075,240
                          
                          
                          $
                          118,627,800LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                          
                          $
                          4,281,353
                          
                          
                          $
                          5,816,714Short-term
      bank loans
                          
                          
                          1,467,000
                          
                          
                          
                          8,802,000Customer
      deposits
                          
                          
                          4,984,801
                          
                          
                          
                          3,609,407Liquidated
      damages payable
                          
                          
                          20,147
                          
                          
                          
                          2,598,289Other
      payables and accrued liabilities
                          
                          
                          496,411
                          
                          
                          
                          746,267Due
      to shareholder
                          
                          
                          -
                          
                          
                          
                          596,023Taxes
      Payable
                          
                          
                          4,003,709
                          
                          
                          
                          5,062,901Total
      current liabilities
                          
                          
                          15,253,421
                          
                          
                          
                          27,231,601Warrant
      Liabilities
                          
                          
                          15,172,712
                          
                          
                          
                          -REDEEMABLE
      COMMON STOCK ($0.0001 par value, 5,464,357 shares issued 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, 10,000,000,000 shares authorized, 28,603,321
      shares and 25,040,000 shares issued and outstanding as of December 31,
      2009 and 2008)
                          
                          
                          2,860
                          
                          
                          
                          2,504Additional
      paid-in capital
                          
                          
                          107,135,593
                          
                          
                          
                          25,924,007Retained
      earnings
                          
                          
                          78,983,794
                          
                          
                          
                          28,570,948Statutory
      reserves
                          
                          
                          11,755,312
                          
                          
                          
                          6,196,478Accumulated
      other comprehensive income
                          
                          
                          6,291,229
                          
                          
                          
                          6,221,943Total
      shareholders' equity
                          
                          
                          204,168,788
                          
                          
                          
                          66,915,880Total
      liabilities and shareholders' equity
                          
                          $
                          259,075,240
                          
                          
                          $
                          118,627,800




See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated financial
statements.




F-3




RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008




2009
                        
                        
                        2008REVENUESContracts
                        
                        $
                        187,473,072
                        
                        
                        $
                        119,920,874Services
                        
                        
                        5,169,434
                        
                        
                        
                        19,422,523192,642,506
                        
                        
                        
                        139,343,397COST
      OF SALESContracts
                        
                        
                        116,716,424
                        
                        
                        
                        74,247,181Services
                        
                        
                        2,858,119
                        
                        
                        
                        10,099,616Depreciation
                        
                        
                        754,688
                        
                        
                        
                        662,436120,329,231
                        
                        
                        
                        85,009,233GROSS
      PROFIT
                        
                        
                        72,313,275
                        
                        
                        
                        54,334,164OPERATING
      EXPENSESSelling,
      general and administrative expenses
                        
                        
                        16,939,558
                        
                        
                        
                        13,883,023Stock
      compensation expense and shares placed in escrow
                        
                        
                        47,385
                        
                        
                        
                        17,678,080TOTAL
      OPERATING EXPENSES
                        
                        
                        16,986,943
                        
                        
                        
                        31,561,103INCOME
      FROM OPERATIONS
                        
                        
                        55,326,332
                        
                        
                        
                        22,773,061OTHER
      INCOME (EXPENSES), NETOther
      income, net
                        
                        
                        241,313
                        
                        
                        
                        490,601Change
      in fair value of warrants
                        
                        
                        (831,185
                        )
                        
                        
                        -Interest
      expense, net
                        
                        
                        (90,830
                        )
                        
                        
                        (383,649
                        )Gain
      (expenses) on liquidated damage
                        
                        
                        1,746,120
                        
                        
                        
                        (1,598,289
                        )TOTAL
      OTHER INCOME (EXPENSES), NET
                        
                        
                        1,065,418
                        
                        
                        
                        (1,491,337
                        )INCOME
      BEFORE PROVISION FOR INCOME TAXES
                        
                        
                        56,391,750
                        
                        
                        
                        21,281,724PROVISION
      FOR INCOME TAXES
                        
                        
                        -
                        
                        
                        
                        -NET
      INCOME
                        
                        
                        56,391,750
                        
                        
                        
                        21,281,724OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                        
                        
                        69,286
                        
                        
                        
                        4,234,671COMPREHENSIVE
      INCOME
                        
                        $
                        56,461,036
                        
                        
                        $
                        25,516,395WEIGHTED
      AVERAGE NUMBER OF SHARES:Basic
                        
                        
                        25,379,587
                        
                        
                        
                        25,040,000Diluted
                        
                        
                        25,379,587
                        
                        
                        
                        25,148,178EARNINGS
      PER SHARE:Basic
                        
                        $
                        2.22
                        
                        
                        $
                        0.85Diluted
                        
                        $
                        2.22
                        
                        
                        $
                        0.85




See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated financial
statements.




F-4




RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


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
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  17,460,676
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  17,460,676Shares
      issued for services
                  
                  
                  40,000
                  
                  
                  
                  4
                  
                  
                  
                  179,196
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  179,200Imputed
      interest on advances from a shareholder
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  24,268
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  24,268Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,281,724
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21,281,724Allocation
      to statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,086,939
                  )
                  
                  
                  4,086,939
                  
                  
                  
                  
                  
                  
                  
                  -Foreign
      currency translation gain
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,234,671
                  
                  
                  
                  4,234,671BALANCE,
      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 for settlement of liquidated damage payable
                  
                  
                  48,438
                  
                  
                  
                  5
                  
                  
                  
                  216,999
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  217,004Shares
      issued for service
                  
                  
                  2,000
                  
                  
                  
                  
                  
                  
                  
                  8,960
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,960Non-cash
      exercise of warrants at $5.38
                  
                  
                  260,851
                  
                  
                  
                  26
                  
                  
                  
                  5,881,081
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,881,107Issuance
      of common stock at $30.75
                  
                  
                  3,252,032
                  
                  
                  
                  325
                  
                  
                  
                  76,111,266
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  76,111,591Imputed
      interest on due to shareholders
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,557
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,557Stock
      compensation expense
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  38,425
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  38,425Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  56,391,750
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  56,391,750Allocation
      to statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,558,834
                  )
                  
                  
                  5,558,834
                  
                  
                  
                  
                  
                  
                  
                  -Foreign
      currency translation gain
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  69,286
                  
                  
                  
                  69,286BALANCE,
      December 31, 2009
                  
                  
                  28,603,321
                  
                  
                  $
                  2,860
                  
                  
                  $
                  107,135,593
                  
                  
                  $
                  78,983,794
                  
                  
                  $
                  11,755,312
                  
                  
                  $
                  6,291,229
                  
                  
                  $
                  204,168,788




See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated financial
statements.




F-5




RINO INTERNATIONAL CORPORATION AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008




2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                      
                      $
                      56,391,750
                      
                      
                      $
                      21,281,724Adjusted
      to reconcile net income to cash used in operating
    activities:Depreciation
                      
                      
                      970,451
                      
                      
                      
                      806,625Amortization
                      
                      
                      66,771
                      
                      
                      
                      65,651Allowance
      for bad debt
                      
                      
                      273,278
                      
                      
                      
                      -Imputed
      interest on due to shareholders
                      
                      
                      13,560
                      
                      
                      
                      24,268Amortization
      of long term prepaid expenses
                      
                      
                      46,468
                      
                      
                      
                      28,830Share
      issued for service
                      
                      
                      8,960
                      
                      
                      
                      179,200Stock
      compensation expense and shares placed in escrow
                      
                      
                      38,425
                      
                      
                      
                      17,498,880(Gain)
      expense on liquidated damage
                      
                      
                      (1,746,120
                      )
                      
                      
                      1,598,289Change
      in fair value of warrants
                      
                      
                      831,185
                      
                      
                      
                      -Changes
      in operating assets and liabilitiesNotes
      receivable
                      
                      
                      1,716,803
                      
                      
                      
                      (1,906,766
                      )Accounts
      receivable
                      
                      
                      (6,577,334
                      )
                      
                      
                      (28,635,455
                      )Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                      
                      
                      (3,256,807
                      )
                      
                      
                      2,971,223Inventories
                      
                      
                      (4,199,840
                      )
                      
                      
                      (994,352
                      )Advances
      for inventory purchases
                      
                      
                      (12,067,154
                      )
                      
                      
                      (8,850,435
                      )Other
      current assets and prepaid expenses
                      
                      
                      (111,590
                      )
                      
                      
                      512,905Accounts
      payable
                      
                      
                      (1,534,419
                      )
                      
                      
                      3,043,036Customer
      deposits
                      
                      
                      1,374,550
                      
                      
                      
                      3,424,139Other
      payables and accrued liabilities
                      
                      
                      (249,703
                      )
                      
                      
                      12,662Taxes
      Payable
                      
                      
                      (1,058,542
                      )
                      
                      
                      (5,085,079
                      )Net
      cash provided by operating activities
                      
                      
                      30,930,692
                      
                      
                      
                      5,975,345CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                      
                      
                      (39,295
                      )
                      
                      
                      (2,176,132
                      )Advances
      for non current assets
                      
                      
                      (533,939
                      )
                      
                      
                      (1,283,107
                      )Net
      cash used in investing activities
                      
                      
                      (573,234
                      )
                      
                      
                      (3,459,239
                      )CASH
      FLOWS FROM FINANCING ACTIVITIESChange
      in restricted cash
                      
                      
                      1,030,317
                      
                      
                      
                      (30,317
                      )Proceeds
      from short-term bank loans
                      
                      
                      30,788,100
                      
                      
                      
                      15,712,000Payment
      of short-term bank loans
                      
                      
                      (38,118,600
                      )
                      
                      
                      (7,310,000
                      )Payment
      on liquidated damage settlement
                      
                      
                      (615,018
                      )
                      
                      
                      -Payment
      to shareholder
                      
                      
                      (5,093,486
                      )
                      
                      
                      -Proceeds
      from shareholder
                      
                      
                      1,532,372
                      
                      
                      
                      472,979Proceeds
      from issuance of stock
                      
                      
                      94,855,453
                      
                      
                      
                      -Net
      cash provided by financing activities
                      
                      
                      84,379,138
                      
                      
                      
                      8,844,662EFFECT
      OF EXCHANGE RATE ON CASH
                      
                      
                      9,033
                      
                      
                      
                      990,583INCREASE
      IN CASH AND CASH EQUIVALENTS
                      
                      
                      114,745,629
                      
                      
                      
                      12,351,351CASH
      AND CASH EQUIVALENTS, beginning
                      
                      
                      19,741,982
                      
                      
                      
                      7,390,631CASH
      AND CASH EQUIVALENTS, ending
                      
                      $
                      134,487,611
                      
                      
                      $
                      19,741,982SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for Interest expense
                      
                      $
                      680,925
                      
                      
                      $
                      480,902Cash
      paid for income taxes
                      
                      $
                      229,911
                      
                      
                      $
                      5,434,122Shares
      issued for liquidated damage penalty settlement
                      
                      $
                      217,004
                      
                      
                      $
                      -Shares
      issued for service received
                      
                      $
                      8,960
                      
                      
                      $
                      179,200




See
report of independent registered public accounting firm.


The
accompanying notes are an integral part of these consolidated financial
statements.




F-6




RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 – NATURE OF BUSINESS





RINO
International Corporation (“the Company” or “RINO”) was originally incorporated
in 1984 as Applied Biometrics, Inc. in accordance with the laws of the State of
Minnesota. On December 27, 2006, the shareholders of the Company approved a
proposal to re-domicile the Company from the State of Minnesota to the State of
Neveda. The Company through its 100% owned subsidiaries and VIEs, engages in
designing, developing, manufacturing, and installation of environmental
protection and energy saving industrial equipments.





Current
Development





In August
2009, Dalian Rino Environment Engineering Science and Technology Co., Ltd.
(“Dalian Rino”) formed Rino Technology Corporation (“Rino Technology”), a
wholly-owned subsidiary, in the state of Nevada, United States of
America. Rino Technology is established to pursue selective strategic
acquisitions, focusing on product line extensions and access to new
markets.





In
November 2009, the Company formed Rino Investment Co., Ltd. (“Rino Investment”),
a wholly-owned subsidiary in P.R. China (“PRC”). Rino Investment is
established to provide services to its investing enterprises in the areas of
technical support, technical staff training and setting up research development
center which helps to engage in the leading industrial technology
development.





In
December 2009, Rino Investment formed Dalian RINO Heavy Industry Co., Ltd.
(“Rino Heavy”). Rino Heavy is established to engage in designing, developing,
manufacturing, and installing environmental protection and energy saving
equipments





NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis ofPresentation





The
accompanying consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America and reflect the activities of the following
subsidiaries and VIEs.  All material intercompany transactions
and balances have been eliminated in the consolidation.




See
report of independent registered public accounting firm.


F-7





RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Place
                                  incorporated
                                
                                Ownership
                                  percentageInnomind
      Group Limited (“Innomind”)
                                
                                BVI
                                
                                100%Dalian
      Innomind Environment Engineering Co., Ltd. (“Dalian
    Innomind”)
                                
                                Dalian,
      China
                                
                                100%Rino
      Investment (Dalian) Co., Ltd. (“Dalian Investment”)
                                
                                Dalian,
      China
                                
                                100%Dalian
      RINO Heavy Industry Co., Ltd. (“Dalian Rino Heavy)
                                
                                Dalian,
      China
                                
                                100%Dalian
      Rino Environment Engineering Science and Technology Co., Ltd. (“Dalian
      Rino”)
                                
                                Dalian,
      China
                                
                                VIERino
      Technology Corporation (“Rino Technology)
                                
                                Nevada,
      USA
                                
                                VIEDalian
      Rino Environmental Engineering Project Design Co., Ltd. (“Dalian Rino
      Design”)
                                
                                Dalian,
      China
                                
                                VIEDalian
      Rino Environmental Construction & Installation Project Co., Ltd.
      (“Dalian Rino Installation”)
                                
                                Dalian,
      China
                                
                                VIE





In
accordance with the interpretation of Generally Accepted Accounting Principles
(GAAP), variable interest entities (VIEs) are generally entities that lack
sufficient equity to finance their activities without additional financial
support from other parties or whose equity holders lack adequate decision making
ability.  All VIEs with which the Company is involved must be
evaluated to determine the primary beneficiary of the risks and rewards of the
VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.





ASC 810
(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.  Pursuant to an Entrusted Management Agreement by and
between Dalian Innomind and Dalian Rino, dated October 3, 2007, Dalian Rino and
its shareholders agreed to entrust the operations and management of the Business
to Dalian Innomind and Dalian Innomind is entitled to Dalian Rino’s net profit
as an entrusted management fee. In accordance with the provisions of ASC
810, the Company has determined that Dalian Rino and its 100% owned
subsidiaries Dalian Rino Design, Rino Technology and Dalian Rino
Installation are VIEs and that the Company is the primary beneficiary, and
accordingly, the financial statements of Dalian Rino, Dalian Rino Design, Rino
Technology and Dalian Rino Installation are consolidated into the financial
statements of the Company.





The
carrying amount of the VIEs’ assets and liabilities are as follows:





December 31, 2009
                    
                    
                    December 31, 2008Current
      assets
                    
                    $
                    145,870,479
                    
                    
                    $
                    78,579,641Property,
      plant and equipment
                    
                    
                    11,270,034
                    
                    
                    
                    12,101,537Other
      noncurrent assets
                    
                    
                    7,713,576
                    
                    
                    
                    7,030,157Total
      assets
                    
                    
                    164,854,089
                    
                    
                    
                    97,711,335Total
      liabilities
                    
                    
                    150,218,805
                    
                    
                    
                    82,599,035Net
      assets
                    
                    $
                    14,635,284
                    
                    
                    $
                    15,112,300


See
report of independent registered public accounting firm.
  F-8


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Use of
Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions about future events. These estimates and the
underlying assumptions affect the reported amounts of assets, liabilities,
revenue and expenses, and disclosures about contingent assets and
liabilities. Such estimates and assumptions by management affect accrued
expenses, the valuation of accounts receivable, inventories, and long-lived
assets, legal contingencies, lives of plant and equipment, lives of intangible
assets, calculation of warranty accruals, taxes, share-based compensation and
others. Management believes that the estimates used in preparing its financial
statements are reasonable and prudent. Actual results could differ from those
estimates.





ForeignCurrencyTransactions





The
reporting currency of the Company is the US dollar. The functional currency is
the Chinese Renminbi (”RMB”). The Company’s PRC subsidiaries, and
VIEs conduct business in RMB, and maintain their accounting records in RMB.
Innomind Group Limited, the Company’s 100% owned BVI subsidiary headquartered in
Hong Kong, maintains its accounting records in its local currency, Hong Kong
Dollars.





The
financial statements of the Company’s PRC subsidiaries and VIEs are translated
into US dollars using period-end exchange rates of $0.14670 at
December 31, 2009 and 2008 as to assets and liabilities and weighted
average exchange rates for the periods of $0.14661 and $0.14415 for the years
ended December 31 2009 and 2008, respectively, as to income and cash flow
statement. The financial statements of the Company’s Hong Kong subsidiary
are translated into US dollars using period-end exchange rates of $0.12900 at
December 31, 2009 and 2008 as to assets and liabilities and weighted average
exchange rates of $0.12900 and $0.12843 for the years ended December 31, 2009
and 2008, respectively. The equity accounts are translated at their
historical exchange rates.  Resulting translation adjustments are
recorded as a component of accumulated other comprehensive income 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. Translation adjustments resulting from this process amounted to
$69,286, and $4,234,671 for the fiscal years ended December 31, 2009 and 2008,
respectively.





GAAP
requires cash flows from the Company's operations calculated based upon the
local currencies using the weighted 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.




See
report of independent registered public accounting firm.


F-9





RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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 years ended December 31, 2009 and 2008, no material
transaction gains and losses occurred.





Concentrationand Risks





Cash
in Bank





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, Hong
Kong 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
December 31, 2009 and 2008, the Company has $134,070,387 and $19,744,139 cash
balance not covered by FDIC insurance in the United States,
respectively.  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.





Major
Customers





During
the years ended December 31, 2009 and 2008, no customer accounted for more than
10% of the Company’s total sales.





Major
Suppliers





Two major
suppliers provided approximately 93% of the Company’s purchases of raw materials
for the year ended December 31, 2009, with each supplier individually accounting
for 45% and 48%, respectively. One major supplier provided 82% of the
Company’s purchase of raw materials for the year ended December 31, 2008. The
Company does not have any accounts payable to these suppliers at December 31,
2009 and 2008, respectively. Advances to these suppliers as of December 31,
2009 and 2008 amounted to $33,046,907 and $17,978,181,
respectively.





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.




See
report of independent registered public accounting firm.


F-10


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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.




Restricted
Cash





The
Company records cash deposits in banks or other institutions subject to
restrictions on the withdrawal or use of the funds as restricted
cash.





Notes
Receivable





Notes
receivable represent trade accounts receivable due from various customers where
the customers’ banks have guaranteed the payment of the notes.  This
amount is non-interest bearing and is normally paid within three to six
months.  The Company has the ability to submit requests for payment to
the customers’ bank earlier than the scheduled payment date, but will incur an
interest charge and a processing fee when it submits an early payment
request.  The Company had $440,100 and $2,157,957 in notes receivable
as of December 31, 2009 and 2008, respectively.





Accounts
Receivable





Accounts
receivable are presented net of an allowance for doubtful accounts. The Company
maintains reserves for potential credit losses on accounts receivable. 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 reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reverses. The estimated loss rate is
based on our historical loss experience and also contemplates current market
conditions. Delinquent account balances are written-off after management has
determined that the likelihood of collection is not probable, and known bad
debts are written off against allowance for doubtful accounts when identified.
The Company’s allowance for doubtful accounts was reserved at $273,446 and $0 as
of December 31, 2009 and 2008, respectively.




See
report of independent registered public accounting firm.


F-11


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Cost and Estimated Earnings
in Excess of Billings on Uncompleted Contracts





Costs and
estimated earnings in excess of billings on uncompleted contracts represent
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize contract
revenue.





Billings in Excess of Cost
and Estimated Earnings on Uncompleted Contracts





Billings
in excess of costs and estimated earnings on uncompleted contracts represent
billings in excess of revenues recognized pursuant to the
percentage-of-completion method.





Inventories





Inventories
consist of raw materials and low cost consumption supplies used in the
manufacturing process and work in process. Inventories are valued at the lower
of cost or market, as determined on a first-in, first-out basis, using the
weighted average cost method. Management reviews its inventories periodically to
determine if any reserves are necessary for potential obsolescence or if write
downs are necessary due to the carrying value exceeding its net
realizable value.  Based upon managements’ review, there were no
provisions for obsolete or slow moving inventories as of December 31, 2009 and
2008.




Property, Plant and
Equipment





Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When assets are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of plant and equipment is
provided using the straight-line method for substantially all assets with
estimated lives as follows:





Buildings
            30
      YearsPlant
      and machinery
            15
      YearsMotor vehicles
            10
      YearsFurniture,
      fixtures and equipment
            5
      Years





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.





See
report of independent registered public accounting firm.




F-12


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
Company recognizes an impairment loss when estimated cash flows generated by
those assets are less than the carrying amounts of the asset. Based on
management review, the Company believes that there were no impairments as of
December 31, 2009.





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
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. As of December 31, 2009, the Company expected
all of its intangible assets to be fully recoverable.





Accounting forLong-LivedAssets





Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. We assess
the recoverability of the assets based on the undiscounted future cash flow the
assets are expected to generate and recognize an impairment loss when estimated
undiscounted future cash flow expected to result from the use of the asset plus
net proceeds expected from disposition of the asset, if any, are less than the
carrying value of the asset. When we identify an impairment, we reduce the
carrying amount of the asset to its estimated fair value based on a discounted
cash flow approach or, when available and appropriate, to comparable market
values.  As of December 31, 2009, management believes there were no
impairments on the Company’s long-lived assets.





Fair Value of Financial
Instruments





On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:




See
report of independent registered public accounting firm.


F-13


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




·
                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 assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instruments.
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value.


Effective
January 1, 2009, warrants to purchase 382,500 shares of the Company’s
common stock 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 the U.S. dollar, 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 expired.




As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to a liability, as if these warrants were treated as a
derivative liability since their issuance in October, 2007 (“2007 Warrants”). On
January 1, 2009, the Company reclassified $1,058,702 from additional
paid-in capital, as a cumulative effect adjustment, $420,070 from beginning
retained earnings and $1,478,772 to warrant liabilities to recognize the fair
value of such warrants. In July, August and October of 2009, warrants to
purchase 382,500 shares of the Company’s common stock were exercised through
cashless conversion. The fair value of the exercised warrants amounted to
$5,881,107.   Therefore, the Company recognized
$4,402,335 of loss from the change in fair value of these warrants for the
year ended December 31, 2009.





On
December 7, 2009, the Company sold 3,252,032 shares of its common stock; Series
A Common Stock Warrants, which are exercisable within six months of the closing
date; to purchase up to an aggregate of 1,138,211 shares of Common Stock at an
exercise price of $34.50 per Warrant (the “2009 Series A Warrants”); and Series
B Common Stock Warrants, which are exercisable beginning on the six month one
day anniversary of the closing date until the one year one day anniversary of
the closing date, to purchase up to an aggregate of 1,138,211 shares of Common
Stock at an exercise price of $34.50 per Warrant (the “2009 Series B
Warrants”).  These warrants were treated as a derivative
liability because the strike price of the warrants is denominated in the
U.S. dollar, 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 expired. The fair value of the warrants on
grant date and as of December 31, 2009 amounted to $18,743,862 and $15,172,712.
Therefore, the company recognized $3,571,150 of gain from the change in fair
value of warrants for the year ended December 31, 2009 on these
warrants.




See
report of independent registered public accounting firm.


F-14


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Warrants
referred to in the preceding paragraphs do not trade in an active securities
market, and as such, the Company estimates the fair value of these warrants
using the Black-Scholes option pricing model using the following
assumptions:





2007
      Warrants
                
                Exercise Date
                
                
                January 1,
                  2009Annual
      dividend yield
                
                
                -
                
                
                
                -Expected
      life (years)
                
                
                4.00-4.19
                
                
                
                4.76Risk-free
      interest rate
                
                
                2.23
                %
                
                
                1.48
                %Expected
      volatility
                
                
                130.68
                %
                
                
                138.91
                %





2009
      Series A Warrants
                  
                  December 31,
                    2009
                  
                  Issuance
                    DateAnnual
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life (years)
                  
                  
                  0.43
                  
                  
                  
                  0.50Risk-free
      interest rate
                  
                  
                  0.20
                  %
                  
                  
                  0.16
                  %Expected
      volatility
                  
                  
                  63.37
                  %
                  
                  
                  68.56
                  %





2009
      Series B Warrants
                  
                  December 31,
                    2009
                  
                  Issuance DateAnnual
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Expected
      life (years)
                  
                  
                  0.94
                  
                  
                  
                  1.00Risk-free
      interest rate
                  
                  
                  0.75
                  %
                  
                  
                  0.55
                  %Expected
      volatility
                  
                  
                  124.55
                  %
                  
                  
                  131.16
                  %





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
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.




See
report of independent registered public accounting firm.




F-15


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
following table sets forth by level within the fair value hierarchy of the
Company’s financial assets and liabilities that was accounted for at fair value
on a recurring basis as of December 31, 2009.




Carrying
      Value at
                      December 31,
                    
                    
                    Fair Value Measurement at
                      December 31,
      20092009
                    
                    
                    Level1
                    
                    
                    Level 2
                    
                    
                    Level 3Warrant
      liability
                    
                    $
                    15,172,712
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    15,172,712




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.




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.  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 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. 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.





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.




See
report of independent registered public accounting firm.


F-16


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Enterprise Wide
Disclosure





The
Company’s chief operating decision-makers (i.e. chief executive officer and his
direct reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by business lines for
purposes of allocating resources and evaluating financial performance. The
Company is engaged in designing, developing, manufacturing, and installing
environmental protection and energy saving equipment for the Chinese iron and
steel industry and no other business segment. There are no segment managers
who are held accountable for operations, operating results and plans for levels
or components below the consolidated unit level. Based on qualitative and
quantitative criteria established by “Disclosures about Segments of an
Enterprise and Related Information”, the Company considers itself to be
operating within one reportable segment.





Government
Grant





The
Dalian municipal government approved grants to the Company to encourage
high-technology industry research and development. The government grant for the
years ended December 31, 2009 and 2008 amounted to $225,779 and $474,830,
respectively.





Research and Development
Costs





Research
and development (“R&D”) expenses include salaries, material, contract and
other outside service fees, facilities and overhead costs. Under the guidance of
GAAP, the Company expenses the costs associated with the R&D activities when
incurred.  The Company incurred R&D expenses for the years ended
December 31, 2009 and 2008 amounted to $220,416 and $720,750,
respectively.





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 years ended December 31, 2009 and 2008
amounted to $228,891 and $990,256, respectively.





Stock-based
Compensation





We are
required to estimate the fair value of share-based awards on the date of grant.
The value of the award is principally recognized as expenses ratably over the
requisite service periods. The fair value of our restricted stock units is based
on the closing market price of our common stock on the date of grant. We have
estimated the fair value of stock options and stock purchase rights as of the
date of grant or assumption using the Black-Scholes option pricing model, which
was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected
volatility of our stock price. We evaluate the assumptions used to value
stock options and stock purchase rights on a quarterly basis. The fair values
generated by the Black-Scholes model may not be indicative of the actual fair
values of our equity awards, as it does not consider other factors important to
those awards to employees, such as continued employment, periodic vesting
requirements and limited transferability.


See
report of independent registered public accounting firm.


F-17


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
Company is required to measure the costs of the equity instruments issued in
exchange for the receipt of goods or services from other than employees at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably determinable.
The value of equity instruments issued for consideration other than
employee services is determined on the earlier of a performance commitment or
completion of performance by the provider of goods or services.





Stock
compensation expense is recognized based on awards expected to
vest.  GAAP requires forfeitures to be estimated at the time of grant
and revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates.  There were no estimated forfeitures as the
Company has a short history of issuing options.





Income
Taxes





The
Company reports income taxes pursuant to FASB’s accounting standard for income
taxes. Under  the asset and liability method of accounting for income taxes
as required by this accounting standard, deferred taxes are determined based on
the temporary differences between the financial statement and tax basis of
assets and liabilities using tax rates expected to be in effect during the years
in which the basis differences reverse. A valuation allowance is recorded when
it is more likely than not that some of the deferred tax assets will not be
realized.  FASB’s accounting standard for accounting for uncertainty
in income taxes requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. As of January 1, 2007,
income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. 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.





Comprehensive
income





GAAP
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.




See
report of independent registered public accounting firm.


F-18


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Earnings Per
Share





GAAP
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.





Recently Adopted Accounting
Standards





In
January 2009, the FASB’s accounting standard regarding other investments
providing additional guidance which amended the impairment model to remove the
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 this
guidance did not have a material impact on the Company’s consolidated financial
statements.





In April
2009, the FASB’s accounting standard regarding fair value measurements and
disclosures providing additional guidance for estimating fair value 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 guidance shall be
applied prospectively with retrospective application not permitted. The adoption
of this guidance did not have a material impact on the Company’s consolidated
financial statements.





In April
2009, the FASB’s
accounting standard regarding debt and equity securities requires 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 guidance 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 guidance 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 guidance 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
this guidance did not have a material impact on the Company’s consolidated
financial statements.




See
report of independent registered public accounting firm.


F-19


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





In April
2009, the FASB issued an accounting standard that requires 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 guidance, fair values for these assets and liabilities were only
disclosed annually. This guidance applies to all financial instruments and
requires all entities to disclose the method(s) and significant assumptions used
to estimate the fair value of financial instruments. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial
statements.




In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets.  This
guidance is effective for the Company beginning in 2010. Should the Company’s
accounts receivable securitization programs not qualify for sale treatment under
the revised rules, future securitization transactions entered into on or after
January 1, 2010 would be classified as debt and the related cash flows would be
reflected as a financing activity. The adoption of this guidance did not have a
material impact on the Company’s consolidated financial statements.





In June
2009, the FASB updated an accounting standard regarding consolidation guidance
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. This guidance 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.
This guidance requires an ongoing reassessment of whether a company is the
primary beneficiary of a variable interest entity. This guidance also requires
additional disclosures about a company’s involvement in variable interest
entities and any significant changes in risk exposure due to that involvement.
This guidance is effective for fiscal years beginning after November 15, 2009.
The adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.




See
report of independent registered public accounting firm.


F-20


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods
within those fiscal years for arrangements outstanding as of the beginning of
those fiscal years. The adoption of this guidance did not have a material impact
on the Company’s consolidated financial statements.





In
November 2009, the FASB issued an ASU regarding accounting for stock dividends,
including distributions to shareholders with components of stock and cash. This
ASU clarifies that the stock portion of a distribution to shareholders that
contains components of cash and stock and allows shareholders to select their
preferred form of the distribution (with a limit on the amount of cash that will
be distributed in total) should be considered a stock dividend and included in
EPS calculations as a share issuance. The adoption of this guidance did not
have a material impact on the Company’s consolidated financial
statements





In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166,Accounting for Transfers
of Financial Assets—an amendment of FASB Statement No.
140. The amendments in this Accounting Standards Update improve financial
reporting by eliminating the exceptions for qualifying special-purpose entities
from the consolidation guidance and the exception that permitted sale accounting
for certain mortgage securitizations when a transferor has not surrendered
control over the transferred financial assets. In addition, the amendments
require enhanced disclosures about the risks that a transferor continues to be
exposed to because of its continuing involvement in transferred financial
assets. Comparability and consistency in accounting for transferred financial
assets will also be improved through clarifications of the requirements for
isolation and limitations on portions of financial assets that are eligible for
sale accounting. The Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.




See
report of independent registered public accounting firm.


F-21


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167,Amendments to FASB Interpretation
No. 46(R) . The amendments in this Accounting Standards Update replace
the quantitative-based risks and rewards calculation for determining which
reporting entity, if any, has a controlling financial interest in a variable
interest entity with an approach focused on identifying which reporting entity
has the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling
financial interest in a variable interest entity. The amendments in this Update
also require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of
this ASU, however, the Company does not expect the adoption of this ASU to have
a material impact on its consolidated financial statements.




In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial
statements.





In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity.  The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the
date the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company does not expect the adoption of
this ASU to have a material impact on the Company’s consolidated financial
statements.




See
report of independent registered public accounting firm.


F-22


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2.  A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers.  2)  Activity in
Level 3 fair value measurements.  In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.





Reclassifications





Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.





Note
3 – ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following:





December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008Accounts
      receivable
                  
                  $
                  58,084,617
                  
                  
                  $
                  51,503,245Less:
      allowance for bad debts
                  
                  
                  (273,446
                  )
                  
                  
                  -Accounts
      receivable, net
                  
                  $
                  57,811,171
                  
                  
                  $
                  51,503,245





NOTE
4 – COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS





Costs and
estimated earnings in excess of billings on uncompleted contracts represent
revenues recognized in excess of amounts billed pursuant to the
percentage-of-completion method used to recognize contract
revenue.  As of December 31, 2009 and 2008, the Company had $3,258,806
and $0 of cost and estimated earnings in excess of billings,
respectively.




See
report of independent registered public accounting firm.


F-23


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Costs and
estimated earnings in excess of billings consist of the following:




December 31,
                  2009
                
                December 31,
                  2008Cost
      incurred on uncompleted contracts
                
                $
                3,173,870
                
                
                $
                4,648,357Estimated
      earnings
                
                
                2,090,778
                
                
                
                3,856,481Contract
      costs incurred plus estimated earnings to date
                
                
                5,264,648
                
                
                
                8,504,838Less:
      progress billings
                
                
                (2,005,842
                )
                
                
                (8,504,838
                )Costs
      and estimated earnings in excess of billings on uncompleted
      contracts
                
                $
                3,258,806
                
                
                $
                -





NOTE
5 – INVENTORIES





Inventories
consisted of the following raw material, work-in-process and
supplies:





December
      31,
                  2009
                
                
                December 31,
                  2008Raw
      material
                
                $
                246,798
                
                
                $
                223,168Work-in-process
                
                
                5,101,685
                
                
                
                921,985Low
      cost consumption supplies
                
                
                57,383
                
                
                
                58,295Total
                
                $
                5,405,866
                
                
                $
                1,203,448





For the
years ended December 31, 2009 and 2008, no provision for obsolete
inventories was recorded by the Company.





NOTE
6 – ADVANCES FOR INVENTORY PURCHASES





The
Company makes advances to certain suppliers for inventory purchases. Most
of the Company’s vendors require advanced to them as a guarantee that the
Company will receive their purchase on a timely basis. The advances on
inventory purchases amounted to $34, 056,231 and $21,981,669 as of December
31, 2009 and 2008, respectively.





NOTE 7 –
PROPERTY, PLANT AND EQUIPMENT





The
following is a summary of property, plant and equipment at December 31, 2009 and
2008:


December 31,
                    2009
                  
                  
                  December 31,
                    2008Buildings
                  
                  $
                  3,936,775
                  
                  
                  $
                  3,936,775Equipment
      and machinery
                  
                  
                  9,508,465
                  
                  
                  
                  9,508,465Motor
      Vehicles
                  
                  
                  1,647,515
                  
                  
                  
                  1,647,515Furniture
      and office equipment
                  
                  
                  447,229
                  
                  
                  
                  407,912Construction
      in progress
                  
                  
                  6,768
                  
                  
                  
                  6,768Total
                  
                  
                  15,546,752
                  
                  
                  
                  15,507,435Less:
      accumulated depreciation
                  
                  
                  3,281,363
                  
                  
                  
                  2,310,316Property,
      plant and equipment, net
                  
                  $
                  12,265,389
                  
                  
                  $
                  13,197,119


See
report of independent registered public accounting firm.
  F-24


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Depreciation
expense for years ended December 31, 2009 and 2008 was $970,451 and $806,625,
respectively. For the years ended December 31, 2009 and 2008, no interest was
capitalized into construction in progress.





NOTE
8 – INTANGIBLE ASSETS





The
following is a summary of intangible assets:





December
      31,
                
                
                December
      31,2009
                
                
                2008Land
      use rights
                
                $
                651,136
                
                
                $
                651,136Patents
      and licenses
                
                
                733,500
                
                
                
                733,500Total
      intangible assets
                
                
                1,384,636
                
                
                
                1,384,636Less:
      accumulated amortization
                
                
                239,840
                
                
                
                173,028Total
      intangible assets, net
                
                $
                1,144,796
                
                
                $
                1,211,608





Amortization
expense for the years ended December 31, 2009 and 2008 amounted to
$66,771 and $65,651, respectively.





The
estimated aggregate amortization expenses for each of the five succeeding years
ended as follows:


Period ending:
                
                Estimated
                  Amortization
                  scheduleYear
      ending December 31, 2010
                
                $
                66,722Year
      ending December 31, 2011
                
                
                66,722Year
      ending December 31, 2012
                
                
                66,722Year
      ending December 31, 2013
                
                
                66,722Year
      ending December 31, 2014
                
                
                66,722Thereafter
                
                
                811,186





NOTE
9 – ADVANCES ON NON CURRENT ASSETS





AdvancestoSuppliers





The
Company makes advances to certain suppliers for construction
projects.  The advances on equipment and construction were
$5,550,966 and $5,550,966 as of December 31, 2009 and 2008,
respectively.




See
report of independent registered public accounting firm.


F-25


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Prepayment forLandUseRight





As of
December 31, 2009 and 2008, the Company prepaid $799,965 and
$458,292, respectively, for purchase of land use rights, but had not
obtained the title to the land use right. Therefore, as of December 31, 2009 and
2008, the amount has been recorded as a prepayment for land use right in other
assets.





Long term prepaid
expenses





As of
December 31, 2009 and 2008, the Company prepaid $324,631 and $132,030 for
more than one year expenses. The Company amortizes the prepayment based on
the terms, for the years ended December 31, 2009 and 2008, accumulated
amortization expense for long term prepayment amounted to $105,184 and $58,680,
respectively.





NOTE
10 – LIQUIDATED DAMAGES PAYABLE





Registration
Rights





Pursuant
to the Securities Purchase Agreement entered into between the Company and a
group of accredited investors (“Securities Purchase Agreement”) on October 5,
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.  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 the agreement amounted to $1,971,116.





Independent
Directors





Pursuant
to the Securities Purchase Agreement, 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. The
independent directors were seated on March 20, 2008, curing this delinquency.
Total liquidated damages payable for the independent board member requirement
therefore is $627,173.


See
report of independent registered public accounting firm.


F-26


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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.





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.  During the year ended
December 31, 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.   Of
liquidated damage payable, $1,746,120 was forgiven and recognized as
other income.  The unpaid liquidated damages payable at December 31,
2009 amounted to $20,147.





NOTE
11 – SHORT TERM BANK LOANS PAYABLE





Short
term bank loans consist of the following:





December
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Due
      to Shanghai Pudong Development Bank  interest at 5.31%, due in
      November 2010, secured by certain equipments
                      
                      $
                      1,467,000
                      
                      
                      $
                      -Due
      to Shanghai Pudong Development Bank  interest at 5.31%, due in
      December 2009, secured by certain buildings, equipment, and land use
      rights
                      
                      
                      -
                      
                      
                      
                      8,802,000Total
      short term bank loans
                      
                      $
                      1,467,000
                      
                      
                      $
                      8,802,000


Total
interest expense on the bank loans for the years ended December 31, 2009 and
2008 amounted to $781,567 and $489,562, respectively.





The above
loans are secured by the Company's equipments, buildings and land use rights
located within PRC, with carrying net value as follows:




December 31,
                  2009
                
                
                December 31,
                  2008Equipment
      & Machinery in Dalian, China
                
                $
                6,965,057
                
                
                $
                7,544,947Buildings
      in Dalian, China
                
                
                -
                
                
                
                3,543,565Land
      use rights in Dalian, China
                
                
                -
                
                
                
                579,575Total
      assets pledged as collateral for bank loans
                
                $
                6,965,057
                
                
                $
                11,668,087


See
report of independent registered public accounting firm.
  F-27


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
12 –TAXES PAYABLE





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.





US Income
Taxes





The
Company and its VIE Rino Technology are incorporated in the State of Nevada
in the U.S., and are subject to a gradual U.S. federal corporate income tax of
15% to 35%. The State of Nevada does not impose any corporate state income
tax.





Hong Kong Income
Taxes





The
Company’s subsidiary, Innomind is incorporated in BVI and its office is located
in Hong Kong. Innomind did not earn any income that was derived in Hong Kong for
the years ended December 31, 2008 and 2009 and therefore was not subject to Hong
Kong Profit Tax.





China Income
Taxes





The
Company conducts all its operating business through its operating subsidiaries
and VIEs, Dalian Innomind, Dalian Rino, Dalian Rino Design, Dalian Rino
Installation, Dalian Rino Heavy and Dalian Investment in China. The operating
subsidiaries and VIEs are governed by the income tax laws of the PRC and do not
have any deferred tax assets or deferred tax liabilities under the income tax
laws of the PRC because there are no temporary differences between financial
statement carrying amounts and the tax bases of existing assets and
liabilities.





The
Company’s subsidiaries and VIEs are governed by the Income Tax Law of the PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local 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%;


See
report of independent registered public accounting firm.
  F-28


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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 exemption period and thereafter, a
three-year tax reduction period with 50% reduction in the income tax
rates.





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 was subject to the
new standard EIT rate of 25%.  On December 10, 2008, Dalian Rino was
approved for a reduced tax rate at 15% for being qualified as an entity
operating with high technology.





Dalian
Innomind is in the environmental protection industry, and is qualified for a 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.





Pursuant
to an Entrusted Management Agreement by and between Dalian Innomind and Dalian
Rino, dated October 3, 2007, Dalian Rino and its shareholders agreed to entrust
the operations and management of the Business to Dalian 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 Dalian Rino.





Dalian
Investment, Dalian Rino Heavy, Dalian Rino Installation and Dalian Rino Design
are subject to an income tax rate of 25%.





The
Company and its VIE Rino Technology were incorporated in the United States
and has incurred net operating losses for income tax purposes for the year ended
December 31, 2009. The Company had estimated loss carry forwards of
approximately $1.49 million and $223,726 as of December 31, 2009 and 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 carry forward
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
December 31, 2009 and 2008 was approximately $505,000 and $76,000. The net
change in the valuation allowance was an increase of approximately
$429,000.




See
report of independent registered public accounting firm.


F-29


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
Company has cumulative undistributed earnings of foreign subsidiaries and VIE’s
of approximately $106,920,420 as of December 31, 2009 which 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.





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 year ended December 31, 2009 and 2008:





2009
                
                
                2008U.S.
      Statutory rate
                
                
                34.0
                %
                
                
                34.0
                %Foreign
      income not recognized in U.S.
                
                
                (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
                %





The
estimated tax savings for the year ended December 31, 2009 and 2008 amounted to
$13,897,084 and $10,156,299, respectively. The net effect on earnings per share
had the income tax been applied would decrease basic and diluted earnings per
share from $2.22 to $1.67 in 2009 and $0.85 to $0.44 in 2008,
respectively.





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, or 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 $53,066,225 and $39,728,824 for the year
ended December 31, 2009, respectively. VAT on sales and VAT on purchases
amounted to $37,135,142 and $27,435,925 for the year ended December 31, 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 December 31, 2009 and 2008, the VAT payable
amounted to $3,260,613 and $4,186,822, respectively.




See
report of independent registered public accounting firm.


F-30


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Taxes
Payable consisted of the following at:


December
      31,2009
                  
                  
                  2008Income
      taxes payable
                  
                  $
                  716,795
                  
                  
                  $
                  876,282VAT
      payable
                  
                  
                  3,260,613
                  
                  
                  
                  4,186,822Other
      miscellaneous taxes
                  
                  
                  26,301
                  
                  
                  
                  (203
                  )Total
      taxes payable
                  
                  $
                  4,003,709
                  
                  
                  $
                  5,062,901





NOTE
13 – RELATED PARTY TRANSACTIONS





The
Company owed $494,614 and $596,023 to a stockholder as of December 31, 2009 and
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 year ended December 31, 2009 and 2008, respectively. Total imputed
interest recorded as additional paid-in capital amounted to $13,557 and $24,268
for the years ended December 31, 2009 and 2008, respectively.




Loan to related
parties
 
 On
December 7, 2009, the Company made a loan of $3,500,000 to Mr. Dejun Zou and Ms.
Jianping Qiu on an unsecured and interest free basis. Mr. Zou and Ms. Qiu are
directors and officers of the Company. The loan is short term in nature and to
be repaid in the form of cash on or before May 10, 2010.




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 entered into in
connection with the Securities Purchase 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 Securities Purchase
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.


See
report of independent registered public accounting firm.
  F-31


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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 December 31, 2009 and 2008, the remaining
reserve needed to fulfill the 50% registered capital requirement totaled $84.5
million and $6.9 million, 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.




Common Stock and
Warrants





Issuance
of Common Stock





On
December 7, 2009, the Company closed sales of 3,252,032 shares of its common
stock; Series A Common Stock Warrants, which are exercisable within six months
of the closing date; to purchase up to an aggregate of 1,138,211 shares of
Common Stock at an exercise price of $34.50 per Warrant (the “2009 Series A
Warrants”); and Series B Common Stock Warrants, which are exercisable beginning
on the six month one day anniversary of the closing date until the one year one
day anniversary of the closing date, to purchase up to an aggregate of 1,138,211
shares of Common Stock at an exercise price of $34.50 per Warrant (the “2009
Series B Warrants”).  These warrants were treated as a derivative
liability because the strike price of the warrants is denominated in the
U.S. dollar, 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 expired. The purchase price for each common
share together with Series A Warrants exercisable into 0.35 of a common share
and Series B Warrants exercisable into 0.35 of a common share is $30.75, and the
gross proceeds of the sale were $99,999,984.  The following table
represents the allocation of the fair value of warrants and also common stock on
issuance date:




See
report of independent registered public accounting firm.


F-32


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Total
      Proceeds
                      
                      $
                      99,999,984Direct
      expenses
                      
                      
                      (5,144,531
                      )Fair
      value of warrants
                      
                      
                      (18,743,862
                      )Allocation
      to common stock and APIC
                      
                      $
                      76,111,591





Issuance
of Common Stock in Private Placement





In
connection with the Private Financing, 250,000 shares of the Company’s 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 Financing and pursuant to the Engagement Agreement
Providing for Investment Banking Services, dated October 5, 2007 by and between
the Company and a placement agent for the Private Financing, 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 issuance. The exercise price of the
warrants is subject to adjustment 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 qualify as permanent equity,
the value of such warrants has created offsetting debit and credit entries to
additional paid-in capital.





Effective
January 1, 2009, 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 the U.S. dollar, 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 expired.





A
discussion of the valuation techniques used to measure fair value for the
warrant liabilities listed above and activity for these liabilities for the
years ended December 31, 2009 is provided elsewhere in this footnote and in Note
2.





Settlement
of Liquidated Damage Payable





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 December 31,
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.


See
report of independent registered public accounting firm.
  F-33


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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
                
                
                2,276,422Forfeited
                
                
                -Exercised
                
                
                (382,500
                )Outstanding
      as of December 31, 2009
                
                
                2,276,422





Following
is a summary of the status of warrants outstanding at December 31,
2009:





Outstanding Warrants
                    
                    Exercisable WarrantsExercise
                      Price
                    
                    Number of
                      Shares
                    
                    Average
                      Remaining
                      Contractual
                      Life
                    
                    Average
                      Exercise
                      Price
                    
                    
                    Number of
                      Shares
                    
                    Average
                      Remaining
                      Contractual
                      Life$
                    34.5
                    
                    
                    2,276,422
                    
                    0.68
      years
                    
                    $
                    34.5
                    
                    
                    
                    1,138,211
                    
                    0.43
      yearsTotal
                    
                    
                    2,276,422
                    
                    
                    
                    
                    
                    
                    
                    
                    1,138,211





Stock
Options





On June
30, 2009, pursuant to an Employment Agreement, 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.





See
report of independent registered public accounting firm.




F-34


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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 GAAP.





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.
GAAP 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 $38,425 compensation expense in general and administrative
expenses for the year ended December 31, 2009.





As of
December 31, 2009, the total compensation cost related to stock options not yet
recognized was $358,797 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,
      December 31, 2009
                
                
                50,000
                
                
                $
                6.15
                
                
                $
                1,075,000




Following
is a summary of the status of options outstanding at December 31,
2009:


See
report of independent registered public accounting
firm.


F-35


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





OutstandingOptions
                    
                    ExercisableOptionsExercise
                      Price
                    
                    Number
                    
                    
                    Average
                      Remaining
                      ContractualLife
                    
                    Average
                      Exercise
                      Price
                    
                    Number
                    
                    
                    Average
                      Remaining
                      Contractual
                      Life$
                    6.15
                    
                    
                    50,000
                    
                    
                    
                    4.50 yrs
                    
                    $
                    
                    
                    -
                    
                    
                    
                    -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.  For the year ended December 31, 2009, $8,960
related to the common shares issued to the Chairman of Audit Committee was
recorded as stock compensation expense.





NOTE
16 - EARNINGS PER SHARE





The
following sets forth the calculation of earnings per share for years ended
December 31, 2009 and 2008:




2009
                
                
                2008Net
      income
                
                $
                56,391,750
                
                
                $
                21,281,724Adjustments
      for diluted EPS calculation
                
                
                -
                
                
                
                -Adjusted
      net income for calculating EPS-diluted
                
                $
                56,391,750
                
                
                $
                21,281,724Weighted
      average number of common stock – Basic
                
                
                25,379,587
                
                
                
                25,040,000Effect
      of dilutive securities:Warrants
                
                
                -
                
                
                
                108,178Weighted
      average number of common stock – Diluted
                
                
                25,379,587
                
                
                
                25,148,178Earnings
      per share:Basic
                
                $
                2.22
                
                
                $
                0.85Diluted
                
                $
                2.22
                
                
                $
                0.85





For the
year ended December 31, 2009, a total of 2,276,422 warrants were excluded from
the diluted earnings per share due to its anti-dilutive effect, and 50,000
options were excluded from the diluted earnings per share since none was vested
as of December 31, 2009. For the year ended December 31, 2008, a total of 62,500
stock options were forfeited due to resignation of CFO and therefore excluded
from the diluted earnings per share.




See
report of independent registered public accounting firm.


F-36


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
17 – 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 $127,137 and
$95,980 for the years ended December 31, 2009 and 2008,
respectively.   The Chinese government is responsible for the medical
benefits and the pension liability to be paid to these employees.





Lease
Commitments





The
Company recognizes lease expense on a straight-line basis over the term of the
lease in accordance to FASB’s accounting standard regarding leases. The Company
entered into vehicle leases, property leases and equipment leases. The minimum
future payment for leases as follows:





Year
      ending December 31, 2010
                      
                      $
                      21,815Year
      ending December 31, 2011
                      
                      
                      6,660Year
      ending December 31, 2012
                      
                      
                      6,660Year
      ending December 31, 2013
                      
                      
                      3,885Thereafter
                      
                      
                      -Total
                      
                      $
                      39,020





PurchaseCommitments





As of
December 31, 2009 and 2008, the Company had firm purchase commitments for
capital projects in progress and land use right of $100,554,394 and
$10,594,674, respectively.





Register CapitalCommitments





In
December 2009, RINO increased its investment to Dalian Innomind from $20M to
$80M, Dalian Innomind received $20M on December 18, 2009, the remaining $40M to
be paid by RINO two years from December 18, 2009.





In
December 2009, Dalian Investment found Dalian Rino Heavy. Registered capital of
$50,000,000 was not received and to be paid as of December 31,
2009.




See
report of independent registered public accounting firm.


F-37


RINO
INTERNATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
18 – SUBSEQUENT EVENT





The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions.




On March
22, 2010, Mr. Zou and Mrs. Qiu transferred their personal property as a security
of the loan borrowed from the Company.




In March
2010, Dalian Rino prepaid total of $7.2 million related to purchase commitments
for capital projects in progress.




See
report of independent registered public accounting firm.


F-38