(Name, Telephone, E-mail and/or Facsimile Number
and Address of Company Contact Person)
Securities registered or to be registered pursuant
to Section 12(b) of the Act:
* Ordinary shares are not traded in the United
States; rather they are deposited with JP Morgan Chase Bank, N.A., as Depositary. Each American Depositary Share represents three
(3) ordinary shares.
Securities registered or to be registered pursuant
to Section 12(g) of the Act:
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
The number of outstanding shares of each of the issuer’s classes
of capital or common stock as of December 31, 2016 was: 19,791,110 ordinary shares, par value $0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
PART I
CERTAIN INFORMATION
In this annual report on
Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company” and “Ossen”
refer to Ossen Innovation Co., Ltd., a company organized in the British Virgin Islands, its predecessor entities and its subsidiaries.
Unless the context indicates
otherwise, all references to “China” and the “PRC” refer to the People’s Republic of China, all references
to “Renminbi” or “RMB” are to the legal currency of the People’s Republic of China, all references
to “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States and all
references to “ADSs” refer to our American Depositary Shares, each of which represents one ordinary share. This annual
report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader.
We make no representation that the Renminbi or U.S. dollar amounts referred to in this report could have been or could be converted
into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On April 1, 2017, the cash buying rate announced
by the People’s Bank of China was RMB 6.903 to $1.00.
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking
statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that represent
our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking
statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies
and objectives of management for future operations, any statements concerning proposed new projects or other developments, any
statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies,
intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”,
“will”, “should”, “could”, “would”, “predicts”, “potential”,
“continue”, “expects”, “anticipates”, “future”, “intends”, “plans”,
“believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking
statements.
These statements are necessarily
subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results,
performance or achievements, or industry results, to differ materially from any future results, performance or achievements described
in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements,
including with respect to correct measurement and identification of factors affecting our business or the extent of their likely
impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based or the success of our business.
Forward-looking statements
should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether,
or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available
at the time those statements are made and management’s belief as of that time with respect to future events, and are subject
to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested
by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” and elsewhere
in this report.
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not Applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not Applicable.
3.A. Selected Financial Data
The following selected
financial information should be read in connection with, and is qualified by reference to, our consolidated financial statements
and their related notes and the section entitled “Operating and Financial Review and Prospects” included elsewhere
in this annual report. The consolidated statements of income data for the fiscal years ended December 31, 2014, 2015 and 2016 and
the balance sheet data as of December 31, 2015 and 2016 are derived from audited consolidated financial statements included elsewhere
in this annual report. The consolidated statements of income data for the fiscal years ended December 31, 2012 and 2013 and the
balance sheet data as of December 31, 2012, 2013 and 2014 are not included in this annual report. Our historical results for any
prior period are not necessarily indicative of results to be expected in any future period.
Selected Consolidated Statement
of Income Data
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Revenues
|
|
$
|
117,029,154
|
|
|
$
|
117,908,416
|
|
|
$
|
123,571,455
|
|
|
$
|
113,891,989
|
|
|
$
|
122,397,886
|
|
Cost of goods sold
|
|
|
100,932,528
|
|
|
|
102,197,994
|
|
|
|
110,250,876
|
|
|
|
102,353,957
|
|
|
|
111,611,457
|
|
Gross profit
|
|
|
16,096,626
|
|
|
|
15,710,422
|
|
|
|
13,320,579
|
|
|
|
11,538,032
|
|
|
|
10,786,429
|
|
Selling and distribution expenses
|
|
|
734,159
|
|
|
|
986,378
|
|
|
|
772,383
|
|
|
|
625,500
|
|
|
|
917,074
|
|
General and administrative expenses
|
|
|
6,376,383
|
|
|
|
4,478,413
|
|
|
|
6,340,584
|
|
|
|
3,485,118
|
|
|
|
3,950,934
|
|
Total Operating Expenses
|
|
|
7,110,542
|
|
|
|
5,464,791
|
|
|
|
7,112,967
|
|
|
|
4,110,618
|
|
|
|
4,868,008
|
|
Income from operations
|
|
|
8,986,084
|
|
|
|
10,245,631
|
|
|
|
6,207,612
|
|
|
|
7,427,414
|
|
|
|
5,918,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses, net
|
|
|
(2,827,138
|
)
|
|
|
(2,823,952
|
)
|
|
|
(2,401,268
|
)
|
|
|
(2,696,966
|
)
|
|
|
(3,556,045
|
)
|
Other income, net
|
|
|
90,584
|
|
|
|
371,894
|
|
|
|
907,941
|
|
|
|
558,426
|
|
|
|
911,430
|
|
Income before income taxes
|
|
|
6,249,530
|
|
|
|
7,793,573
|
|
|
|
4,714,285
|
|
|
|
5,288,874
|
|
|
|
3,273,806
|
|
Income taxes
|
|
|
(926,048
|
)
|
|
|
(1,180,167
|
)
|
|
|
(578,727
|
)
|
|
|
(1,219,030
|
)
|
|
|
(575,428
|
)
|
Net income
|
|
|
5,323,482
|
|
|
|
6,613,406
|
|
|
|
4,135,558
|
|
|
|
4,069,844
|
|
|
|
2,716,378
|
|
Less: Net Income attributable to non-controlling interest
|
|
|
499,509
|
|
|
|
716,602
|
|
|
|
276,682
|
|
|
|
426,440
|
|
|
|
335,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interest
|
|
|
4,823,973
|
|
|
|
5,896,804
|
|
|
|
3,858,876
|
|
|
|
3,643,404
|
|
|
|
2,381,279
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(6,975,100
|
)
|
|
|
(5,829,470
|
)
|
|
|
779,135
|
|
|
|
1,647,348
|
|
|
|
703,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(6,975,100
|
)
|
|
|
(5,829,470
|
)
|
|
|
779,135
|
|
|
|
1,647,348
|
|
|
|
703,573
|
|
Comprehensive Income (loss)
|
|
|
(2,151,127
|
)
|
|
|
67,334
|
|
|
|
4,638,011
|
|
|
|
5,290,752
|
|
|
|
3,084,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
19,804,164
|
|
|
|
19,862,537
|
|
|
|
19,901,959
|
|
|
|
19,901,959
|
|
|
|
19,942,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share*
|
|
|
0.24
|
|
|
|
0.30
|
|
|
|
0.19
|
|
|
|
0.18
|
|
|
|
0.12
|
|
* Calculation is based on net income attributable to controlling
interest and the weighted average shares outstanding, excluding foreign currency translation gain (loss).
Selected Balance Sheets Data
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Cash and cash equivalents
|
|
$
|
217,631
|
|
|
$
|
812,277
|
|
|
$
|
684,592
|
|
|
$
|
1,139,450
|
|
|
$
|
1,996,764
|
|
Total current assets
|
|
|
132,425,505
|
|
|
|
144,772,273
|
|
|
|
159,358,503
|
|
|
|
169,273,347
|
|
|
|
165,023,097
|
|
Total long-term assets
|
|
|
8,018,247
|
|
|
|
9,468,260
|
|
|
|
11,405,994
|
|
|
|
12,755,970
|
|
|
|
21,958,617
|
|
Total assets
|
|
|
140,443,752
|
|
|
|
154,240,533
|
|
|
|
170,764,497
|
|
|
|
182,029,317
|
|
|
|
186,981,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
37,997,958
|
|
|
|
50,106,311
|
|
|
|
67,355,476
|
|
|
|
83,534,989
|
|
|
|
94,204,578
|
|
Total shareholders’ equity
|
|
|
102,445,794
|
|
|
|
104,134,222
|
|
|
|
103,409,021
|
|
|
|
98,494,328
|
|
|
|
92,777,136
|
|
Total liabilities and shareholders’ equity
|
|
|
140,443,752
|
|
|
|
154,240,533
|
|
|
|
170,764,497
|
|
|
|
182,029,317
|
|
|
|
186,981,714
|
|
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons For The Offer And Use Of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in our
ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all
other information contained in this annual report, including the matters discussed under the headings “Forward-Looking Statements”
and “Operating and Financial Review and Prospects” before you decide to invest in our ADSs. We are a holding company
with substantial operations in China and are subject to a legal and regulatory environment that in many respects differs from the
United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually
occur, our business, financial condition, results of operations, liquidity and our future growth prospects could be materially
and adversely affected.
Risks Related to Our Business and Our Industry
We may sell our existing business and
acquire a new business in the medical technology industry, although there is no guarantee that such transactions will be consummated.
We have entered into a
non-binding letter of intent (the "LOI") with America-Asia Diabetes Research Foundation (the "Foundation"),
a California corporation that owns 90.27% of the equity interests of San MediTech (Huzhou) Co. Ltd. ("San MediTech"),
a China-based medical device company engaged in the research, development and marketing of glucose control products, and the shareholders
of the Foundation (the "Selling Shareholders"). Pursuant to the LOI, we intend to acquire all of the issued and outstanding
equity interests of the Foundation in exchange for 81,243,000 of our ordinary shares (the "Acquisition"). Upon completion
of the Acquisition, we would indirectly own 90.27% of San MediTech. San MediTech's proprietary Dynamic Glucose Monitoring System
("DGMS") provides continuous, real-time monitoring of glucose level in diabetes patients, with two patents granted in
China and several patents pending both in China and the U.S. DGMS has been approved by the China Food and Drug Administration and
has entered into clinical trials in the U.S. for DGMS.
In connection with the
Acquisition, we plan to sell our existing pre-stressed steel manufacturing business, including all existing liabilities, immediately
following the completion of the Acquisition. It is expected that an entity affiliated with Dr. Liang Tang, our Chairman, will acquire
all of the equity of our wholly-owned subsidiary, which indirectly owns all of our existing operating subsidiaries, in exchange
for the forfeiture and cancellation of all 11,889,500 ordinary shares currently held by Dr. Tang (the “Sale Transaction”).
It is expected that if
such transactions are consummated as currently contemplated, our current shareholders, other than the Chairman, will own approximately
8.9% of our issued and outstanding ordinary shares following the consummation of such transactions and the Selling Shareholders
will own approximately 91.1% of the issued and outstanding ordinary shares.
The Acquisition and the
Sale Transaction are subject to due diligence investigations by the relevant parties, the negotiation and execution of definitive
agreements, our receipt of shareholder approval of the transactions and all necessary regulatory approvals, and the satisfaction
of other customary closing conditions. There can be no assurance that the Acquisition and the Sale Transaction will be completed
as proposed or at all. Both the Acquisition and the Sale Transaction would be subject to the satisfaction of various closing conditions.
Furthermore, even in the event that such transactions are completed, there can be no assurance that such transactions will be completed
on the same terms as those described above. In the event that such transactions are consummated, the interests of our existing
shareholders would be substantially diluted.
Our chairman owns a large percentage
of our outstanding stock and could significantly influence the outcome of our corporate matters.
Dr. Tang owns approximately
60.1% of our outstanding ordinary shares, reflecting a majority equity interest in our company. As our majority shareholder, Dr.
Tang is able to elect our board of directors, and determine the outcome of all matters requiring the approval of the holders of
a majority of our outstanding shares, including the sale of our assets or an acquisition of assets pursuant to the currently proposed
Acquisition and Sale Transaction or otherwise. This concentration of ownership in our shares by Dr. Tang limits your ability to
influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. In
addition, sales of significant amounts of ordinary shares held by Dr. Tang, or the prospect of these sales, could adversely affect
the market price of our ordinary shares.
Our operations are cash intensive, and
our business could be adversely affected if we fail to maintain sufficient levels of liquidity and working capital.
As of December 31, 2016,
we had $0.2 million of cash and cash equivalents. Historically, we have spent a significant amount of cash on our operational activities,
principally to procure raw materials for our products. Our short-term loans are from Chinese banks and are generally secured by
a portion of our fixed assets, land use right, receivables and/or guarantees by related parties. The term of almost all such loans
is one year or less. Historically, we have rolled over such loans on an annual basis. However, we may not have sufficient funds
available to pay all of our borrowings upon maturity in the future. Failure to roll over our short-term borrowings at maturity
or to service our debt could result in the imposition of penalties, including increases in interest rates, legal actions against
us by our creditors, or even insolvency.
Although we have been able
to maintain adequate working capital primarily through cash from operations and short-term borrowings, any failure by our customers
to settle outstanding accounts receivable, or our inability to borrow sufficient capital from local banks, in the future could
materially and adversely affect our cash flow, financial condition and results of operations. For example, in 2016, one of our
customers in South Korea filed for bankruptcy, which negatively impacted our revenue generated from export.
In addition, since 2013,
we have been required to provide cash deposits, instead of bank guarantee letters, when we bid for projects, which results in further
pressure on our working capital. Yet, during this time period, local banks have generally maintained tighter lending policies than
in the past, thereby limiting our ability to borrow funds in order to win bids that we believe we otherwise could have won. Although
our production facilities are running at full capacity, the bids we are losing due to lack of up-front cash deposit may be more
profitable than the ones we are winning, which could negatively impact our overall revenue and profitability.
If existing sources of capital are insufficient
to support our business, we may issue debt and equity securities that are senior to our ordinary shares as to distributions and
in liquidation, which could negatively affect the value of our ordinary shares, or we may not be able to raise additional financing
at all.
If available liquidity
is not sufficient to meet our operating and loan obligations as they come due, our plans include considering pursuing alternative
financing arrangements, reducing expenditures as necessary, or limiting our plans for expansion to meet our cash requirements.
However, there is no assurance that, if required, we will be able to raise additional capital, reduce discretionary spending or
efficiently limit our expansion to provide the required liquidity. Currently, the capital markets for small capitalization companies
are difficult and banking institutions have become stringent in their lending requirements. Accordingly, we cannot ensure the availability
or terms of any third party financing. If we are unable to raise additional financing, we may be unable to procure the raw materials
we need, implement our long-term business plan, develop or enhance our products, take advantage of future opportunities or respond
to competitive pressures on a timely basis.
Alternatively, if we raise
capital by issuing equity or convertible debt securities, such issuances could result in substantial dilution to our shareholders.
In addition, we may issue senior notes, subordinated notes or preferred shares that have preference over our common equity. In
the event of our liquidation, any such lenders and holders of our debt or preferred securities would receive a distribution of
our available assets before distributions to the holders of our ADSs. Our decision to incur debt and issue securities in future
offerings will depend on market conditions and other factors beyond our control. We cannot predict or estimate the amount, timing
or nature of future offerings and debt financings. Future offerings could reduce the value of shares of our ADSs or dilute your
investment.
We face intense competition, and if we
are unable to compete effectively we may not be able to maintain profitability.
We compete with many other
companies located in the PRC and internationally that manufacture materials similar to ours. Many of our competitors are larger
companies with greater financial resources than us. Intense competition in a challenging economic environment in the PRC has, in
the past, put pressure on our margins and may adversely affect our future financial performance. Moreover, intense competition
may result in potential or actual litigation between us and our competitors relating to such activities as competitive sales practices,
relationships with key suppliers and customers or other matters.
In 2015 and 2016, we generated
revenue of approximately $85.0 million and $101.4 million, respectively, or 72.1% and 86.6%, respectively, of our total revenue,
from sales of our rare earth coated PC wires and PC strands. We believe that we are the only prestressed steel material manufacturer
in the PRC that currently manufactures rare earth coated prestressed steel materials for bridge construction. While we believe
that our rare earth coating capabilities provide us with a competitive advantage among our competitors, it is likely that our competitors
will seek to develop similar competing products in the near future. Furthermore, in 2015 and 2016, gross margins for our coated
products was lower than the gross margins for our plain surface products due, in part, to pricing pressure. We intend to continue
to expand research and development efforts to advance our rare earth coating applications even further. In particular, we continued
to develop a rare earth coating application for zinc-aluminum alloy coated products, which are more corrosion-resistant than zinc
coated products in 2017. However, there can be no assurance that our initial competitive advantage will be retained and that one
or more competitors will not develop products that are equal or superior to ours in quality and are better priced than our rare
earth coated products.
Our revenues are highly dependent on
a limited number of customers and the loss of any one of our major customers could materially and adversely affect our growth and
our revenues.
During the years ended
December 31, 2016, 2015 and 2014, our six largest customers contributed 81.4%, 74.9% and 61.3% of our total sales, respectively.
As a result of our reliance on a limited number of customers, we may face pricing and other competitive pressures, which may have
a material adverse effect on our profits and our revenues. The volume of products sold for specific customers varies from year
to year, especially since we are not the exclusive provider for any customers. In addition, there are a number of factors, other
than our performance, that could cause the loss of a customer or a substantial reduction in the products that we provide to any
customer and that may not be predictable. For example, our customers may decide to reduce spending on our products or a customer
may no longer need our products following the completion of a project. The loss of any one of our major customers, a decrease in
the volume of sales to these customers or a decrease in the price at which we sell our products to them could materially adversely
affect our profits and our revenues.
In addition, this customer
concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given their relative
size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we accept such
unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of
operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend
upon the timing and volume of business from our largest customers and the financial and operational success of these customers.
As we expand our operations, we may need
to establish a more diverse supplier network for our raw materials. The failure to secure a more diverse supplier network could
have an adverse effect on our financial condition.
We currently purchase almost
all of our raw materials from a small number of suppliers. Purchases from our five largest suppliers amounted to 99.1%, 97.7% and
95.1% of our raw material purchases in the years ended December 31, 2016, 2015 and 2014, respectively. In the event that we need
to diversify our supplier network, we may not be able to procure a sufficient supply of raw materials at a competitive price, which
could have an adverse effect on our results of operations, financial condition and cash flows.
Furthermore, despite our
efforts to control our supply of raw materials and maintain good relationships with our existing suppliers, we could lose one or
more of our existing suppliers at any time. The loss of one or more key suppliers could increase our reliance on higher cost or
lower quality supplies, which could negatively affect our profitability. Any interruptions to, or decline in, the amount or quality
of our raw materials supply could materially disrupt our production and adversely affect our business, financial condition and
financial prospects.
Volatile steel prices can cause significant
fluctuations in our operating results. Our revenues and operating income could decrease if steel prices decline or if we are unable
to pass price increases on to our customers.
Our principal raw material
is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel industry as a whole
is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including
general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by us
and other steel service centers, consolidation of steel producers, higher raw material costs for steel producers, import duties
and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for
us.
We, like many other steel
manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time delivery requirements
of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate
to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market
conditions. Our commitments to purchase steel are generally at prevailing market prices in effect at the time we place our orders.
We have no long-term, fixed-price steel purchase contracts. When steel prices increase, competitive conditions will influence how
much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our
raw materials to our customers, the revenues and profitability of our business could be adversely affected.
When steel prices decline,
customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices, lower margins
and inventory valued at the lower of cost or market adjustments as we use existing steel inventory. Significant or rapid declines
in steel prices or reductions in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore,
changing steel prices could significantly impact our revenues, gross margins, operating income and net income.
In
2016, Chinese Government continued its policy to cut excessive industrial capacity and reform the supply-side of its economy. China
has lowered steel production by about 90 million tons in the recent years and will push to cut a further 100 million to 150 million
tons over the next 5 years, while strictly controlling steel capacity increases, according to the Chinese government statement
announced in January 2016. As a result, the average price of steel products, including our products and principal raw materials,
increased in 2016 and reached the highest level in two and a half years. The shortage of coking coal, one of steelmaking raw materials,
also led to higher prices. The average selling prices of our products also increased in 2016 and with our advanced payment to suppliers,
we were able to lock the raw materials at a lower price, which resulted in higher margin in 2016. We expect steel demand will slightly
outpace supply and average price of steel products will continue to rise in 2017.
However,
there can be no assurance that we will be able to raise our prices to compensate for the increase in raw materials.
Sales to customers outside China expose
us to risks inherent in international sales.
We generated approximately
4.2%, 6.6% and 7.2%, respectively, of our revenue during the years ended December 31, 2016, 2015 and 2014 from sales to customers
in international markets. As a result, we are subject to risks and challenges that we would otherwise not face if we conducted
our business only in China. For example, in 2009 and 2010, the European Union and the United States imposed anti-dumping duties
on imports of certain prestressed wires and wire strands originating in China. These measures had a negative impact on our business
and results of operations. In 2016, one of our customers in South Korea filed for bankruptcy, which negatively impacted our revenue
generated from export.
We are subject to various risks and uncertainties
that might affect our ability to procure quality raw materials.
Our performance depends
on our ability to procure low cost, high quality raw materials on a timely basis from our suppliers. Our suppliers are subject
to certain risks, including availability of raw materials, labor disputes, inclement weather, natural disasters, and general economic
and political conditions, which might limit the ability of our suppliers to provide us with low cost, high quality merchandise
on a timely basis. Furthermore, for these or other reasons, one or more of our suppliers might not adhere to our quality control
standards, and we might not identify the deficiency. Our suppliers’ failure to supply quality materials at a reasonable cost
on a timely basis could reduce our net sales or profits, damage our reputation and have an adverse effect on our financial condition.
We may lose our competitive advantage,
and our operations may suffer, if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual property.
We rely on a combination
of patents, trademarks, trade secrets and confidentiality agreements to protect our intellectual property rights. While we are
not currently aware of any infringement on our intellectual property rights, our ability to compete successfully and to achieve
future revenue growth will depend, in significant part, on our ability to protect our proprietary technology. Despite many laws
and regulations promulgated, as well as other efforts made, by China over the past several years in an attempt to protect intellectual
property rights, intellectual property rights are not as certain in China as they would be in many Western countries, including
the United States. Furthermore, enforcement of such laws and regulations in China has not been fully developed. Neither the administrative
agencies nor the court systems in China are as equipped as their counterparts in developed countries to deal with violations or
handle the nuances and complexities between compliant technological innovation and non-compliant infringement.
Our rare earth coating
technology is protected through a combination of patents, trade secrets, confidentiality agreements and other methods. However,
our competitors may independently develop proprietary methodologies similar to ours or duplicate our products, or develop alternatives,
which could have a material adverse effect on our business, results of operations and financial condition. The misappropriation
or duplication of our intellectual property could disrupt our ongoing business, distract our management and employees, reduce our
revenues and increase our expenses. We may need to litigate to enforce our intellectual property rights. Any such litigation could
be time consuming and costly and the outcome of any such litigation cannot be guaranteed.
Our revenues, expenses and profits are
difficult to predict and vary significantly from quarter to quarter. This could cause the trading price of our ordinary shares
to decline.
Our operating results vary
significantly from quarter to quarter. Therefore, we believe that period-to-period comparisons of our results of operations are
not necessarily meaningful and should not be relied upon as an indication of our future performance. It is possible that in the
future some of our quarterly results of operations may be below the expectations of market analysts and our investors, which could
lead to a significant decline in the trading price of our ordinary shares. Factors which affect the fluctuation of our revenues,
expenses and profits include:
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delays or cancellations of railway or infrastructure projects in China due to unexpected accidents
or to financial or other issues confronting the Ministry of Transport, China National Railway Co., or other PRC governmental agencies
overseeing these industries;
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changes in prices of our raw materials, with higher prices leading to reduced operating income;
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variations, expected or unexpected, in the duration, size, timing and scope of purchase orders;
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changes in our pricing policies or those of our competitors;
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changes in compensation, which may reduce our gross profit for the quarter in which they are effected;
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our inability to manage costs, including those related to our raw materials, personnel, infrastructure
and facilities;
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exchange rate fluctuations; and
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general economic conditions.
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A portion of our expenses,
particularly those related to personnel and facilities are generally fixed in advance of any particular quarter. As a result, unanticipated
variations in the number and timing of our purchase orders or prices of our raw materials may cause significant variations in our
operating results in any particular quarter.
Our success depends in large part upon our senior management
and key personnel. Our inability to attract and retain these individuals could materially and adversely affect our business, results
of operations and financial condition.
We are highly dependent
on our senior management and other key employees, including our Chairman, Dr. Tang and our Chief Executive Officer and Chief Financial
Officer, Mr. Hua. Our future performance will be dependent upon the continued service of members of our senior management and key
employees. We do not maintain key man life insurance for any of the members of our management team or other key personnel. Competition
for senior management in our industry is intense, and we may not be able to retain our senior management and key personnel or attract
and retain new senior management and key personnel in the future, which could materially and adversely affect our business, results
of operations and financial condition.
We have limited insurance coverage and
may incur losses resulting from product liability claims, business interruption or natural disasters.
We are exposed to risks
associated with product liability claims in the event that the use of our products results in property damage or personal injury.
Since our products are ultimately incorporated into bridges, buildings, railways and other large structures, it is possible that
users of these structures or people installing our products could be injured or killed by such structures, whether as a result
of defects, improper installation or other causes. Because we continue to expand our customer base and because our products are
used for long periods of time, we are unable to predict whether product liability claims will be brought against us in the future
or to predict the impact of any resulting adverse publicity on our business. The successful assertion of product liability claims
against us could result in potentially significant monetary damages and require us to make significant payments. We do not carry
product liability insurance and may not have adequate resources to satisfy a judgment in the event of a successful claim against
us. As the insurance industry in China is still in its early stages of development, even the insurance that we currently carry
offers limited coverage compared with that offered in many other countries. Any business interruption or natural disaster could
result in substantial losses and diversion of our resources and materially and adversely affect our business, financial condition
and results of operations.
If we are unable to maintain appropriate
internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the
restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, and cause
investors to lose confidence in our reported financial information.
Effective internal controls
are necessary for us to provide reliable financial reports and effectively prevent fraud. As a public company, we have significant
requirements for enhanced financial reporting and internal controls. We are required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of our internal controls over financial reporting and, for many companies, a report by the independent
registered public accounting firm addressing these assessments. The process of designing and implementing effective internal controls
is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments
and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations
as a public company.
We cannot assure you that
we will not in the future identify areas requiring improvement in our internal control over financial reporting. In addition, we
cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will
implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If
we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to comply
with Sarbanes-Oxley and meet our reporting obligations, result in the restatement of our financial statements, harm our operating
results, subject us to regulatory scrutiny and sanction, and cause investors to lose confidence in our reported financial information.
Risks Related to Doing Business in China
We have suffered currency exchange losses,
and we may continue to suffer currency exchange losses if the RMB continues to depreciate relative to the U.S. dollar, and fluctuations
in the value of the RMB may have an adverse effect on our shareholders’ investment.
Our reporting currency
is the U.S. dollar. However, substantially all of our revenues are denominated in RMB. Any significant revaluation of the Renminbi
may have a material adverse effect on the U.S. dollar equivalent amount of our revenues and financial condition as well as on the
value of, and any dividends payable on, our ordinary shares in foreign currency terms. For instance, a decrease in the value of
Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment
in our ordinary shares and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the
prices of our ADSs. For 2015 and 2016, we had foreign currency translation loss of $5.8 million and $6.9 million, respectively,
primarily due to the material depreciation of the RMB against the U.S. dollar during past two years.
In July 2005, China reformed
its exchange rate regime by establishing a managed floating exchange rate regime based on market supply and demand with reference
to a basket of currencies. The RMB is no longer pegged to the U.S. dollar and the exchange rate will have some flexibility. If
the RMB depreciates relative to the U.S. dollar, our revenues as expressed in our U.S. dollar financial statements will decline
in value. Also, the RMB depreciation will increase Chinese steel industry’s purchasing cost for importing iron ore, which
in turn may increase the cost of our raw materials. Conversely, RMB depreciation may benefit our export revenue and profit, as
the price of our exported products may increase as expressed in RMB. In addition, our currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars. On the other hand, our proceeds
from overseas financings and our sales from overseas markets will decrease in value if we choose not to or are unable to convert
the proceeds into RMB and the RMB appreciates against the U.S. dollar, which may reduce the value of a shareholder’s investment
in our ADSs.
On May 19, 2007, the central
bank of China, the People’s Bank of China, announced a policy to expand the maximum daily floating range of RMB trading prices
against the U.S. dollar in the inter-bank spot foreign exchange market from 0.3% to 0.5%. While the international reactions to
the RMB revaluation and widening of the RMB’s daily trading band have generally been positive, with the increased floating
range of the RMB’s value against foreign currencies, the RMB may appreciate or depreciate significantly in value against
the U.S. dollar or other foreign currencies in the long term, depending on the fluctuation of the basket of currencies against
which it is currently valued. On June 19, 2010, the PBOC announced that it has decided to proceed further with the reform of the
RMB exchange rate regime to enhance the flexibility of the RMB exchange rate, and that emphasis would be placed on reflecting market
supply and demand with reference to a basket of currencies. While so indicating its intention to make the RMB’s exchange
rate more flexible, the PBOC ruled out any sharp fluctuations in the currency or a one-off adjustment. On April 16, 2012, the PBOC
enlarged the floating band of RMB’s trading prices against the U.S. dollar in the inter-bank spot foreign exchange market
from 0.5% to 1% around the middle rate released by the China Foreign Exchange Trade System each day. In February 2014, the center
point of the currency’s official trading band hit 6.1146, representing appreciation of more than 11.7% since June 19, 2010.
On March 17, 2014, the PBOC announced a policy to further expand the maximum daily floating range of RMB trading prices against
the U.S. dollar in the inter-bank spot foreign exchange market to 2%. In 2016, the RMB became one of five global reserve currencies
and entered into the International Monetary Fund’s Special Drawing Rights, alongside the Dollar, Euro, Pound and the Yen.
In addition, China's forex reserves fell by $319.8 billion in 2016. In the long term, the RMB may continue to depreciate significantly
in value against the U.S. dollar or other foreign currencies, depending on the market supply and demand with reference to a basket
of currencies.
The Renminbi may be revalued
further against the U.S. dollar or other currencies, or may be permitted to enter into a full or limited free float, which may
result in an appreciation or depreciation in the value of the Renminbi against the U.S. dollar or other currencies. In addition,
there are very limited hedging transactions available in China to reduce our exposure to exchange rate fluctuations. While we may
decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and
we may not be able to successfully hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by
PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
Changes in China’s political or
economic situation could harm us and our operating results.
Economic reforms adopted
by the Chinese government have had a positive effect on the economic development of the country, but the government could change
these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability.
Some of factors that could have this effect include:
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Level of government involvement in the economy;
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Control of foreign exchange;
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Methods of allocating resources;
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Balance of payments position;
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International trade restrictions; and
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International conflict.
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The Chinese economy differs
from most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. For example,
state-owned enterprises still constitute a large portion of the Chinese economy, and weak corporate governance and the lack of
a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way
or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.
The PRC government exerts substantial
influence over the infrastructure and steel sectors and the manner in which we must conduct our business activities.
The PRC government has
exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy through regulation
and state ownership, including the infrastructure and steel sectors where we have been doing our business. Any government decisions
or actions to postpone, change or halt the construction of certain types of infrastructure projects for any reason, such as the
high speed railway accident in July 2011 in South China and the ongoing reduction of 100 million to 150 million tons of steel production
announced in 2016, or any decisions the government might make to cut spending, could adversely impact our business and results
of operations.
In addition, our ability
to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions
in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government
actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on
economic conditions in China or particular regions thereof.
You may have difficulty enforcing judgments
against us.
Our assets are located,
and our operations are conducted, in the PRC. In addition, substantially all of our directors and officers are nationals and residents
of the PRC and a substantial portion of their assets is located outside the United States. As a result, it may be difficult to
effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts
of the PRC would recognize or enforce judgments of U.S. courts because China does not have any treaties or other arrangements that
provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the
PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they
decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest.
Most of our revenues are denominated
in Renminbi, which is not freely convertible for capital account transactions and may be subject to exchange rate volatility.
We are exposed to the risks
associated with foreign exchange controls and restrictions in China, as our revenues are primarily denominated in Renminbi, which
is currently not freely exchangeable. The PRC government imposes control over the convertibility between Renminbi and foreign currencies.
Under the PRC foreign exchange regulations, payments for “current account” transactions, including remittance of foreign
currencies for payment of dividends, profit distributions, interest and operation-related expenditures, may be made without prior
approval but are subject to procedural requirements. Strict foreign exchange control continues to apply to “capital account”
transactions, such as direct foreign investment and foreign currency loans. These capital account transactions must be approved
by, or registered with, the PRC State Administration of Foreign Exchange, or SAFE. Further, capital contribution by an offshore
shareholder to its PRC subsidiaries may require approval by the Ministry of Commerce in China or its local counterparts. We cannot
assure you that we are able to meet all of our foreign currency obligations to remit profits out of China, to pay dividends, or
to fund operations in China.
On August 29, 2008, SAFE
promulgated the Circular on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142, to regulate the conversion by foreign invested enterprises,
or FIEs, of foreign currency into Renminbi by restricting how the converted Renminbi may be used. Circular 142 requires that Renminbi
converted from the foreign currency-dominated capital of a FIE may be used only for purposes within the business scope approved
by the applicable government authority and may not be used for equity investments within the PRC unless specifically provided.
In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency-dominated
capital of a FIE. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi
loans if the proceeds of such loans have not yet been used. Compliance with Circular 142 may delay or inhibit our ability to complete
such transactions, which could affect our ability to expand our business.
China’s legal system is different
from those in some other countries.
China is a civil law jurisdiction.
Under the civil law system, prior court decisions may be cited as persuasive authority but do not have binding precedential effect.
Although progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization
and governance, foreign investment, commerce, taxation and trade, China’s legal system remains less developed than the legal
systems in many other countries. Furthermore, because many laws, regulations and legal requirements have been recently adopted,
their interpretation and enforcement by the courts and administrative agencies may involve uncertainties. Sometimes, different
government departments may have different interpretations. Licenses and permits issued or granted by one government authority may
be revoked by a higher government authority at a later time. Government authorities may decline to take action against unlicensed
operators which may work to the disadvantage of licensed operators, including us. The PRC legal system is based in part on government
policies and internal rules that may have a retroactive effect. We may not be aware of our violation of these policies and rules
until sometime after the violation. Changes in China’s legal and regulatory framework, the promulgation of new laws and possible
conflicts between national and provincial regulations could adversely affect our financial condition and results of operations.
In addition, any litigation in China may result in substantial costs and diversion of resources and management attention.
Our business and financial performance
may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Ossen Materials constitutes
a round-trip investment without MOFCOM approval.
On August 8, 2006, six
PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the
2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A Rule which was amended by the Ministry
of Commerce on June 22, 2009, a “round-trip investment” is defined as having taken place when a PRC business that is
owned by PRC individuals is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC
individuals. Under the 2006 M&A Rules which was amended by the Ministry of Commerce on June 22, 2009, any round-trip investment
must be approved by MOFCOM, and any indirect arrangement or series of arrangements which achieves the same end result without the
approval of MOFCOM is a violation of PRC law.
However, the PRC regulatory
authorities may take the view that the acquisition of shares in our PRC operating subsidiaries and the share exchange between our
predecessor, Ultra Glory, and our subsidiary, Ossen Materials Group, are part of an overall series of arrangements which constitute
a round-trip investment. If the PRC regulatory authorities take this view, we cannot assure you we may be able to obtain the approval
required from MOFCOM. It is also possible that the PRC regulatory authorities could invalidate our acquisition and ownership of
our Chinese subsidiaries, and that these transactions require the prior approval of the China Securities Regulatory Commission,
or CSRC, before MOFCOM approval is obtained.
If these regulatory actions
occur, we cannot assure you that we will be able to re-establish control of our Chinese subsidiaries’ business operations,
that any such contractual arrangements will be protected by PRC law, or that we would receive as complete or effective an economic
benefit and control of our Chinese subsidiaries’ business as if we had direct ownership of our Chinese subsidiaries.
PRC regulations relating to investments
in offshore companies by PRC residents may subject our future PRC-resident beneficial owners or our PRC subsidiaries to liability
or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase
their registered capital or distribute profits.
SAFE promulgated the Circular
on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly
known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to
register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for
the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic
enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular
37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle,
such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material
event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration,
the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent
and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in
its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration
requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
We believe that some of
our shareholders are PRC residents under SAFE Circular 37. We do not have control over the these shareholders and our other beneficial
owners and cannot assure you that all of our PRC-resident beneficial owners have complied with, and will in the future comply with,
SAFE Circular 37 and subsequent implementation rules. The failure of PRC-resident beneficial owners to register or amend their
SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future
PRC-resident beneficial owners of our company to comply with the registration procedures set forth in SAFE Circular 37 and subsequent
implementation rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, SAFE
Circular 37 is unclear how this regulation, and any future regulation concerning offshore or cross-border transactions, will be
interpreted, amended and implemented by the relevant PRC government authorities, and we cannot predict how these regulations will
affect our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our
ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends
to us. These risks could in the future have a material adverse effect on our business, financial condition and results of operations.
All employee participants in our share
incentive plans who are PRC citizens may be required to register with the SAFE. We may also face regulatory uncertainties that
could restrict our ability to adopt additional option plans for our directors and employees under PRC law.
In December 2006, the People’s
Bank of China promulgated the Administrative Measures for Individual Foreign Exchange, which set forth the respective requirements
for foreign exchange transactions by PRC individuals under either current account or the capital account. In January 2007, the
SAFE issued the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, which, among other things,
specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee
stock ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, the SAFE promulgated the
Processing Guidance on Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans
or Stock Option Plans of Overseas-Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are
granted stock options by an overseas publicly-listed company are required, through a qualified PRC domestic agent or PRC subsidiary
of such overseas publicly-listed company, to register with the SAFE and complete certain other procedures. In February 2012, the
SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in
Stock Incentive Plan of Overseas Publicly Listed Company, according to which, employees, directors, supervisors and other management
members participating in any share incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRC
citizens residing in China for a continuous period of not less than one year, subject to limited exceptions, are required to register
with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain
other procedures. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our
ability to make payments under our equity incentive plans or receive dividends or sales proceeds related thereto, or our ability
to contribute additional capital into our subsidiaries in China and limit our subsidiaries’ ability to distribute dividends
to us. We also face regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our
directors and employees under PRC law.
In addition, the PRC State
Administration of Taxation has issued circulars concerning employee share options or restricted shares. Under these circulars,
employees working in the PRC who exercise share options, or whose restricted shares vest, will be subject to PRC individual income
tax. The PRC subsidiaries of an overseas listed company have obligations to file documents related to employee share options or
restricted shares with relevant tax authorities and to withhold individual income taxes of those employees related to their share
options or restricted shares. If the employees fail to pay, or the PRC subsidiaries fail to withhold applicable income taxes, the
PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC government authorities.
Under the New Enterprise Income Tax Law,
we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC shareholders.
China passed a New Enterprise
Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. Under the New EIT Law, an enterprise established
outside of China with de facto management bodies within China is considered a resident enterprise, meaning that it can be treated
in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define
de facto management as “substantial and overall management and control over the production and operations, personnel, accounting,
and properties” of the enterprise. In addition, a circular issued by the State Administration of Taxation on April 22, 2009
clarified that dividends and other income paid by such resident enterprises will be considered to be PRC source income, subject
to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This recent circular also
subjects such resident enterprises to various reporting requirements with the PRC tax authorities.
Although substantially
all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would require or permit
our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC
resident enterprise. However, if the PRC tax authorities determine that we are a resident enterprise for PRC enterprise income
tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax
at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this
would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income
tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the
PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing
of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it
is possible that future guidance issued with respect to the new resident enterprise classification could result in a situation
in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by
our non-PRC shareholders from transferring our shares.
Restrictions under PRC law on our PRC
subsidiaries' ability to pay dividends and make other distributions could materially and adversely affect our ability to grow,
make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
Our revenues are generated
by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to pay dividends and make other
payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out
of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC
subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined
in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered
capital. Allocations to these statutory reserve funds can be used only for specific purposes and are not transferable to us in
the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us
could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business,
pay dividends and otherwise fund and conduct our business.
Any failure to comply with PRC environmental
laws may require us to incur significant costs.
We carry on our business
in an industry that is subject to PRC environmental protection laws and regulations. These laws and regulations require enterprises
engaged in manufacturing and construction that may cause environmental waste to adopt effective measures to control such waste.
In addition, such enterprises are required to pay fines, or to cease operations entirely under extreme circumstances, should they
discharge waste substances. The Chinese government may also change the existing laws or regulations or impose additional or stricter
laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may be unable to pass
on to our customers through higher prices for our products.
We must comply with the Foreign Corrupt
Practices Act.
We are required to comply
with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from making prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent
practices occur from time to time in mainland China. If any of our non-U.S. listed competitors that are not subject to the Foreign
Corrupt Practices Act engage in these practices, they may receive preferential treatment and secure business from government officials
in a way that is unavailable to us. Furthermore, although we inform our personnel that such practices are illegal, we cannot assure
you that our employees or other agents will not engage in illegal conduct for which we might be held responsible under U.S. law.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.
Because our funds are held in banks that
do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue our business
operations.
Banks and other financial
institutions in the PRC do not provide insurance for funds held on deposit. The Chinese government implemented the bank deposit
insurance program on May 1, 2015. Financial institutions are required to pay insurance premiums into a fund that is managed by
an agency appointed by the State Council. The program is designed to return bank clients' deposits if their bank suffers insolvency
or bankruptcy. The reimbursement is drawn from the new fund in the case of the deposit being RMB500,000 ($72,077 as of December
31, 2016) or less. However, the implementation and impact of this program are uncertain. As a result, in the event of a bank failure,
we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability
to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees
and other creditors, we may be unable to continue our business operations.
If relations between the United States
and China worsen, investors may be unwilling to hold or buy our ordinary shares and our share price may decrease.
At various times during
recent years, the United States and China have had significant disagreements over political and economic issues. Controversies
may arise in the future between these two countries. Any political or trade controversies between the United States and China,
whether or not directly related to our business, could reduce the price of our ordinary shares.
If we become directly subject to the
recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in
a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In recent years, U.S. public
companies that have substantially all of their operations in China, particularly companies that have completed reverse merger transactions,
have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory
agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity
has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial
accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As
a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has
sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now, or were in the
recent past, subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into
the allegations. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue,
we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be
costly and time consuming and distract our management from growing our Company. If such allegations are not proven to be groundless,
our Company and business operations will be severely impacted and your investment in our stock could be rendered worthless.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially
all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of
our disclosures.
We are regulated by the
SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated
by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily
in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations
and business take place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles
that are present when reviewing our disclosures. These same obstacles are not present for similar companies whose operations or
business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosures and public pronouncements
are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other
filings are not subject to the review of China Securities Regulatory Commission, a PRC regulator that is tasked with oversight
of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with
the understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our
SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local
regulator.
The audit report
included in this prospectus is prepared by auditors who are not inspected fully by the Public Company Accounting Oversight Board,
or the PCAOB, and, as such, our shareholders are deprived of the benefits of such inspection.
As an auditor of companies
that are publicly traded in the United States and a firm registered with the PCAOB, BDO China Shu Lun Pan Certified Public Accountants
LLP is required under the laws of the United States to undergo regular inspections by the PCAOB. However, because we have substantial
operations within the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the
Chinese government authorities, our auditor and its audit work is not currently inspected fully by the PCAOB.
Inspections of other auditors
conducted by the PCAOB outside China have at times identified deficiencies in those auditors' audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections
of audit work undertaken in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures.
As a result, shareholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported financial
information and procedures and the quality of our financial statements.
Risks Related to Our ADSs
The market price for our ADSs may be
volatile.
The market price for our
ADSs is highly volatile and subject to wide fluctuations in response to various factors, including the following:
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actual or anticipated fluctuations in our quarterly operating results and revisions to our expected
results;
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changes in financial estimates by securities research analysts;
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conditions in the markets for our products;
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changes in the economic performance or market valuations of companies specializing in our industry
or our customers or their industries;
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changes in market valuations of U.S. listed companies headquartered in China, and in particular
small capitalization companies;
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announcements by us or our competitors of new products, acquisitions, strategic relationships,
joint ventures or capital commitments;
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addition or departure of our senior management and key personnel;
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fluctuations of exchange rates between the Renminbi and the U.S. dollar;
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litigation related to our intellectual property;
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release or expiry of transfer restrictions on our outstanding ordinary shares; and
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sales or perceived potential sales of our ADSs.
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In addition, the securities
market has from time to time, and to an even greater degree over the past several years, experienced significant price and volume
fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have
a material adverse effect on the market price of our ADSs. In the event that market price of our ADSs is below $1 for more than
30 consecutive business days we will fail to meet the requirements of NASDAQ listing rules. Furthermore, in the past, following
periods of volatility in the market price of a public company’s securities, shareholders have frequently instituted securities
class action litigation against that company. Litigation of this kind could result in substantial costs and a diversion of our
management’s attention and resources.
We may be precluded from paying any dividends
on our ADSs.
Under British Virgin Islands
law, we may pay dividends if the directors declare that the company is able to satisfy the provisions of Section 57 of the BVI
Act. Pursuant to this provision, the company, immediately after the distribution, must satisfy the solvency test, in so far as
its assets exceeds its liabilities, and the company must be able to pay its debts as they become due. Our ability to pay dividends
will therefore depend on our ability to generate sufficient profits. Even if we are able to pay dividends, we cannot give any assurance
that we will declare dividends of any amounts, at any rate or at all in the future. We have not paid any dividends in the past.
Future dividends, if any, will be at the discretion of our board of directors, subject to the approval of our shareholders, and
will depend upon our results of operations, our cash flows, our financial condition, the payment of our subsidiaries of cash dividends
to us, our capital needs, future prospects and other factors that our directors may deem appropriate. We currently intend to retain
most, if not all, of our available funds and any future earnings to operate and expand our business.
You may not have the same voting rights
as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.
Holders of our ADSs may
not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs
appoint the depositary or its nominee as their representative to exercise the voting rights attached to the ordinary shares represented
by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons
who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise your right to vote.
Your right to participate in any rights
offering may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical
to make them available to you.
We may from time to time
distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to
you in the United States unless we register the rights, and the securities to which the rights relate, under the Securities Act,
or unless an exemption from registration is available. Under the deposit agreement, the depositary will not make rights available
to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities
Act or exempt from registration. We are under no obligation to file a registration statement with respect to any such rights or
securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a
necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings
and may experience dilution in your holdings as a result.
The depositary of our ADSs
has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other
deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of
ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical
to make a distribution available to holders of ADSs. For example, the depositary may determine that it is not practicable to distribute
certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these
cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on
transfer of your ADSs.
Your ADSs are transferable
on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems
expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems
it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the
deposit agreement, or for any other reason.
If we are classified as a passive foreign
investment company, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any taxable
year, after applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of our assets
(generally based on average value determined on a quarterly basis) are held for the production of, or produce, passive income,
we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization
could result in adverse U.S. tax consequences to our U.S. shareholders, including gain realized on the disposition of our ADSs
or ordinary shares being treated as ordinary income rather than capital gain and in punitive interest charges being applied to
such sales proceeds. Rules similar to those applicable to dispositions apply to amounts treated as “excess distributions.”
We do not believe that
we were a PFIC for our 2016 taxable year. However, because the determination of our PFIC status is based on such factual matters
as the composition of our income and assets, the valuation of our assets, and our market capitalization, there is no assurance
that the United Stated Internal Revenue Service (“IRS”) will agree with our position. In addition, there can be no
assurance that we will not become a PFIC for the current taxable year ending December 31, 2017 or in future taxable years. U.S.
shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ADSs
or ordinary shares if we were to become a PFIC. See “Taxation — United States Federal Income Taxation — Tax Consequences
if We Are a Passive Foreign Investment Company.”
If equity research analysts do not publish
research or reports about our company or if they issue unfavorable commentary or downgrade our ADSs, the price of our ADSs could
decline.
The trading market for
our ADSs relies in part on the research and reports that equity research analysts publish about us and our company. We do not control
these analysts. The price of our ADSs could decline if one or more equity analysts downgrade our ordinary shares or if they issue
other unfavorable commentary, or cease publishing reports, about us or our company.
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ITEM 4.
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INFORMATION ON THE COMPANY
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4A. History and Development of the Company
We were incorporated under
the laws of the British Virgin Islands as Ultra Glory International Ltd., or Ultra Glory, in 2010. We operate under the BVI Business
Companies Act, 2004, or the BVI Act. Our registered office is located at Akara Bldg., 24 De Castro Street, Wickhams Cay 1, Road
Town, Tortola, British Virgin Islands. The telephone number of the registered office is +86 (21) 51192951. Our World Wide Web address
is http://www.osseninnovation.com. Information contained on our website does not constitute a part of this annual report.
Our agent for service of
process in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. The telephone number of our
agent for service is (212) 894-8940.
Business Combination
On July 7, 2010, Ultra
Glory and its sole shareholder entered into a share exchange agreement with Ossen Innovation Group, a British Virgin Islands limited
liability company organized on April 30, 2011 under the BVI Act and the shareholders of Ossen Innovation Group. Pursuant to the
share exchange agreement, Ultra Glory acquired from the shareholders of Ossen Innovation Group all of the issued and outstanding
shares of Ossen Innovation Group, in exchange for an aggregate of 10,000,000 newly issued ordinary shares issued by Ultra Glory
to the shareholders of Ossen Innovation Group. In addition, the sole shareholder of Ultra Glory sold all of the 5,000,000 ordinary
shares of Ultra Glory that were issued and outstanding prior to the business combination, to the shareholders of Ossen Innovation
Group for cash, at a price of $0.03 per share. As a result, the individuals and entities that owned shares of Ossen Innovation
Group prior to the business combination acquired 100% of the equity of Ultra Glory, and Ultra Glory acquired 100% of the equity
of Ossen Innovation Group. Ossen Innovation Group is now a wholly owned subsidiary of Ultra Glory. In conjunction with the business
combination, Ultra Glory filed an amended charter, pursuant to which Ultra Glory changed its name to Ossen Innovation Co., Ltd.,
changed its fiscal year end to December 31, changed the par value of its ordinary shares to $0.01 per share and increased its authorized
shares to 100,000,000. Upon the consummation of the business combination, we ceased to be a shell company.
Potential Acquisition of a New Business
In July 2016, we entered
into a non-binding letter of intent with America-Asia Diabetes Research Foundation , a California corporation that owns 90.27%
of the equity interests of San MediTech (Huzhou) Co. Ltd., a China-based medical device company engaged in the research, development
and marketing of glucose control products, and the shareholders of the Foundation. Pursuant to the LOI, we intend to acquire all
of the issued and outstanding equity interests of the Foundation in exchange for 81,243,000 of our ordinary shares. Upon completion
of the Acquisition, we would indirectly own 90.27% of San MediTech. San MediTech's proprietary Dynamic Glucose Monitoring System
provides continuous, real-time monitoring of glucose level in diabetes patients, with two patents granted in China and several
patents pending both in China and the U.S. DGMS has been approved by the China Food and Drug Administration and has entered into
clinical trials in the U.S. for DGMS.
In connection with the
Acquisition, we plan to sell our existing pre-stressed steel manufacturing business, including all existing liabilities, immediately
following the completion of the Acquisition. It is expected that an entity affiliated with Dr. Liang Tang, our Chairman, will acquire
all of the equity of our wholly-owned subsidiary, which indirectly owns all of our existing operating subsidiaries, in exchange
for the forfeiture and cancellation of all 11,889,500 ordinary shares currently held by Dr. Tang.
It is expected that if
such transactions are consummated as currently contemplated, our current shareholders, other than the Chairman, will own approximately
8.9% of our issued and outstanding ordinary shares following the consummation of such transactions and the Selling Shareholders
will own approximately 91.1% of the issued and outstanding ordinary shares.
The Acquisition and the
Sale Transaction are subject to due diligence investigations by the relevant parties, the negotiation and execution of definitive
agreements, our receipt of shareholder approval of the transactions and all necessary regulatory approvals, and the satisfaction
of other customary closing conditions. There can be no assurance that the Acquisition and the Sale Transaction will be completed
as proposed or at all. Both the Acquisition and the Sale Transaction would be subject to the satisfaction of various closing conditions.
Furthermore, even in the event that such transactions are completed, there can be no assurance that such transactions will be completed
on the same terms as those described above. In the event that such transactions are consummated, the interests of our existing
shareholders would be substantially diluted.
Capital Expenditures
We incurred capital expenditures
of approximately $17,537, $29,687 and $81,441 for the years ended December 31, 2016, 2015 and 2014, respectively, primarily in
connection with maintenance and repair of current production lines. These capital expenditures were financed by proceeds from bank
financing and cash provided by operating activities.
Our capacity expansion
to add 30,000 tons of annual production capacity for rare earth coated products has been indefinitely suspended due to an extended
unfavorable business climate, intense market competition and the uncertainty of financial markets in China.
We expect that our capital
expenditures in fiscal year 2017 will be incurred primarily in connection with maintenance and repair of current production
lines.
4B. Business Overview
Overview
We manufacture and sell
an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, which
we believe is the most comprehensive array among our competitors in China. Our materials are used in the construction of bridges,
highways and other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province
and in Jiujiang City, Jiangxi Province, in the People’s Republic of China. Based on our extensive experience in the industry,
we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized
prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects in China.
During the year ended December
31, 2016, we generated revenue of approximately $101.4 million, or 86.6% of our total revenue (as compared to $85.0 million, or
72.1% of our total revenue, in 2015), from sales of our rare earth coated PC wires and PC strands. We believe that we are the only
prestressed steel material manufacturer in the PRC that currently manufactures rare earth coated materials for bridge construction.
While we believe that our
rare earth coating capabilities provide us with a competitive advantage among our competitors due to higher strength and higher
quality, it is likely that our competitors will seek to develop similar competing products in the near future. We intend to continue
to expand research and development efforts to advance our rare earth coating applications even further. In particular, we continued
to develop a rare earth coating application for zinc-aluminum alloy coated products in 2016, which are more corrosion-resistant
than zinc coated products. However, there can be no assurance that our initial competitive advantage will be retained and that
one or more competitors will not develop products that are equal or superior to ours in quality or are better priced than our rare
earth coated products. Furthermore, in both 2015 and 2016, the average margin for our coated products was lower than the average
margin for our plain surface products. In 2015, it was mainly because the average price of the raw materials purchased for our
coated products did not decline as steeply as the average price of the raw materials purchased for our plain surface products,
while in 2016 it was mainly because the average price of the raw materials purchased for our coated products increased more than
the average price of the raw materials purchased for our plain surface products.
The primary characteristics
of our rare earth coated products, which are used primarily in the construction of new bridges and the renovation of older bridges
in need of repair, are as follows:
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Superior corrosion resistance;
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Superior toughness and plasticity;
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Endurance against extreme heat;
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Smooth and appealing coating; and
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Our products are marketed
under the “Ossen” brand name both domestically and internationally. We handle all aspects of market research, product
design, engineering, manufacturing, sales and marketing. We conduct our manufacturing operations in our ISO 9001 manufacturing
facilities in Maanshan City and Jiujiang City, in the PRC.
Our capacity expansion
to add 30,000 tons of annual production capacity for rare earth coated products has been indefinitely suspended due to an extended
unfavorable business climate, intense market competition and the uncertainty of financial markets in China.
In 2013, the Chinese
market began to adopt zinc-aluminum alloy coated PC wires and PC strands, which have more corrosion-resistance and stronger
protective effect than zinc coated PC wires and PC strands. Our research and development department is currently developing a
method to apply rare earth materials to the zinc-aluminum alloy coating process. In 2014, 2015 and 2016, we have made
progress in developing such product and we will continue our research and development efforts in 2017. We anticipate that
additional time will be necessary for such products to pass government inspection and to gain acceptance in the market.
Ossen Materials, our operating
subsidiary, was founded in 2004. In 2005, we expanded our manufacturing capabilities by acquiring a facility in Jiujiang City in
the PRC and forming Ossen Jiujiang. The founders of Ossen were among the first in China to introduce and promote the use of prestressed
steel materials in construction projects. They have been involved in producing prestressed materials since 1994 and each has accumulated
more than 20 years of experience in the prestressed materials industry.
We are affiliated with
the Ossen Group, which is a Chinese conglomerate controlled by our Chairman, Dr. Tang. The Ossen Group’s core businesses
include steel manufacturing, real estate and other investments. There is no active business relationship between our company and
any of the other entities that comprise the Ossen Group other than what we have disclosed in Items 4.C and 7.B below.
Competitive Advantages
Our management believes
that the following competitive strengths differentiate us from other domestic and international competitors and are the key factors
to our success:
We are taking advantage of industry trends
in the bridge infrastructure sectors in the PRC and other international markets
Since 2012, China’s
economic growth slowed and the demand for prestressed materials in the infrastructure construction industry in the domestic PRC
market decreased. However, we believe there is still much room for growth in China’s infrastructure construction industry,
and in particular the construction and restoration of bridges in the PRC that would benefit from the quality and durability of
our rare earth coated prestressed materials.
We believe that the Chinese
central government will continue to maintain economic growth rate at 6-7% in the next two years by injecting capital into the economy
by funding new infrastructure projects. While we do not believe that the Chinese government will initiate another large scale,
comprehensive capital injection, we believe that infrastructure spending will be selectively targeted at developing regions in
Central or Western China. Furthermore, through the “One Belt, One Road” initiatives, announced in late 2013, and the
Asian Infrastructure Investment Bank launched in December 2015, investments are expected to be made during the next decade to construct
new bridges and new railroads. We believe that these developments should create bidding opportunities for us and we expect the
market will continue to recover gradually in 2017 and beyond.
Leading provider of customized prestressed steel materials
Based on our extensive
experience in the industry, we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture
and sale of customized prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects
in China. We manufacture and sell an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed
steel materials, which we believe is the most comprehensive array among our competitors in China and which are used in the construction
of bridges, highways and other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City,
Anhui Province and in Jiujiang City, Jiangxi Province, in the People’s Republic of China.
Strong in-house research and development capabilities
Our research and development
team consists of members recognized as industry experts in China, and each member of our senior management team has over 20 years
of industry experience on average. We have built a recognized brand name in the industry by introducing innovative solutions to
the prestressed materials industry, and particularly coated prestressed materials, in China and internationally. Our engineering
team works closely with our customers in order to understand their requirements. We have been able to introduce new equipment to
enhance cost saving and time reduction in the construction of bridges, highways, railways and buildings, as well as numerous other
projects.
Efficient proprietary production technology
We continually pursue technological
improvements to our manufacturing processes via our strong in-house development teams. We own thirty-one patents granted by the
State Intellectual Property Office of the PRC, including four invention patents and twenty-seven utility model patents as of April
1, 2017. In addition, we have applied for six invention and six utility model patents, which are currently pending. These patents
and patent applications are intended to protect our technologies, including production processes of various wire ropes, pickling
methods for steel wire materials and devices designed for the production of steel wire. Our research and development efforts have
generated technological improvements that have been instrumental in controlling our production costs and increasing our operational
efficiency, most notably with respect to the development of our rare earth coated materials.
Strong recognition from domestic and international customers
for supplying materials for infrastructure projects
The solid reputation that
our management team has developed over the past 20 years in the prestressed material industry in China and in other countries such
as Canada, the United States, Japan, South Korea, Bangladesh, South Africa, Italy and Spain, including an established track record
for consistently providing quality products at competitive prices, has enabled us to develop a strong customer base and to be involved
in major building projects.
We generated approximately
4.2% and 6.6%, respectively, of our revenue during the years ended December 31, 2016 and 2015 from sales to customers in international
markets (including primarily Japan, Vietnam, South Korea, New Zealand, Australia, Bangladesh, Chile, Costa Rica, and Brunei), primarily
for use in the construction of bridges. Due to the anti-dumping measures imposed by the United States and European Union and increased
demand for our products in the PRC market and these other markets, we do not intend to reestablish a presence in the United States
or the European Union at the levels we experienced in 2008 in the near future. However, if opportunities arise in the U.S. or EU
markets or in other international markets for us to win bids on projects or to reengage with former customers or establish relationships
with new customers, we would pursue such opportunities.
Rigorous quality control standards
Consistent with our continuing
commitment to quality, we impose rigorous quality control standards at various stages of our production process. We strictly comply
with various national and international quality standards with respect to the manufacture of prestressed materials. Our certifications
and accreditations include the Japanese Industrial Standards (JIS) certification, United Kingdom Accreditation Service (UKAS),
the Korean Standards Association (KS) certification from South Korea and an ISO 9001 certification. We believe that these certifications,
together with the numerous national awards that we have been awarded demonstrate our commitment to producing high-quality products
as well as providing us with a competitive advantage over some of our competitors in certain international markets and in China.
Experienced management and operational teams with domestic
PRC international market knowledge
Our senior management team
and key operating personnel have extensive management skills, relevant operating experience and industry knowledge. In particular,
Dr. Tang, our Chairman, is a Doctor of Economics, Senior Engineer and Professor of Finance and Statistics at the School of East
China Normal University, and has extensive experience managing and operating companies in the prestressed steel industry. We believe
our management team’s experience and in depth knowledge of the market in China and internationally will enable us to continue
to successfully execute our expansion strategies. In addition, we believe our management team’s strong track record will
enable us to continue to take advantage of market opportunities that may arise.
Our Products
Our prestressed steel materials
are categorized as plain surface products and coated products.
Plain Surface Products
Our plain surface products,
which term refers to our uncoated plain surfaced and stabilized products, are characterized as follows:
|
·
|
Plain surface prestressed concrete, or PC, strands. These products consist of PC wires that are
twisted into a bundle and used in precast concrete plates on the riding surface of bridges. These products are categorized based
on size, strength and structure. Sizes range from 9.3mm to 17.8mm. Strength level ranges from 1570MPa (megapascal) to 2000MPa.
The number of strands in the products varies between 3 and 7.
|
|
·
|
Unbonded plain surface PC strands. These products consist of plain surface PC strands that are
coated with grease and extruded with high-density polyethylene. These products are used primarily in the construction of bridges
and buildings.
|
|
·
|
PC wires, also referred to as stabilized materials. These products are further divided among the
following three categories:
|
|
§
|
Plain surface PC wires. This product consists of an individual round wire used in the construction
of buildings.
|
|
§
|
Indented PC wires. This product consists of an individual round wire that contains an indentation
used in the construction of buildings.
|
|
§
|
Helical (spiral) rib PC wires. This product consists of an individual round wire whose surface
is pulled out into a helical rib pattern used in the construction of railway ties, or sleepers, and buildings.
|
PC wires are categorized
based on size, strength and structure. Sizes range from 4.0mm to 9.0mm. Strength level ranges from 1570MPa to 2000MPa. The number
of strands in the products varies between 3 and 7.
Coated Prestressed Products
Our coated prestressed products
included zinc coated PC products and rare earth coated PC products. Rare earth coated products are plain surface materials that
are zinc coated with a rare earth zinc-plating protective layer so as to produce materials that are more corrosion-resistant and
long-lasting. The purpose of galvanizing is to generate a surface layer to protect the materials from erosion, abrasion and oxidization,
without changing the elements of the basic materials or weakening the basic material’s strength or other functionality through
any techniques that utilize physical chemistry or electrochemistry. The coating process can cause loss of strength in regular steel
materials, but the loss of strength in rare earth coated prestressed products is reduced.
For steel wires and strands,
coating can provide a protective layer to improve the product’s corrosion-resistant level and increase its life span. Traditional
technology uses zinc as the coating material and such products are called zinc coated PC wires and PC strands. The introduction
of rare earth coating technology adds more benefits to the final products. When rare earth is added into the coating material and
form a new alloy with zinc, it increases further the life span of the product. More importantly, it reduces the loss of strength
compared to traditional zinc coating process.
The coating process happens
in an environment with very high temperature. Because of the high temperature, there will be some loss of product strength during
the coating process. For example, if the steel wires to be used as raw material have a strength level of 2000 MPa (mega pascal),
its strength level will lose about 300 MPa after going through the traditional coating process. When zinc forms a new alloy with
rare earth and is used as a coating layer, the requirement of high temperature for processing could be lowered. Processing with
lower temperature results in less loss of product strength during the coating process. Therefore, the same raw material, if using
rare earth coating, could deliver higher strength final product. Compared with better corrosion-resistant level, longer life span,
higher strength level may be the most important benefit rare earth coated products bring to customers, as compared to zinc coated
products. Higher strength means less steel is needed to build the bridge. The bridge cables could be slimmer, quantity of steel
required for construction could be less and overall construction cost could be reduced.
Applications of zinc coated
PC wires and PC strands are similar to those of rare earth coated PC wires and PC strands, primarily in the construction of bridges.
The rare earth coated products could be considered as “upgraded version” of zinc coated products. Margin is affected
by market conditions. In general, gross margin of rare earth coated products is 1%-5% higher than similar zinc coated products.
The application of rare
earth coating technology enables our product to meet the higher standards of bridge project. We are and will continue to allocate
more resource on rare earth coated PC products.
Our rare earth coated products
are characterized as the following:
Rare earth coated PC wires.
These products are further divided as follows:
|
·
|
Ф5.0 Series, used for suspension bridges.
|
|
·
|
Ф7.0 Series, used for cable-stayed bridges.
|
Rare earth coated PC strands,
used for bridges and buildings.
Customers that purchase
our prestressed materials also purchase other supporting products, such as anchorage devices and ripple tubes, to complement our
materials. These supplementary products are produced by anchorage manufacturing factories that are unaffiliated with us.
Competition
China is one of the world’s
largest producers and markets for prestressed steel materials. In 2014, 2015 and 2016, our sales were predominantly to customers
located in the PRC, and as a result, our primary competitors were PRC domestic companies.
We believe that being located
in China provides us with a number of competitive factors within our industry, including the following:
|
·
|
Pricing.
Flexibility to control pricing of products and the ability to use economies of
scale to secure competitive pricing advantages;
|
|
·
|
Technology.
Ability to manufacture products efficiently, utilize low-cost raw materials,
and to achieve better production quality; and
|
|
·
|
Barriers to entry.
Technical knowledge, access to raw materials, local market knowledge
and established relationships with suppliers and customers to support the development of commercially viable production facilities
and products.
|
Competition among manufacturers
of plain surface steel products in China can be characterized as fragmented, with many large and small companies competing with
each other. Our primary competitors for these products are Baosteel Group Shanghai Ergang Co. Ltd., Jiangyin Fasten Steel Products
Co., Ltd., Jiangyin Walsin Steel Cable Co. Ltd., Jiangxi Xinhua Steel Cable Co. Ltd. and Silvery Dragon Co., Ltd.
Competition among PRC manufacturers
of zinc coated prestressed products in China is limited to only four companies. Our main competitors for these products are Baosteel
Group Shanghai Ergang Co. Ltd., Shuangyou Eaststeel and Jiangyin Walsin Steel Cable Co. Ltd. Furthermore, we believe that we are
the only Chinese rare earth coated prestressed material manufacturer. While we believe that our rare earth coating capabilities
provide us with a competitive advantage among our competitors, it is likely that our competitors will seek to develop similar competing
products in the near future. We intend to continue to expand research and development efforts to advance our rare earth coating
applications even further. In particular, we continued to develop a rare earth coating application for zinc-aluminum alloy coated
products, which are more corrosion-resistant than zinc coated products in 2016. However, there can be no assurance that our initial
competitive advantage will be retained and that one or more competitors will not develop products that are equal or superior to
ours in quality or are better priced than our rare earth coated products.
We believe that we differentiate
ourselves because we have built a recognized brand name in the industry and because we offer superior product quality, timely delivery
and high value. We believe that we have the following advantages over many of our competitors:
|
·
|
the performance and cost effectiveness of our products;
|
|
·
|
our ability to manufacture and deliver products in required volumes, on a timely basis, and at
competitive prices;
|
|
·
|
superior quality and reliability of our products;
|
|
·
|
our after-sale support capabilities, from both an engineering and an operational perspective;
|
|
·
|
effectiveness of customer service and our ability to send experienced operators and engineers as
well as a seasoned sales force to assist our customers; and
|
|
·
|
overall management capability.
|
Seasonality
Demand for our products
remains fairly consistent throughout the year.
Our Raw Materials and Supply
Raw Materials
High carbon steel wire
rods are the primary raw material required to manufacture prestressed steel materials. The quality and cost of the rods we purchase
differ between our plain surface products and our rare earth and zinc coated products. Rare earth and zinc coated products require
higher-priced rods that are higher in purity and durability. The price for certain rods needed for coated products is higher than
rods needed for plain surface products.
Our Supply Sources
We select our suppliers
by assessing criteria such as the quality of materials supplied, the duration of the supplier’s business relationship with
us, pricing, delivery reliability and response time to orders placed by us. To minimize purchasing costs, we use a limited number
of suppliers. Because we purchase substantial quantities from these suppliers, we are often able to procure these products at competitive
prices. We usually enter into a one-year purchase agreement with each supplier and then order on a spot basis for each delivery.
We negotiate pricing with our suppliers on an arm’s length basis prior to the delivery of these supplies to us, based upon
the prevailing market prices at such time.
The suppliers that supplied
us with a significant percentage of our raw materials for the past three years were Jiangsu Shagang Group Co., Ltd., Jiangyin Runde
Logistics Co., Ltd., Beijing Baosteel Northern Trading Co., Ltd, Zhangjiagang Free Trade Zone,, and Shanghai Chemical Industry
Supply and Marketing Co., Ltd. and all are based in China.
Purchases from our five
largest suppliers amounted to 99.1%, 97.7% and 95.1% of our raw material purchases in 2016, 2015 and 2014, respectively.
We are not dependent on
any one of our suppliers, as we are able to source raw materials from alternative vendors should the need arise. We have not experienced
significant production disruptions due to a supply shortage from our suppliers, nor have we had any major dispute with a material
supplier.
Volatility of Price of Raw Materials
We have no long-term, fixed-price
steel purchase contracts. When steel prices increase competitive conditions will influence how much of the price increase we can
pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers,
the revenues and profitability of our business could be adversely affected. When steel prices decline, customer demands for lower
prices and our competitors' responses to those demands could result in lower sale prices, lower margins and inventory valued at
the lower of cost or market adjustments as we use existing steel inventory. Significant or rapid declines in steel prices or reductions
in sales volumes could result in us incurring inventory or goodwill impairment charges. Therefore, changing steel prices could
significantly impact our revenues, gross margins, operating income and net income. In 2016, Chinese Government continued its policy
to cut excessive industrial capacity and reform the supply-side of its economy. China has lowered steel production by about 90
million tons in the recent years and will push to cut a further 100 million to 150 million tons over the next 5 years, while strictly
controlling steel capacity increases, according to the Chinese government statement announced in January 2016. As a result, the
average price of steel products, including our products and principal raw materials, increased in 2016 and reached the highest
level in two and a half years. The shortage of coking coal, one of steelmaking raw materials, also led to higher prices. The average
selling prices of our products also increased in 2016 and with our advanced payment to suppliers, we were able to lock the raw
materials at a lower price, which resulted in higher margin in 2016. We expect steel demand will slightly outpace supply and steel
price will continue to rise in 2017.
Manufacturing Process
Equipment
Our production facilities
use innovative equipment and machinery imported from France and Italy and, we believe, is of the highest quality in metal wire
drawing, wire stranding, zinc plating and finishing. Our production lines produce prestressed steel materials that meet quality
standards mandated by numerous countries, including Japan, the United Kingdom and South Korea.
We own cutting edge technologies
in over 20 high-tech fields, including oil-immersion preservation technology, new coating production technology, skin pass coating
technology, coating stabilization technology, rare earth alloy plating technology, new high-temperature phosphorization heating
technology, new material traction technology, rare earth alloy technology, new fixed scoring technology, new high-temperature low-speed
thread stripping technology, and double coating stabilization, among others. We believe that we are the leading company in our
industry with respect to the implementation of innovative technologies in the manufacture of prestressed steel materials.
Production Process
The production of our products
involves various steps, including inspection, pickling, washing, rinsing, phosphatizing, boronizing, surface treatment, plating,
baking, coating, cooling, polishing, inspection and packaging. The technology and procedures used in the above processes vary among
the different products that we manufacture and depend upon the product specifications prescribed by a particular customer.
Generally, the manufacturing process involves
the following:
|
·
|
Cleaning steel wire rods or other similar raw materials by chemical pickling, mechanical de-scaling
or a similar process. The materials are then cold drawn and reduced until the desired diameter and resistance characteristics are
achieved. This process is what provides the material with its strength.
|
|
·
|
In the production of strands, the individual wires (either 3 or 7 wires) are braided together to
form a strand.
|
|
·
|
The final step is to subject the steel material to a thermo-chemical process which endows the material
with mechanical properties, such as low relaxation, which enable the material to last over time.
|
Production Lines
We currently have 18 production
lines, consisting of the following:
|
·
|
Two surface treatment production lines, one located in our Maanshan facility and one in our Jiujiang
facility, each composed of an acid pickling bath, rinsing bath, high pressure water rinsing bath, phosphating bath, saponification
(boronizing) bath and cleaning bath.
|
|
·
|
Seven wire drawing production lines, four located in our Maanshan facility and three in our Jiujiang
facility, each composed of a pay-off machine, drawn can and take-up machine. Each of our half-finished products is processed on
a wire drawing production line.
|
|
·
|
Three PC strand stabilization treatment production lines, two located in our Maanshan facility
and one in our Jiujiang facility, each composed of stranding machines, straightening wheels, jockey wheels, medium frequency furnace,
cooling tank, take-up and pay-off machines, a wire arraying machine and a layer winding machine. The PC strand stabilization product
lines in our Jiujiang facility produce plain surface PC strands and zinc coated PC strands of various specifications.
|
|
·
|
One zinc galvanization production line, located in our Jiujiang facility, composed of a pay-off
machine, degreasing furnace, acid rinsing pickling tank, assistant plating tank, drying furnace, galvanizing furnace, drawing tower
and take-up machine. Half-finished products needed for different series of zinc coated PC wires and strands are produced on this
line.
|
|
·
|
Two surface finishing production lines, both located in our Jiujiang facility, each composed of
a pay-off machine, a finishing machine and a take-up machine. These production lines are used to produce half-finished products
of zinc coated PC wires and strands.
|
|
·
|
Two PC wire stabilization treatment production lines, both located in our Jiujiang facility, each
composed of a pay-off machine, jockey wheel, straightening machine, indent marking machine, medium frequency furnace, cooling tank,
towing machine, shearing machine and take-up machine. Zinc coated PC wires, round PC wires, indented PC wires and helical rib PC
wires are produced on these production lines.
|
|
·
|
One unbonded PC strand production line, located in our Jiujiang facility, composed of a pay-off
machine, oiling machine, high-density polyethylene plastic injection machine, water tank, towing machine and take-up machine. This
production line is used to produce different series of unbonded plain surface PC strands and unbonded zinc coated PC strands.
|
Quality Control
Consistent with our continuing
commitment to quality, we impose rigorous quality control standards at various stages in the production process. In addition, our
facilities are equipped with first-class testing equipment, such as a tensile strength tester and a relaxation tester, which guarantee
the high quality and safety of our products.
We strictly comply with
various national and international quality standards with respect to the manufacture of pre-stressed materials. Our certifications
and accreditations include the Japanese Industrial Standards (JIS) certification, United Kingdom Accreditation Service (UKAS),
the Korean Standards Association (KS) certification from South Korea and an ISO 9001 certification.
Our procedure when discovering
any product quality problem in the production process includes immediate shut down for inspection. Once the problem is solved,
we continue with production. If a problem occurs with a product, the product inspector stamps a nonconformity seal and hangs a
nonconformity label on the problematical product. The nonconforming product is moved to a separate area and is not transferred
to the next procedure. We do not deliver nonconforming products to users.
Sales, Marketing and Distribution
Sales and Marketing
We have been successful
to date in maintaining long-term relationships with numerous customers by satisfying their commercial needs. In addition, our marketing
team monitors the market and responds accordingly in order to increase our customer base. We have a dedicated marketing and sales
team of 9 employees that proactively follows up on new sales leads.
Our marketing team develops
strategies for the short-term and long-term by obtaining first-hand information about our products’ market positioning, monitoring
national macro-economic policies, inquiring about current and future market needs, following the progress of existing projects
and the satisfaction of existing customers. In addition, our technicians and marketing specialists regularly visit governmental
departments, construction development companies, design institutes, supervision institutions, national construction quality inspection
institutions and builders to promote new products. We have also joined the PRC national bridge exhibition for marketing purposes.
Bidding Process
Many of the projects in
our industry are awarded through a competitive bidding process among qualified bidders. The evaluation of proposals is undertaken
objectively, consistently and without bias towards particular bidders. Qualified bidders are evaluated against a predetermined
set of criteria, and contracts are almost never awarded on the basis of price alone. A contract is awarded to the bidder or bidders
that provide what is considered a proposal that offers the best value to the purchaser, as determined by the predetermined criteria
set by the purchaser. The criteria vary depending on the type of contract. Examples of criteria include price, technical merit,
flexibility to future changes to requirements, speed of product delivery, sustainability and quality. During the bid evaluation
process, our marketing team and members of our management respond to various inquiries and our company undergoes various assessments,
including compliance, technical, commercial bid and qualification assessments.
Since 2013, approximately
one-third of the coated product projects and all of the plain surface product projects on which we bid have required an up-front,
refundable cash deposit. However, during this time period, local banks have generally maintained tighter lending policies than
in the past, thereby limiting our ability to win bids that we believe we otherwise could have won. We selectively put down cash
deposit for projects that we believed we could win and generate higher profit.
Distribution
Both of our manufacturing
plants are equipped with facilities for cargo lifting, shipment and distribution. Products for domestic customers are distributed
to the destination designated by our customers. Products for international customers are delivered either to carriers at various
ports of exit in China or delivered to a designated destination overseas.
Technical After-Sales Services
Our team of experienced
engineers and technicians provides after-sales services to our customers. After the delivery of our materials, our engineers train
our customers to install and identify and address safety and maintenance concerns. After a sale of our product, we introduce and
advertise the company brand position, distribute a guide application method process, issue regulation manuals, and explain and
solve general and difficult problems. All technical after-sales services are provided to our customers free of charge.
Our Customers
We sell the vast majority
of our products domestically in China. Since our inception, we have also exported our products to foreign countries, including
the United States, Canada, Spain, Japan, South Korea, Taiwan, Australia, South Africa and Saudi Arabia, among others. Our customers
are diverse in nature, as we sell our products directly to end users, to other manufacturers and to distributors, in each case
depending on the nature of the product and the utilization of the product.
While we value our relationship
with each of our customers, we believe that generally the loss of any particular customer, including our largest customers, would
not materially impact our business in the long-term. Many of our customer contracts relate to designated infrastructure projects
which are performed during a defined period of time, and are not necessarily long-term in nature. Accordingly, if any of our customers
were to discontinue purchasing our products, we would actively seek new customers, which we have been successful doing in the past.
In 2016, 2015 and 2014,
sales to our six largest customers, in the aggregate, accounted for approximately 81.4%, 79.5% and 74.9% of our total sales, respectively.
The following table provides the name of each customer that contributed to 10% of our revenues in each of 2014, 2015 and 2016 and
the percentage of our revenues generated from such customers during these periods.
Name of Customer
|
|
2016 Revenues
|
|
|
2015 Revenues
|
|
|
2014 Revenues
|
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
Zhangjiagang Shajing Iron and Steel Trading Co., Ltd.**
|
|
|
43.52
|
%
|
|
|
22.7
|
%
|
|
|
*
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jiangsu Jinrun Steel Cable Co., Ltd.
|
|
|
*
|
|
|
|
*
|
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wuhan Weikaer Steel Wire Product Co., Ltd.
|
|
|
10.2
|
%
|
|
|
12.1
|
%
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhejiang Kexin Engineering Material Co., Ltd.
|
|
|
*
|
|
|
|
*
|
|
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wuhan Steel & Iron Jiangbei Group Metal Products Co., Ltd.
|
|
|
*
|
|
|
|
15.1
|
%
|
|
|
16.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wuhan Xianggang Metal Products Co., Ltd.
|
|
|
10.1
|
%
|
|
|
16.2
|
%
|
|
|
*
|
|
* Less than 10% of our annual revenues.
** Zhangjiagang Ruifeng Iron and Steel Co., Ltd. changed its name
to Zhangjiagang Shajing Iron and Steel Trading Co., Ltd. in 2013.
The following table describes
the breakdown of our sales in 2016, 2015 and 2014 between our domestic and international customers.
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic Sales
|
|
$
|
112,119,286
|
|
|
$
|
110,109,028
|
|
|
$
|
115,256,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Sales
|
|
|
4,909,868
|
|
|
|
7,799,388
|
|
|
|
8,315,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
117,029,154
|
|
|
$
|
117,908,416
|
|
|
$
|
123,571,455
|
|
Research and Development
Our research and development
efforts are focused on three objectives:
|
·
|
Superior product safety and quality;
|
|
·
|
Reduction of operating costs; and
|
|
·
|
Sustaining growth through the development of new products.
|
We have a research and
development team at each of our facilities. In total, nineteen employees are dedicated to research and development. We spent $3.9
million, $3.4 million and $3.9 million in 2016, 2015 and 2014, respectively, on our research and development activities to customize
products for new or existing customers and develop new products such as rare earth zinc-aluminum coated products. The nature of
our research and development activities needed for our product development is generally not cash intensive. In addition, a portion
of the work is conducted by organizations and universities with which we have a collaborative relationship.
We regularly train the
members of our research and development department in order to consistently enhance our research and development capabilities in
the field of coating technology. We have developed a business model that involves a very close interrelationship between our research
and development department and our product development and marketing departments. As a result, we focus our research and development
activities on projects that would enable us to branch out our products into new desired markets. In addition, we conduct research
and development activities that enable us to increase our market share in existing markets in the PRC and internationally. We also
focus certain of our research and development activities on higher margin products that can be sold to customers in international
markets.
Specifically, we have entered
into cooperation agreements with Jiujiang Institute pursuant to which the institute assists us in our efforts to improve the comprehensive
function and manufacturing technique of our high strength, anti-erosion zinc coated prestressed strands. These high strength products,
which have high endurance against erosion, are sold domestically and internationally. In addition, we are cooperating with other
steel manufacturers in research efforts regarding zinc coated PC wires, which serve as raw materials for our zinc coated PC strands,
indented PC wires and helical rib PC wires with high performance and are designed for our international customers.
We entered into an agreement
with the Shanghai Machinery Manufacturing Technology Research Institute in 2000 and pursuant to this agreement, we established
a joint laboratory to design high strength, indented PC wire and zinc coated PC wire according to our specifications or requirements
of our customers. These customized products designed by our joint laboratory can reduce customer costs by improving the efficiency
of the use of raw materials. This cooperation is a mutually beneficial and there is no fee for the research and laboratory results.
We believe that our research
and development activities and production technology for rare-earth zinc coated materials have contributed significantly to our
growth. By using rare earth zinc-plating technology, we are able to lower the temperature for the stabilizing treatment during
the production process and thereby minimize the loss of strength during the stabilizing process. As a result, this technology reduces
the level of strength required of our raw materials under circumstances of unvaried finished product strength requirement and enables
us to produce materials with greater strength under circumstances in which the strength of raw materials remains firm. We believe
that we are the only enterprise which can produce rare-earth zinc coated pre-stressing materials of 1,860 megapascal strength level
and 15.20 mm diameter in the world, as a result of our rare earth zinc-plating technology. We will continue our research and development
efforts to improve the strength and stability of such product.
We plan to continue our
research and development efforts to strengthen our leading position in our industry. In 2014, we developed 12.7 mm 2060 mPa ultra
high strength and low relaxation prestressed strands. Our research and development team also upgraded the heating method of acid
pickling process, the circulating cooling water system of steel wire stabilization production line, and the winding system of coated
steel wire. In addition, we are working on developing a production line with annual output of 5,000 tons of ultra high strength
steel wire and strand and have broken through several technical difficulties to date. We also own or lease various technologies
that improve the quality of our products and reduce our operating costs, including coating polished technology, stabilizing treatment
technology for dual tension gear zinc coated prestressing material, warning technology for missing plating of coating production
line, stranded wire greasing technology, water cut-off technology by strander infrared temperature detection and other core technologies.
Since 2013, the Chinese
market began to adopt zinc-aluminum alloy coated PC wires and PC strands, which have more corrosion-resistance and stronger protective
effect than zinc coated PC wires and PC strands. Zinc-aluminum alloy layer (coating containing 5% Al and 95% Zn) has better plastic,
adhesion, and corrosion resistance, and thus its corrosion resistance property is unchanged before and after the deformation. Its
resistance to atmospheric etching characteristics is better than zinc and rare earth coated products, and still has good coating
properties. The alloy layer of such products has long-term stability. Although we are able to produce zinc-aluminum alloy coated
PC wires and PC strands, we are trying to develop the method to apply rare earth in zinc-aluminum alloy coating process, which
will result in less loss of product strength during the coating process and higher strength final product.
Intellectual Property
We rely on a combination
of patents, trademarks, domain names and confidentiality agreements to protect our intellectual property. Our manufacturing processes
are based on technology developed primarily in-house by our research and development and engineering personnel.
With respect to proprietary
know-how that is not patentable and processes for which patents are difficult to enforce, we rely on, among other things, trade
secret protection and confidentiality agreements to safeguard our interests. All of our research and development personnel have
entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection
issues and require our associates to assign to us all of the inventions, designs and technologies they develop during the course
of employment with us. We are not aware of any material infringement of our intellectual property rights.
Patents
As of April 1, 2017, we
have thirty-one patents registered with the State Intellectual Property Office of the PRC, including four invention patents and
twenty-seven utility model patents. In addition, we have applied for an additional six invention and six utility model patents
as of April 1, 2017.
During 2016 and the first
quarter of 2017, two pending utility model patents and one pending invention patent were approved by the State Intellectual Property
Office.
Actual examination times
for patent applications in China vary, but examinations of similar patent applications have taken approximately one year. These
patents and patent applications are intended to protect the production processes of various wire ropes, pickling methods of materials
of steel wire and devices designed for the steel wire production. The term of all of the utility model patents is ten years from
the filing of the application and the term of all of the invention patents is twenty years from the filing of the application.
We currently do not have any patents registered or pending in any jurisdiction outside of the PRC.
The following table provides
the name, the application number or patent number, the name of the applicant or patent holder and the status of our registered
invention patents and each of our invention patent applications, and the expiration date of our registered invention patent:
Name
|
|
Application No.
/Patent No.
|
|
Applicant
/Patent
Holder
|
|
Status
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
Stabilizing Process of Indented Wire
|
|
ZL200710157149.0
|
|
Ossen Jiujiang
|
|
Registered
|
|
11/22/2027
|
Method to Change the Length of Waste of Stranded Wire Joint
|
|
ZL200910144241.2
|
|
Ossen Materials
|
|
Registered
|
|
7/26/2029
|
Production Process of Zinc Coated Steel Wire
|
|
ZL201010105179.9
|
|
Ossen Jiujiang
|
|
Registered
|
|
2/2/2030
|
Re-processing Technology of Galvanized Steel Wire
|
|
ZL201310137387.0
|
|
Ossen Jiujiang
|
|
Registered
|
|
4/18/2033
|
The following table provides
the name, the application number or patent number, the name of the applicant or patent holder and the status of each of our registered
utility model patents and utility model patent applications, and the expiration dates of our registered utility model patents:
Name
|
|
Application No.
/Patent No.
|
|
Applicant
/Patent
Holder
|
|
Status
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
Oiling Device for PC Strand
|
|
ZL200820185079.x
|
|
Ossen Materials
|
|
Registered
|
|
08/21/2018
|
|
|
|
|
|
|
|
|
|
Infrared Safety Control Device for Lift Truck
|
|
ZL200820185081.7
|
|
Ossen Materials
|
|
Registered
|
|
08/21/2018
|
|
|
|
|
|
|
|
|
|
Device Designed to Control Smoke by Temperature
|
|
ZL200820185082.1
|
|
Ossen Materials
|
|
Registered
|
|
08/21/2018
|
|
|
|
|
|
|
|
|
|
Device Designed to Control Water Temperature When Phosphatizing the PC Strand
|
|
ZL200920233724.5
|
|
Ossen Materials
|
|
Registered
|
|
07/29/2019
|
|
|
|
|
|
|
|
|
|
Device for Testing Center Steel Wire Broken for Stranded Wire
|
|
ZL200920233725.x
|
|
Ossen Materials
|
|
Registered
|
|
07/29/2019
|
|
|
|
|
|
|
|
|
|
Device Designed to Test Temperature of Steel Wire When Drawing the Stranded Wire
|
|
ZL200920233726.4
|
|
Ossen Materials
|
|
Registered
|
|
07/29/2019
|
|
|
|
|
|
|
|
|
|
Steel Wire Joint Machine with Pressure Detecting Function
|
|
ZL200920233728.3
|
|
Ossen Materials
|
|
Registered
|
|
07/29/2019
|
|
|
|
|
|
|
|
|
|
Automatic Paper Rolling Device of Asphalt Paper
|
|
ZL200920233729.8
|
|
Ossen Materials
|
|
Registered
|
|
07/29/2019
|
|
|
|
|
|
|
|
|
|
Aerial Overhaul Platform for Forklift
|
|
ZL200920233730.0
|
|
Ossen Materials
|
|
Registered
|
|
07/29/2019
|
Name
|
|
Application No.
/Patent No.
|
|
Applicant
/Patent
Holder
|
|
Status
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
Skid Used When Packing PC Strand
|
|
ZL200920233731.5
|
|
Ossen Materials
|
|
Registered
|
|
07/29/2019
|
|
|
|
|
|
|
|
|
|
Inductive Water Saving Device
|
|
ZL201220218155.4
|
|
Ossen Materials
|
|
Registered
|
|
06/25/2021
|
|
|
|
|
|
|
|
|
|
Anti-Impact Gear
|
|
ZL201220217756.3
|
|
Ossen Materials
|
|
Registered
|
|
06/23/2021
|
|
|
|
|
|
|
|
|
|
Lock Device for PC Strand Production Wheel
|
|
ZL201220218156.9
|
|
Ossen Materials
|
|
Registered
|
|
06/25/2021
|
|
|
|
|
|
|
|
|
|
New Dies for Wire Drawing
|
|
ZL201320723167.7
|
|
Ossen Materials
|
|
Registered
|
|
12/24/2022
|
|
|
|
|
|
|
|
|
|
Energy-saving Device for Acid Mist Drainage
|
|
ZL201320722838.8
|
|
Ossen Materials
|
|
Registered
|
|
12/24/2022
|
|
|
|
|
|
|
|
|
|
Cold Assembly Mould
|
|
ZL201420023335.0
|
|
Ossen Materials
|
|
Registered
|
|
1/14/2024
|
|
|
|
|
|
|
|
|
|
Prestressed Strand Spreader
|
|
ZL201420023447.6
|
|
Ossen Materials
|
|
Registered
|
|
1/14/2024
|
|
|
|
|
|
|
|
|
|
Pickling Pool Electric Heating Control System
|
|
ZL201620087931.4
|
|
Ossen Materials
|
|
Registered
|
|
1/26/2026
|
|
|
|
|
|
|
|
|
|
Air Compressor Motor Protection System
|
|
ZL201620087953.0
|
|
Ossen Materials
|
|
Registered
|
|
1/26/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furnace for Zinc Coating Process
|
|
ZL201320200197.4
|
|
Ossen Jiujiang
|
|
Registered
|
|
4/18/2023
|
|
|
|
|
|
|
|
|
|
Actinomycetes Machine Discharge Line Protection Devices
|
|
ZL201320200077.4
|
|
Ossen Jiujiang
|
|
Registered
|
|
4/18/2023
|
|
|
|
|
|
|
|
|
|
Strand Actinomycetes Devices
|
|
ZL201320200171.X
|
|
Ossen Jiujiang
|
|
Registered
|
|
4/18/2023
|
|
|
|
|
|
|
|
|
|
Cooling Device with Distilled Water for Medium Frequency Furnace
|
|
ZL201320199776.1
|
|
Ossen Jiujiang
|
|
Registered
|
|
4/18/2023
|
|
|
|
|
|
|
|
|
|
U-shape Hot Galvanizing Furnace
|
|
ZL201420532006.9
|
|
Ossen Jiujiang
|
|
Registered
|
|
9/16/2024
|
Plastic Particle Drying Mixer
|
|
ZL201420798062.7
|
|
Ossen Jiujiang
|
|
Registered
|
|
12/16/2024
|
|
|
|
|
|
|
|
|
|
Multi-functional Line Traction Machine for Steel Wire Stabilization Processing Production Line
|
|
ZL201420798307.6
|
|
Ossen Jiujiang
|
|
Registered
|
|
12/16/2024
|
|
|
|
|
|
|
|
|
|
Dust Removing Device for Surface Treatment for Drawing Steel Wire
|
|
ZL201420798232.1
|
|
Ossen Jiujiang
|
|
Registered
|
|
12/16/2024
|
Trademarks
We have been granted a
total of five trademarks, three of which are registered trademarks in the PRC and two of which are registered with the World Intellectual
Property Organization (WIPO) in accordance with Madrid Agreement. The five trademarks which are described in the table below were
transferred by Shanghai Ossen Investment Co., Ltd. to Ossen Materials in 2008 and 2009.
Name of Trademark
|
|
Application No.
/Trademark No.
|
|
Applicant
/Trademark
Holder
|
|
Status
|
|
|
|
|
|
|
|
A Figurative Trademark (Registered under Madrid Agreement )
|
|
0973552
|
|
Ossen Innovation Materials
|
|
Registered
|
|
|
|
|
|
|
|
“OSSEN” (Registered under Madrid Agreement )
|
|
0945308
|
|
Ossen Innovation Materials
|
|
Registered
|
|
|
|
|
|
|
|
A Figurative Trademark (PRC Domestic Registered)
|
|
4396898
|
|
Ossen Innovation Materials
|
|
Registered
|
|
|
|
|
|
|
|
“OSSEN” (PRC Domestic Registered)
|
|
4396895
|
|
Ossen Innovation Materials
|
|
Registered
|
|
|
|
|
|
|
|
“
” (PRC Domestic Registered)
|
|
4396896
|
|
Ossen Innovation Materials
|
|
Registered
|
Environmental Matters
The Environmental Protection
Law, promulgated by the National People’s Congress on December 26, 1989, is the primary law for environmental protection
in China. The law establishes basic principles for coordinated advancement of economic growth, social progress and environmental
protection, and defines the rights and duties of governments at all levels. Local environmental protection bureaus may set stricter
local standards than the national standards and enterprises are required to comply with the stricter of the two sets of standards.
Due to the nature of our business, we produce certain amounts of waste water, gas and solid waste materials during the course of
our production. We believe that we are in compliance in all material respects with applicable PRC laws and regulations. All of
our products meet the relevant environmental requirements under PRC laws and during the three years ended December 31, 2016, 2015
and 2014, we were not subject to any fines or legal action involving non-compliance with any relevant environmental regulation,
nor are we aware of any threatened or pending action, including by any environmental regulatory authority.
Governmental Regulations
Business license
Any company that conducts
business in the PRC must have a business license that covers a particular type of work. Our business license covers our present
business of manufacturing, processing, procuring and selling metallic materials, metallic products, new alloy materials, rare earth
application products, building materials, general machinery and related products. Prior to expanding our business beyond that of
our business license, we are required to apply and receive approval from the PRC government.
Employment laws
We are subject to laws
and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety conditions,
citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations, which may require
substantial resources for compliance. China’s National Labor Law, which became effective on January 1, 1995, and China’s
National Labor Contract Law, which became effective on January 1, 2008, permit workers in both state and private enterprises in
China to bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be
developed through collaboration between the labor union (or worker representatives in the absence of a union) and management that
specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types
of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract.
Patent protection in China
The PRC has domestic laws
for the protection of copyrights, patents, trademarks and trade secrets. The PRC is also signatory to some of the world’s
major intellectual property conventions, including:
|
·
|
Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4,
1980);
|
|
·
|
Paris Convention for the Protection of Industrial Property (March 19, 1985);
|
|
·
|
Patent Cooperation Treaty (January 1, 1994); and
|
|
·
|
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
|
Patents in the PRC are
governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of
the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003, respectively.
The PRC is signatory to
the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application
for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during
the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).
The Patent Law covers three
kinds of patents - patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first
to file, which means that a patent may be granted only to the person who first files an application. Consistent with international
practice, the PRC allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness
and practical applicability only. For a design to be patentable it cannot be identical with, or similar to, any design which, before
the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country,
and should not be in conflict with any prior right of another.
Value added tax
Pursuant to the Provisional
Regulation of China on Value Added Tax and their implementing rules, all entities and individuals that are engaged in the sale
of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay
VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Furthermore,
when exporting goods, the exporter is entitled to a portion, or in some instances all, of the VAT refund that the exporter previously
paid.
Foreign currency exchange
Under the PRC foreign currency
exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends,
interest payments, and trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items,
such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval
of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may buy, sell and/or remit foreign currencies
only at those banks authorized to conduct foreign exchange business, after providing valid commercial documents and, in the case
of capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside
of China are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the State Reform and Development
Commission.
Mandatory statutory reserve and dividend
distributions
Under applicable PRC regulations,
foreign-invested enterprises in China may pay dividends out of their accumulated profits only, if any, as determined in accordance
with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside at
least 10% of its after-tax profit based on PRC accounting standards each year for its general reserve until the cumulative amount
of such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors
of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of liquidation.
Employees
As of December 31, 2016,
2015 and 2014, we had 191, 204 and 201 full-time employees. As of April 1, 2017, we had 191 full-time employees.
The following table shows
the breakdown in numbers and percentages of employees by department as of December 31, 2016:
Functions
|
|
Number of
employees
|
|
|
% of total
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
101
|
|
|
|
53
|
%
|
Technology
|
|
|
23
|
|
|
|
12
|
%
|
Research & Development
|
|
|
19
|
|
|
|
10
|
%
|
Quality Control
|
|
|
6
|
|
|
|
3
|
%
|
General Administration, Purchasing, Sales and Marketing
|
|
|
42
|
|
|
|
22
|
%
|
Total
|
|
|
191
|
|
|
|
100
|
%
|
We have not experienced
any significant labor disputes and consider our relationship with our employees to be good. Our employees are not covered by any
collective bargaining agreement.
We have established an
employee welfare plan in accordance with the relevant PRC laws and regulations. Our total expenses for this plan were approximately
$276,044, $231,014 and $197,832 in 2016, 2015 and 2014, respectively.
As we continue to expand
our business, we believe it is critical to hire and retain top talent, especially in the areas of marketing, metal surface treatment,
materials science, and technology engineering. We believe we have the ability to attract and retain high quality engineering talent
in China based on our competitive salaries, annual performance-based bonus system, and equity incentive program for senior employees
and executives. In addition, we have a training program for entry-level engineers that allows them to work closely with an experienced
mentor to gain valuable hands-on experience and provide other professional development opportunities, including seminars where
experienced engineers give lectures on specific engineering topics and new methods that can be applied to various projects.
Legal Proceedings
From time to time, we may
be involved in various claims and legal proceedings arising in the ordinary course of business. We are not currently a party to
any such claims or proceedings which, if decided adversely to us, would either, individually or in the aggregate, have a material
adverse effect on our business, financial condition, results of operations or cash flows.
4C. Organizational Structure
We are affiliated with the Ossen Group, which
is a Chinese conglomerate controlled by our Chairman, Dr. Tang. The Ossen Group’s core businesses include steel manufacturing,
real estate and other investments.
Our Shareholders
Dr. Tang, our chairman,
owns 100% of the shares of Effectual Strength Enterprises Ltd., a British Virgin Islands company, which currently owns approximately
60.1% of our outstanding ordinary shares. The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating
Acme Development Ltd., which owns approximately 3.0% of our outstanding ordinary shares. The spouse of the chief executive officer
of Ossen Material Research (formerly Shanghai ZFX), which is an affiliated company of ours that supplies us with raw materials,
owns 100% of the shares of Gross Inspiration Development Ltd., which owns approximately 3.0% of our outstanding ordinary shares.
In December 2011, 5 million shares were issued in our initial public offering. Currently we have approximately 30.1% of our ordinary
shares, or 5,950,610 shares, trading on NASDAQ in the form of ADS’s. The holders of the remaining approximately 3.8% of our
shares are investors that are residents of the PRC and are unaffiliated with Ossen.
Our Subsidiaries
British Virgin Islands Companies
Ossen Innovation Group,
our wholly owned subsidiary, is the sole shareholder of two holding companies organized in the British Virgin Islands: Ossen Group
(Asia) Co., Ltd., or Ossen Asia, and Topchina Development Group Ltd., or Topchina. All of the equity of Ossen Asia and Topchina
had been held by Dr. Tang, our Chairman, since inception. In May 2010, Dr. Tang transferred these shares to Ossen Innovation Group
in anticipation of the public listing of our company’s shares in the United States.
Ossen Asia is a British
Virgin Islands limited liability company organized on February 7, 2002. Ossen Asia has one direct operating subsidiary in China,
Ossen Innovation Materials Co. Ltd., or Ossen Materials. Ossen Asia owns 81% of the equity of Ossen Materials.
Topchina is a British Virgin
Islands limited liability company organized on November 3, 2004. Ossen Materials and Topchina directly own an operating subsidiary
in China, Ossen (Jiujiang) New Materials Co., Ltd., or Ossen Jiujiang. As of December 31, 2016, Ossen Materials owns 20.5% of the
equity of Ossen Jiujiang and Topchina owns 79.5%.
Ossen Materials
Ossen Materials was formed
in China on October 27, 2004 as a Sino-foreign joint venture limited liability company under the name Ossen (Maanshan) Steel Wire
and Cable Co., Ltd. On May 8, 2008, Ossen Materials was restructured from a Sino-foreign joint venture limited liability company
to a corporation. The name of the entity was changed at that time to Ossen Innovation Materials Co., Ltd.
Ossen Asia owns 81% of
the equity of Ossen Materials. The remaining 19% is held in the aggregate by four Chinese entities, two of which are controlled
by Chinese governmental entities, one of which is controlled by Zhonglu Co. Ltd., a company whose shares are listed on the Shanghai
Stock Exchange, and one of which is controlled by Chinese citizens.
Through Ossen Materials,
we have manufactured and sold plain surface PC strands, rare earth coated PC steel wires and PC wires in our Maanshan City facility
since 2004. The primary markets for the products manufactured at our Maanshan facility are Anhui Province, Jiangsu Province, Zhejiang
Province and Shanghai City, each in the PRC.
Ossen Jiujiang
On April 6, 2005, Shanghai
Ossen Investment Holdings (Group) Co., Ltd., or Ossen Shanghai, acquired a portion of the bankruptcy assets of Jiujiang Steel &
Iron Company, including equipment, land use rights and inventory, for approximately RMB 20,000,000 (approximately $2.9 million).
Ossen Jiujiang was formed by Ossen Shanghai in the PRC as a Sino-foreign joint venture limited liability company on April 13, 2005.
Ossen Shanghai then transferred the newly acquired assets to Ossen Jiujiang. At its inception, Ossen Jiujiang was owned by two
entities: 33.3% of its equity was held by Ossen Asia and 66.7% by Ossen Shanghai. In June 2005, Ossen Shanghai transferred its
entire interest in Ossen Jiujiang to Topchina in exchange for approximately $2.9 million. In October 2007, Topchina transferred
41.7% of the equity in Ossen Jiujiang to Ossen Asia for no consideration. On December 17, 2007, Ossen Asia transferred all of its
shares in Ossen Jiujiang to Ossen Materials.
On November 19, 2010, the
Department of Commerce of Jiujiang City approved an increase in the registered capital of Ossen Jiujiang by approximately $29.2
million, which capital must be paid in full by November 2013. On November 5, 2012, the Department of Commerce of Jiujiang City
approved a decrease in the registered capital of Ossen Jiujiang by approximately $9.2 million. As of December 31, 2014, Topchina
paid approximately $20 million of the increased registered capital to Ossen Jiujiang. As a result, 79.5% of Ossen Jiujiang is currently
held by Topchina and 20.5% by Ossen Materials. On April 9, 2014, Ossen (Jiujiang) Steel Wire & Cable Co., Ltd. changed its
name to Ossen (Jiujiang) New Materials Co., Ltd.
Through Ossen Jiujiang,
we manufacture zinc or rare earth coated PC wires and strands, plain surface PC strands, unbonded PC strands, helical rib PC wires,
sleeper PC wires and indented PC wires. The primary markets for the PC strands manufactured in our Jiujiang facility are Jiangxi
Province, Hubei Province, Hunan Province, Fujian Province and Sichuan Province, each in the PRC.
Organizational Structure Chart
The following chart reflects
our organizational structure:
4D. Property, Plants and Equipment
Under PRC law, land is
owned by the state. “Land use rights” are granted to an individual or entity after payment of a land use right fee
is made to the applicable state or rural collective economic organization. Land use rights allow the holder the right to use the
land for a specified long-term period.
We have land-use rights
for facilities at two locations in the PRC, one in Maanshan City, Anhui Province and one in Jiujiang City, Jiangxi Province, which
are utilized for production, research and development and employee living quarters. We have paid all amounts relating to these
properties. The land-use rights for our Maanshan facility expires in 2058 and the rights for our Jiujiang facilities expire at
different intervals, ranging from 2055 to 2057. Our facilities cover an aggregate of approximately 106,136 square meters.
As of December 31, 2016,
our production facility in Maanshan City had a total gross floor area of approximately 47,356 square meters and we employed 42
production personnel at that facility. Our Maanshan facility contained seven production lines with an annual production of approximately
134,017 tons in 2016. As of December 31, 2016, our production facility in Jiujiang City had a total gross floor area of approximately
58,780 square meters and we employed 59 production personnel at that facility. Our Jiujiang facility contained eleven production
lines with an annual production of approximately 143,091 tons in 2016. Historically, we have not experienced any form of disruption
in our production facilities. The total tonnage we manufactured was more than 140,000 tons because a portion of our sold products
were intermediate products.
We believe that our current
property rights are sufficient for our current operations.
|
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
Not Applicable
|
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion
and analysis should be read in conjunction with our consolidated financial statements, the notes to those financial statements
and other financial data that appear elsewhere in this annual report. In addition to historical information, the following discussion
contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the
timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors,
including those set forth in “Risk Factors” and elsewhere in this report. Our consolidated financial statements are
prepared in conformity with U.S. GAAP.
5A. Operating Results
Overview
General
We manufacture and sell
an array of plain surface prestressed steel materials and rare earth coated and zinc coated prestressed steel materials, which
we believe is the most comprehensive array among our competitors in China. Our materials are used in the construction of bridges,
highways and other infrastructure projects in the PRC and internationally. Our facilities are located in Maanshan City, Anhui Province
and in Jiujiang City, Jiangxi Province, in the People’s Republic of China. Based on our extensive experience in the industry,
we believe that Ossen is one of the leading enterprises in the PRC in the design, engineering, manufacture and sale of customized
prestressed steel materials used in the construction of bridges, highways, and other infrastructure projects in China.
Important Factors Affecting our Results of Operations and
Existing Trends
Migration of Our Business to the Domestic PRC Market
Our results of operations
depend in part on the proportion of international sales to domestic sales that we attain during a particular financial reporting
period. Sales to international customers have historically generated profit margins that are approximately 2% to 5% higher on average
than sales to domestic customers. In addition, we have historically collected a significant percentage of revenues generated by
international sales by letter of credit, which enables us to convert accounts receivable into cash more quickly. Between 2013 and
2015, the Chinese government followed a prudent monetary policy and was conservative in lending to certain industries, including
steel industry and our domestic customers. In 2016, the Chinese government’s policy in lending is slightly less conservative
compared to 2015. As a result, our domestic customers were able to pay our accounts receivables faster than 2014 and 2015, and
our average Days Sales Outstanding was approximately 126, 150 and 150 days in 2016, 2015 and 2014, respectively.
Our current business model
is to continue focusing on the domestic PRC market, while selectively pursuing international opportunities when appropriate. Under
existing PRC governmental policies, especially the newly announced “One Belt, One Road” initiatives, significant investments
are expected to be made during the next decade to construct many new bridges and new railroads.
We generated approximately
4.2%, 6.6% and 6.7%, respectively, of our revenue during the years ended December 31, 2016, 2015 and 2014 from sales to customers
in international markets including primarily Vietnam, South Korea, Japan, New Zealand, Australia, Bangladesh, Brunei, Costa Rica,
and Chile, primarily for use in the construction of bridges. The decrease in 2016 was primarily due to one of our customers in
South Korea filed for bankruptcy. In October 2013, we were awarded a Japanese Industrial Standards (JIS) certificate. This
certification allows us to sell our SWPR7BL prestressed concrete strands in Japan. We then successfully completed a renovation
project for our dedicated epoxy pre-stressed strand. This renovation allowed us to secure more high-value, high margin orders,
particularly from the Japanese marketplace. In 2015, our major Japanese customer won the bid for the construction of Tokyo New
National Stadium for 2020 Tokyo Olympic Game and we are one of two suppliers to provide plain surface prestressed steel products
to this Japanese customer. As a result of this, our export of plain surface prestressed steel products to the Japanese market increased
in 2016 and we anticipate that it will continue to increase in 2017 as the 2020 Tokyo Olympic Games approach. Due to the anti-dumping
measures imposed by the United States and European Union and increased demand for our products in these other markets, we do not
intend to reestablish a presence in the United States or the European Union at the levels we experienced in 2008 in the near future.
However, if opportunities arise in the U.S. or EU markets or in other international markets for us to win bids on projects or to
reengage with former customers or establish relationships with new customers, we would pursue such opportunities.
Product Mix and Industry Trends
Our results of operations
also depend in part on the product mix that we attain during a particular financial reporting period. We produce and sell products
according to customer orders. The sales prices of our rare earth coated products are generally higher than the prices of our plain
surface, stabilized and zinc coated products. Gross margins for our rare earth coated products were historically higher than our
other products because rare earth coating technology enables us to produce base on lower grade raw materials, which increases gross
margin. Since the introduction in 2009 of our rare earth coated materials, which undergo a coating process that reduces the loss
in strength and performance that prestressed materials otherwise undergo during our manufacturing processes, we have lowered the
standards for strength and performance requirements for the raw materials used in our rare earth coated products.
However, the margins for
our plain surface products surpassed the margins for our coated products in 2014, 2015 and 2016. In 2014, 2015 and 2016, the average
gross margin of plain surface products was approximately 11.9%, 17.5% and 21.0% and the average gross margin of our coated products,
including rare earth coated and zinc coated products, was approximately 10.6%, 12.7% and 11.6%, respectively. The increase in average
gross margin of plain surface PC strands in 2016 was mainly due to the orders in this year were mainly retail orders, which normally
have higher gross profit margin than the wholesale orders. In 2016, the decrease in average gross margin of coated products was
mainly due to the increase of purchase price of raw materials of coated products. In 2014 and 2015, the average gross margin of
coated products, including zinc coated products and rare earth coated products, was lower than plain surface products mainly because
the average price of the raw materials purchased for our coated products did not decline as steeply as the average price of the
raw materials purchased for our plain surface products. In 2016, coated products had lower gross margin mainly because the average
price of the raw materials purchased for our coated products increased more than the average price of the raw materials purchased
for our plain surface products.
As an overall percentage
of sales, sales of our coated products increased from 81.0% in 2015 to 93.6% in 2016 and 92.5% and 89.0%, respectively, of our
coated product sales in the years ended December 31, 2016 and December 31, 2015 were sales of rare earth coated products and the
remaining 7.5% and 11.0%,%, respectively, were zinc coated products.
Favorable price and terms for supply of principal raw materials
Our principal raw material
is high carbon steel wire rods that we typically purchase from multiple primary steel producers. The steel industry as a whole
is cyclical and, at times, pricing and availability of steel can be volatile due to numerous factors beyond our control, including
general domestic and international economic conditions, labor costs, sales levels, competition, levels of inventory held by us
and other steel service centers, consolidation of steel producers, higher raw material costs for steel producers, import duties
and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for
us.
We, like many other steel
manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time delivery requirements
of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate
to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market
conditions. Our key suppliers usually dedicate portions of their inventories as reserves to meet our manufacturing requirements.
These key suppliers are generally provided a prepayment and in return, they give us discounts compared to prevailing market prices.
We have no long-term, fixed-price
steel purchase contracts. When steel prices increase, competitive conditions will influence how much of the price increase we can
pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers,
the net sales and profitability of our business could be adversely affected.
When steel prices decline,
customer demands for lower prices and our competitors' responses to those demands could result in lower sale prices and, consequently,
lower margins. Significant or rapid declines in steel prices or reductions in sales volumes could result in us incurring inventory
or goodwill impairment charges. Changing steel prices therefore could significantly impact our net sales, gross margins, operating
income and net income. In 2010 and 2011, the impact of steel price fluctuation on our results of operations was immaterial. In
2012, our average raw material price decreased because China’s steel price decreased as a result of the soft demand in domestic
market and high inventory of the industry and we manufactured and sold products which required lower grade and lower price raw
materials compared to 2011. In 2014 and 2015, steel supply continued to outpace demand as China’s economic growth slowed
and growth in steel demand in China remained weak. The price of all of our principal raw materials decreased in 2014 and 2015 due
to the market condition of steel industry in China. However, since raw materials purchased for our rare earth and zinc coated products
are produced by only a select few steel manufacturers, the average price of these raw materials was not as volatile as other steel
products, and the decline is not as much as those that are mass produced such as raw materials for plain surface products in 2014
and 2015. In 2016, Chinese Government continued its policy to cut excessive industrial capacity and reform the supply-side of its
economy, while strictly controlling steel capacity increases. As a result, the average price of steel products, including our products
and principal raw materials, rallied in 2016 and reached the highest level in two and a half years. The shortage of coking coal,
one of steelmaking raw materials, also led to higher prices. We expect steel demand will slightly outpace supply and steel price
will continue to rise in 2017.
We currently purchase almost
all of our new materials from a very small number of suppliers. Purchases from our five largest suppliers amounted to 99.1%, 97.7%
and 95.1% of our total raw material purchases in 2016, 2015 and 2014, respectively. To date, we have been able to obtain favorable
pricing and delivery terms from these suppliers. However, if we were to increase the scale of our production, we may need to further
diversify our supplier network and, as a result, may not be able to obtain favorable pricing and delivery terms from new suppliers.
Slow Growth of the Chinese Economy
We operate our manufacturing
facilities in China and derive the majority of our revenues from sales to customers in China. As such, economic conditions in China
affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials
and our other expenses. Although the economy in China has grown significantly in the past decades, any slow-down of economic growth
in China could reduce expenditures for infrastructure, which in turn may adversely affect our operating results and financial condition.
For example, the weakness in the economy could reduce the investment in infrastructure, which, in turn, could result in demand
for our products and our revenues may decline. Furthermore, any financial turmoil affecting the financial markets and banking system
may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially
reasonable terms, or at all.
Level of income tax and preferential tax treatment
Our net income is affected
by the income tax that we pay and any preferential tax treatment that we are able to receive. Our operating subsidiaries are subject
to the PRC enterprise income tax, or EIT. According to the relevant laws and regulations in the PRC, foreign invested enterprises
established prior to January 1, 2008 are entitled to full exemption from income tax for two years beginning with the first year
in which such enterprise is profitable and a 50% income tax reduction for the subsequent three years. Ossen Materials was entitled
to an EIT exemption during the two years ended December 31, 2006 and was subject to a 50% income tax reduction during the three
years ended December 31, 2009. Ossen Jiujiang was entitled to the EIT exemption during the two years ended December 31, 2008, and
a 50% income tax reduction during the three years ended December 31, 2012.
Ossen Materials was subject
to a 15% tax rate through 2012 as the result of its being designated a high-tech enterprise. In 2012, Ossen Materials renewed its
status of high-tech enterprise, and would be subject to a 15% tax rate through 2015. In 2015, Ossen Materials renewed its status
of high-tech enterprise again, and will be subject to a 15% tax rate through 2018. Ossen Jiujiang was subject to a 15% tax rate
through 2011 as the result of its being designated a high-tech enterprise. Since January 1, 2012, Ossen Jiujiang has enjoyed a
tax rate of 15% as it is considered as a high-tech enterprise. In 2015, Ossen Jiujiang successfully renewed its status of high-tech
enterprise, and will be subject to a 15% tax rate through 2018. In the event that our income tax obligations increase over time,
our net income will be affected.
Foreign currency translation
Our financial statements
are expressed in U.S. dollars but the functional currency of our operating subsidiaries is RMB. Our results of operations are translated
at average exchange rates during the relevant financial reporting periods, assets and liabilities are translated at the unified
exchange rate at the end of these periods and equity is translated at historical exchange rates. Adjustments resulting from the
process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
Description of Selected Income Statement Items
Revenues
. We generate
revenue from sales of our prestressed steel products, including plain surface products and rare earth coated products. We also
derive an insignificant amount of revenue from providing services to select customers. Service revenues account for less than 2%
of total revenues for all periods presented and is recognized upon delivery and acceptance of the finished products by the customer,
or when pick up occurs.
Cost of goods sold
.
Cost of goods sold includes direct and indirect production costs, as well as freight and handling costs for products sold.
Selling expenses.
Selling expenses consist of sales commissions, payroll, traveling expenses, transportation expenses and advertising expenses. For
example, we typically pay our international distribution customers a commission ranging from 0.5% to 5% of invoiced amounts (including
VAT) actually paid to us.
General and administrative
expenses.
General and administrative expenses consist primarily of research and development expense, management and office
salaries and employee benefits, deprecation for office facility and office equipment, travel and entertainment, legal and accounting,
consulting fees and other office expenses.
Financial expenses.
Financial expenses consist of interest expense on bank loans, interest income.
Other Income
. Our
other income consisted of government grants and revenue from sales of scrap materials.
Income Taxes
. Ossen
Materials and Ossen Jiujiang have been recognized by their respective local government agencies as high-tech enterprises. As a
result, both subsidiaries were subject to an income tax rate of 15% under relevant PRC income tax laws in 2014, 2015 and 2016.
Results of Operations
The following table sets
forth the key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
% of Revenue
|
|
|
2015
|
|
|
% of Revenue
|
|
|
2014
|
|
|
% of Revenue
|
|
Revenues
|
|
|
117,029,154
|
|
|
|
100.0
|
%
|
|
|
117,908,416
|
|
|
|
100.0
|
%
|
|
|
123,571,455
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
|
|
|
100,932,528
|
|
|
|
86.2
|
%
|
|
|
102,197,994
|
|
|
|
86.7
|
%
|
|
|
110,250,876
|
|
|
|
89.2
|
%
|
Gross profit
|
|
|
16,096,626
|
|
|
|
13.8
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%
|
|
|
15,710,422
|
|
|
|
13.3
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%
|
|
|
13,320,579
|
|
|
|
10.8
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%
|
Selling expenses
|
|
|
734,159
|
|
|
|
0.6
|
%
|
|
|
986,378
|
|
|
|
0.8
|
%
|
|
|
772,383
|
|
|
|
0.6
|
%
|
General and administrative expenses
|
|
|
6,376,383
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|
|
|
5.4
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%
|
|
|
4,478,413
|
|
|
|
3.8
|
%
|
|
|
6,340,584
|
|
|
|
5.1
|
%
|
Total operating expenses
|
|
|
7,110,542
|
|
|
|
6.1
|
%
|
|
|
5,464,791
|
|
|
|
4.6
|
%
|
|
|
7,112,967
|
|
|
|
5.8
|
%
|
Income from operation
|
|
|
8,986,084
|
|
|
|
7.7
|
%
|
|
|
10,245,631
|
|
|
|
8.7
|
%
|
|
|
6,207,612
|
|
|
|
5.0
|
%
|
Financial expenses, net
|
|
|
(2,827,138
|
)
|
|
|
-2.4
|
%
|
|
|
(2,823,952
|
)
|
|
|
-2.4
|
%
|
|
|
(2,401,268
|
)
|
|
|
-1.9
|
%
|
Other income, net
|
|
|
90,584
|
|
|
|
0.1
|
%
|
|
|
371,894
|
|
|
|
0.3
|
%
|
|
|
907,941
|
|
|
|
0.7
|
%
|
Income before income taxes
|
|
|
6,249,530
|
|
|
|
5.3
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%
|
|
|
7,793,573
|
|
|
|
6.6
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%
|
|
|
4,714,285
|
|
|
|
3.8
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%
|
Income Taxes
|
|
|
(926,048
|
)
|
|
|
-0.8
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%
|
|
|
(1,180,167
|
)
|
|
|
-1.0
|
%
|
|
|
(578,727
|
)
|
|
|
-0.5
|
%
|
Net Income
|
|
|
5,323,482
|
|
|
|
4.5
|
%
|
|
|
6,613,406
|
|
|
|
5.6
|
%
|
|
|
4,135,558
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Less: net income attributable to non-controlling interest
|
|
|
499,509
|
|
|
|
0.4
|
%
|
|
|
716,602
|
|
|
|
0.6
|
%
|
|
|
276,682
|
|
|
|
0.2
|
%
|
Net income attributable to controlling interest
|
|
|
4,823,973
|
|
|
|
4.1
|
%
|
|
|
5,896,804
|
|
|
|
5.0
|
%
|
|
|
3,858,876
|
|
|
|
3.1
|
%
|
Other comprehensive income- Foreign currency translation gain (loss)
|
|
|
(6,975,100
|
)
|
|
|
-6.0
|
%
|
|
|
(5,829,470
|
)
|
|
|
-4.9
|
%
|
|
|
779,135
|
|
|
|
0.6
|
%
|
Total other comprehensive income (loss)
|
|
|
(6,975,100
|
)
|
|
|
-6.0
|
%
|
|
|
(5,829,470
|
)
|
|
|
-4.9
|
%
|
|
|
779,135
|
|
|
|
0.6
|
%
|
Comprehensive Income
|
|
|
(2,151,127)
|
|
|
|
-1.8
|
%
|
|
|
67,334
|
|
|
|
0.1
|
%
|
|
|
4,638,011
|
|
|
|
3.8
|
%
|
Year Ended December 31, 2016 Compared
to Year Ended December 31, 2015
Revenues
. During
the year ended December 31, 2016, we had revenues of approximately $117.0 million as compared to revenues of approximately $117.9
million during year ended December 31, 2015, a decrease of approximately $0.9 million, or 0.8%. The slight decrease in our revenues
during the year ended December 31, 2016 was mainly attributable to a 67.9% decrease in sales of plain surface PC strands, a 21.6%
decrease in sales of zinc coated products, and a 63.4% decrease in other products, partially offset by an increase in sales of
rare earth coated PC wires and PC strands.
The following table provides
a breakdown of our revenues during the years ended December 31, 2016 and 2015, respectively:
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Year ended December 31,
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|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Difference
|
|
Products:
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|
Plain surface PC strands
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|
|
5,256,109
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|
|
|
4.5
|
%
|
|
|
16,394,864
|
|
|
|
13.9
|
%
|
|
|
-67.9
|
%
|
Zinc coated PC wires and PC strands
|
|
|
8,195,801
|
|
|
|
7.0
|
%
|
|
|
10,459,026
|
|
|
|
8.9
|
%
|
|
|
-21.6
|
%
|
Rare earth coated PC wires and PC strands
|
|
|
101,361,992
|
|
|
|
86.6
|
%
|
|
|
85,007,683
|
|
|
|
72.1
|
%
|
|
|
19.2
|
%
|
Others
|
|
|
2,215,252
|
|
|
|
1.9
|
%
|
|
|
6,046,843
|
|
|
|
5.1
|
%
|
|
|
-63.4
|
%
|
Total
|
|
|
117,029,154
|
|
|
|
100
|
%
|
|
|
117,908,416
|
|
|
|
100
|
%
|
|
|
-0.7
|
%
|
In 2016, the demand for
our rare earth coated PC wires and PC strands continue to recover and the demand for our higher strength and higher margin rare
earth coated products improved compared to 2015. As a result, the sales of rare earth coated PC wires and PC strands increased by
$16.4 million, or 19.2%, to $101.4 million for the year of 2016. However, revenues of our plain surface products and zinc coated
products decreased due to our business strategy to focus on rare earth coated products. The average steel price recovered in 2016
due to the government policy to cut excess capacity.
The sales of zinc coated
PC wires and PC strands were $8.2 million during the year ended December 31, 2016, a decrease of 21.6%, compared to the year ended
December 31, 2015. The decrease of sales generated by zinc coated products in 2016 was primarily due to our strategy to focus on
rare earth coated products in 2016.
The sales of plain surface
PC strands and PC wires were $5.3 million during the year ended December 31, 2016, a decrease of $11.1 million, or 67.9%, compared
to the year ended December 31, 2015. This decrease of sales generated by plain surface PC strands and PC wires was primarily due
to our focus on rare earth coated products and the decline in sales to wholesale market during the period.
Other sales were $2.2 million
during the year ended December 31, 2016, a decrease of $6.0 million, or 63.4%, compared to the year ended December 31, 2015. This
decrease was primarily due to less spare raw materials sold in 2016 compared to 2015 and the decrease of service revenue.
Cost of Goods Sold
.
Cost of goods sold was approximately $100.9 million during the year ended December 31, 2016, as compared to approximately $102.2
million during the year ended December 31, 2015, representing a decrease of 1.3%, or approximately $1.3 million. This decrease
primarily resulted from the slight decrease of revenues As a percentage of revenues, cost of goods sold decreased from 86.7% to
86.2% during the year ended December 31, 2016.
Gross Profit and Gross
Margin.
Our gross profit is equal to the difference between our revenues and our cost of goods sold. Our gross profit increased
2.5% to approximately $16.1 million during the year ended December 31, 2016, from approximately $15.7 million for the same period
in 2015. For the years ended December 31, 2016 and 2015, our gross margin was 13.8% and 13.3%, respectively. The slight increase
of gross margin was primarily due to the lower than average price of raw materials locked by advance payment to suppliers.
Selling Expenses
.
Selling expenses totaled $0.7 million for the year ended December 31, 2016, as compared to $1.0 million for the year ended December
31, 2015, a decrease of 25.6%. This decrease was primarily due to lower transportation cost associated with lower revenue from
export in 2016.
General and Administrative
Expenses
. General and administrative expenses totaled $6.4 million for the year ended December 31, 2016, as compared to $4.5
million for the year ended December 31, 2015, an increase of 42.4%. The increase in 2016 was primarily due to higher research
and development cost and higher bad-debt provision in 2016.
Operating Income.
As a result of the foregoing, operating income for the year ended December 31, 2016 was approximately $9.0 million, a decrease
of 12.3% as compared to approximately $10.2 million for the same period in 2015. This decrease was primarily due to an increase
in research and development expenses and an increase in bad-debt provision. As a percentage of net sales, operating income decreased
from 7.7% to 8.7% during the year ended December 31, 2016.
Income Taxes
. We
incurred income tax expenses of $0.9 million and $1.2 million in the fiscal years ended December 31, 2016 and 2015, respectively.
Ossen Materials and Ossen Jiujiang were subject to a 15% tax rate as the result of being designated as high-tech enterprises through
2018.
Net Income
. As a
result of the foregoing, our net income totaled approximately $5.3 million for the year ended December 31, 2016, as compared to
approximately $6.6 million for the year ended December 31, 2015, a decrease of 19.5%.
Net Income Attributable
to Non-controlling Interest.
We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate. Net income attributable
to non-controlling interest represents the net income attributable to the holders of the remaining shares.
Foreign Currency Income
(Loss).
For the year ended December 31, 2016, foreign currency exchange loss was $6.9 million, compared to foreign currency
exchange loss of $5.8 million, for the year ended December 31, 2015.
Year Ended December 31, 2015 Compared
to Year Ended December 31, 2014
Revenues
. During
the year ended December 31, 2015, we had revenues of approximately $117.9 million as compared to revenues of approximately $123.6
million during year ended December 31, 2014, a decrease of approximately $5.7 million, or 4.6%. The decrease in our revenues during
the year ended December 31, 2015 was mainly attributable to a decrease in sales of rare earth coated PC wires and PC strands, partially
offset by an increase in sales of plain surface products and spare raw materials and service revenue.
The following table provides
a breakdown of our revenues during the years ended December 31, 2015 and 2014, respectively:
|
|
Year ended December 31,
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Difference
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain surface PC strands
|
|
|
16,394,864
|
|
|
|
13.9
|
%
|
|
|
12,198,665
|
|
|
|
9.9
|
%
|
|
|
34.4
|
%
|
Zinc coated PC wires and PC strands
|
|
|
10,459,026
|
|
|
|
8.9
|
%
|
|
|
10,030,458
|
|
|
|
8.1
|
%
|
|
|
4.3
|
%
|
Rare earth coated PC wires and PC strands
|
|
|
85,007,683
|
|
|
|
72.1
|
%
|
|
|
97,566,192
|
|
|
|
79.0
|
%
|
|
|
-12.9
|
%
|
Others
|
|
|
6,046,843
|
|
|
|
5.1
|
%
|
|
|
3,776,140
|
|
|
|
3.1
|
%
|
|
|
60.1
|
%
|
Total
|
|
|
117,908,416
|
|
|
|
100
|
%
|
|
|
123,571,455
|
|
|
|
100
|
%
|
|
|
-4.6
|
%
|
In 2015, the demand for
our products, including both plain surface products and coated products, recovered slightly compared to 2014, as we sold more products
in 2015. However, revenues of our rare earth coated products decreased due to lower prices compared to 2014. The domestic PRC steel
industry was still difficult due to the downturn and overcapacity of the whole industry, with resulting in lower prices on most
steel products compared to 2014, affecting all of our products, and in particular our higher strength rare earth coated products.
As a result, the sales of rare earth coated PC wires and PC strands decreased by $12.6 million, or 12.9%, to $85.0 million for
the year of 2015.
The sales of zinc coated
PC wires and PC strands were $10.5 million during the year ended December 31, 2015, an increase of 4.3%, compared to the year ended
December 31, 2014. The slight increase of sales generated by zinc coated products in 2015 was primarily due to the increase in
demand, partially offset by the price decline in 2015.
The sales of plain surface
PC strands and PC wires were $16.4 million during the year ended December 31, 2015, an increase of $4.2 million, or 34.4%, compared
to the year ended December 31, 2014. This increase of sales generated by plain surface PC strands and PC wires was primarily due
to the recovery of the demand, partially offset by the price decline in 2015.
Other sales were $6.0 million
during the year ended December 31, 2015, an increase of $2.3 million, or 60.1%, compared to the year ended December 31, 2014. This
increase was primarily due to the 49.9% increase of service revenue and the 82.7% increase in revenue generated by selling spare
raw materials in 2015 compared to 2014.
Gross Profit and Gross
Margin.
Our gross profit increased 17.9% to approximately $15.7 million during the year ended December 31, 2015, from approximately
$13.3 million for the same period in 2014. For the years ended December 31, 2015 and 2014, our gross margin was 13.3% and 10.8%,
respectively. The increase of gross margin was primarily due to the decrease of average price of raw materials. The gross margin
of plain surface products increased approximately 6.0% due to average price of its raw material decreased significantly. The gross
margin of rare earth coated products increased only slightly mainly because average price of its raw material, high carbon steel
wire, declined less as compared to the decline in prices of our other raw materials.
Selling Expenses
.
Selling expenses was $1.0 million for the year ended December 31, 2015, as compared to $0.8 million for the year ended December
31, 2014, an increase of 27.7%. This increase was attributable primarily due to higher transportation cost associated with new
overseas' customers and higher commission fees.
General and Administrative
Expenses
. General and administrative expenses totaled $4.5 million for the year ended December 31, 2015, as compared to $6.3
million for the year ended December 31, 2014, a decrease of 29.4%. The decrease in 2015 was primarily due to the collection
of account receivables which reduced bad debt provision and the decrease of research and development expenses.
Operating Income.
As a result of the foregoing, operating income for the year ended December 31, 2015 was approximately $10.2 million, an increase
of 65.0% as compared to approximately $6.2 million for the same period in 2014. This increase was primarily due to the increase
in gross profit and the decrease in general and administrative expenses. As a percentage of net sales, operating income increased
from 5.0% to 8.7% during the year ended December 31, 2015.
Income Taxes
. We
incurred income tax expenses of $1.2 million and $0.6 million in the fiscal years ended December 31, 2015 and 2014, respectively.
Ossen Materials and Ossen Jiujiang were subject to a 15% tax rate as the result of being designated as high-tech enterprises through
2018.
Net Income
. As a
result of the foregoing, our net income was approximately $6.6 million for the year ended December 31, 2015, as compared to approximately
$4.1 million for the year ended December 31, 2014, an increase of 59.9%.
Net Income Attributable
to Non-controlling Interest.
We own 81% of Ossen Materials and 96.1% of Ossen Jiujiang in the aggregate. Net income attributable
to non-controlling interest represents the net income attributable to the holders of the remaining shares.
Foreign Currency Income
(Loss).
For the year ended December 31, 2015, foreign currency exchange loss was $5.8 million, compared to foreign currency
exchange gain of $0.8 million, for the year ended December 31, 2014.
Critical Accounting Policies and Estimates
Our consolidated financial
statements, which have been prepared in accordance with U.S. GAAP. Our financial statements reflect the selection and application
of accounting policies, which require management to make significant estimates and judgments. See Note 2 to our consolidated financial
statements for “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the most
critical accounting policies that currently affect our financial condition and results of operations.
Use of Estimates
The preparation of the
consolidated and combined financial statements in conformity with generally accepted accounting principles in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the
time the estimates are made. Actual results could differ from those estimates.
Revenue Recognition
In accordance with the
ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability
is reasonable assured.
The Company derives revenues
from the processing, distribution and sale of own products. The Company recognizes its revenues net of value-added taxes (“VAT”).
The Company is subject to VAT which is levied on the rate of 17% on the invoiced value of sales. Output VAT is borne by customers
in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases
to the extent not refunded for export sales.
The Company will recognize
revenue for domestic sales based on the terms defined in the contract as long as risk of loss has transferred to the customers
and each of the criteria under ASC 605 have been met. Contracts terms may require the Company to deliver the finished goods to
the customers’ location or the customer may pick up the finished goods at the Company’s factory. International sales
are recognized when shipment clears customs and leaves the port.
Contracts with distributors
do not offer any chargeback or price protection. The Company experienced no product returns and recorded no reserve for sales returns
for the years ended December 31, 2016, 2015 and 2014.
Research and Development
Research and development
costs are expensed as incurred and totaled approximately $3,869,277, $3,404,333 and $3,914,918 for the years ended December 31,
2016, 2015 and 2014, respectively. Research and development costs are included in general and administrative expenses in the accompanying
statements of operations. Research and development costs are incurred on a project specific basis.
Income Taxes
The Company accounts for
income taxes following the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this method, deferred tax
assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities
using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records
a valuation allowance to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that
some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is
recognized in income in the period that includes the enactment date.
The Company also follows
FASB ASC 740, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should
be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance
on recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
As of December 31, 2016, the Company did not have a liability for unrecognized tax benefits.
The Company has not provided
for income taxes on accumulated earnings amounting $54,590,589 that are subject to the PRC dividend withholding tax as of December
31, 2016, since these earnings are intended to be permanently reinvested.
Fair Value of Financial Instruments
The Company applies the
provisions of ASC 820,
Fair Value Measurements and Disclosures
, to the financial instruments that are required to be carried
at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at
the measurement date. The Company uses a three-tier fair value hierarchy based upon observable and non-observable inputs that prioritizes
the information used to develop our assumptions regarding fair value. Fair value measurements are separately disclosed by level
within the fair value hierarchy. FASB ASC 820 (formerly SFAS No. 157 Fair Value Measurements) establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy prioritizes the inputs into three levels based
on the extent to which inputs used in measuring fair value are observable in the market
These tiers include:
·
Level 1—defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
·
Level 2—defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
·
Level 3—defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop
its own assumptions.
The company’s financial
instruments primarily consist of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts payable,
other payables and accrued liabilities, short-term bank loans, and bond payable.
The carrying value of
cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other current assets and liabilities approximate
fair value because of the short term nature of these items. The estimated fair values of short-term bank loans were not materially
different from their carrying value as presented due to the short maturities and that the interest rates on the borrowing approximate
those that would have been available for loans of similar remaining maturity and risk profile. As the carrying amounts are reasonable
estimates of the fair value, these financial instruments are classified within Level 1 of the fair value hierarchy.
Accounts Receivable
Accounts receivable are
carried at net realizable value. The Company reviews its accounts receivables on a periodic basis and makes general and specific
allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual
receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment
history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
If accounts receivable are to be provided for, or written off, they would be recognized in the consolidated statement of operations
within operating expenses. Balance of allowance of doubtful accounts was $985,990 and $738,101 at December 31, 2016 and 2015, respectively.
The increase was mainly due to the increase of accounts receivable aging over 1 year.
Inventories
Inventories are stated
at the lower of cost or net realizable value, which is based on estimated selling prices less any further costs expected to be
incurred for completion and disposal. Cost of raw materials is calculated using the weighted average method and is based on purchase
cost. Work-in-progress and finished goods costs are determined using the weighted average method and comprise direct materials,
direct labor and an appropriate proportion of overhead. The Company considers a provision for excess, obsolete, or slow-moving
inventory based on changes in customer demand, technology developments or other economic factors. At December 31, 2016 and 2015,
the Company has $120,347 and nil reserve for inventories.
Advance to Suppliers
Advance to Suppliers represents
interest-free cash paid in advance to suppliers for purchases of raw materials. The balance of advance to suppliers was $46,729,285
and $55,730,089 at December 31, 2016 and 2015, respectively. Among the balance of $46,729,285, the aging of $13,112,588 was within
60 days, $25,460,073 was between 60-90 days and $8,156,624 was over 90 days. No allowance was provided for the prepayments balance
at December 31, 2016.
In 2016, the PRC steel
industry was still in a process of reducing inventory. We were able to receive raw materials delivered by our suppliers in 2016
at a discounted price, locked in by prepayments. We expect to continue gradually reducing our balance of advance to suppliers once
market conditions improve.
Property, Plant, and Equipment
Property, plant, and equipment
are stated at cost less accumulated depreciation, and include expenditure that substantially increases the useful lives of existing
assets.
Depreciation is provided
over their estimated useful lives, using the straight-line method. Estimated useful lives are as follows:
Plant, buildings and improvements
|
5 ~ 20 years
|
|
|
Machinery and equipment
|
5 ~ 20 years
|
|
|
Motor vehicles
|
5 years
|
|
|
Office Equipment
|
5 ~ 10 years
|
When assets are sold or
retired, their costs and accumulated depreciation are eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the period of disposition as an element of other income. The cost of maintenance
and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Land Use Rights
According to the PRC laws,
the government owns all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land
use rights granted by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line
method over the lease term of fifty years.
Impairment of Long-Lived Assets
Long-lived assets are
evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts
may not be recoverable in accordance with FASB ASC 360, “Property, Plant and Equipment”.
In evaluating long-lived
assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset
and eventual disposition in accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows
attributable to the asset, less estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment
loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to
be disposed of and for which there is a committed plan of disposal, whether through sale or abandonment, are reported at the lower
of carrying value or fair value less costs to sell.
No impairment loss is
subsequently reversed even if facts and circumstances indicate recovery. There was no impairment loss recognized for the years
ended December 31, 2016, 2015 and 2014.
Related Party
In general, related parties
exist when there is a relationship that offers the potential for transactions at less than arm’s-length, favorable treatment,
or the ability to influence the outcome of events different from that which might result in the absence of that relationship. A
related party may be any of the followings: a) affiliate, a party that directly or indirectly controls, is controlled by, or is
under common control with another party; b) principle owner, the owner of record or known beneficial owner of more than 10% of
the voting interest of an entity; c) management, persons having responsibility for achieving objectives of the entity and requisite
authority to make decision; d) immediate family of management or principal owners; e) a parent company and its subsidiaries; d)
other parties that has ability to significant influence the management or operating policies of the entity.
FASB issued authoritative
guidance that clarifies considerations relating to the consolidation of certain entities. The guidance requires identification
of the Company’s participation in variable interest entities (“VIE”), which are defined as entities with a level
of invested equity that is not sufficient to fund future activities to permit them to operation on a standalone basis, or whose
equity holders lack certain characteristics of a controlling financial interest. That, for entities identified as a VIE, the guidance
sets forth a model to evaluate potential consolidation based on an assessment of which party to a VIE, if any, bears a majority
of the exposure to expected losses, or stand to gain from majority of its expected returns. The guidance also sets forth certain
disclosure regarding interests in a VIE that are deemed significant even if consolidation is not required. This item is discussed
in further detail in Note 10 – Related Party Transactions.
Recently Issued Accounting Pronouncements
In January 2017, the FASB
issued Accounting Standards Update (“ASU”) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment” (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. An
entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's
carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance
does not amend the optional qualitative assessment of goodwill impairment. Public business entity that is a U.S. Securities and
Exchange Commission filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal
years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2017-04 on our consolidated
financial statements.
In November 2016, the FASB
issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires
that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted
cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted
cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
We are currently evaluating the impact of the adoption of ASU 2016-18 on our consolidated financial statements.
In August 2016, the FASB
issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including
bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization
transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU
are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the
adoption of ASU 2016-15 on our consolidated financial statements.
In June 2016, the FASB
issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting
credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost
basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect
its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from
the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt
securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses
be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment
in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables,
net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded
from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption
of ASU 2016-13 on our consolidated financial statements.
In April 2016, the FASB
issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment
transactions. The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU will be effective for annual
periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are
currently evaluating the impact of the adoption of ASU 2016-09 on our consolidated financial statements.
In February 2016, the FASB
issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic
842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective
of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial
statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842
and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic
840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing
between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between
capital leases and operating leases in the previous leases guidance. The result of retaining a distinction between finance leases
and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive
income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities.
Early application of the amendments in ASU 2016-02 is permitted. We are currently in the process of evaluating the impact of the
adoption of ASU 2016-02 on our consolidated financial statements.
In January 2016, the FASB
issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments
to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under
equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. In addition the amendments in this update eliminate the requirement
for to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments
in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. Except for the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not
permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
5B. Liquidity and Capital Resources
We have historically
met our working capital and capital expenditure requirements by using both net cash flow from operations and by bank borrowings,
including loans from banks and bank acceptance notes. In 2014, in addition to bank borrowings, our subsidiary in Maanshan, Ossen
Materials, completed a private placement of approximately $16.2 million in aggregate principal amount of notes to certain accredited
investors in China. The notes bore a fixed interest rate of 10.75% per annum, payable annually in arrears, and was repaid on September
2, 2016 with income from operations and short-term bank loans. We expect to finance our operations and working capital needs in
the near future from cash generated from operations and short-term borrowings, including lines of credit from local banks, which
can be utilized to fund our short term operation and fulfill liabilities.
Our cash and cash equivalents,
which are denominated in RMB, were approximately $0.2 million at December 31, 2016, as compared to $0.8 million at December 31,
2015 and $0.7 million at December 31, 2014. Our restricted cash was approximately $6.7 million at December 31, 2016, as compared
to $8.8 million at December 31, 2015 and $17.6 million at December 31, 2014. For the years ended December 31, 2014, 2015 and 2016,
we used a significant portion of our cash reserve to purchase raw materials to satisfy our production needs and to maintain satisfactory
levels of inventory. In addition, since 2013, we have been required to provide cash deposits, instead of bank guarantee letters,
when we bid for projects, which results in further pressure on our working capital. Yet, during this time period, local banks have
generally maintained tighter lending policies than in the past, thereby limiting our ability to borrow funds in order to win bids
that we believe we otherwise could have won. Although our production facilities are running at full capacity, the bids we are losing
due to lack of up-front cash deposit may be more profitable than the ones we are winning, which could negatively impact our overall
revenue and profitability. In 2014, 2015 and 2016, we were able to generate net profits and positive cash flow from operating activities.
We believe that our cash reserves, together with expected cash flow from operations and short-term loans, are sufficient to allow
us to continue to operate for the next 12 months. For details of our bank loans and notes payables please see “Bank Loans
and Bank Acceptance Notes” below.
We had $8.4 million of
accounts receivable aged over 180 days as of December 31, 2015. We had $2.7 million of accounts receivable aged over 180 days as
of December 31, 2016. As of April 1, 2017, we have collected approximately $5.3 million of such receivables. The remaining approximately
$32.0 million of uncollected accounts receivable are mainly from construction companies that have long-term business relationship
with us. Based on our historical experience, most of these projects are government sponsored programs and we are confident that
we will be able to collect the balance when the projects are completed.
We believe that current
cash balances, future cash provided by operations, and amounts available under our line of credit or bank borrowings will be sufficient
to cover our operating and capital needs in the ordinary course of business for the foreseeable future. If we experience an adverse
operating environment or unanticipated and unusual capital expenditure requirements, additional financing may be required. No assurance
can be given, however, that additional financing, if required, would be available at all or on favorable terms. We might also
require or seek additional financing for the purpose of bidding new projects growing our existing markets, or for other reasons.
Such financing may include the use of additional debt or the sale of additional equity securities. Any financing which involves
the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly
significant dilution to our existing shareholders.
Accounts Receivable
In 2014, 2015 and 2016,
the accounts receivable collection period of our domestic customers was approximately 150, 150, and 126 days after receiving the
materials at their construction site, respectively. Our accounts receivable decreased to $43.2 million at December 31, 2015 from
$53.8 million at December 31, 2014 as a result of the collection of long aging accounts receivable during 2015. As of December
31, 2016, our accounts receivable decreased to $37.3 million from $43.2 million at December 31, 2015. The decrease was primarily
due to the slightly improved marketing condition in 2016, which positively affected the timing of our customers’ payments
to us.
The average Days Sales
Outstanding (“DSO”) of 2015 and 2016 were 150 days and 126 days, respectively. The DSO as of December 31, 2015 and
2016 were 133 days and 116 days, respectively. The decrease in DSO as of December 31, 2016 was primarily due to the faster payments
from our customers during 2016.
The following table describes
the aging of our accounts receivable during 2015 and 2016:
As of Date
|
|
Account Receivables
Balance (in US
Dollars)
|
|
|
<60 days
|
|
|
60-90 days
|
|
|
90-180 days
|
|
|
>180 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
37,298,465
|
|
|
|
24,914,390
|
|
|
|
8,698,708
|
|
|
|
951,302
|
|
|
|
2,734,065
|
|
December 31, 2015
|
|
|
43,247,974
|
|
|
|
25,039,184
|
|
|
|
3,166,578
|
|
|
|
6,622,723
|
|
|
|
8,419,489
|
|
As of April 1, 2017,
we have collected approximately $5.3 million or 14.2% of the $37.3 million of accounts receivable outstanding as of December
31, 2016 in cash. See Note 2 to our audited financial statements for a schedule of our valuation account.
Major Customers
During the years ended
December 31, 2016, 2015 and 2014, our six largest customers contributed 81.4%, 79.5%, and 74.9% of our total sales, respectively.
See “Business—Our Customers” above. As a result of our reliance on a limited number of customers, we may face
pricing and other competitive pressures, which may have a material adverse effect on our profits and our revenues. The volume of
products sold for specific customers varies from year to year, especially since we are not the exclusive supplier for any customers.
In addition, there are a number of factors, other than our performance, that could cause an unpredictable loss of a customer or
substantial reduction in the business. For example, our customers may decide to reduce spending on our products due to insufficient
funding or delay of the project, or a customer may no longer need our products following the completion of a project. The loss
of any one of our major customers, a decrease in the volume of sales to these customers or a decrease in the price at which we
sell our products to them could materially adversely affect our profits and our revenues.
In addition, this customer
concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given their relative
size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and we accept such
unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of
operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend
upon the timing and volume of business from our largest customers and the financial and operational success of these customers.
Bank Loans and Bank Acceptance Notes
At December 31, 2016, we
had approximately $16.9 million of short-term bank loans and $9.6 million of bank acceptance notes outstanding, as compared to
approximately $17.7 million of short-term bank loans and $12.5 million of bank acceptance notes outstanding at December 31, 2015
and $18.7 million and $26.5 million at December 31, 2014, respectively. The decreased balance in 2016 was primarily due to the
fact that the Chinese government was still conservative in lending to certain industries including steel industry and our domestic
customers.
Our notes payable of $12.5
million at December 31, 2015 and $9.6 million at December 31, 2016 represented the amount of bank acceptance notes our suppliers
received from us for our purchases of raw materials. These notes were issued by financial institutions, typically by banks, that
entitle our suppliers to receive the full face amount from the bank or financial institution at maturity. Our notes payable are
interest-free and range from six months to one year from the date of issuance. These notes are subject to bank charges of 0.05%
of the principal amount as commission on each issuance and in total were secured by $8.8 million and $6.7 million restricted cash
as of December 31, 2015 and 2016, respectively. Bank acceptance notes are commonly used in domestic China due to their enhanced
credibility and the liquidity it provides to the bearer. The bearer always has the option to cash the bank acceptance notes before
maturity at its issuing bank and receive a discounted amount in cash. We expect that bank acceptance notes will continue to account
for a material portion of our total receivables and payables in the near future.
Short-term bank loans were
obtained from local banks in China. All short-term bank loans are repayable within one year and are secured by a portion of our
property, plant and equipment and land use rights, or guaranteed by related parties. None of our short-term bank loans have financial
covenants. However, each loan contains a covenant that restricting our use of the funds to either purchases of raw materials or
working capital.
The weighted average annual
interest rate of our short-term bank loans was 6.11%, 6.18% and 7.14% as of December 31, 2016, 2015 and 2014, respectively. Interest
expense was $1.1 million, $1.0 million and $1.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Due to the Chinese government’s
policy to reduce the country’s steel capacity, Chinese banks further tightened lending to steel companies. We were also affected
by this policy and we had to repay a portion of our short term bank loans in 2016 without being able to roll-over such loans into
new short-term loans. However, we did not experience difficulties in the rollover of the remaining short-term bank loans that we
use to fund our daily operations in 2016. In 2014, our subsidiary, Ossen Innovation Materials Co., Ltd., raised RMB 100 million
(approximately $16.2 million) in Chinese debt market and it was repaid upon its mature in September 2016. We anticipate rollovers
of most current facilities that are set to mature in 2017 and anticipate a slight reduction in the availability of short-term bank
loans but we do not anticipate any difficulties to fund our operations. Three of our affiliates, namely Ossen Material Research
(formerly Shanghai ZFX), Shanghai Ossen, and Ossen Shanghai, have provided guarantees for certain of our short-term bank loans
for no consideration. There can be no assurance that Shanghai Zhaoyang, Ossen Material Research, Ossen Shanghai, and Shanghai Ossen
will be willing or able to continue to provide similar guarantees on this basis with respect to future borrowings. We usually maintain
lines of credit with several local banks, which will be utilized to fund our short term operation and fulfill liabilities.
Working Capital
Our working capital was
approximately $101.6 million at December 31, 2016, as compared to $94.7 million at December 31, 2015 and $108.0 million at December
31, 2014.
The working capital increase
of $6.9 million in 2016 as compared with 2015 was due primarily to the repayment of bond and the increase in bank acceptance note,
partially offset by the decrease in accounts receivable and advance to suppliers . The working capital decrease of $13.3 million
in 2015 as compared with 2014 was due primarily to the increase in the current portion of bond payable.
Inventories
We, like many other steel
manufacturers, maintain substantial inventories of steel to accommodate the short lead times and just-in-time delivery requirements
of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate
to satisfy the anticipated needs of our customers based upon historic buying practices, supply agreements with customers and market
conditions.
Cash Flows
Our cash flow from operations
in 2015 was positive primarily due to a decrease in accounts receivable. In 2016, our cash flow from operations was positive primarily
due to the decrease in advance to suppliers and inventories. Despite the increase in cash from operating activities in 2016, we
had a decrease of $0.6 million in cash and cash equivalent primarily due to effect of exchange rate changes on cash was $8.6 million.
Years Ended December 31, 2016 and 2015
The following table sets
forth a summary of our net cash flow information for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
15,528,845
|
|
|
$
|
12,441,861
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(17,537
|
)
|
|
|
(29,687
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(7,523,571
|
)
|
|
|
(4,431,100
|
)
|
Operating Activities
Net cash provided by operating
activities was approximately $15.5 million in 2016, as compared to $12.4 million of net cash provided by operating activities in
2015. This increase in cash provided by operating activities was the result of a $1.3 million decrease in inventories due to higher
consumption of raw materials at the end of 2016, a $9.0 million decrease in advance to suppliers due to less prepayments for raw
materials of plain surface and zinc coated products, partially offset by a $1.3 million decrease in net income due to higher operating
expenses and a $7.3 million increase in notes receivable because our customers used less cash for payment.
Investing Activities
Net cash used in investing
activities was $17,537 in 2016, as compared to $29,687 of net cash used in investing activities in 2015 as the result of less spending
in maintenance and repair of production lines in 2016.
Financing Activities
Net cash used in financing
activities in 2016 was approximately $7.5 million, as compared to approximately $4.4 million of net cash used in financing activities
in 2015. The increase in cash used in financing activities was the result of the repayment of bond, a decrease in proceeds from
notes payable and a decrease in restricted cash, partially offset by an increase in proceeds from short-term bank loans, an increase
in proceeds from long-term bank loans and a decrease in repayment of notes payable.
Years Ended December 31, 2015 and 2014
The following table sets
forth a summary of our net cash flow information for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
12,441,861
|
|
|
$
|
1,804,435
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(29,687
|
)
|
|
|
(80,985
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,431,100
|
)
|
|
|
(3,500,632
|
)
|
Operating Activities
Net cash provided by operating
activities was approximately $12.4 million in 2015, as compared to $1.8 million of net cash provided by operating activities in
2014. This increase in cash provided by operating activities was the result of a $2.5 million increase in net income due to improved
gross margin and reduced SG&A expenses, a $10.5 million decrease in accounts receivable due to increased efforts to collect
long aging accounts receivable, a $1.9 million decrease in notes receivable because our customers used more cash for payment, partially
offset by a $7.1 million increase in inventories due to raw materials purchased for preparation of new projects.
Investing Activities
Net cash used in investing
activities was $29,687 in 2015, as compared to $80,985 of net cash provided by investing activities in 2014 as the result of less
spending in maintenance and repair of production lines in 2015.
Financing Activities
Net cash used in financing
activities in 2015 was approximately $4.4 million, as compared to approximately $3.5 million of net cash used in financing activities
in 2014. The increase in cash used in financing activities was the result of a decrease of proceeds from short-term bank loans
and a decrease of proceeds from notes payable, partially offset by a decrease in restricted cash and a decrease in repayments of
short-term bank loans.
5C. Research and Development, Patents and Licenses, etc.
See the discussion under the headings “Research
and Development”, “Intellectual Property” and “Patents” in Item 4 above.
5D. Trend Information
See discussion in Parts
A and B of this item.
5.E. Off-Balance Sheet Arrangements
As of December 31, 2016
we guaranteed $59.8 million, $70.6 million and $28.5 million short-term debt for Shanghai Pujiang, Ossen Material Research and
Ossen Shanghai respectively. We also guaranteed $7.2 million, nil and $2.2 million of notes payable for the three companies respectively.
We do not have any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to our investors.
5.F. Tabular Disclosure of Contractual Obligations
Our contractual obligations
consist of short-term and long-term debt obligations. The following table sets forth a breakdown of our contractual obligations
as of December 31, 2016:
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
CONTRACTUAL OBLIGATIONS
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt obligations
(1)
|
|
|
26,502,811
|
|
|
|
26,502,811
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest Commitments – Short-term bank loans
|
|
|
692,798
|
|
|
|
692,798
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt obligations
(2)
|
|
|
7,207,727
|
|
|
|
-
|
|
|
|
7,207,727
|
|
|
|
-
|
|
|
|
-
|
|
Interest Commitments – Long-term bank loans
|
|
|
1,537,648
|
|
|
|
576,618
|
|
|
|
961,030
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
35,940,984
|
|
|
|
27,772,227
|
|
|
|
8,168,757
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Attributable to short-term bank loans and bank acceptance notes.
|
|
(2)
|
Attributable to long-term bank loans.
|
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
6.A. Directors, Executive Officers and Key Employees
The following table sets
forth the name, age, positions and a brief description of the business experience of each of our directors, executive officers
and key employees as of the date hereof.
Name
|
|
Position(s)
|
|
Age
|
|
|
|
|
|
Liang Tang
|
|
Chairman of the Board
|
|
50
|
|
|
|
|
|
Wei Hua
|
|
Chief Executive Officer, Chief Financial Officer and Director
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Junhong Li
|
|
Director
|
|
51
|
|
|
|
|
|
Xiaobing Liu
|
|
Director
|
|
58
|
|
|
|
|
|
Yingli Pan
|
|
Director
|
|
63
|
|
|
|
|
|
Zhongcai Wu
|
|
Director
|
|
68
|
There are no family relationships
among our directors and officers. There are no arrangements or understandings with major shareholders, customers, suppliers or
others, pursuant to which any person referred to above was selected as a director or member of senior management, except as disclosed
in Note 10 in the “accompanying consolidated financial statements”. The address of each of our directors and executive
officers is c/o Ossen Innovation Co., Ltd., 518 Shangcheng Road, Floor 17, Shanghai, 200120, People’s Republic of China.
Executive Officers and Directors
Dr. Liang Tang
was
appointed as our Chairman following our business combination. Dr. Tang has been the Chairman and President of Ossen Materials,
our subsidiary, since 2008. Dr. Tang has also been President of Shanghai Ossen Investment Holding (Group) Co., Ltd. since 2001.
He has more than 20 years of experience in the steel industry. Prior to joining our Company in 2004, from 1994 until 1998, Dr.
Tang was the President of Zhongmin Group of PRC Ministry of Civil Affairs. From 1988 until 1994, Dr. Tang was Head of Enterprise
Administrative Division of the Shanghai Municipal Metallurgical Industry Bureau. Prior to that date, Dr. Tang was the Deputy Director
of Enterprise Management at Baosteel Group Shanghai Ergang Co., Ltd., a competitor of ours. Dr. Tang is involved in many charity
affairs and social organizations including China Committee of Corporate Citizenship and China Chamber of Metallurgy Industry. Dr.
Tang has received the title of Shanghai Leader by the Shanghai Municipal Government, Outstanding Innovation Entrepreneur by the
Symposium on Chinese Enterprise Innovation and the Royal Knight Medal of Spain by the King of Spain. Dr. Tang received a bachelor’s
degree from Shanghai University, a Masters degree in International Finance from Peking University and an MBA from Fordham University.
Dr. Tang also received a doctoral degree in world economics from East China Normal University.
Mr. Wei Hua
was
appointed as our CEO and a director of ours following our business combination. In January 1, 2017, Mr. Hua was appointed as our
CFO. Mr. Hua has served as Chairman of the Board of Directors of Ossen Jiujiang since 2007. Since 2000, he has been the Assistant
Chief Executive Officer for the Steel Department of Ossen Group. Before joining Ossen Group in 2000, from 1988 until 2000, Mr.
Hua was a vice supervisor of the department of technology and quality supervision at Baosteel Group Shanghai Ergang Co., Ltd. From
1985 until 1988, Mr. Hua worked at Shanghai No. 5 steel factory. He graduated from Shanghai University with a degree in Business
Management.
Mr. Junhong Li
has
been one of our directors since July 2010. Mr. Li has been the Senior Partner and Deputy Chief Accountant at Continental Certified
Public Accountants since 2008. Prior to joining Continental Certified Public Accountants in 2008, from 2007 until 2008, Mr. Li
was the Executive Director and Chief Financial Officer of ZMAY Holdings Limited. From 2004 until 2007, Mr. Li was Chief Financial
Officer of Zhongmin On Line Technology Co. Ltd. Mr. Li has more than 20 years of experience in mergers and acquisitions, reorganizations
and management consulting. Mr. Li received a bachelor’s degree from Central University of Finance and Economics and he is
qualified as a certified public accountant.
Mr. Xiaobing Liu
has been one of our directors since July 2010. Mr. Liu has served as Chairman of the Board of Huachen Trust since 2009. From 2005
until 2009, Mr. Liu was Chairman of the Board of Directors of Shanghai Dingfeng Technology Co., Ltd. Since 2002, he has also been
an independent director of Southern Building Material Co., Ltd. Mr. Liu graduated from the University of Shanghai for Science and
Technology with a bachelor’s degree in optical instruments.
Ms. Yingli Pan
has
been one of our directors since July 2010. Professor Pan has been a professor in the Department of Finance at Antai College of
Economics & Management of Shanghai since 2005. Prior to being appointed professor at Antai College of Economics & Management
of Shanghai in 2005, from 1994 until 2005, Professor Pan was a professor in the Finance Department at East China Normal University.
Professor Pan received a bachelor’s degree in economics from East China Normal University, a master’s degree in economics
from Shanghai University of Finance and Economics and a doctoral degree in economics from East China Normal University.
Mr. Zhongcai Wu
has been one of our directors since July 2010. Mr. Wu has been Chief Engineer in the Communications Department of Yunnan Province
since 2002. Mr. Wu received a bachelor’s degree in road and bridge engineering from Hunan University.
Each of our directors will
serve as a director until our next annual general meeting and until their successors are duly elected and qualified.
6.B. Compensation
For the year ended December
31, 2016, the aggregate cash compensation that we paid to our executive officers and directors was approximately $86,300. For the
year ended December 31, 2015, the aggregate cash compensation that we paid to our executive officers and directors was approximately
$86,300. There are no service contracts between us and any of our directors, except for those directors who are also our executive
officers. Pursuant to PRC law, 25% of our executive officers’ salaries have been set aside for pension and retirement.
Employment Agreements
We have entered into an
employment agreement with Dr. Liang Tang. Dr. Tang is employed as Chairman of the Board of our Company. The term of his agreement
expired on December 31, 2016. As of the date hereof, the term of the agreement has been automatically extended to December
31, 2021.We compensate Dr. Tang at an annual rate of approximately $14,106. We may terminate the employment agreement for cause
as specified in the agreement. Dr. Tang may terminate the employment agreement with thirty days written notice. The employment
agreement may be renewed upon the mutual agreement of the parties.
Effective December 31,
2016, Mr. Feng Peng, resigned from the Company. Mr. Wei Hua, Chief Executive Officer of the Company is acting as interim CFO during
the transition and search period for a new CFO.
Each executive officer
has agreed to hold in confidence any confidential information that he has obtained about the Company.
6.C. Board Practices
Terms of Directors and Officers
Expiration of Term of Directors
Pursuant to our memorandum
and articles of association, the business of our company is managed by our board of directors. Commencing with the first annual
meeting of the shareholders, directors are elected for a term of office to expire at the next succeeding annual meeting of the
shareholders after their election. Each director will hold office until the expiration of his or her term of office and until his
or her successor has been elected and qualified, or until his or her earlier death, resignation or removal by the shareholders
or a resolution passed by the majority of the remaining directors.
In the interim between annual
meetings of shareholders, or special meetings of shareholders called for the election of directors, any vacancy on the board of
directors may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by
the sole remaining director. A director elected to fill a vacancy resulting from death, resignation or removal of a director will
serve for the remainder of the full term of the director whose death, resignation or removal will have caused such vacancy and
until his successor will have been elected and qualified.
Director Remuneration Upon Termination
The directors may receive
such remuneration as our board of directors may determine from time to time. The compensation committee will assist the directors
in reviewing and approving the compensation structure for the directors. Currently, our directors are not entitled to receive any
remuneration upon termination of employment.
Audit Committee
Our audit committee consists
of Junhong Li, Yingli Pan and Xiaobing Liu, each of whom satisfies the independence requirements of Rule 10A-3 under the Securities
Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and Rule 5605 of the NASDAQ rules. The audit committee
oversees our accounting and financial reporting processes and audits of the financial statements of our company. The audit committee
is responsible for, among other things:
|
·
|
selecting our independent auditors and pre-approving all audit and non-audit services permitted
to be performed by our independent auditors;
|
|
·
|
reviewing with our independent auditors any audit problems or difficulties and management’s
response;
|
|
·
|
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation
S-K;
|
|
·
|
discussing our annual audited financial statements with management and our independent auditors;
|
|
·
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps
adopted in light of material control deficiencies; and
|
|
·
|
meeting separately and periodically with management and our independent auditors.
|
Compensation Committee
Our compensation committee
consists of Xiaobing Liu, Yingli Pan and Junhong Li, each of whom satisfies the independence requirements of Rule 5605 of the NASDAQ
rules. The compensation committee assists the Board in reviewing and approving the compensation structure, including all forms
of compensation relating to our directors and executive officers. Our Chief Executive Officer may not be present at any committee
meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
|
·
|
reviewing and approving the total compensation package for our senior executives; and
|
|
·
|
reviewing periodically, and approving, any long-term incentive compensation or equity plans, programs
or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
|
Corporate Governance and Nominating Committee
Our corporate governance
and nominating committee consists of Yingli Pan, Zhongcai Wu and Xiaobing Liu, each of whom satisfies the independence requirements
of Rule 5605 of the NASDAQ rules. The corporate governance and nominating committee assists the board in selecting individuals
qualified to become members of our board and in determining the composition of the board and its committees. The corporate governance
and nominating committee is responsible for, among other things:
|
·
|
identifying and recommending to the board qualified candidates to be nominated for the election
or re-election to the board of directors and committees of the board of directors, or for appointment to fill any vacancy;
|
|
·
|
reviewing annually with the board of directors the current composition of the board of directors
with regards to characteristics such as independence, age, skills, experience and availability of service to us; and
|
|
·
|
advising the board of directors periodically with regard to significant developments in the law
and practice of corporate governance as well as our compliance with these laws and practices, and making recommendations to the
board of directors on all matters of corporate governance and on any remedial actions to be taken, if needed.
|
6.D. Employees
See the section entitled “Employees”
in Item 4.B above.
6.E. Share Ownership
As of April 1, 2017, 19,791,110
of our ordinary shares were outstanding. Holders of our ordinary shares are entitled to vote together as a single class on all
matters submitted to shareholders for approval. No holder of ordinary shares has different voting rights from any other holders
of ordinary shares. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Approximately 5,975,730 of our ordinary shares represented by American Depositary Receipts are held by an aggregate of 1 record
holder in the United States.
Beneficial ownership is
determined in accordance with the rules and regulations of the SEC. The percentages of shares beneficially owned in the table below
are based on 19,791,110 ordinary shares outstanding as of April 1, 2017.
The following table sets
forth information with respect to the beneficial ownership of our common shares as of April 1, 2017 by:
|
·
|
each of our directors and executive officers; and
|
|
·
|
each person known to us to beneficially own more than 5% of our outstanding ordinary shares.
|
Unless otherwise noted
below, the address for each listed shareholder, director or executive officer is 518 Shangcheng Road, Floor 17, Shanghai, 200120,
People’s Republic of China.
Name
|
|
Number of
Shares
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Directors, Executive Officers and 5% Shareholders
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liang Tang
|
|
|
11,889,500
|
|
|
|
60.1
|
%
|
|
|
|
|
|
|
|
|
|
Wei Hua
(2)
|
|
|
600,000
|
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
Junhong Li
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Xiaobing Liu
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Yingli Pan
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Zhongcai Wu
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Percentage
of beneficial ownership of each listed person is based on ordinary shares outstanding as of the date of this filing, including
ordinary shares convertible from all outstanding preferred shares, and the ordinary shares underlying any options and warrants
exercisable by such person within 60 days of the date of this filing. Percentage of beneficial ownership of each listed person
is based on ordinary shares outstanding as of March 15, 2016 and the ordinary shares underlying any options and warrants exercisable
by such person within 60 days of the date of this filing.
|
|
(2)
|
The spouse of our chief executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme
Development Ltd., which owned 3% of the shares of Ossen Innovation Group prior to the business combination, and owns 3% of our
shares since the business combination. Mr. Hua may be deemed to beneficially own these shares under SEC rules and regulations.
|
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
7.A. Major Shareholders
See Item 6.E., “Share
Ownership,” for a description of our major shareholders.
7.B. Related Party Transactions
Transfers of Shares Between Related Parties
Several of our subsidiaries
and affiliates which are, or at one time were, controlled by our chairman, transferred shares with other entities controlled by
Dr. Tang. See the discussion under Item 4.C above for a description of these transactions.
Issuance of Shares to Related Parties
The spouse of our chief
executive officer, Wei Hua, owns 100% of the shares of Fascinating Acme Development Ltd., which owns 3% of our outstanding ordinary
shares. The spouse of the chief executive officer of Ossen Material Research, which is an affiliated company of ours that supplies
us with raw materials, owns 100% of the shares of Gross Inspiration Development Ltd., which owns 3% of our outstanding ordinary
shares.
Purchases from a Related Party
Historically, we have purchased
a significant percentage of our raw materials from an affiliated entity, Ossen Material Research (formerly Shanghai ZFX), an agent
that supplies steel wire rods to prestressed concrete manufacturers in China such as our company. Ossen Material Research is controlled
by our chairman, Dr. Tang. Ossen Material Research is a member of the Ossen Group, whose relationship to us is described above
under the heading “Business – Overview.”
Ossen Material Research
procures materials from the limited number of high quality manufacturers and suppliers of our raw materials in the PRC. However,
since the introduction in 2009 of our rare earth coated materials, which undergo a coating process that reduces the loss in strength
and performance that prestressed materials otherwise undergo during our manufacturing processes, we have lowered the standards
for strength and performance requirements for our raw materials. As a result, we have been able to expand our supplier base to
include suppliers of products with lower levels of strength and performance and have not relied on supplies from Ossen Material
Research.
Guarantees
During the years ended December
31, 2016, 2015 and 2014 , Shanghai Ossen, an affiliate of ours, and Ossen Material Research (formerly Shanghai ZFX), an affiliate
of ours, and Ossen Shanghai, an affiliate of ours, provided guarantees for certain of our short-term and long-term bank loans.
The term of each of the short-term loans is within one year. The term of the long-term loans is within three years. The purpose
of these loans is to fund our working capital needs. Local banks have required guaranties pursuant to their standard regulations.
Shanghai Ossen Investment Co., Ltd. is a member of the Ossen Group, whose relationship to us is described above under the heading
“Business – Overview.”
Shanghai Ossen guaranteed
loans in the amount of $0 in 2016, $0 in 2015 and $4.9 million in 2014. Ossen Material Research guaranteed loans in the amount
of $1.3 million, $11.9 million and $8.1 million in 2016, 2015 and 2014, respectively. Ossen Material Research guaranteed notes
payable in the amount of $0, $0 and $14.8 million in 2016, 2015 and 2014, respectively. Ossen Shanghai guaranteed loans in the
amount of $0 million in 2016, $2.5 million in 2015 and $1.6 million in 2014. These guarantees in 2016, 2015 and 2014 were provided
for no consideration. In addition, in 2016, 2015 and 2014, we guaranteed loans in the amount of $59.8, $16.9 million and $15.5
million and notes payable in the amount of $7.2, $34.1 million and $21.3 for Shanghai Pujiang, we guaranteed loans in the amount
of $70.6, $32.3 million and $4.9 million and notes payable in the amount of $0, $12.3 million and $0 for Ossen Material Research,
and we guaranteed loans in the amount of $37.9, $7.7 million and $0 and notes payable in the amount of $2.2, $1.5 million and $0
for Ossen Shanghai.
There can be no assurance
that Ossen Material Research, Shanghai Ossen and Ossen Shanghai will be willing or able to continue to provide similar guarantees
on this basis with respect to future borrowings. The loans that have come due have been repaid by us in full.
The terms of the loan guarantees
between the guarantor and the bank provide for the following: if the borrower does not repay its loan, the bank may seek the principal
and interest of the loan from the guarantor; the guarantee period is typically one or two years from the date the guaranteed loan
is due, as determined by the lending bank; the bank may change the terms of the loan with the borrower without receiving the consent
of the guarantor; the guarantor indemnifies the bank for actual damage or loss because of any fraudulent misrepresentations made
by the guarantor and if the guarantor causes the contract to become invalid, the guarantor indemnifies the bank for damages and
losses.
7.C. Interests of Experts and Counsel
Not applicable.
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ITEM 8.
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FINANCIAL INFORMATION
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Consolidated Statements and Other Financial Information
The financial statements
required by this item may be found at the end of this report on 20-F, beginning on page F-1.
Legal Proceedings
We are not currently, and
have not recently been, a party to any material legal or administrative proceedings. We are not aware of any material legal or
administrative proceedings threatened against us. From time to time, we are subject to various legal or administrative proceedings
arising in the ordinary course of our business.
Dividends
We have never declared
or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the future.
We currently intend to retain all future earnings to finance our operations and to expand our business.
No Significant Changes
No significant changes
to our financial condition have occurred since the date of the annual financial statements contained herein.
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ITEM 9.
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THE OFFER AND LISTING
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9.A. Offer and Listing Details
Our ADS’s are listed
for trading on the NASDAQ Capital Market under the symbol “OSN.” The shares began trading on December 21, 2010 on the
NASDAQ Global Market. The listing of our ADS’s was transferred to the NASDAQ Capital Market on July 30, 2013. The trading
price for the ADSs was $2.16 on March 31, 2017.
In August 2016, the Company
announced a ratio change for its ADR program. As a result, the number of the Company's ordinary shares represented by each ADS
was changed from one (1) ordinary share to three (3) ordinary shares.
To effect this ratio change,
ADS holders will be required to exchange their existing ADSs for new ADSs on the basis of one (1) new ADS for every three (3) existing
ADSs surrendered. If the aggregate number of ADSs to which a holder is entitled results in a fractional ADS, such fractions will
be sold, if possible, and the net proceeds, if any, will be distributed to such holder.
The table below shows,
for the periods indicated the high and low market prices on the NASDAQ for the ADSs and all prices have been retroactively adjusted
to reflect the current ADS-to-ordinary share ratio of one ADS to three ordinary shares, which became effective on August 22, 2016,
for all periods presented.
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
4.11
|
|
|
$
|
3.24
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
$
|
3.48
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
4.14
|
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
3.57
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.40
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
$
|
2.94
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
3.42
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
3.00
|
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.82
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
$
|
3.30
|
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
3.12
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
2.36
|
|
|
$
|
1.99
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.72
|
|
|
$
|
1.96
|
|
The table below sets forth
the high and low closing market prices for our shares on NASDAQ during the most recent six-month period (all prices have been retroactively
adjusted to reflect the current ADS-to-ordinary share ratio of one ADS to three ordinary shares, which became effective on August
22, 2016, for all periods presented):
|
|
High
|
|
|
Low
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
|
|
$
|
2.30
|
|
|
$
|
2.05
|
|
|
|
|
|
|
|
|
|
|
November
|
|
$
|
2.36
|
|
|
$
|
1.99
|
|
|
|
|
|
|
|
|
|
|
December
|
|
$
|
2.17
|
|
|
$
|
2.02
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
$
|
2.25
|
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
February
|
|
$
|
2.72
|
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
March
|
|
$
|
2.28
|
|
|
$
|
2.01
|
|
9.B. Plan of Distribution
Not Applicable.
9.C. Markets
Our ADS’s are currently
traded on the NASDAQ Capital Market.
9.D. Selling Shareholders
Not Applicable.
9.E. Dilution
Not Applicable.
9.F. Expenses of the Issuer
Not Applicable.
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a British Virgin
Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association and
the BVI Business Companies Act, 2004 (as amended from time to time) which is referred to as the BVI Act below. The following description
of certain provisions of our memorandum and articles of association does not propose to be complete and is qualified in its entirety
by our memorandum and articles of association.
Ordinary Shares
Certificates representing
our ordinary shares are issued in registered form. Our shareholders who are nonresidents of the British Virgin Islands may freely
hold and vote their shares. We are currently authorized to issue 100,000,000 ordinary shares. We do not have the power to issue
bearer shares.
Charter
Our charter documents consist
of our amended and restated memorandum of association and our amended and restated articles of association, or the memorandum and
articles of association. We may amend our memorandum and articles of association generally by a special resolution of our shareholders.
Corporate Powers
Ultra Glory was incorporated
under the BVI Act on January 21, 2010. Pursuant to our memorandum of association, the objects for which we were established are
unrestricted and we have full power and authority to carry out any objects not prohibited by the BVI Act, as the same may be revised
from time to time, or any other law of the British Virgin Islands, except that we have no power to carry on banking or trust business,
business as an insurance or reinsurance company, insurance agent or insurance broker, the business of company management, the business
of providing the registered office or the registered agent for companies incorporated in the British Virgin Islands, or business
as a mutual fund, mutual fund management or mutual fund administrator, unless we obtain certain licenses under the laws of the
British Virgin Islands.
Board Composition
Pursuant to our memorandum
and articles of association, the business of our company is managed by our board of directors. Commencing with the first annual
meeting of the shareholders, directors are elected for a term of office to expire at the next succeeding annual meeting of the
shareholders after their election. Each director will hold office until the expiration of his or her term of office and until his
or her successor has been elected and qualified, or until his or her earlier death, resignation or removal by the shareholders
or a resolution passed by the majority of the remaining directors.
In the interim between
annual meetings of shareholders, or special meetings of shareholders called for the election of directors, any vacancy on the board
of directors may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or
by the sole remaining director. A director elected to fill a vacancy resulting from death, resignation or removal of a director
will serve for the remainder of the full term of the director whose death, resignation or removal will have caused such vacancy
and until his successor will have been elected and qualified.
There is no cumulative
voting by shareholders for the election of directors. We do not have any age-based retirement requirement and we do not require
our directors to own any number of shares to qualify as a director.
Board Meetings
Board meetings may be held
at the discretion of the directors at such times and in such manner as the directors may determine upon not less than three days
notice having been given to all directors. Decisions made by the directors at meetings shall be made by a majority of the directors.
There must be at least a majority of the directors (with a minimum of two) at each meeting.
Directors Interested
in a Transaction
A director must, immediately
after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by us, disclose such
interest to the board of directors. A director who is interested in a transaction entered into, or to be entered into, by the company,
may vote on a matter related to the transaction, attend a meeting of directors at which a matter relating to the transaction arises
and be included among the directors present at the meeting for the purposes of a quorum and sign a document on behalf of the company,
or do any other thin in his capacity as a director, that relates to the transaction. A director is not required to disclose his
interest in a transaction or a proposed transaction to our board of directors if the transaction or proposed transaction is between
the director and us, or the transaction or proposed transaction is or is to be entered into the ordinary course of our business
and on usual terms and conditions.
The directors may exercise
all powers of our company to borrow money, mortgage or charge our undertakings and property, issue debentures, debenture shares
and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third
party.
Our directors may, by resolution,
fix the compensation of directors in respect of services rendered or to be rendered in any capacity to us.
A director may attend and
speak at any meeting of the shareholders and at any separate meeting of the holders of any class of our shares.
Rights of Shares
We are currently authorized
to issue 100,000,000 ordinary shares. The shares are made up of one class and one series, namely ordinary shares with a par value
of $0.01 per share. The ordinary shares have one vote each and have the same rights with regard to dividends paid by the company
and distributions of the surplus assets of the company.
We may purchase, redeem
or acquire our shares, provided that we obtain the consent of the member whose shares are being purchased, redeemed or otherwise
acquired.
Issuance of Shares;
Variation of Rights of Shares
Our articles of association
provide that directors may, without limiting or affecting any right of holders of existing shares, offer, allot, grant options
over or otherwise dispose of our unissued shares to such persons at such times and for such consideration and upon such terms and
conditions as the directors may determine.
Without prejudice to any
special rights previously conferred on the holders of any existing shares or class of shares, we may issue shares, with such preferred,
deferred or other special rights or such restrictions, whether in regard to dividend, voting or otherwise, as the directors from
time to time may determine.
If we issue shares of more
than one class, we will further amend and restate our Memorandum and Articles of Association to reflect the rights attached to
any class (unless otherwise provided by the terms of issue of the shares of that class) as may be varied with the consent in writing
of the holders of not less than three-fourths of the issued shares of that class and the holders of not less than three-fourths
of the issued shares of any other class of shares which may be affected by such variation. The rights conferred upon the holders
of the shares of any class issued with preferred or other rights will not, unless otherwise expressly provided by the terms of
issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
Shareholders Meetings
Under our memorandum and
articles of association, we are required to hold an annual meeting of shareholders each year at such date and time determined by
our directors. Meetings of shareholders may be called pursuant to board resolution or the written request of shareholders holding
more than 30% of the votes of our outstanding voting shares. Written notice of meetings of shareholders must be given to each shareholder
entitled to vote at a meeting not fewer than 10 days prior to the date of the meeting, with certain limited exceptions. The written
notice will state the place, time and business to be conducted at the meeting. The shareholders listed in our share register on
the date prior to the date the notice is given shall be entitled to vote at the meeting, unless the notice provides a different
date for determining the shareholders who are entitled to vote.
A meeting of shareholders
held without proper notice will be valid if shareholders holding 90% majority of the total number of shares entitled to vote on
all matters to be considered at the meeting, or 90% of the votes of each class or series of shares where shareholders are entitled
to vote thereon as a class or series, together with an absolute majority of the remaining votes, have waived notice of the meeting
and, for this purpose, presence of a shareholder at the meeting is deemed to constitute a waiver. The inadvertent failure of the
directors to give notice of a meeting to a shareholder, or the fact that a shareholder has not received notice, will not invalidate
a meeting.
Shareholders may vote in
person or by proxy. No business may be transacted at any meeting unless a quorum of shareholders is present. A quorum consists
of the presence in person or by proxy of holders entitled to exercise at least 50% of the voting rights of the shares of each class
or series of shares entitled to vote as a class or series thereon and the same proportion of the votes of the remaining shares
entitled to vote thereon.
Changes in the Maximum
Number of Shares the Company is Authorized to Issue
Subject to the provisions
of the BVI Act, we may, by a resolution of shareholders, amend our memorandum and articles of association to increase or decrease
the number of shares authorized to be issued. Our directors may, by resolution, authorize a distribution by us at a time, of an
amount, and to any shareholders they think fit if they are satisfied, on reasonable grounds, that we will, immediately after the
distribution, satisfy the solvency test as set forth in the BVI Act, which requires that the value of a company’s assets
exceeds its liabilities, and the company is able to pay its debts as they fall due.
Indemnification
Subject to the provisions
of the BVI Act, we may indemnify any person who (a) is or was a party or is threatened to be made a party to any threatened, pending
or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or
was a director of our company; or (b) is or was, at our request, serving as a director of, or in any other capacity is or was acting
for, another company or a partnership, joint venture, trust or other enterprise, against all expenses, including legal fees, and
against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or
investigative proceedings.
Material Differences between U.S. Corporate
Law and British Virgin Islands Corporate Law
The BVI Act differs from
laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the material differences between the
provisions of the BVI Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Differences in Corporate
Law
We were incorporated under,
and are governed by, the laws of the British Virgin Islands. The corporate statutes of the State of Delaware and the British Virgin
Islands are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt memorandum of association
and articles of association that will provide shareholders with rights that do not vary in any material respect from those they
would enjoy if we were incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a
summary of some of the differences between provisions of the BVI Act applicable to us and the laws applicable to companies incorporated
in Delaware and their shareholders.
Director’s Fiduciary
Duties
Under Delaware corporate
law, a director of a Delaware corporation has a fiduciary duty to the corporation and its stockholders. This duty has two components:
the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily
prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to
stockholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that
a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate
position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of
the corporation and its stockholders take precedence over any interest possessed by a director, officer or controlling stockholder
and not shared by the stockholders generally. In general, actions of a director are presumed to have been made on an informed basis,
in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption
may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction
by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to
the corporation.
British Virgin Islands
law provides that every director of a British Virgin Islands company, in exercising his powers or performing his duties, shall
act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the
director shall exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking
into account, but without limitation, the nature of the company, the nature of the decision, the position of the director and the
nature of his responsibilities. In addition, British Virgin Islands law provides that a director shall exercise his powers as a
director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes British Virgin Islands
law or the memorandum association or articles of association of the company.
Amendment of Governing
Documents
Under Delaware corporate
law, with very limited exceptions, a vote of the stockholders is required to amend the certificate of incorporation. Under British
Virgin Islands law, no article or regulation shall be amended, rescinded or altered, and no new article shall be made, without
the approval of the members pursuant to a special resolution, unless the memorandum of association and articles of association
provide otherwise.
Written Consent of Directors
Under Delaware corporate
law, directors may act by written consent only on the basis of a unanimous vote. Under British Virgin Islands law, directors’
consents need only a majority of directors signing to take effect.
Written Consent of Shareholders
Under Delaware corporate
law, unless otherwise provided in the certificate of incorporation, any action to be taken at any annual or special meeting of
stockholders of a corporation, may be taken by written consent of the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to take such action at a meeting. As permitted by British Virgin Islands law, shareholders’
consents need only a majority of shareholders signing to take effect. Our memorandum of association and articles of association
provide that, other than changes to our memorandum of association and articles of association, shareholders may approve corporate
matters by way of a resolution consented to at a meeting of shareholders or in writing by a majority of shareholders entitled to
vote thereon. Changes to our memorandum of association and articles of association require the approval of 66 2/3% of the votes
of shareholders.
Shareholder Proposals
Under Delaware corporate
law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice
provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized
to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law
and our memorandum of association and articles of association provide that our directors shall call a meeting of the shareholders
if requested in writing to do so by shareholders entitled to exercise at least 30% of the voting rights in respect of the matter
for which the meeting is requested.
Sale of Assets
Under Delaware corporate
law, a vote of the stockholders is required to approve the sale of assets only when all or substantially all assets are being sold.
In the British Virgin Islands, shareholder approval is required when more than 50% of the company’s total assets by value
are being disposed of or sold.
Dissolution; Winding
Up
Under Delaware corporate
law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100%
of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved
by a simple majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include
in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
As permitted by British Virgin Islands law and our memorandum of association and articles of association, we may be voluntarily
liquidated under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities and
we are able to pay our debts as they fall due.
Redemption of Shares
Under Delaware corporate
law, any stock may be made subject to redemption by the corporation at its option or at the option of the holders of such stock
provided there remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property or rights,
as specified in the certificate of incorporation or in the resolution of the board of directors providing for the issue of such
stock. As permitted by British Virgin Islands law, and our memorandum of association and articles of association, shares may be
repurchased, redeemed or otherwise acquired by us. Our directors must determine that immediately following the redemption or repurchase
we will be able to satisfy our debts as they fall due and the value of our assets exceeds our liabilities.
Variation of Rights
of Shares
Under Delaware corporate
law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class,
unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, and our memorandum of association
and articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached
to any class only with the consent in writing of holders of not less than three-fourths of the issued shares of that class and
holders of not less than three-fourths of the issued shares of any other class of shares which may be affected by the variation.
Removal of Directors
Under Delaware corporate
law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding
shares entitled to vote, unless the certificate provides otherwise. As permitted by British Virgin Islands law and our memorandum
of association and articles of association, directors may be removed by resolution of directors or resolution of shareholders,
with or without cause.
Mergers
Under the BVI Act, two
or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more
constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies
into a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of
merger or consolidation which must be authorized by a resolution of shareholders.
Shareholders not otherwise
entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains
any provision which, if proposed as an amendment to the memorandum association or articles of association, would entitle them to
vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger
or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve
the plan of merger or consolidation.
Inspection of Books
and Records
Under Delaware corporate
law, any shareholder of a corporation may for any proper purpose inspect or make copies of the corporation’s stock ledger,
list of shareholders and other books and records. Under the BVI Act, members, upon giving written notice to us, are entitled to
inspect the register of members, the register of directors and minutes of resolutions of members, and to make copies of these documents
and records.
Conflict of Interest
The BVI Act provides that
a director shall forthwith, after becoming aware that he is interested in a transaction entered into or to be entered into by the
company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest does
not affect the validity of a transaction entered into by the director or the company. A transaction entered into by us, in respect
of which a director is interested, is voidable by us unless the director’s interest was disclosed to the board prior to the
company’s entry into the transaction or was not required to be disclosed. A transaction is not voidable if the material facts
of the director’s interest are known by the members entitled to vote or if the transaction is approved or ratified by a resolution
of members. As permitted by British Virgin Islands law and our memorandum of association and articles of association, a director
interested in a particular transaction may vote on it, attend meetings at which it is considered, and sign documents on our behalf
which relate to the transaction.
Transactions with Interested
Shareholders
Delaware corporate law
contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically
elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in
certain business combinations with an “interested shareholder” for three years following the date that such person
becomes an interested shareholder. An interested shareholder generally is a person or group who or that owns or owned 15% or more
of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential
acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply
if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves
either the business combination or the transaction that resulted in the person becoming an interested shareholder. This encourages
any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s
board of directors.
British Virgin Islands
law has no comparable provision.
Independent Directors
There are no provisions
under Delaware corporate law or under the BVI Act that require a majority of our directors to be independent.
Cumulative Voting
Under Delaware corporate
law, cumulative voting for elections of directors is not permitted unless the company’s certificate of incorporation specifically
provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors
since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which
increases the shareholder’s voting power with respect to electing such director. There are no prohibitions to cumulative
voting under the laws of the British Virgin Islands, but our memorandum of association and articles of association do not provide
for cumulative voting.
Anti-takeover Provisions
in Our Memorandum of Association and Articles of Association
Some provisions of our
memorandum of association and articles of association may discourage, delay or prevent a change in control of our company or management
that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares
in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.
10.C. Material Contracts
We have not entered into
any material contracts other than in the ordinary course of business and other than those described in this annual report.
10.D. Exchange Controls
British Virgin Islands
There are currently no exchange
control regulations in the British Virgin Islands applicable to us or our shareholders.
The PRC
China regulates foreign
currency exchanges primarily through the following rules and regulations:
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Foreign Currency Administration Rules of 1996, as amended; and
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Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.
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As we disclosed in the
risk factors above, Renminbi is not a freely convertible currency at present. Under the current PRC regulations, conversion of
Renminbi is permitted in China for routine current-account foreign exchange transactions, including trade and service related foreign
exchange transactions, payment of dividends and service of foreign debts. Conversion of Renminbi for most capital-account items,
such as direct investments, investments in PRC securities markets and repatriation of investments, however, is still subject to
the approval of SAFE.
Pursuant to the above-mentioned
administrative rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions
at banks in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as
presentment of valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts
and outbound investment in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested
enterprises outside China are subject to limitations and requirements in China, such as prior approvals from the PRC Ministry of
Commerce or SAFE.
10.E. Taxation
The following summary of
the material British Virgin Islands, PRC and U.S. tax consequences of an investment in our ADSs or ordinary shares is based upon
laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive
effect. This summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible
tax considerations. This summary also does not deal with all possible tax consequences relating to an investment in our ADSs or
ordinary shares, such as the tax consequences under state, local, non-U.S., non-PRC, and non-British Virgin Islands tax laws. Investors
should consult their own tax advisors with respect to the tax consequences of the acquisition, ownership and disposition of our
ADSs or ordinary shares.
British Virgin Islands
Taxation
All dividends, interests,
rents, royalties, compensations and other amounts paid by us are exempt from all forms of taxation in the British Virgin Islands
and any capital gains realized with respect to any of our shares, debt obligations, or other securities are not subject to any
form of taxation in the British Virgin Islands. No estate, inheritance, succession or gift tax, rate, duty, levy or other charge
is payable under BVI law by persons who are not persons resident in the British Virgin Islands with respect to any of our shares,
debt obligation or other securities. There are currently no withholding taxes or exchange control regulations in the British Virgin
Islands applicable to us or our shareholders. Currently, there is no income tax treaty, convention or reciprocal tax treaty regarding
withholdings currently in effect between the United States and the British Virgin Islands. We will only be liable to pay payroll
tax with respect to employees employed and working in the British Virgin Islands. We do not currently have, and do not intend to
have in the near future, any employees in the British Virgin Islands.
People’s Republic
of China Taxation
Under the former Income
Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, any dividends payable by foreign-invested enterprises
to non-PRC investors were exempt from PRC withholding tax. In addition, any dividends payable, or distributions made, by us to
holders or beneficial owners of our shares would not be subject to any PRC tax, provided that such holders or beneficial owners,
including individuals and enterprises, were not deemed to be PRC residents under the PRC tax law and were not otherwise subject
to PRC tax.
On March 16, 2007, the
PRC National People’s Congress approved and promulgated a new PRC Enterprise Income Tax Law, which took effect as of January
1, 2008. Under the new tax law, enterprises established under the laws of non-PRC jurisdictions but whose “de facto management
body” are located in China are considered “resident enterprises” for PRC tax purposes. Under the implementation
regulations issued by the State Council relating to the new tax law, “de facto management body” is defined as the body
that has material and overall management control over the business, personnel, accounts and properties of an enterprise. In April
2009, the PRC State Administration of Taxation promulgated a circular to clarify the definition of “de facto management body”
for enterprises incorporated overseas with controlling shareholders being PRC enterprises. It remains unclear how the tax authorities
will treat an overseas enterprise invested or controlled by another overseas enterprise and ultimately controlled by PRC individual
residents as is in our case. We are currently not treated as a PRC resident enterprise by the relevant tax authorities. Since substantially
all of our management is currently based in China and may remain in China in the future, we may be treated as a “resident
enterprise” for the PRC tax purposes, in which case, we will be subject to PRC income tax as to our worldwide income at a
uniform income tax rate of 25%. In addition, the new tax law provides that dividend income between qualified “resident enterprises”
is exempt from income tax.
Moreover, the new tax law
provides that an income tax rate of 10% is normally applicable to dividends payable for earnings derived since January 1, 2008
to non-PRC investors who are “non-resident enterprises,” to the extent such dividends are derived from sources within
China. We are a British Virgin Islands holding company and substantially all of our income is derived from dividends, if any, we
receive from our operating subsidiaries located in China. Thus, dividends payable to us by our subsidiaries in China may be subject
to the 10% withholding tax if we are considered as a “non-resident enterprise” under the new tax law.
Moreover, non-resident
individual investors may be required to pay PRC individual income tax at a rate of 20% on interests or dividends payable to the
investors or any capital gains realized from the transfer of ADSs or ordinary shares if such gains are deemed income derived from
sources within the PRC. Under the Individual Income Tax Law or the IIT Law, non-resident individual refers to an individual who
has no domicile in China and does not stay in the territory of China or who has no domicile in China and has stayed in the territory
of China for less than one year. Pursuant to the IIT Law and its implementation rules, for purposes of the PRC capital gains tax,
the taxable income will be the balance of the total income obtained from the transfer of the ADSs or ordinary shares minus all
the costs and expenses that are permitted under PRC tax laws to be deducted from the income. Therefore, if we are considered as
a PRC "resident enterprise" and dividends we pay with respect to our ADSs or ordinary shares and the gains realized from
the transfer of our ADSs or ordinary shares are considered income derived from sources within the PRC by relevant competent PRC
tax authorities, such gains earned by non-resident individuals may also be subject to PRC withholding tax at a rate of 20%.
Under the currently available
guidance of the new tax law, dividends payable by us to our shareholders should not be deemed to be derived from sources within
China and therefore should not be subject to withholding tax at 10%, or a lower rate if reduced by a tax treaty or agreement. However,
what will constitute income derived from sources within China is currently unclear. In addition, gains on the disposition of our
shares should not be subject to PRC withholding tax. However, these conclusions are not entirely free from doubt. In addition,
it is possible that these rules may change in the future, possibly with retroactive effect.
United States Federal
Income Taxation
The following is a discussion
of the material U.S. federal income tax considerations that may apply to an investor with respect to the acquisition, ownership
and disposition of our ADSs or ordinary shares. This discussion does not purport to address all of the tax consequences of owning
our ADSs or ordinary shares with respect to all categories of investors that acquire our ADSs or ordinary shares, some of which
(such as financial institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, insurance
companies, persons holding our ADSs or ordinary shares as part of a hedging, integrated, conversion, straddle or constructive sale
transaction, traders in securities that have elected the mark-to-market method of accounting for their securities, persons liable
for alternative minimum tax, persons who are investors in pass-through entities, grantor trusts, persons who own, directly or indirectly
under applicable constructive ownership rules, 10% or more (by voting power) of our ADSs or ordinary shares, persons who received
our ADSs or ordinary shares pursuant to the exercise of an option or otherwise as compensation, certain former citizens and long-term
residents of the United States, dealers in securities or currencies and investors whose functional currency is not the U.S. dollar)
may be subject to special rules. This discussion addresses only holders who purchase our ADSs or ordinary shares and hold such
ADSs or ordinary shares as a capital asset (i.e., generally for investment). Moreover, this discussion is based on the Internal
Revenue Code of 1986, as amended (or the Code), existing and proposed Treasury regulations promulgated under the Code, published
rulings, and administrative and judicial interpretations of the Code, all as currently in effect as of the date of hereof, all
of which are subject to change, possibly with retroactive effect. Investors should consult their own tax advisors regarding the
tax consequences arising in their own particular situation under U.S. federal, state, local or foreign law or the United States
– PRC income tax treaty with respect to the acquisition, ownership or disposition of our ADSs or ordinary shares.
For purposes of this discussion,
the term “U.S. Holder” means (except as described in the preceding paragraph) a beneficial owner of our ADSs or ordinary
shares that is, for United States federal income tax purposes, (i) an individual U.S. citizen or resident, (ii) a corporation (or
other entity taxable as a corporation) created or organized under the laws of the United States or any political subdivision thereof,
or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source
or (iv) a trust if either (x) a court within the United States is able to exercise primary jurisdiction over the administration
of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (y) the trust
has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. A beneficial owner of our
ADSs or ordinary shares (other than a partnership) that is not a U.S. Holder is referred to below as a “Non-U.S. Holder.”
If a partnership, or an
entity treated for U.S. federal income tax purposes as a partnership, such as a limited liability company, holds our ADSs or ordinary
shares, the tax treatment of a partner in such partnership will depend on the status of the partner and upon the activities of
the partnership. A partner in such a partnership holding our ADSs or ordinary shares, you should consult its tax advisor.
United States Federal
Income Taxation of U.S. Holders
Distributions
Subject to the discussion
of Passive Foreign Investment Companies, or PFICs, below, distributions made by us with respect to our ADSs or ordinary shares
to a U.S. Holder will constitute dividends to the extent of our current or accumulated earnings and profits, as determined under
U.S. federal income tax principles. Distributions in excess of our earnings and profits will be treated first as a nontaxable return
of capital to the extent of the U.S. Holder’s tax basis in our ADSs or ordinary shares, and thereafter as capital gain. Because
we are not a U.S. corporation, U.S. Holders that are corporations will generally not be entitled to claim a dividends-received
deduction with respect to any distributions they receive from us.
Subject to the discussion
of PFICs below, dividends paid on our ADSs or ordinary shares that are received by U.S. Holders that are individuals, estates or
trusts will be taxed at the rate applicable to long-term capital gains (a maximum rate of 15% for taxable years beginning on or
before December 31, 2013), provided that such dividends meet the requirements of "qualified dividend income." For this
purpose, qualified dividend income includes dividends paid by a non-U.S. corporation if certain holding period and other requirements
are met, and the stock of the non-U.S. corporation with respect to which dividends are paid is readily tradable on an established
securities market in the U.S. (such as the NASDAQ Capital Market). Dividends that fail to meet such requirements, and dividends
received by corporate U.S. Holders, are taxed at ordinary income rates. No dividend received by a U.S. Holder will be a qualified
dividend (i) if the U.S. Holder held the ordinary share with respect to which the dividend was paid for less than 61 days during
the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for
this purpose, under the rules of Code Section 246(c), any period during which the U.S. Holder has an option to sell, is under a
contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified
option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share (or
substantially identical securities); or (ii) to the extent that the U.S. Holder is under an obligation (pursuant to a short sale
or otherwise) to make related payments with respect to positions in property substantially similar or related to the ADS or ordinary
share with respect to which the dividend is paid. If we were to be a "passive foreign investment company" (as such term
is defined in the Code) for any taxable year, dividends paid on our ADSs or ordinary shares in such year or in the following taxable
year would not be qualified dividends. In addition, a non-corporate U.S. Holder will be able to take a qualified dividend into
account in determining its deductible investment interest (which is generally limited to its net investment income) only if it
elects to do so; in such case the dividend will be taxed at ordinary income rates.
Sale, Exchange or Other
Disposition of ADSs or ordinary shares
Subject to the discussion
of PFICs below, a U.S. Holder will recognize taxable gain or loss upon a sale, exchange or other taxable disposition of our ADSs
or ordinary shares in an amount equal to the difference between the amount realized by the U.S. Holder from such disposition and
the U.S. Holder’s tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the U.S.
Holder’s holding period is greater than one year at the time of the disposition. Long-term capital gains of non-corporate
U.S. Holders may be eligible for reduced rates of taxation. A U.S. Holder’s ability to deduct capital losses is subject to
certain limitations.
Tax Consequences If
We Are A Passive Foreign Investment Company
We will be a passive foreign
investment company (a “PFIC”) if, after applying certain pass-through rules, either: (i) 75% or more of our gross income
in any taxable year consists of “passive income” (including dividends, interest, gains from the sale or exchange of
investment property and certain rents and royalties); or (ii) at least 50% of our assets in any taxable year (averaged over the
year and generally determined on a quarterly basis) produce or are held for the production of passive income.
We do not believe that
we were a PFIC for our 2016 taxable year. However, because the determination of our PFIC status is based on such factual matters
as the composition of our income and assets the valuation of our assets, and our market capitalization, there is no assurance that
the United Stated Internal Revenue Service (“IRS”) will agree with our position for the 2016 taxable year or any prior
taxable year. In addition, there can be no assurance that we will not become a PFIC for the current taxable year ending December
31, 2017 or in future taxable years.
If we were to be treated
as a PFIC for any taxable year during the period in which a U.S. Holder owns our ADSs or ordinary shares (and regardless of whether
we remain a PFIC for subsequent taxable years), each U.S. Holder who is treated as owning our stock for purposes of the PFIC rules
would be liable to pay U.S. federal income tax at the highest applicable income tax rates on ordinary income upon the receipt of
“excess distributions” (i.e., the portion of any distributions received by the U.S. Holder on our ADSs or ordinary
shares in a taxable year in excess of 125 percent of the average annual distributions received by the U.S. Holder in the three
preceding taxable years, or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares) and on any gain
from the disposition of our ADSs or ordinary shares, plus interest on a portion of such amounts, as if such excess distributions
or gain had been recognized ratably over the U.S. Holder’s holding period of our ADSs or ordinary shares.
The above rules relating
to the taxation of excess distributions and dispositions will not apply to a U.S. Holder who has made a timely “qualified
electing fund” (“QEF”) election for all taxable years that the holder has held our ADSs or ordinary shares and
if we comply with certain reporting requirements. Instead, each U.S. Holder who has made a timely QEF election is required for
each taxable year that we are a PFIC to include in income a pro rata share of our ordinary earnings as ordinary income and a pro
rata share of our net capital gain as long term capital gain, regardless of whether we have made any distributions of the earnings
or gain. The U.S. Holder’s basis in our ADSs or ordinary shares will be increased to reflect taxed but undistributed income.
Distributions of income that had been previously taxed will result in a corresponding reduction in the basis of the ADSs or ordinary
shares and will not be taxed again once distributed. A U.S. Holder making a QEF election will generally recognize capital gain
or loss on the sale, exchange or other taxable disposition of our ADSs or ordinary shares. If we determine that we are a PFIC for
any taxable year, we may provide each U.S. Holder with all necessary information in order to make the QEF election described above.
Alternatively, if we were
to be treated as a PFIC for any taxable year and provided that our ADSs or ordinary shares are treated as “marketable stock”
(e.g., “regularly traded” on the NASDAQ Capital Market) a U.S. Holder may make a mark-to-market election. Under a “mark-to-market”
election, in any taxable year that we are a PFIC, any excess of the fair market value of the ADSs or ordinary shares at the close
of any taxable year over the U.S. Holder’s adjusted tax basis in the ADSs or ordinary shares is included in the U.S. Holder’s
income as ordinary income. In addition, the excess, if any, of the U.S. Holder’s adjusted tax basis at the close of any taxable
year over the fair market value of the ADSs or ordinary shares is deductible in an amount equal to the lesser of the amount of
the excess or the amount of the net mark-to-market gains that the U.S. Holder included in income in prior years. A U.S. Holder’s
tax basis in its ADSs or ordinary shares would be adjusted to reflect any such income or loss. For any taxable year that we are
a PFIC, gain realized on the sale, exchange or other disposition of our ADSs or ordinary shares would be treated as ordinary income,
and any loss realized on the sale, exchange or other disposition of the ADSs or ordinary shares would be treated as ordinary loss
to the extent that such loss does not exceed the net mark-to-market gains previously included by the U.S. Holder. There can be
no assurances that there will be sufficient trading volume with respect to the ADSs or ordinary shares for the ADSs or ordinary
shares to be considered “regularly traded,” or that our ADSs or ordinary shares will continue to trade on the NASDAQ
Capital Market. Accordingly, there are no assurances that our ADSs or ordinary shares will be marketable stock for these purposes.
A U.S. Holder who holds
our ADSs or ordinary shares during a period when we are a PFIC will be subject to the foregoing rules for that taxable year and
all subsequent taxable years with respect to that U.S. Holder’s holding of our ADSs or ordinary shares, even if we cease
to be a PFIC, subject to certain exceptions for U.S. Holders who made a timely mark-to-market or QEF election. U.S. Holders are
urged to consult their tax advisors regarding the PFIC rules in the event that we are a PFIC, including as to the advisability
and consequences of making a QEF or mark-to-market election.
U.S. Federal Income
Taxation of Non-U.S. Holders
Except as described in
“Backup Withholding and Information Reporting” below, non-U.S. Holders will generally not be subject to U.S. federal
income tax or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our ADSs or ordinary shares
unless, in the case of U.S. federal income taxes, the income is effectively connected with the conduct by the Non-U.S. Holder of
a trade or business in the United States (“effectively connected income”) (and, if an income tax treaty applies, the
income is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States or, in the case of an
individual, the income is attributable to a fixed place of business).
Non-U.S. Holders will generally
not be subject to U.S. federal income tax or withholding tax on any gain realized upon the sale, exchange or other disposition
of our ADSs or ordinary shares, unless either:
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the gain is effectively connected income (or, if a treaty applies, the gain is attributable to
a permanent establishment maintained by the Non-U.S. Holder in the United States or, in the case of an individual, the income is
attributable to a fixed place of business); or
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the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during
the taxable year of disposition and certain other conditions are met.
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Effectively connected income
may be subject to regular U.S. federal income tax in the same manner as discussed in the section above relating to the taxation
of U.S. Holders, unless exempt under an applicable income tax treaty. In addition, effectively connected income of a corporate
Non-U.S. Holder may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by
an applicable income tax treaty.
Non-U.S. Holders may be
subject to tax in jurisdictions other than the United States on dividends received from us on our ADSs or ordinary shares and on
any gain realized upon the sale, exchange or other disposition of our ADSs or ordinary shares. Non-U.S. Holders should consult
with their own tax advisors regarding such other jurisdictions.
Backup Withholding and
Information Reporting
U.S. Holders (other than
certain exempt recipients) may be subject to information reporting requirements with respect to the payment of dividends on, or
proceeds from the disposition of, our ADSs or ordinary shares. In addition, a U.S. Holder may be subject, under certain circumstances,
to backup withholding at a rate of up to 28% with respect to dividends paid on, or proceeds from the disposition of, our ADSs or
ordinary shares unless the U.S. Holder provides proof of an applicable exemption or correct taxpayer identification number and
otherwise complies with applicable requirements of the backup withholding rules. A U.S. Holder of our ADSs or ordinary shares who
provides an incorrect taxpayer identification number may be subject to penalties imposed by the IRS.
Non-U.S. Holders are generally
not subject to information reporting or backup withholding with respect to dividends paid on, or proceeds from the disposition
of, our ADSs or ordinary shares, provided that the Non-U.S. Holder provides its taxpayer identification number, certifies to its
foreign status, or establishes another exemption to the information reporting or back-up withholding requirements.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject
to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements
and other information with the SEC. The Company’s reports, registration statements and other information can be inspected
on the SEC’s website at www.sec.gov and such information can also be inspected and copies ordered at the public reference
facilities maintained by the SEC at the following location: 100 F Street NE, Washington, D.C. 20549. You may also visit us on the
World Wide Web at http://www.osseninnovation.com. However, information contained on our website does not constitute a part of this
annual report.
10.I. Subsidiary Information
Not Applicable.
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Financial instruments that
expose us to concentrations of credit risk primarily consist of cash and accounts receivables. The maximum amount of loss due to
credit risk in the event of other parties failing to perform their obligations is represented by the carrying amount of each financial
asset as stated in our consolidated balance sheets.
As of December 31, 2016,
2015, and 2014, substantially all of our cash included bank deposits in accounts maintained within the PRC where there is currently
no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, we have not
experienced any losses in such accounts and we believe we are not exposed to any significant risks on our cash in bank accounts.
We are exposed to various
types of market risks, including changes in foreign exchange rates, commodity prices and inflation in the normal course of business.
Interest rate risk
We are subject to risks
resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in China in interest
bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations
in interest rates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest
rate risk.
Commodity price risk
Certain raw materials used
by us are subject to price volatility caused by supply conditions, political and economic variables and other unpredictable factors.
The primary purpose of our commodity price management activities is to manage the volatility associated with purchases of commodities
in the normal course of business. We do not speculate on commodity prices.
Foreign exchange risk
The RMB is not a freely
convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly from current
or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we declare.
Very limited hedging transactions
are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future,
the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure
at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our
ability to convert RMB into foreign currencies.
Inflation risk
Inflationary factors such
as increases in the cost of our products and overhead costs may adversely affect our operating results. A high rate of inflation
may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase proportionately with these increased costs.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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The depositary may charge
each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect
of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or
issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities,
and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs are cancelled or reduced for any other reason,
$5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The
depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution,
rights and/or other distribution prior to such deposit to pay such charge.
The following additional
charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs or
to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or
an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:
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a fee of $1.50 per ADR or ADRs for transfers of certificated or direct registration ADRs;
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a fee of up to $0.05 per ADS for any cash distribution made pursuant to the deposit agreement;
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a fee of up to $0.05 per ADS per calendar year (or portion thereof) for services performed by the
depositary in administering the ADRs (which fee may be charged on a periodic basis during each calendar year and shall be assessed
against holders of ADRs as of the record date or record dates set by the depositary during each calendar year and shall be payable
in the manner described in the next succeeding provision);
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reimbursement of such fees, charges and expenses as are incurred by the depositary and/or any of
the depositary’s agents (including, without limitation, the custodian and expenses incurred on behalf of holders in connection
with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in connection
with the servicing of the shares or other deposited securities, the delivery of deposited securities or otherwise in connection
with the depositary’s or its custodian’s compliance with applicable law, rule or regulation (which charge shall be
assessed on a proportionate basis against holders as of the record date or dates set by the depositary and shall be payable at
the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other
cash distributions);
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stock transfer or other taxes and other governmental charges;
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cable, telex and facsimile transmission and delivery charges incurred at your request in connection
with the deposit or delivery of shares;
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transfer or registration fees for the registration of transfer of deposited securities on any applicable
register in connection with the deposit or withdrawal of deposited securities; and
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expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars.
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We will pay all other charges
and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time
between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.
Our depositary has agreed
to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor
relations expenses and exchange application and listing fees. Neither the depositary nor we can determine the exact amount to be
made available to us because (i) the number of ADSs that will be issued and outstanding, (ii) the level of fees to be charged to
holders of ADSs and (iii) our reimbursable expenses related to the ADR program are not known at this time. The depositary collects
its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of
withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting
those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect
its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the
book-entry system accounts of participants acting for them. The depositary will generally set off the amounts owing from distributions
made to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the depositary
may refuse to provide any further services to holders that have not paid those fees and expenses owing until such fees and expenses
have been paid.
At the discretion of the
depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary.
The consolidated financial statements include
the accounts of Ossen Innovation Co., Ltd. and its subsidiaries and have been prepared in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP"). Intercompany accounts and transactions have been eliminated upon consolidation.
The preparation of the consolidated and combined
financial statements in conformity with generally accepted accounting principles in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best information available at the time the estimates are made. Actual
results could differ from those estimates.
Non-controlling interests in the Company’s
subsidiaries are recorded in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification 810 Consolidation (“ASC 810”) and are reported as a component of equity, separate from the parent’s
equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions.
Results of operations attributable to the non-controlling interest are included in our consolidated results of operations and,
upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or
loss recognized in earnings.
The accompanying consolidated financial statements
are presented in United States dollars (“US$” or “$”). The functional currency of the Company is Renminbi
(“RMB”). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange
rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred. The resulting transaction adjustments are recorded as a component
of shareholders’ equity. Gains and losses from foreign currency transactions are included in net income.
The RMB is not freely convertible into foreign
currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that
the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
In accordance with the ASC Topic 605, “Revenue
Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonable assured.
The Company derives revenues from the processing,
distribution and sale of own products. The Company recognizes its revenues net of value-added taxes (“VAT”). The Company
is subject to VAT which is levied on the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition
to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent
not refunded for export sales.
The Company will recognize revenue for domestic
sales based on the terms defined in the contract as long as risk of loss has transferred to the customers and each of the criteria
under ASC 605 have been met. Contracts terms may require the Company to deliver the finished goods to the customers’ location
or the customer may pick up the finished goods at the Company’s factory. International sales are recognized when shipment
clears customs and leaves the port.
Contracts
with distributors do not offer any chargeback or price protection. The Company experienced no product returns and recorded no reserve
for sales returns for the years ended December 31, 2016, 2015 and 2014.
Cost of revenue includes direct and indirect
production costs, as well as freight in and handling costs for products sold.
Selling expenses include operating expenses
such as sales commissions, payroll, traveling expenses, transportation expenses and advertising expenses.
General and administrative expenses include
management and office salaries and employee benefits, deprecation for office facility and office equipment, travel and entertainment,
legal and accounting, consulting fees and other office expenses.
Research and development costs are expensed
as incurred and totaled approximately
$3,869,277, $3,404,333 and $3,914,918 for the years ended
December 31, 2016, 2015 and 2014, respectively. Research and development costs are included in G&A in the accompanying statements
of operations. Research and development costs are incurred on a project specific basis.
Retirement benefits in the form of contributions
under defined contribution retirement plans to the relevant authorities are charged to operations as incurred. Retirement benefits
of $160,656, $148,232 and $140,823 were charged to operations for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company accounts for income taxes following
the liability method pursuant to FASB ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax
rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance
to offset deferred tax assets if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all,
of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in income in
the period that includes the enactment date.
The Company also follows FASB ASC 740, which
addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on recognition,
classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of
December 31, 2015, the Company did not have a liability for unrecognized tax benefits.
The Company has not provided for income taxes
on accumulated earnings amounting $54,590,589 that are subject to the PRC dividend withholding tax as of December 31, 2016, since
these earnings are intended to be permanently reinvested.
Enterprises or individuals, who sell commodities,
engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with Chinese
Laws. The VAT standard rate is 17% of the gross sale 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
the sales of the finished products.
In accordance with the PRC Regulations on Enterprises
with Foreign Investment, an enterprise established in the PRC with foreign investment is required to provide for certain statutory
reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated
from net profit as reported in the enterprise’s PRC statutory accounts. A wholly-owned foreign enterprise (“WOFE”)
is required to allocate at least 10% of its annual after-tax profit to the General Reserve Fund until the balance of such fund
has reached 50% of its respective registered capital. A non-wholly-owned foreign invested enterprise is permitted to provide for
the above allocation at the discretion of its board of directors. Appropriations to the Enterprise Expansion Fund and Staff Welfare
and Bonus Fund are at the discretion of the board of directors for all foreign invested enterprises. The aforementioned reserves
can only be used for specific purposes and are not distributable as cash dividends.
As a result, $491,649, $609,621 and $406,053
have been appropriated to the accumulated statutory reserves by the Company’s PRC subsidiaries for the years ended December
31, 2016, 2015 and 2014 respectively.
Comprehensive income is defined as the change
in equity during the year from transactions and other events, excluding the changes resulting from investments by owners and distributions
to owners, and is not included in the computation of income tax expense or benefit. Accumulated comprehensive income consists of
foreign currency translation. The Company presents comprehensive income (loss) in accordance with ASC Topic 220, “Comprehensive
Income”. ASC Topic 220 states that all items that are required to be recognized under accounting standards as components
of comprehensive income (loss) be reported in the consolidated financial statements.
For financial reporting purposes, the Company
considers all highly liquid investments purchased with original maturity of three months or less to be cash equivalents. The Company
maintains no bank account in the United States of America. The Company maintains its bank accounts in Mainland China and Hong Kong.
Balances at financial institutions or state-owned banks within the Mainland China are not covered by insurance. However, 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.
According to the rules of Hong Kong Deposit Protection Board, in case a member bank of Deposit Protection Scheme (“DPS”)
fails, the DPS will pay compensation up to a maximum of HK$500,000 to each depositor of the failed Scheme member.
Restricted cash represents amounts held by
a bank as security for bank acceptance notes and therefore is not available for the Company’s use until such time as the
bank acceptance notes have been fulfilled or expired, normally within twelve month period.
• Level 1—defined as observable
inputs such as quoted prices in active markets for identical assets or liabilities;
• Level 2—defined as inputs other
than quoted prices in active markets, that are either directly or indirectly observable; and
• Level 3—defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The company’s financial instruments primarily
consist of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts payable, other payables
and accrued liabilities, short-term bank loans, and bond payable.
The carrying value of cash and cash equivalents,
restricted cash, accounts receivable, accounts payable, and other current assets and liabilities approximate fair value because
of the short term nature of these items. The estimated fair values of short-term bank loans were not materially different from
their carrying value as presented due to the short maturities and that the interest rates on the borrowing approximate those that
would have been available for loans of similar remaining maturity and risk profile. As the carrying amounts are reasonable estimates
of the fair value, these financial instruments are classified within Level 1 of the fair value hierarchy.
The Company identified bond payable as a Level
2 instrument due to the fact that its value can be determined based on similar bonds that are publicly traded and the inputs to
the valuation are primarily based upon readily observable pricing information. The balance of bond payable, which was measured
and disclosed at fair value, was nil and $15,273,177 at December 31, 2016 and 2015, respectively.
The Company calculates earnings per share in
accordance with ASC Topic 260, “Earnings per Share.” Basic earnings per share is computed by dividing the net income
by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed similar to
basic earnings per share except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential ordinary shares equivalents had been issued and if the additional common shares were dilutive.
Accounts receivable are carried at net realizable
value. The Company reviews its accounts receivables on a periodic basis and makes general and specific allowances when there is
doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the
Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness
and current economic trends. Accounts are written off after exhaustive efforts at collection. If accounts receivable are to be
provided for, or written off, they would be recognized in the consolidated statement of operations within operating expenses. Balance
of allowance of doubtful accounts was $985,990 and $738,101 at December 31, 2016 and 2015, respectively.
Inventories are stated at the lower of cost
or net realizable value, which is based on estimated selling prices less any further costs expected to be incurred for completion
and disposal. Cost of raw materials is calculated using the weighted average method and is based on purchase cost. Work-in-progress
and finished goods costs are determined using the weighted average method and comprise direct materials, direct labor and an appropriate
proportion of overhead. At December 31, 2016 and 2015, the Company has $120,347 and nil reserve for inventories.
Advance to Suppliers represents interest-free
cash paid in advance to suppliers for purchases of raw materials. The balance of advance to suppliers was $46,729,285 and $55,730,089
at December 31, 2016 and 2015, respectively. Among the balance of $46,729,285, the aging of $13,112,588 was within 60 days, $25,460,073
was between 60-90 days and $8,156,624 was over 90 days. No allowance was provided for the prepayments balance at December 31, 2016.
Customer deposits consist of amounts paid to
the Company in advance for the sale of products in the PRC. The Company receives these amounts and recognizes them as a current
liability until the revenue can be recognized when the goods are delivered. The balance of customer deposits was $135,903 and $309,147
at December 31, 2016 and 2015, respectively.
Property, plant, and equipment are stated at
cost less accumulated depreciation, and include expenditure that substantially increases the useful lives of existing assets.
Depreciation is provided over their estimated
useful lives, using the straight-line method. Estimated useful lives are as follows:
When assets are sold or retired, their costs
and accumulated depreciation are eliminated from the consolidated financial statements and any gain or loss resulting from their
disposal is recognized in the period of disposition as an element of other income. The cost of maintenance and repairs is charged
to income as incurred, whereas significant renewals and betterments are capitalized.
According to the PRC laws, the government owns
all the land in the PRC. Companies or individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. The land use rights granted to the Company are being amortized using the straight-line method over the
lease term of fifty years.
Long-lived assets are evaluated for impairment
periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable in
accordance with FASB ASC 360, “Property, Plant and Equipment”.
In evaluating long-lived assets for recoverability,
the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition in
accordance with FASB ASC 360-10-15. To the extent that estimated future, undiscounted cash inflows attributable to the asset, less
estimated future, undiscounted cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount
equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there
is a committed plan of disposal, whether through sale or abandonment, are reported at the lower of carrying value or fair value
less costs to sell.
No impairment loss is subsequently reversed
even if facts and circumstances indicate recovery. There was no impairment loss recognized for the years ended December 31, 2016,
2015 and 2014.
ASC 280-10-50, “Operating Segments”,
define the characteristics of an operating segment as a) being engaged in business activity from which it may earn revenue and
incur expenses, b) being reviewed by the company's chief operating decision maker (CODM) for decisions about resources to be allocated
and assess its performance and c) having discrete financial information. Although we indeed look at our product to analyze the
nature of our revenue, other financial information, such as certain costs and expenses and net income are not captured or analyzed
by these categories. Therefore discrete financial information is not available by product line and we have no CODM to make resource
allocation decisions or assess the performance of the business based on these categories, but rather in the aggregate. Based on
this, Management believes that it operates in one business segment.
In the analysis of product lines as potential
operating segments, management also considered ASC 280-10-50-11, “Aggregation Criteria”, which allows for the aggregation
of operating segments if the segments have similar economic characteristics and if the segments are similar in each of the following
areas:
•The methods used to distribute their products or provide their
services; and
We are engaged in the business of manufacturing
and selling steel materials. Our manufacturing process is essentially the same for the entire Company and is performed in house
at our facilities in China. Our customers primarily consist of entities in the steel industry. The distribution of our products
is consistent across the entire Company. In addition, the economic characteristics of each customer arrangement are similar in
that we maintain policies at the corporate level.
In general, related parties exist when there
is a relationship that offers the potential for transactions at less than arm’s-length, favorable treatment, or the ability
to influence the outcome of events different from that which might result in the absence of that relationship. A related party
may be any of the followings: a) affiliate, a party that directly or indirectly controls, is controlled by, or is under common
control with another party; b) principle owner, the owner of record or known beneficial owner of more than 10% of the voting interest
of an entity; c) management, persons having responsibility for achieving objectives of the entity and requisite authority to make
decision; d) immediate family of management or principal owners; e) a parent company and its subsidiaries; d) other parties that
has ability to significant influence the management or operating policies of the entity.
FASB issued authoritative guidance that clarifies
considerations relating to the consolidation of certain entities. The guidance requires identification of the Company’s participation
in variable interest entities (“VIE”), which are defined as entities with a level of invested equity that is not sufficient
to fund future activities to permit them to operation on a standalone basis, or whose equity holders lack certain characteristics
of a controlling financial interest. That, for entities identified as a VIE, the guidance sets forth a model to evaluate potential
consolidation based on a assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stand
to gain from majority of its expected returns. The guidance also sets forth certain disclosure regarding interests in a VIE that
are deemed significant even if consolidation is not required. This item is discussed in further detail in Note 10 – Related
Party Transactions.
The Company’s operations are conducted
in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political,
economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are
subject to special considerations and significant risks not typically associated with companies in North America and Western Europe.
These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange.
The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes
in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad,
and rates and methods of taxation, among other things.
The Company cannot guarantee that the current
exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two
comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of
PRC Renminbi (RMB) converted to U.S. dollars on the date. The exchange rate could fluctuate depending on changes in the political
and economic environments without notice.
In January 2017, the FASB issued Accounting
Standards Update (“ASU”) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment” (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. An entity will
apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount
over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend
the optional qualitative assessment of goodwill impairment. Public business entity that is a U.S. Securities and Exchange Commission
filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal years beginning
after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2017-04 on our consolidated financial statements.
In November 2016, the FASB issued ASU No.
2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted
cash equivalents. The amendments in this ASU are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.
We are currently evaluating the impact of the adoption of ASU 2016-18 on our consolidated financial statements.
In August 2016, the FASB issued ASU No.
2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU
2016-15”), which addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement
of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the
effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the
settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life
insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and
separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. We are currently evaluating the impact of the adoption of ASU 2016-15
on our consolidated financial statements.
In April 2016, the FASB issued ASU No.
2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions.
The areas for simplification in ASU 2016-09 include the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after
December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the
impact of the adoption of ASU 2016-09 on our consolidated financial statements.
In January 2016, the FASB issued ASU No.
2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities” (“ASU 2016-01”). The amendments in this update require all equity investments to be measured at
fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of
accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present
separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change
in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the
fair value option for financial instruments. In addition the amendments in this update eliminate the requirement for to disclose
the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments
measured at amortized cost on the balance sheet for public entities. For public business entities, the amendments in ASU 2016-01
are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except for
the early application guidance discussed in ASU 2016-01, early adoption of the amendments in this update is not permitted. We do
not expect the adoption of ASU 2016-01 to have a material impact on our consolidated financial statements.
Accounts receivable related to the Company’s
major customers comprised 60% and 27% of all accounts receivable as of December 31, 2016 and 2015, respectively.
Accounts payable related to the Company’s
major suppliers comprised 34% and nil of all accounts payable as of December 31, 2016 and 2015, respectively.
Notes receivable are received from customers
for the purchase of the Company’s products and are issued by financial institutions that entitle the Company to receive
the full face mount from the financial institution at maturity, which bears no interest and generally ranges from three to six
months from the date of issuance.
Unrealized foreign exchange translation
gain/(loss) for the year ended December 31, 2016, 2015 and 2014 was ($323,040), ($329,926) and $66,536, respectively, which has
been included in other comprehensive income/(loss). Depreciation expense for the years ended December 31, 2016 2015 and 2014was
$793,844, $1,317,119 and $$1,430,997, respectively.
Unrealized foreign exchange translation
gain/(loss) for the year ended December 31, 2016, 2015 and 2014 was ($247,088), ($221,323) and $33,781, respectively, which has
been included in other comprehensive income/(loss). Amortization expense for the years ended December 31, 2016, 2015 and 2014
was $89,911, $98,941 and $100,282, respectively. As of December 31, 2016 and 2015,
Amortization expense for the next five years and thereafter
is as follows:
The balance of due to related party arises
from the purchase of raw materials paid by Ossen Material Research on behalf of the Company.
Dr. Tang is the chairman and controlling
interest shareholder of the Company. From time to time, Dr. Tang paid operating expenses on behalf of the Company to assist with
the Company’s cash needs for business purposes.
In accordance with ASC 810-10, “Consolidation”,
the Company first evaluated that none of the related parties met the scope exceptions as outlined in the guidance. The Company
then had to determine if it hold any variable interest in the related parties. The Company determined to have a variable interest
in Shanghai Pujiang, Ossen Material Research and Ossen Shanghai because the Company guarantees $59,824,131 of the outstanding
short term debt and $7,207,727 of notes payable of Shanghai Pujiang, $70,635,721 of the outstanding short term debt of Ossen Material
Research and $28,542,598 of the outstanding short term debt and $2,162,318 of notes payable of Ossen Shanghai. Next, the Company
evaluated if Shanghai Pujiang, Ossen Material Research or Ossen Shanghai are variable interest entities. Using both qualitative
and quantitative analysis, the Company does not have the power to direct Shanghai Pujiang, Ossen Material Research and Ossen Shanghai’s
activities that significantly impact their economic performance and does not have the obligation to absorb losses or the right
to receive benefits from the entities. Thus, the Company is not the primary beneficiary of Shanghai Pujiang, Ossen Material Research
and Ossen Shanghai. As a result, the Company determined Shanghai Pujiang, Ossen Material Research and Ossen Shanghai were not
variable interest entities that require consolidation as defined in ASC 810. The Company determined Dr. Tang to be the primary
beneficiary of Shanghai Pujiang, Ossen Material Research and Ossen Shanghai because Dr. Tang is most closely associated with the
Shanghai Pujiang, Ossen Material Research and Ossen Shanghai. Dr. Tang had the power to direct the activities of Shanghai Pujiang,
Ossen Material Research and Ossen Shanghai that most significantly impact its economic performance and has the obligation to absorb
losses of Shanghai Pujiang, Ossen Material Research and Ossen Shanghai that could potentially be significant or the right to receive
benefits from the related parties that could potentially be significant.
The Company also evaluated the remaining
related parties and affiliated entities under ASC 810 and because the Company does not guarantee the debt, the holders of the
equity were at risk and therefore determined to be the primary beneficiary and these entities are not variable interest entities
that require consolidation.
The interest-free notes payable, ranging
from six months to one year from the date of issuance, are secured by $6,703,242and $8,780,433 restricted cash, as of December
31, 2016 and 2015, respectively.
All the notes payable are subject to bank
charges of 0.05% of the principal amount as commission on each loan transaction.
All short term bank loans are obtained
from local banks in China and are repayable within one year.
The average annual interest rate of the
short-term bank loans was 6.105% and 6.182% as of December 31, 2016 and 2015, respectively. Interest expense, included in the
financial expenses in the statement of operations, was $1,070,192 $1,017,345 and $1,943,115 for the years ended December 31, 2016,
2015 and 2014, respectively. The Company was in compliance of their financial covenants at December 31, 2016 and 2015, respectively.
Interest expense, included in the financial expenses in the
statement of operations, was $225,900, nil and nil for the years ended December 31, 2016, 2015 and 2014, respectively.