(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, 2018 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 every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated
filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check
one):
† The term “new or revised financial accounting
standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
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, 2019, the cash
buying rate announced by the People’s Bank of China was RMB 6.73 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, 2016, 2017 and 2018 and
the balance sheet data as of December 31, 2017 and 2018 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, 2014 and 2015 and the
balance sheet data as of December 31, 2014, 2015 and 2016 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Revenues
|
|
$
|
136,104,867
|
|
|
$
|
132,375,915
|
|
|
$
|
117,029,154
|
|
|
$
|
117,908,416
|
|
|
$
|
123,571,455
|
|
Cost of goods sold
|
|
|
115,585,803
|
|
|
|
117,721,799
|
|
|
|
100,932,528
|
|
|
|
102,197,994
|
|
|
|
110,250,876
|
|
Gross profit
|
|
|
20,519,064
|
|
|
|
14,654,116
|
|
|
|
16,096,626
|
|
|
|
15,710,422
|
|
|
|
13,320,579
|
|
Selling and distribution expenses
|
|
|
327,365
|
|
|
|
598,832
|
|
|
|
734,159
|
|
|
|
986,378
|
|
|
|
772,383
|
|
General and administrative expenses
|
|
|
5,263,914
|
|
|
|
6,002,121
|
|
|
|
6,376,383
|
|
|
|
4,478,413
|
|
|
|
6,340,584
|
|
Total Operating Expenses
|
|
|
5,591,279
|
|
|
|
6,600,953
|
|
|
|
7,110,542
|
|
|
|
5,464,791
|
|
|
|
7,112,967
|
|
Income from operations
|
|
|
14,927,785
|
|
|
|
8,053,163
|
|
|
|
8,986,084
|
|
|
|
10,245,631
|
|
|
|
6,207,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses, net
|
|
|
(1,621,486
|
)
|
|
|
(1,610,337
|
)
|
|
|
(2,827,138
|
)
|
|
|
(2,823,952
|
)
|
|
|
(2,401,268
|
)
|
Other income, net
|
|
|
208,071
|
|
|
|
147,108
|
|
|
|
90,584
|
|
|
|
371,894
|
|
|
|
907,941
|
|
Income before income taxes
|
|
|
13,514,370
|
|
|
|
6,589,934
|
|
|
|
6,249,530
|
|
|
|
7,793,573
|
|
|
|
4,714,285
|
|
Income taxes
|
|
|
(2,129,387
|
)
|
|
|
(691,556
|
)
|
|
|
(926,048
|
)
|
|
|
(1,180,167
|
)
|
|
|
(578,727
|
)
|
Net income
|
|
|
11,384,983
|
|
|
|
5,898,378
|
|
|
|
5,323,482
|
|
|
|
6,613,406
|
|
|
|
4,135,558
|
|
Less: Net Income attributable to non-controlling interest
|
|
|
1,005,530
|
|
|
|
553,067
|
|
|
|
499,509
|
|
|
|
716,602
|
|
|
|
276,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interest
|
|
|
10,379,453
|
|
|
|
5,345,311
|
|
|
|
4,823,973
|
|
|
|
5,896,804
|
|
|
|
3,858,876
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(6,272,303
|
)
|
|
|
6,606,207
|
|
|
|
(6,975,100
|
)
|
|
|
(5,829,470
|
)
|
|
|
779,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(6,272,303
|
)
|
|
|
6,606,207
|
|
|
|
(6,975,100
|
)
|
|
|
(5,829,470
|
)
|
|
|
779,135
|
|
Comprehensive Income (loss)
|
|
|
4,107,150
|
|
|
|
11,951,518
|
|
|
|
(2,151,127
|
)
|
|
|
67,334
|
|
|
|
4,638,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
19,791,110
|
|
|
|
19,791,110
|
|
|
|
19,804,164
|
|
|
|
19,862,537
|
|
|
|
19,901,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share*
|
|
|
0.52
|
|
|
|
0.27
|
|
|
|
0.24
|
|
|
|
0.30
|
|
|
|
0.19
|
|
* 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
Cash and cash equivalents
|
|
$
|
3,444,421
|
|
|
$
|
950,225
|
|
|
$
|
217,631
|
|
|
$
|
812,277
|
|
|
$
|
684,592
|
|
Restricted cash
|
|
$
|
4,070,655
|
|
|
$
|
7,192,928
|
|
|
$
|
6,7036242
|
|
|
$
|
8,780,443
|
|
|
$
|
17,572,732
|
|
Total current assets
|
|
|
155,293,023
|
|
|
|
144,640,849
|
|
|
|
132,259,554
|
|
|
|
144,772,273
|
|
|
|
159,358,503
|
|
Total long-term assets
|
|
|
6,952,888
|
|
|
|
7,878,057
|
|
|
|
8,184,198
|
|
|
|
9,468,260
|
|
|
|
11,405,994
|
|
Total assets
|
|
|
162,245,911
|
|
|
|
152,518,906
|
|
|
|
140,443,752
|
|
|
|
154,240,533
|
|
|
|
170,764,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
42,182,852
|
|
|
|
37,568,527
|
|
|
|
37,997,958
|
|
|
|
50,106,311
|
|
|
|
67,355,476
|
|
Total shareholders’ equity
|
|
|
120,063,059
|
|
|
|
114,950,379
|
|
|
|
102,445,794
|
|
|
|
104,134,222
|
|
|
|
103,409,021
|
|
Total liabilities and shareholders’ equity
|
|
|
162,245,911
|
|
|
|
152,518,906
|
|
|
|
140,443,752
|
|
|
|
154,240,533
|
|
|
|
170,764,497
|
|
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
The proposed sale of our existing
business and proposed acquisition of a new business in the medical technology industry have not been consummated, and such transaction
will not be consummated.
On July 19, 2017, we
entered into a Share Exchange Agreement (the "SEA") with the shareholders (the “Selling Shareholders”) of
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. Pursuant to the SEA, we agreed 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 agreed to sell our existing pre-stressed steel manufacturing business, including all existing liabilities,
immediately following the completion of the Acquisition. An entity affiliated with Dr. Liang Tang, our Chairman, agreed to 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 11,850,000 ordinary shares held by Dr. Tang at that time (the “Sale Transaction”).
The Selling Shareholders
breached the SEA and as a result, the SEA and the Sale Transaction have been terminated. We may consider a transaction similar
to the Sale Transaction along with the acquisition of another business in the future, although no such plans currently exist and
there is no guarantee that we will be successful in consummating any such transaction. Any such transaction would be subject to
the satisfaction of various closing conditions, including shareholder approval. Furthermore, in the event that such transactions
are consummated, the interests of our existing shareholders may be substantially diluted.
Our chairman controls a large percentage
of our outstanding stock through an entity that has applied for listing on a foreign exchange and could significantly influence
the outcome of our corporate matters.
Acme
Innovation Limited, an affiliate of Dr. Tang, owns approximately 65.9% of our outstanding ordinary shares, reflecting a
majority equity interest in our company. The parent entity of Acme Innovation Limited has applied for listing of its shares
on a foreign exchange. See Item 4C below. As the controlling person of 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. This concentration of ownership in our
shares controlled 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
controlled by Dr. Tang, or the prospect of these sales, could adversely affect the market price of our ordinary shares.
Furthermore, the potential listing of our parent entity on a foreign exchange could negatively impact on 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,
2018, we had approximately $3.4 million of cash and cash equivalents and $4.1 million of restricted cash. 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 short-term 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.
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 2017 and 2018, we
generated revenue of approximately $112.4 million and $103.4 million, respectively, or 84.9% and 76.0%, respectively, of our total
revenue, from sales of our rare earth coated PC wires and PC strands. We believe that our rare earth coating capabilities provide
us with a competitive advantage among our competitors, however, it is likely that our competitors may develop similar competing
products. We intend to continue to expand research and development efforts to advance our rare earth coating applications even
further, including improving the products’ corrosion-resistant level and increasing the products’ strength and life
span. Meanwhile, we will also continue to invest in research and development of higher strength and higher corrosion-resistant
level of other types of prestressed 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 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, 2018 and 2017, our six largest customers contributed 68.3% and 74.8% 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 accounted for 99.8% and 99.7% of our raw material purchases in the years ended December 31, 2018 and 2017,
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 product 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 2018, China continued
focusing on addressing the overcapacity in the steel industry and strengthening supply-side structural reform to drive sustained
growth. As of December 2018, China has lowered steel production by approximately 150 million tons, according to reports issued
by the Chinese government. As a result, the average price of steel products, including our products and principal raw materials,
increased in 2018. According to industry consultant Frost & Sullivan, the Chinese central government will focus on strictly
controlling steel capacity increases in 2019, however, due to the slowdown of economic growth, local governments in Northern China,
the most important steel production base in China, could increase allowable production levels of steel products, including our
products and principal raw materials. As a result, we expect the average price of our principal raw materials to decrease in 2019.
This could adversely impact our results of operations due to lower sale prices of our coated and plain surface products in the
market.
Sales to customers outside China
and international developments expose us to risks inherent in international sales and increased competition.
We generated approximately
3.3% and 4.1%, respectively, of our revenue during the years ended December 31, 2018 and 2017 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. In the first quarter of 2018, the United States government announced stiff tariffs on imports of steel and aluminum from
certain countries, including China. In June 2018, the United States government announced the imposition of an additional duty of
25% on approximately $34 billion worth of Chinese imports. In September 2018, the United States government announced the imposition
of an additional duty of 10% on approximately $200 billion worth of Chinese imports. Although we have not generated any sales from
the United States since the anti-dumping duties were imposed in 2010, these measures imposed in 2018 may also have a negative impact
on our business and results of operations because Chinese-based steel product exporters may now focus their marketing efforts on
the Chinese domestic market.
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 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.
A failure of our information
technology systems would harm our business.
The
nature of our business requires the development and implementation of certain functioning information technology systems. Such
systems are vulnerable to a variety of potential risks, including damage or interruption resulting from natural disasters and telecommunication
failures and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. The occurrence of any of these
events could result in costly interruptions or failures adversely affecting our business and the results of our operations.
We rely on information technology
to support our operations and reporting environments. A security failure of that technology could impact our ability to operate
our businesses effectively, adversely affect our reported financial results, impact our reputation and expose us to potential liability
or litigation.
In
the ordinary course of our business, we store sensitive data, including intellectual property, our proprietary business information
and that of our customers, suppliers and business partners, and information of our customers and employees, on our networks. The
secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite
our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to
a cyber incident, natural disaster, hardware or software failure or error, telecommunications system failure, service provider
or vendor error or failure, intentional or unintentional personnel actions, employee error, malfeasance or other disruptions. Any
such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, altered, damaged,
held ransom, lost or stolen. In any such event, we could suffer significant loss or incur significant liability, including: damage
to our reputation; loss of customer confidence or goodwill; and significant expenditures of time and money to address and remediate
resulting damages to affected individuals or business partners. Furthermore, such data breach could result in legal claims or proceedings,
liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations, and damage
our reputation, which could adversely affect our business, revenues and competitive position.
Risks Related to Doing Business in China
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 2017 and 2018, we had foreign currency translation gain of $6.6 million and foreign currency translation
loss of $6.3 million, respectively, primarily due to the strengthening of the RMB against the U.S. dollar in 2017 and the weakening
of the RMB against the U.S. dollar in 2018.
The value of the RMB
against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic
conditions and China’s foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars,
has been based on exchange rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the RMB solely to the U.S. dollar, and the RMB appreciated more than 20% against the
U.S. dollar over the following three years. Between July 2008 and June 2010, however, this appreciation halted and the RMB was
traded within a narrow range against the U.S. dollar. Between July 2010 and November 2015, the RMB fluctuated against the U.S.
dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of IMF completed the regular five-year
review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October
1, 2016, RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with
the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB depreciated significantly
in the backdrop of a surging U.S. dollar and persistent capital outflows of China. This depreciation halted in 2017, and the RMB
appreciated approximately 7% against the U.S. dollar during this one-year period. In 2018, the RMB depreciated 4.8% against the
U.S. dollar. With the development of the foreign exchange market and progress towards interest rate liberalization and RMB internationalization,
the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the RMB
will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how
market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
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 reduction of 150 million tons of steel production announced between
2016 and 2018, 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.
In light of the
flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange
policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and
substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If
any of our shareholders regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval
requirement timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion
further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currencies, we may not be able to satisfy our foreign currency demands.
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 RMB 500,000 (approximately $72,852
as of December 31, 2018) 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, which may result
in or intensify potential conflicts in relation to territorial, regional security and trade disputes. In 2018, the United States
implemented certain trade policies, tariffs, other trade actions against China relating to the import and export of certain products,
and negotiations with respect thereto, may have a negative effect on our business, financial condition, and results of operations
in China. China has imposed, or threatened to impose, tariffs on U.S. imports or to take other actions in retaliation to actions
taken by the United States. These developments may have a material adverse effect on the economy, financial markets, and currency
exchange rates in China and the United States. Any continuing or worsening trade relations between the United States and China
could significantly reduce domestic growth in China and therefore adversely affect our business, financial condition and results
of operations.
If we become directly subject to
the scrutiny, criticism and negative publicity that historically related to 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 past 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 annual report 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 previous 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 current taxable year 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.
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.
Capital Expenditures
We incurred capital
expenditures of approximately $72,305 and $37,848 for the years ended December 31, 2018 and 2017, 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.
We expect to incur
further capital expenditures in fiscal year 2019 in connection with our 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, 2018, we generated revenue of approximately $103.4 million, or 76.0% of our total revenue (as compared to $112.4 million,
or 84.9% of our total revenue, in 2017), from sales of our rare earth coated PC wires and PC strands.
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, however, it is likely that our competitors may develop similar competing products. We intend to continue to expand research
and development efforts to advance our rare earth coating applications even further including improving the product’s corrosion-resistant
level and increasing the product’s strength and life span 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.
The primary characteristics
of coated prestressed products, which are used in infrastructure projects, most notably, 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.
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. We have made progress in developing such product so far and we
will continue our research and development efforts in 2019. 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 senior management team 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 nearly 25 years of experience in the prestressed materials industry.
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
We believe that the
Chinese central government will continue to maintain economic growth rate at approximately 6.0% in the next few years by optimizing
economic structure and reforming the supply-side and funding infrastructure investment to maintain stable GDP growth. 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. In addition,
the safety and technical requirements for building construction are higher, resulting in an increase in the demand of prestressed
materials. We believe that these developments should create opportunities for us and we expect the market will continue to grow
gradually in 2019 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 extensive experience
in prestressed materials industry. 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 forty-two patents granted
by the State Intellectual Property Office of the PRC, including seven invention patents and thirty-five utility model patents as
of April 1, 2019. These patents and patent applications are intended to protect our technologies, including production processes
of various wire ropes, pickling methods for steel wire materials, the quality control methods for certain steel wire products 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 nearly 25 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
3.3% and 4.1%, respectively, of our revenue during the years ended December 31, 2018 and 2017 from sales to customers in international
markets including primarily Vietnam, South Korea, Japan, New Zealand, Australia, Bangladesh, Brunei, Costa Rica, South Africa,
Egypt, and Amman, primarily for use in the construction of bridges. Due to the anti-dumping measures imposed by the United States
and European Union in 2008 and 2009 and recent stiff trade measures imposed by the United States government in 2018, 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. Although
we have not generated any sales from the United States since the anti-dumping duties were imposed in 2010, these measures imposed
in 2018 may also have a negative impact on our business and results of operations because Chinese-based steel product exporters
may now focus their marketing efforts on the Chinese domestic market.
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:
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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.
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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.
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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 prestressed products are plain surface
materials that are coated with a rare earth or rare earth alloy protective layer so as to produce materials that are more corrosion-resistant
and long-lasting. The purpose of coating 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 in the coating process 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 primarily in the construction of bridges.
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 2017 and 2018, 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 Guizhou Steel Wire Co., Ltd. and Silvery Dragon Co.,
Ltd.
Competition among PRC
manufacturers of zinc coated prestressed products in China is limited to only several companies. Our main competitors for these
products are Baosteel Group Nantong Wire Products Co., Ltd., Shuangyou Eaststeel and Jiangyin Walsin Steel Cable Co. Ltd. Furthermore,
While we believe that our rare earth coating capabilities provide us with a competitive advantage among our competitors, however,
it is likely that our competitors may develop similar competing products. We intend to continue to expand research and development
efforts to advance our coating applications even further, including improving the products’ corrosion-resistant level and
increasing the products’ strength and life span 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
is slightly affected by seasonality and is usually low during the first quarter of every year, as February is the Chinese New Year
holiday and the winter weather in Northern China is cold, which results in a slowdown of construction.
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., Shanghai Chemical Industry Supply and Marketing Co., Ltd., Jiangxi Yigeer Technology Co., Ltd., and Baosteel Group Nantong
Wire Products Co., Ltd. and all are based in China.
Purchases from our
five largest suppliers accounted for 99.8% and 99.7% of our raw material purchases in 2018 and 2017, 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 2018, the Chinese government continued to
focus on addressing the overcapacity in the steel industry and strengthening supply-side structural reform to drive sustained growth.
As of December 2018, China has lowered steel production by about 150 million tons, according to reports issued by the Chinese government.
As a result, the average price of steel products, including our products and principal raw materials, increased in 2018. According
to industry consultant Frost & Sullivan, the Chinese central government will focus on strictly controlling steel capacity increases
in 2019. However, due to the slowdown of economic growth, local governments in Northern China, the most important steel production
base, could increase allowable production levels of steel products, including our products and principal raw materials. As a result,
we expect the average price of our principal raw materials will decrease in 2019. This could adversely impact our results of operations
due to lower sale prices of our coated and plain surface products in the market.
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, zinc 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.
|
Processing Lines
We currently have 18
processing lines, consisting of the following:
|
·
|
Two surface treatment 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 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 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 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 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 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 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 six 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.
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 2017 and 2018, sales
to our six largest customers, in the aggregate, accounted for approximately 68.3% and 74.8% of our total sales, respectively. The
following table provides the name of each customer that contributed to more than 10% of our revenues in each of 2017 and 2018 and
the percentage of our revenues generated from such customers during these periods.
Name of Customer
|
|
2018 Revenues
|
|
|
2017
Revenues
|
|
|
|
(%)
|
|
|
(%)
|
|
|
|
|
|
|
|
|
Zhangjiagang Shajing Iron and Steel Trading Co., Ltd.
|
|
|
*
|
|
|
|
30.4
|
|
|
|
|
|
|
|
|
|
|
Jiangsu Jinrun Steel Cable Co., Ltd.
|
|
|
13.6
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
Zhangjiagang OVM Machinery Co., Ltd.
|
|
|
14.1
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Shanghai Hanghe Metal Products Co., Ltd.
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Zhejiang Kexin Engineering Material Co., Ltd.
|
|
|
14.6
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
Liuzhou OVM Machinery Co., Ltd.
|
|
|
10.2
|
|
|
|
*
|
|
* Less than 10% of our annual revenues.
The following table describes the breakdown of our sales
in 2018 and 2017 between our domestic and international customers.
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Domestic Sales
|
|
$
|
131,642,673
|
|
|
$
|
126,930,386
|
|
|
|
|
|
|
|
|
|
|
International Sales
|
|
$
|
4,462,194
|
|
|
$
|
5,445,529
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
136,104,867
|
|
|
$
|
132,375,915
|
|
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, sixteen employees are dedicated to research and development. We spent
$3.3 million and $4.3 million in 2018 and 2017, respectively, on our research and development activities to customize products
for new or existing customers and develop new 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. Pursuant to a two-year research cooperation agreement
with Jiujiang Institute in 2017, Ossen Jiujiang agreed to provide its research and development resources such as the research and
development team and testing laboratories for facilitating students of Jiujiang Institute to develop new technology know-how on
certain galvanised prestressed technology with a view to reducing unit costs, improving production efficiency, upgrading product
quality. 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.
In addition, our Jiujiang
facility received the recognition of Jiujiang Municipal Enterprise Technology Center by Jiujiang Municipal Government in 2012 and
our Maanshan facility received Maanshan Municipal Projects Technology Research Center by Maanshan Municipal Science and Technology
Bureau in 2014.
We believe that our
research and development activities and production technology for rare-earth zinc coated materials have enhanced our market position.
By using rare earth-alloy-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 can produce
zinc rare earth alloy coated pre-stressing materials of 1,860 mega pascal (“mPa”) strength level and 15.20 mm diameter,
as a result of our rare earth alloy-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 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.
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, 2019,
we have forty-two patents registered with the State Intellectual Property Office of the PRC, including seven invention patents
and thirty-five utility model patents.
Between January 1,
2018 to April 1, 2019, five previously-pending utility model patents and three previously-pending invention patents 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, the quality control methods for certain steel wire products 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
|
Prestressed Galvanized Steel Wire Joint Stabilizing Processing Production Method
|
|
ZL201610567857.0
|
|
Ossen Jiujiang
|
|
Registered
|
|
7/18/2036
|
High-strength prestressed steel wire drawing and matching method
|
|
ZL201610567616.6
|
|
Ossen Jiujiang
|
|
Registered
|
|
7/18/2036
|
Prestressed steel strand aeration pickling tank and pickling method
|
|
ZL201510161287.0
|
|
Ossen Materials
|
|
Registered
|
|
4/6/2035
|
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
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
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
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Ossen Materials
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Registered
|
|
06/23/2021
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|
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Lock Device for PC Strand Production Wheel
|
|
ZL201220218156.9
|
|
Ossen Materials
|
|
Registered
|
|
06/25/2021
|
|
|
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|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Name
|
|
Application No.
/Patent No.
|
|
Applicant
/Patent
Holder
|
|
Status
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Prestressed Steel Wire Ultrasonic Vibration Pickling Pool
|
|
ZL201621197903.4
|
|
Ossen Materials
|
|
Registered
|
|
11/6/2026
|
|
|
|
|
|
|
|
|
|
Prestressed Strand Online Water Removal Device
|
|
ZL201720979882.X
|
|
Ossen Materials
|
|
Registered
|
|
8/6/2027
|
|
|
|
|
|
|
|
|
|
Prestressed Steel Strand Production Spiral Air Cylinder
|
|
ZL201621197904.9
|
|
Ossen Materials
|
|
Registered
|
|
11/6/2026
|
|
|
|
|
|
|
|
|
|
Closed Soot Filter System for Strand Production
|
|
ZL201721178282.X
|
|
Ossen Materials
|
|
Registered
|
|
9/13/2027
|
|
|
|
|
|
|
|
|
|
Strand Take-up Machine
|
|
ZL201721177583.0
|
|
Ossen Materials
|
|
Registered
|
|
9/13/2027
|
|
|
|
|
|
|
|
|
|
Steel Wire On-line Oil Coating Device
|
|
ZL201721178741.4
|
|
Ossen Materials
|
|
Registered
|
|
9/13/2027
|
|
|
|
|
|
|
|
|
|
Prestressed Steel Strand Packaging Structure
|
|
ZL201720976708.X
|
|
Ossen Materials
|
|
Registered
|
|
8/6/2027
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
An Oil Weight Control Device for Unbonded Steel Strand
|
|
ZL201620720468.2
|
|
Ossen Jiujiang
|
|
Registered
|
|
7/10/2026
|
|
|
|
|
|
|
|
|
|
A Dedusting and Dedusting Device for A Prestressed Steel Strand Joint Machine
|
|
ZL201620720466.3
|
|
Ossen Jiujiang
|
|
Registered
|
|
7/10/2026
|
|
|
|
|
|
|
|
|
|
A Galvanized Steel Wire Fixture for Tensile Testing Machine
|
|
ZL201620720452.1
|
|
Ossen Jiujiang
|
|
Registered
|
|
7/10/2026
|
|
|
|
|
|
|
|
|
|
A Trapezoid Mold for Wire Rod Drawing of Carbon Steel
|
|
ZL201620720451.7
|
|
Ossen Jiujiang
|
|
Registered
|
|
7/10/2026
|
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, 2018 and
2017, 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 16.0% or 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.
Since May 1, 2018, the VAT rate is 16% which applies to the manufacturing sector in China. 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,
2018 and 2017, we had 184 and 190 full-time employees. As of April 1, 2019, we had 184 full-time employees.
The following table
shows the breakdown in numbers and percentages of employees by department as of December 31, 2018:
Functions
|
|
Number of
employees
|
|
|
% of total
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
102
|
|
|
|
55
|
%
|
Research & Development
|
|
|
16
|
|
|
|
9
|
%
|
Quality Control
|
|
|
6
|
|
|
|
3
|
%
|
General Administration, Purchasing, Sales and Marketing
|
|
|
60
|
|
|
|
33
|
%
|
Total
|
|
|
184
|
|
|
|
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
$265,491 and $249,491 in 2018 and 2017, 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.
4C. Organizational Structure
Our Majority Shareholders
Pursuant
to securities purchase agreements dated August 7, 2018, on August 8, 2018 and August 14, 2018, Effectual Strength
Enterprises Limited (“Effectual”), a British Virgin Islands company controlled by Liang Tang, purchased:
|
·
|
600,000 shares from Fascinating Acme Development
Limited, an entity controlled by the spouse of Wei Hua, our Chief Executive Officer, at a price of $2.582 per ADS, each ADS representing
three Ordinary Shares; and
|
|
·
|
600,000 shares from Gross Inspiration
Development Limited, an entity controlled by the spouse of Xufeng Zhou, our senior manager, at a price of $2.582 per ADS.
|
On October 2, 2018,
Acme Innovation Limited, a British Virgin Islands company (“Acme”) wholly owned by Pujiang International Group Limited,
a Cayman Islands company (“Pujiang”) controlled by Dr. Liang Tang, purchased 13,050,000 of our ordinary shares from
Effectual, in exchange for the issuance
of 54,404 shares of Pujiang to Elegant Kindness Limited (“Elegant”), a British Virgin Islands company wholly owned
by Dr. Liang Tang. Consequently, Acme now holds 13,050,000 of our ordinary shares.
On December 11, 2018,
Pujiang, the parent entity of Acme, submitted an application to the Hong Kong Stock Exchange (the “HK Exchange”), seeking
approval of a potential listing of Pujiang’s shares on the HK Exchange following a proposed initial public offering of Pujiang’s
shares. Such application is subject to the review of the HK Exchange. The terms of such offering have not yet been set. Furthermore,
the timing of the consummation of such potential offering and listing is unknown, and there is no guarantee that such listing and
offering will be consummated at all. This filing shall not be deemed an offering of the securities of Pujiang or the Company.
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) Innovation 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 three third-party 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 Ossen Group PRC, which is ultimately 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) Innovation 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, 2018, our production facility and office in Maanshan City had a total gross floor area of approximately 14,668
square meters and we employed 49 production personnel at that facility. Our Maanshan facility contained seven processing lines.
As of December 31, 2018, our production facility and office in Jiujiang City had a total gross floor area of approximately 20,810
square meters and we employed 53 production personnel at that facility. Our Jiujiang facility contained eleven processing lines.
The production volume of our Maanshan facility and Jiujiang facility was 193,174 tons in 2018. Historically, we did not experience
any form of disruption in our production facilities. However, from July 2018 to December 2018, due to a local government's construction
accident affecting a high-voltage transmission line near Ossen Jiujiang production facility, the power supply to some of our zinc
coating processing lines was interrupted, resulting in the inoperability of several equipment. We were able to overcome this temporary
interruption by purchasing semi-finished zinc coated products to produce finished zinc coated products. The total annual production
of our two facilities decreased in 2018 compared to 2017 due to less demand of our rare earth coated products and the interrupted
power supply in Jiujiang facility, partially offset by the increase in demand of our zinc coated products in 2018.
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. 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 2018, the Chinese government’s policy in lending is more conservative compared to 2016 and 2017. As a result, our domestic
customers had to pay our accounts receivables slower than 2016 and 2017, and our average Days Sales Outstanding was approximately
150, 123 and 126 days in 2018, 2017 and 2016, 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 “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
3.3% and 4.1%, respectively, of our revenue during the years ended December 31, 2018 and 2017 from sales to customers in international
markets including primarily Vietnam, South Korea, Japan, New Zealand, Australia, Bangladesh, Brunei, Costa Rica, South Africa,
Egypt, Costa Rica and Amman , primarily for use in the construction of bridges. In 2018, we increased our efforts to develop new
customers in Africa, South America and the Middle East, while at the same time maintaining relationships with existing foreign
customers. Due to the anti-dumping measures imposed by the United States and European Union in 2008 and 2009 and recent stiff trade
measures imposed by the United States government in 2018, 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. Although we have not generated any sales from the United States since the
anti-dumping duties were imposed in 2010, these measures imposed in 2018 may also have a negative impact on our business and results
of operations because Chinese-based steel product exporters may now focus their marketing efforts on the Chinese domestic market.
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. As an overall percentage of sales, sales of our coated products increased from 94.0% in 2017 to 95.7%
in 2018.
Overall gross margin
of our products were 13.8%, 11.1% and 15.1% respectively in 2016, 2017 and 2018. The decrease of gross margin in 2017 compared
to 2016 was primarily due to the increase of the price of raw materials and because the orders for plain surface products were
mainly wholesale orders, which normally have lower gross profit margin than the retail orders we had in 2016. The increase of gross
margin in 2018 was primarily due to the increase of the prices of our steel products.
As an overall percentage
of sales, sales of our coated products increased from 94.0% in 2017 to 95.7% in 2018 and 79.4% and 90.4%, respectively, of our
coated product sales in the years ended December 31, 2018 and December 31, 2017 were sales of rare earth coated products and the
remaining 20.6% and 9.6%, 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 product 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 2014 and 2015, steel supply outpaced 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, 2017 and 2018, 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, increased in 2016, 2017 and 2018. We expect that the Chinese central government
will focus on strictly controlling steel capacity increases in 2019. However, due to the slowdown of economic growth, local governments
in Northern China, the most important steel production base, are expected to increase allowable production levels of steel products,
including our principal raw materials. As a result, according to industry consultant Frost & Sullivan, the average price of
our principal raw materials is expected to decrease in 2019.
We currently purchase
almost all of our new materials from a very small number of suppliers. Purchases from our five largest suppliers amounted to 99.8%,
99.7% and 99.1% of our total raw material purchases in 2018, 2017 and 2016, 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 was subject to a 15% tax rate through 2018. In 2018, Ossen Materials renewed its status of high-tech
enterprise again and will be subject to a 15% tax rate through 2020. 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 was subject to a 15% tax rate through 2018. In 2018, Ossen Jiujiang renewed its status of high-tech enterprise again and will
be subject to a 15% tax rate through 2021. 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 2016, 2017 and 2018.
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,
|
|
|
|
2018
|
|
|
% of Revenue
|
|
|
2017
|
|
|
% of Revenue
|
|
|
2016
|
|
|
% of Revenue
|
|
Revenues
|
|
|
136,104,867
|
|
|
|
100.0
|
%
|
|
|
132,375,915
|
|
|
|
100.0
|
%
|
|
|
117,029,154
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
|
|
|
115,585,803
|
|
|
|
84.9
|
%
|
|
|
117,721,799
|
|
|
|
88.9
|
%
|
|
|
100,932,528
|
|
|
|
86.2
|
%
|
Gross profit
|
|
|
20,519,064
|
|
|
|
15.1
|
%
|
|
|
14,654,116
|
|
|
|
11.1
|
%
|
|
|
16,096,626
|
|
|
|
13.8
|
%
|
Selling expenses
|
|
|
327,365
|
|
|
|
0.2
|
%
|
|
|
598,832
|
|
|
|
0.5
|
%
|
|
|
734,159
|
|
|
|
0.6
|
%
|
General and administrative expenses
|
|
|
5,263,914
|
|
|
|
3.9
|
%
|
|
|
6,002,121
|
|
|
|
4.5
|
%
|
|
|
6,376,383
|
|
|
|
5.4
|
%
|
Total operating expenses
|
|
|
5,591,279
|
|
|
|
4.1
|
%
|
|
|
6,600,953
|
|
|
|
5.0
|
%
|
|
|
7,110,542
|
|
|
|
6.1
|
%
|
Income from operation
|
|
|
14,927,785
|
|
|
|
11.0
|
%
|
|
|
8,053,163
|
|
|
|
6.1
|
%
|
|
|
8,986,084
|
|
|
|
7.7
|
%
|
Financial expenses, net
|
|
|
(1,621,486
|
)
|
|
|
-1.2
|
%
|
|
|
(1,610,337
|
)
|
|
|
-1.2
|
%
|
|
|
(2,827,138
|
)
|
|
|
-2.4
|
%
|
Other income, net
|
|
|
208,071
|
|
|
|
0.2
|
%
|
|
|
147,108
|
|
|
|
0.1
|
%
|
|
|
90,584
|
|
|
|
0.1
|
%
|
Income before income taxes
|
|
|
13,514,370
|
|
|
|
9.9
|
%
|
|
|
6,589,934
|
|
|
|
5.0
|
%
|
|
|
6,249,530
|
|
|
|
5.3
|
%
|
Income Taxes
|
|
|
(2,129,387
|
)
|
|
|
-1.6
|
%
|
|
|
(691,556
|
)
|
|
|
-0.5
|
%
|
|
|
(926,048
|
)
|
|
|
-0.8
|
%
|
Net Income
|
|
|
11,384,983
|
|
|
|
8.64
|
%
|
|
|
5,898,378
|
|
|
|
4.5
|
%
|
|
|
5,323,482
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net income attributable to non-controlling interest
|
|
|
1,005,530
|
|
|
|
0.7
|
%
|
|
|
553,067
|
|
|
|
0.4
|
%
|
|
|
499,509
|
|
|
|
0.4
|
%
|
Net income attributable to controlling interest
|
|
|
10,379,453
|
|
|
|
7.6
|
%
|
|
|
5,345,311
|
|
|
|
4.0
|
%
|
|
|
4,823,973
|
|
|
|
4.1
|
%
|
Other comprehensive income- Foreign currency translation gain (loss)
|
|
|
(6,272,303
|
)
|
|
|
-4.6
|
%
|
|
|
6,606,207
|
|
|
|
5.0
|
%
|
|
|
(6,975,100
|
)
|
|
|
-6.0
|
%
|
Total other comprehensive income (loss)
|
|
|
(6,272,303
|
)
|
|
|
-4.6
|
%
|
|
|
6,606,207
|
|
|
|
5.0
|
%
|
|
|
(6,975,100
|
)
|
|
|
-6.0
|
%
|
Comprehensive Income
|
|
|
4,107,150
|
|
|
|
3.0
|
%
|
|
|
11,951,518
|
|
|
|
9.0
|
%
|
|
|
(2,151,127
|
)
|
|
|
-1.8
|
%
|
Year Ended December 31, 2018 Compared
to Year Ended December 31, 2017
Revenues
. During
the year ended December 31, 2018, we had revenues of approximately $136.1 million as compared to revenues of approximately $132.4
million during year ended December 31, 2017, an increase of approximately $3.7 million, or 2.8%. The increase in our revenues during
the year ended December 31, 2018 was mainly attributable to a 124.0% increase in sales of zinc coated PC wires and PC strands,
partially offset by an 8.1% decrease in rare earth coated products, a 20.3% decrease in plain surface products and a 43.4% decrease
in other products.
The following table
provides a breakdown of our revenues during the years ended December 31, 2018 and 2017, respectively:
|
|
Year ended December 31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Difference
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain surface PC strands
|
|
|
4,812,541
|
|
|
|
3.5
|
%
|
|
|
6,037,207
|
|
|
|
4.6
|
%
|
|
|
-20.3
|
%
|
Zinc coated PC wires and PC strands
|
|
|
26,834,870
|
|
|
|
19.7
|
%
|
|
|
11,978,159
|
|
|
|
9.0
|
%
|
|
|
124.0
|
%
|
Rare earth coated PC wires and PC strands
|
|
|
103,368,148
|
|
|
|
76.0
|
%
|
|
|
112,437,410
|
|
|
|
84.9
|
%
|
|
|
-8.1
|
%
|
Others
|
|
|
1,089,308
|
|
|
|
0.8
|
%
|
|
|
1,923,138
|
|
|
|
1.5
|
%
|
|
|
-43.4
|
%
|
Total
|
|
|
136,104,867
|
|
|
|
100
|
%
|
|
|
132,375,915
|
|
|
|
100
|
%
|
|
|
2.8
|
%
|
The market demand for
our rare earth coated PC wires and PC strands decreased in 2018, which motivated us to focus on the production and sale of zinc
coated products. As a result, the sales of rare earth coated PC wires and PC strands decreased by $9.1 million, or 8.1%, to
$103.4 million for the year of 2018.
The sales of zinc coated
PC wires and PC strands were $26.8 million during the year ended December 31, 2018, an increase of 124.0%, compared to the year
ended December 31, 2017. The increase of sales generated by zinc coated products in 2018 was primarily due to our efforts to focus
on the production and sale of zinc coated products and increased market demand for such products in 2018.
The sales of plain
surface PC strands and PC wires were $4.8 million during the year ended December 31, 2018, a decrease of $1.2 million, or 20.3%,
compared to the year ended December 31, 2017. This decrease of sales generated by plain surface PC strands and PC wires was primarily
due to decreased market demand during the period.
Other sales were $1.1
million during the year ended December 31, 2018, a decrease of $0.8 million, or 43.4%, compared to the year ended December 31,
2017. This decrease was primarily due to fewer scrap materials sold in 2018 compared to 2017 and the decrease of service revenue.
Cost of Goods Sold
.
Cost of goods sold was approximately $115.6 million during the year ended December 31, 2018, as compared to approximately $117.7
million during the year ended December 31, 2017, representing a decrease of 1.8%, or approximately $2.1 million. This decrease
occurred mainly because the total sales volume deceased in 2018 and the average price of raw materials did not increase as much
as the average sale price of our products. As a percentage of revenues, cost of goods sold decreased from 88.9% to 84.9% during
the year ended December 31, 2018.
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 40.0% to approximately $20.5 million during the year ended December 31, 2018, from approximately $14.7 million for the
same period in 2017. For the years ended December 31, 2018 and 2017, our gross margin was 15.1% and 11.1%, respectively. The increase
of gross margin was primarily due to the increase of the prices of our steel products.
Selling Expenses
.
Selling expenses totaled $0.3 million for the year ended December 31, 2018, as compared to $0.6 million for the year ended December
31, 2017, a decrease of 45.3%. This decrease was primarily due to lower freight and sales commission for export sales and lower
transportation cost for domestic sales as more projects were in closer proximity in 2018.
General and Administrative
Expenses
. General and administrative expenses totaled $5.3 million for the year ended December 31, 2018, as compared to $6.0
million for the year ended December 31, 2017, a decrease of 12.3%. The decrease in 2018 was primarily due to lower research
and development cost for customized products in 2018.
Operating Income.
As
a result of the foregoing, operating income for the year ended December 31, 2018 was approximately $14.9 million, an increase of
85.4% as compared to approximately $8.1 million for the same period in 2017. As a percentage of net sales, operating income increased
from 6.1% to 11.0% during the year ended December 31, 2018. This increase was primarily due to higher gross profit and lower operating
expenses.
Income Taxes
.
We incurred income tax expenses of $2.1 million and $0.7 million in the fiscal years ended December 31, 2018 and 2017, 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 $11.4 million for the year ended December 31, 2018, as compared
to approximately $5.9 million for the year ended December 31, 2017, an increase of 93.0%.
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. Our net income attributable
to non-controlling interest totaled approximately $1.0 million for the year ended December 31, 2018, as compared to approximately
$0.6 million for the year ended December 31, 2017.
Foreign Currency
Income (Loss).
For the year ended December 31, 2018, foreign currency exchange loss was $6.3 million, compared to foreign
currency exchange gain of $6.6 million, for the year ended December 31, 2017. The loss was due to the weakening of the exchange
rate of the RMB versus the US dollar in 2018.
Year Ended December 31, 2017 Compared
to Year Ended December 31, 2016
Revenues
. During
the year ended December 31, 2017, we had revenues of approximately $132.4 million as compared to revenues of approximately $117.0
million during year ended December 31, 2016, an increase of approximately $15.4 million, or 13.1%. The increase in our revenues
during the year ended December 31, 2017 was mainly attributable to a 10.9% increase in sales of rare earth coated PC wires and
PC strands, a 46.1% increase in zinc coated PC wires and PC strands, and a 14.9% increase in plain surface PC strands, partially
offset by a 13.2% decrease in other products.
The following table
provides a breakdown of our revenues during the years ended December 31, 2017 and 2016, respectively:
|
|
Year ended December 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Difference
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain surface PC strands
|
|
|
6,037,207
|
|
|
|
4.6
|
%
|
|
|
5,256,109
|
|
|
|
4.5
|
%
|
|
|
14.9
|
%
|
Zinc coated PC wires and PC strands
|
|
|
11,978,159
|
|
|
|
9.0
|
%
|
|
|
8,195,801
|
|
|
|
7.0
|
%
|
|
|
46.1
|
%
|
Rare earth coated PC wires and PC strands
|
|
|
112,437,410
|
|
|
|
84.9
|
%
|
|
|
101,361,992
|
|
|
|
86.6
|
%
|
|
|
10.9
|
%
|
Others
|
|
|
1,923,138
|
|
|
|
1.5
|
%
|
|
|
2,215,252
|
|
|
|
1.9
|
%
|
|
|
-13.2
|
%
|
Total
|
|
|
132,375,915
|
|
|
|
100
|
%
|
|
|
117,029,154
|
|
|
|
100
|
%
|
|
|
13.1
|
%
|
The demand for our
rare earth coated PC wires and PC strands continue to improve in 2017. However, the demand for lower strength coated materials
was greater than demand for higher strength coated materials. We used lower grade raw materials for some of our rare earth coated
products to improve margins without sacrificing product strength or quality. As a result, the sales of rare earth coated PC wires
and PC strands increased by $11.1 million, or 10.9%, to $112.4 million for the year of 2017.
The sales of zinc coated
PC wires and PC strands were $12.0 million during the year ended December 31, 2017, an increase of 46.1%, compared to the year
ended December 31, 2016. The increase of sales generated by zinc coated products in 2017 was primarily due to our efforts to take
advantage of the improved market condition and customer demand and promoting the products in 2017.
The sales of plain
surface PC strands and PC wires were $6.0 million during the year ended December 31, 2017, an increase of $0.8 million, or 13.9%,
compared to the year ended December 31, 2016. This increase of sales generated by plain surface PC strands and PC wires was primarily
due to favorable wholesale market demand during the period.
Other sales were $1.9
million during the year ended December 31, 2017, a decrease of $0.3 million, or 13.2%, compared to the year ended December 31,
2016. This decrease was primarily due to fewer spare raw materials sold in 2017 compared to 2016 and the decrease of service revenue.
Cost of Goods Sold
.
Cost of goods sold was approximately $117.7 million during the year ended December 31, 2017, as compared to approximately $100.9
million during the year ended December 31, 2016, representing an increase of 16.6%, or approximately $16.8 million. This increase
mainly resulted from the increase of revenues and the increase of raw material costs. As a percentage of revenues, cost of goods
sold increased from 86.2% to 88.9% during the year ended December 31, 2017.
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
decreased 9.0% to approximately $14.7 million during the year ended December 31, 2017, from approximately $16.1 million for the
same period in 2016. For the years ended December 31, 2017 and 2016, our gross margin was 11.1% and 13.8%, respectively. The decrease
of gross margin was primarily due to the increase of the price of raw materials and because the orders for plain surface products
were mainly wholesale orders, which normally have lower gross profit margin than the retail orders we had in 2016.
Selling Expenses
.
Selling expenses totaled $0.6 million for the year ended December 31, 2017, as compared to $0.7 million for the year ended December
31, 2016, a decrease of 18.4%. This decrease was primarily due to lower sales commission and lower transportation cost in 2017.
General and Administrative
Expenses
. General and administrative expenses totaled $6.0 million for the year ended December 31, 2017, as compared to $6.4
million for the year ended December 31, 2016, a decrease of 5.9%. The decrease in 2017 was primarily due to lower bad-debt
provision, partially offset by higher research and development cost in 2017.
Operating Income.
As
a result of the foregoing, operating income for the year ended December 31, 2017 was approximately $8.1 million, a decrease of
10.4% as compared to approximately $9.0 million for the same period in 2016. As a percentage of net sales, operating income decreased
from 7.7% to 6.1% during the year ended December 31, 2017.This decrease was primarily due to lower gross profit partially offset
by lower operating expenses.
Income Taxes
.
We incurred income tax expenses of $0.7 million and $0.9 million in the fiscal years ended December 31, 2017 and 2016, 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 $5.9 million for the year ended December 31, 2017, as compared
to approximately $5.3 million for the year ended December 31, 2016, an increase of 10.8%.
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. Our net income attributable
to non-controlling interest totaled approximately $0.6 million for the year ended December 31, 2017, as compared to approximately
$0.5 million for the year ended December 31, 2016.
Foreign Currency
Income (Loss).
For the year ended December 31, 2017, foreign currency exchange gain was $6.6 million, compared to foreign
currency exchange loss of $6.9 million, for the year ended December 31, 2016. The gain was due to the strengthening of the exchange
rate of the RMB versus the US dollar in 2017.
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 606, “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 was subject to VAT which was levied on the rate of 17% on the invoiced value of sales before May
1, 2018. After May 1, 2018, the Company’s VAT rate is 16% which applies to the manufacturing sector in China. 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 606 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, 2018, 2017 and 2016.
Research and Development
Research and development
costs are expensed as incurred and totaled approximately $3,345,097, $4,269,512 and $3,869,277 for the years ended December 31,
2018, 2017 and 2016, 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. It is unlikely that the amount
of liability for unrecognized tax benefits will significantly change over the next 12 months. It is the Company’s policy
to include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively,
as necessary. The Company’s historical tax years will always remain open for examination by the local authorities.
The Company has not
provided for income taxes on accumulated earnings amounting $68,673,561 that are subject to the PRC dividend withholding tax as
of December 31, 2018, 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 $939,535 and $868,973 at December 31, 2018 and 2017, respectively.
The increase was mainly due to the increase of accounts receivable as of December 31, 2018.
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, 2018 and 2017,
the Company has $121,370 and $127,766 reserve for inventories, respectively.
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 $69,986,656 and $71,280,903 at December 31, 2018 and 2017, respectively. Among the balance of
$69,986,656, the aging of $36,913,322 was within 60 days, $25,541,361 was between 60-180 days and $7,531,973 was over 180
days. High carbon steel wire rods are the primary raw material required to manufacture prestressed steel materials. Most
suppliers of high carbon steel wire rods require advance payment. Advance to suppliers at December 31, 2018 decreased from
2017 due to the strengthening of the U.S. dollar at the end of 2018 as compared to the end of 2017. Advance to suppliers in
RMB at December 31, 2018 increased slightly from 2017 in order to secure favorable treatment in terms of supply of raw
materials. No allowance was provided for the prepayments balance at December 31, 2018.
In 2018, the PRC steel
industry completed the process of reducing overcapacity which resulted in the increase of the average steel price. However, we
were able to receive raw materials delivered by our suppliers in 2018 at a discounted price, locked in by prepayments. We expect
to continue using the advance payment to suppliers to lock a discounted price of raw materials and the balance of advance to suppliers
may fluctuate depending on the market development.
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, 2018, 2017 and 2016.
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 adopted Accounting Pronouncements
In May 2014, the FASB
issued a new standard on revenue recognition related to contracts with customers. This standard supersedes nearly all existing
revenue recognition guidance and involves a five-step principles-based approach to recognizing revenue. The new model requires
revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
a company expects to receive. The new standard also require additional qualitative and quantitative about the nature, amount, timing
and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments made in applying the
revenue guidance, and assets recognized from the costs to obtain or fulfill a contract. The Company adopted this standard in the
first quarter of 2018 using the modified retrospective approach. The impact of adoption on its Consolidated Financial Statements
for any period presented is not material.
In November 2015,
the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU amends existing guidance to
require that deferred income tax assets and liabilities be classified as non-current in a classified balance sheet, and eliminates
the prior guidance which required an entity to separate deferred tax assets and liabilities into a current amount and a non-current
amount in a classified balance sheet. The Company adopted this standard prospectively in the first quarter of 2018. The impact
of adoption on its Consolidated Financial Statements for any period presented is not material.
In October 2016, the
FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory, which requires companies to recognize
the income-tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than
when the asset has been sold to an outside party. The Company adopted this standard prospectively in the first quarter of 2018.
The impact of adoption on its Consolidated Financial Statements for any period presented is not material.
In November 2016,
the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”).
This ASU requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. 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 Company adopted this standard in the first quarter of 2018. The impact
of adoption on its Consolidated Financial Statements for any period presented is not material.
In January 2017, the
FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition
of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. The Company
adopted this standard prospectively in the first quarter of 2018. The impact of adoption on its Consolidated Financial Statements
for any period presented is not material.
Recently Issued Accounting Pronouncements
In February 2016,
the FASB issued ASU No. 2016-02 - Leases (Topic 842). Under the new guidance, a lessee is required to recognize
lease liabilities and corresponding right-of-use assets, initially measured at the present value of lease payments, on the balance
sheet for operating leases with terms greater than one year. Lessor accounting remains largely unchanged from existing
lease accounting. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election
not to recognize lease assets and lease liabilities. If the lessee makes the election, the lessee would recognize lease
expense on a straight-line basis over the lease term. This ASU is effective in annual reporting periods beginning after
December 15, 2018 and the interim periods within that fiscal year. The Company is still evaluating the potential impacts
that the implementation of ASU 2016-02 may have on its financial position, operational results, or cash flows
In June 2016, the
FASB issued ASU 2016-13,” Measurement of Credit Losses on Financial Instruments”, to require financial assets carried
at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions
and forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables
arising from operating leases are within the scope of lease accounting standards. The ASUs are effective for interim and annual
periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASUs is modified retrospective. We are
currently obtaining an understanding of the ASUs and plan to adopt them on January 1, 2020.
In January 2017, the
FASB issued ASU No. 2017-04 (Topic 350) Intangibles—Goodwill and Other: Simplifying the Test for Goodwill
Impairment, which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under
the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting
unit exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU will be applied on a prospective basis and
is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment
tests performed after January 1, 2017. The Company does not expect the adoption to have a material impact on the Consolidated Financial
Statements.
In February 2018,
the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”
This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S. tax reform”) and allows a
reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from U.S.
tax reform. Consequently, the update eliminates the stranded tax effects that were created as a result of the historical U.S. federal
corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The Company is required to adopt this standard
in the first quarter of fiscal year 2020, with early adoption permitted. The amendments in this update should be applied either
in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income
tax rate in the Tax Cuts and Jobs Act is recognized. The Company has finished the evaluation and determined there is no impact
of on its Consolidated Financial Statements.
In June 2018, the
FASB issued ASU No. 2018-07 – Compensation – Stock Compensation (Topic 718). The ASU was issued
as part of its Simplification Initiative to reduce costs and complexities of financial reporting. ASU No. 2018-07 simplifies
the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance
on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Currently,
share-based payments transactions to nonemployees are measured at fair value and remeasured at each reporting date through the
date of final vesting. This ASU changes the guidance related to the determination of the measurement date. Under
the new guidance, equity-classified awards would be measured at the grant date. This ASU is effective for fiscal years
beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption is permitted if
financial statements have not yet been issued. The Company is currently evaluating the impact of adoption on the Consolidated
Financial Statements.
In August 2018, the
FASB issued ASU 2018-13 Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which
eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied
on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be
applied on a retrospective basis. The new standard is effective for interim and annual periods beginning after December 15, 2019,
with early adoption permitted. The Company is currently evaluating the impact of adoption on the 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. 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,
and restricted cash which are denominated in RMB, were approximately $3.4 million and $4.1 million at December 31, 2018, as compared
to $1.0 million and $7.2 million at December 31, 2017. The increase in cash and cash equivalents and the decrease in restricted
cash were mainly because the decrease in bank acceptance notes. For the years ended December 31, 2017 and 2018, 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 2016, 2017 and 2018, Chinese central bank, the People’s Bank of China, maintained a prudent and neutral monetary policy
and local banks have generally maintained tight lending policies, in addition to the Chinese government’s policy to reduce
the country’s steel capacity which resulted in further tightened lending to steel companies, thereby limiting our ability
to borrow funds for working capital purpose. In 2016, we were able to generate net profits and positive cash flow from operating
activities. In 2017, we had net profits, but net cash used in operating activities was $3.0 million. In 2018, we had 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 $5.0 million
of accounts receivable aged over 180 days as of December 31, 2017. We had $5.8 million of accounts receivable aged over 180 days
as of December 31, 2018. As of April 1, 2019, we have collected approximately $29.4 million of the $60.6 million of accounts receivable
outstanding as of December 31, 2018. The remaining approximately $31.2 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 2016, 2017 and 2018,
the accounts receivable collection period of our domestic customers was approximately 126, 123 and 150 days after receiving the
materials at their construction site, respectively. As of December 31, 2018, our accounts receivable increased to $60.6 million
from $51.7 million at December 31, 2017 as a result of slower collection of accounts receivable in 2018.
The average Days Sales
Outstanding (“DSO”) of 2016, 2017 and 2018 were 126, 123 days and 150 days, respectively. The DSO as of December 31,
2016, 2017 and 2018 were 116, 142 and 162 days, respectively. The increase in DSO as of December 31, 2018 was primarily due to
the slower payments from our customers during 2018.
The following table
describes the aging of our accounts receivable during 2016, 2017 and 2018:
As of Date
|
|
Account Receivables
Balance (in US
Dollars)
|
|
|
<60 days
|
|
|
60-90 days
|
|
|
90-180 days
|
|
|
>180 days
|
|
December 31, 2018
|
|
|
60,586,869
|
|
|
|
40,328,956
|
|
|
|
7,571,838
|
|
|
|
6,900,964
|
|
|
|
5,785,111
|
|
December 31, 2017
|
|
|
51,699,930
|
|
|
|
37,801,468
|
|
|
|
0
|
|
|
|
8,854,564
|
|
|
|
5,043,898
|
|
December 31, 2016
|
|
|
37,298,465
|
|
|
|
24,914,390
|
|
|
|
8,698,708
|
|
|
|
951,302
|
|
|
|
2,734,065
|
|
As of April 1, 2019,
we have collected approximately $29.4 million or 48.5% of the $60.6 million of accounts receivable outstanding as of December 31,
2018 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, 2018, 2017 and 2016, our six largest customers contributed 68.3%, 74.8% and 81.4% 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, 2018,
we had approximately $13.6 million of short-term bank loans and $8.7 million of bank acceptance notes outstanding, as compared
to approximately $13.9 million of short-term bank loans and $10.3 million of bank acceptance notes outstanding at December 31,
2017 and $16.9 million and $9.6 million at December 31, 2016, respectively. In 2018, Chinese government and Chinese banks were
still conservative in lending to certain industries including steel industry and our domestic customers.
Our notes payable of
$9.6 million at December 31, 2016, $10.3 million at December 31, 2017 and $8.7 million at December 31, 2018 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 $6.7 million,
$7.2 million and $4.1 of restricted cash as of December 31, 2016, 2017 and 2018, 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 5.71%, 6.41% and 6.11% as of December 31, 2018, 2017 and 2016, respectively.
Interest expense was $0.9 million, $0.9 million and $1.1 million for the years ended December 31, 2018, 2017 and 2016, 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
2017 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 2017. In 2018, we were able
to rollover substantially all short-term bank loans and we anticipate rollovers of substantially all current facilities that
are set to mature in 2019. We also anticipate a slight reduction in the availability of short-term bank loans in 2019 but we
do not anticipate any difficulties to fund our operations. In the past, 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 they 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 $113.1 million at December 31, 2018, as compared to $114.7 million at December 31, 2017 and $101.6 million at
December 31, 2016.
The working capital
decrease of $1.6 million in 2018 as compared with 2017 was due primarily to the increase of the current portion of long-term bank
loans and customer deposits, partially offset by the increase in accounts receivable and inventories. The working capital increase
of $13.1 million in 2017 as compared with 2016 was due primarily to the increase of accounts receivable and advance to suppliers,
partially offset by the decrease in note receivable and inventories.
Inventories
We, like many
other steel product 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
In 2017, our cash flow
from operations was negative primarily due to the increase in advance to suppliers and accounts receivable. In 2018, our cash flow
from operations was positive primarily due to the increases in net income and customer deposits, and a decrease in advance to suppliers,
partially offset by the increases in accounts receivable and inventories.
Years Ended December 31, 2018 and
2017
The following table
sets forth a summary of our net cash flow information for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
7,619,314
|
|
|
$
|
(3,019,725
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(72,305
|
)
|
|
|
(37,848
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(700,151
|
)
|
|
|
(3,808,613
|
)
|
Operating Activities
Net cash provided in
operating activities was approximately $7.6 million in 2018, as compared to $3.0 million of net cash used in operating activities
in 2017. This was the result of a $5.5 million increase in net income due to higher revenue, a $1.3 million decrease in advance
to suppliers due to the stronger U.S. dollar, a $4.8 million increase in customer deposits and a $1.3 million increase
in due to shareholder, partially offset by a $8.9 million increase in accounts receivable due to slower payment from our customers
and a $3.7 million increase in inventories due to lower consumption of raw materials at the end of 2018.
Investing Activities
Net cash used in investing
activities was $72,305 in 2018, as compared to $37,848 of net cash used in investing activities in 2017 as the result of more spending
in maintenance and repair of production lines in 2018.
Financing Activities
Net cash used in financing
activities in 2018 was approximately $0.7 million, as compared to approximately $3.8 million of net cash used in financing activities
in 2017. The decrease in cash used in financing activities was the result of an increase in proceeds from short-term bank loans,
a decrease in repayment of notes payable, partially offset by a decrease in proceeds from notes payable.
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,
2018 we guaranteed $74.1 million short-term debt and $2.9 million of notes payable for Shanghai Pujiang.
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, 2018:
|
|
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)
|
|
|
22,315,912
|
|
|
|
22,315,912
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest Commitments – Short-term bank loans
|
|
|
448,746
|
|
|
|
448,746
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt obligations
(2)
|
|
|
7,269,027
|
|
|
|
7,269,027
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest Commitments – Long-term bank loans
|
|
|
404,196
|
|
|
|
404,196
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
30,437,881
|
|
|
|
30,437,881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Attributable to short-term bank loans and bank acceptance notes.
|
(2)
|
Attributable to long-term bank loans.
Less than 1 year is the current portion of 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
|
|
51
|
|
|
|
|
|
Wei Hua
|
|
Chief Executive Officer, Chief Financial Officer and Director
|
|
57
|
|
|
|
|
|
Junhong Li
|
|
Director
|
|
53
|
|
|
|
|
|
Xiaobing Liu
|
|
Director
|
|
60
|
|
|
|
|
|
Yingli Pan
|
|
Director
|
|
63
|
|
|
|
|
|
Zhongcai Wu
|
|
Director
|
|
70
|
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, Dr. Tang first worked as an
officer of the enterprise management office at Baosteel Group Shanghai Ergang Co., Ltd. from July 1988 to March 1993 and then promoted
and worked as the deputy director of the enterprise management office from March 1993 to November 1994. He then served as the deputy
head of the enterprise administrative division of the Shanghai Municipal Metallurgical Industry Bureau from November 1994 to May
1998. From May 1998 to May 2001, Dr. Tang served as an officer of the China Association of Social Workers, previously known as
China Union of Social Workers. Thereafter, Dr. Tang served as the general manager of Innovation Material Research Institute from
May 2001 to April 2004. Dr. Tang graduated from Shanghai University in the PRC, previously Shanghai University of Technology, with
a Bachelor’s degree in Metallurgy and Materials Engineering (Metal Pressure Processing Discipline) in July 1988. He then
obtained a Master of Business Administration degree jointly organized by Peking University in the PRC and Fordham University in
the USA in May 2002, and obtained a Doctoral degree in World Economics from East China Normal University in the PRC in July 2007.
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, 2018, the aggregate cash compensation that we paid to our executive officers and directors was approximately $86,300.
For the year ended December 31, 2017, 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 is set to expire on December 31, 2021. 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.
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, 2019,
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 6,741,110 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, 2019.
The following table
sets forth information with respect to the beneficial ownership of our common shares as of April 1, 2019 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
(2)
|
|
|
13,050,000
|
|
|
|
65.9
|
%
|
|
|
|
|
|
|
|
|
|
Wei Hua
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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 April 1, 2019 and the ordinary shares underlying any options and warrants exercisable by such person within 60 days of the date of this filing.
|
|
(2)
|
Acme holds such shares. Pujiang is the parent entity of Acme and is controlled by Dr. Tang. See Item 4C above.
|
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.
Purchases from a Related Party
Historically, we 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. We have not procured any steel wire rods from Ossen Materials Research since 2014.
Sales to a Related Party
In 2018, we sold $2.8
million of our products to Shanghai Pujiang Cable Co., Ltd., a subsidiary Shanghai Ossen acquired in September 2010. We sold $2.9
million of our products to Zhejiang Pujiang Cable Co., Ltd., a subsidiary of Shanghai Pujiang in 2018. In 2018 and 2017, we generated
approximately 4.2% and 0% of our revenue from sales to Shanghai Pujiang and Zhejiang Pujiang.
Guarantees
During the years ended
December 31, 2018, 2017 and 2016, Ossen Material Research (formerly Shanghai ZFX), an affiliate of ours, and Ossen Shanghai, an
affiliate of ours, and Shanghai Pujiang, 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.
Ossen Material
Research guaranteed loans in the amount of $0, $3.7 million and $1.3 million in 2018, 2017 and 2016, respectively. Ossen
Shanghai guaranteed loans in the amount of $0.6 million in 2018, $0 in 2017 and $0 in 2016. Shanghai Pujiang guaranteed loans
in the amount of $9.4 million in 2018, $3.7 million in 2017 and $0 in 2016. These guarantees in 2018, 2017 and 2016 were
provided for no consideration. In addition, in 2018, 2017 and 2016, we guaranteed loans in the amount of $74.1 million, $5.4
million and $59.8 million and notes payable in the amount of $2.9 million, $0 and $7.2 million for Shanghai Pujiang, we
guaranteed loans in the amount of $0, $18.8 million and $70.6 million for Ossen Material Research, we guaranteed loans in the
amount of $0, $0 and $28.5 million and notes payable in the amount of $0, $0 and $2.2 million for Ossen Shanghai, and we
guaranteed loans in the amount of $0, $25.4 million and $0 for Zhejiang Pujiang.
There can be no assurance
that Ossen Material Research, Shanghai Pujiang 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.
ITEM 8.
|
FINANCIAL INFORMATION
|
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.
ITEM 9.
|
THE OFFER AND LISTING
|
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 closing price for the ADSs was $1.75 on April 1, 2019.
On December 11, 2018,
Pujiang, the parent entity of Acme, our controlling shareholder, submitted an application to the HK Exchange, seeking approval
of a potential listing of Pujiang’s shares on the HK Exchange following a proposed initial public offering of Pujiang’s
shares. Such application is subject to the review of the HK Exchange. The terms of such offering have not yet been set. Furthermore,
the timing of the consummation of such potential offering and listing is unknown, and there is no guarantee that such listing and
offering will be consummated at all. This filing shall not be deemed an offering of the securities of Pujiang or the Company.
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.
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ADDITIONAL INFORMATION
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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 or an entity treated as a partnership for U.S. federal income tax
purposes) 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.
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 24% 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. 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.
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,
2018 and 2017, 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.
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.
The Company adopted ASC Topic 606 Revenue
from Contracts with Customers with a date of the initial application of January 1, 2018 using the modified retrospective method.
As a result, the Company has changed its accounting policy for revenue recognition. The impact of the adoption of ASC Topic 606
on the Company’s consolidated financial statements is not material.
The Company recognizes revenue when goods
or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for
those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs
the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance obligations;
(iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations;
and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company derives revenues from the processing,
distribution and sale of own products. The revenue is recognized at a point in time once the Company has determined that the customer
has obtained control over the product. Control is typically deemed to have been transferred to the customer when the performance
obligation is fulfilled, usually at the time of delivery, at the net sales price (transaction price). Revenue is recognized net
of any taxes collected from customers, which are subsequently remitted to governmental authorities. Shipping and handling costs
for product shipments occur prior to the customer obtaining control of the goods are accounted for as fulfillment costs rather
than separate performance obligations and recorded as sales and marketing expenses.
The Company’s contracts are predominantly
short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient
in ASC Topic 606 exempting the Company from disclosure of the transaction price allocated to remaining performance obligations
if the performance obligation is part of a contract that has an original expected duration of one year or less.
Receivables are recorded when the Company
has an unconditional right to consideration.
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 $3,345,097, $4,269,512 and $3,869,277 for the years ended December 31, 2018,
2017 and 2016, 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 $164,495, $173,637 and $160,656 were charged to operations for the years ended December 31, 2018, 2017 and 2016, 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, 2018, the Company did not have a liability for unrecognized tax benefits.
The Company has not provided for income
taxes on accumulated earnings amounting $ 68,673,561 that are subject to the PRC dividend withholding tax as of December 31, 2018,
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 reduced from 17% to 16% after May 2018. The VAT standard rate is 16% 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, $1,092,559, $549,232 and $491,649
have been appropriated to the accumulated statutory reserves by the Company’s PRC subsidiaries for the years ended December
31, 2018, 2017 and 2016 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.
The Company adopted ASU 2016-18, “Statement
of Cash Flows (Topic 230) - Restricted Cash” in the first quarter of 2018. When cash, cash equivalents, restricted cash and
restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation
of the totals in the statement of cash flows to the related captions in the balance sheet. This reconciliation can be presented
either on the face of the statement of cash flows or in the notes to the financial statements. The following represents a reconciliation
of cash and cash equivalents in the condensed consolidated balance sheet to total cash, cash equivalents and restricted cash in
the condensed consolidated statement of cash flows:
Certain amounts included in the 2017 and
2016 consolidated statement of cash flows have been reclassified to conform to the 2018 financial statement presentation as follows:
The Company has included restricted cash
of $6,703,242 and $7,192,928, respectively, with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows for the year ended December 31, 2017. As a result, the total amount of cash,
cash equivalents, and restricted cash at the beginning of the period on the statement of cash flows for the year ended December
31, 2017 has changed from $217,631 to $6,920,873; the total amount of cash, cash equivalents, and restricted cash at the end of
the period on the statement of cash flows for the year ended December 31, 2017 has changed from $950,225 to $8,143,153.
The Company has included restricted cash
of $8,780,443 and $6,703,242, respectively, with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows for the year ended December 31, 2016. As a result, the total amount of cash,
cash equivalents, and restricted cash at the beginning of the period on the statement of cash flows for the year ended December
31, 2016 has changed from $812,277 to $9,592,720; the total amount of cash, cash equivalents, and restricted cash at the end of
the period on the statement of cash flows for the year ended December 31, 2016 has changed from $217,631 to $6,920,873.
The Company has eliminated the line item
of restricted cash of $489,686 from the financing activities section on the statement of cash flows for the year ended December
31, 2017. As a result, net cash used in financing activities of $4,298,299 on the statement of cash flows for the year ended December
31, 2017 has changed to net cash used in financing activities of $3,808,613. Net decrease in cash, cash equivalents and restricted
cash of $7,355,872 on the statement of cash flows for the year ended December 31, 2017 has changed to net decrease in cash, cash
equivalents and restricted cash of $6,866,186.
The Company has eliminated the line item
of restricted cash of $2,077,201 from the financing activities section on the statement of cash flows for the year ended December
31, 2016. As a result, net cash used in financing activities of $7,532,571 on the statement of cash flows for the year ended December
31, 2016 has changed to net cash used in financing activities of $9,609,772. Net increase in cash, cash equivalents and restricted
cash of $7,978,737 on the statement of cash flows for the year ended December 31, 2016 has changed to net increase in cash, cash
equivalents and restricted cash of $5,901,536.
• 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 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 $939,535 and $868,973 at December 31, 2018 and 2017, 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, 2018 and 2017, the Company has $121,370 and $127,766 reserve for inventories, respectively.
Advance to Suppliers represents interest-free
cash paid in advance to suppliers for purchases of raw materials. The balance of advance to suppliers was $69,986,656 and $71,280,903
at December 31, 2018 and 2017, respectively. Among the balance of $69,986,656, the aging of $36,913,322 was within 60 days, $25,541,361
was between 60-180 days and $7,531,973 was over 180 days. No allowance was provided for the prepayments balance at December 31,
2018.
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 $ 283,869 and
$316,394 at December 31, 2018 and 2017, respectively.
Customer deposits – related parties
consist of amounts paid to the Company in advance for the sale of products in the PRC from related parties. 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 – related parties was $ 4,800,384 and nil at December 31, 2018 and 2017, 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, 2018,
2017 and 2016.
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 9 – 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 May 2014, the FASB issued a new standard
on revenue recognition related to contracts with customers. This standard supersedes nearly all existing revenue recognition guidance
and involves a five-step principles-based approach to recognizing revenue. The new model requires revenue recognition to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive.
The new standard also requires additional qualitative and quantitative about the nature, amount, timing and uncertainty of revenue
and cash flows arising from customer contracts, including significant judgments made in applying the revenue guidance, and assets
recognized from the costs to obtain or fulfill a contract. The Company adopted this standard in the first quarter of 2018 using
the modified retrospective approach. The impact of adoption on its Consolidated Financial Statements for any period presented
is not material.
In November 2015, the FASB issued ASU
2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU amends existing guidance to require that deferred
income tax assets and liabilities be classified as non-current in a classified balance sheet, and eliminates the prior guidance
which required an entity to separate deferred tax assets and liabilities into a current amount and a non-current amount in a classified
balance sheet. The Company adopted this standard prospectively in the first quarter of 2018. The impact of adoption on its Consolidated
Financial Statements for any period presented is not material.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory, which requires companies to recognize the income-tax consequences
of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold
to an outside party. The Company adopted this standard prospectively in the first quarter of 2018. The impact of adoption on its
Consolidated Financial Statements for any period presented is not material.
In November 2016, the FASB issued ASU
2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash,” (“ASU 2016-18”). This ASU requires a
statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. 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 Company adopted this standard in the first quarter of 2018. The impact of adoption
on its Consolidated Financial Statements for any period presented is not material.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business and provides
new guidance in evaluating when a set of transferred assets and activities is a business. The Company adopted this standard prospectively
in the first quarter of 2018. The impact of adoption on its Consolidated Financial Statements for any period presented is not
material.
In February 2016, the FASB issued ASU No. 2016-02 -
Leases
(Topic
842). Under the new guidance, a lessee is required to recognize lease liabilities and corresponding right-of-use assets,
initially measured at the present value of lease payments, on the balance sheet for operating leases with terms greater than one
year. Lessor accounting remains largely unchanged from existing lease accounting. For leases with a term
of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. If
the lessee makes the election, the lessee would recognize lease expense on a straight-line basis over the lease term. This
ASU is effective in annual reporting periods beginning after December 15, 2018 and the interim periods within that fiscal year. The
Company is still evaluating the potential impacts that the implementation of ASU 2016-02 may have on its financial position, operational
results, or cash flows
In June 2016, the FASB issued ASU 2016-13,”
Measurement of Credit Losses on Financial Instruments”, to require financial assets carried at amortized cost to be presented
at the net amount expected to be collected based on historical experience, current conditions and forecasts. Subsequently, the
FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases
are within the scope of lease accounting standards. The ASUs are effective for interim and annual periods beginning after December
15, 2019, with early adoption permitted. Adoption of the ASUs is modified retrospective. We are currently obtaining an understanding
of the ASUs and plan to adopt them on January 1, 2020.
In January 2017, the FASB issued ASU No.
2017-04 (Topic 350) Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment, which removes
Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a
goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair
value, not to exceed the carrying amount of goodwill. This ASU will be applied on a prospective basis and is effective for interim
and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January
1, 2017. The Company does not expect the adoption to have a material impact on the Consolidated Financial Statements.
In February 2018, the FASB released ASU
2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This standard update
addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S. tax reform”) and allows a reclassification from
accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from U.S. tax reform. Consequently,
the update eliminates the stranded tax effects that were created as a result of the historical U.S. federal corporate income tax
rate to the newly enacted U.S. federal corporate income tax rate. The Company is required to adopt this standard in the first
quarter of fiscal year 2020, with early adoption permitted. The amendments in this update should be applied either in the period
of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate
in the Tax Cuts and Jobs Act is recognized. The Company has finished the evaluation and determined there is no impact of on its
Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13 Disclosure
Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies
certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective basis for
certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective
basis. The new standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.
The Company is currently evaluating the impact of adoption on the Consolidated Financial Statements.
Accounts receivable related to the Company’s
major customers comprised 43% and 37% of all accounts receivable as of December 31, 2018 and 2017, respectively.
Accounts payable related to the Company’s
major suppliers comprised nil and 4% of all accounts payable as of December 31, 2018 and 2017, respectively.
Unrealized foreign exchange translation
gain/(loss) for the year ended December 31, 2018, 2017 and 2016 was ($183,640), $251,912 and ($323,040), respectively, which has
been included in other comprehensive income/(loss). Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was
$548,553, $705,289 and $793,844, respectively. As of December 31, 2018 and 2017, a net book value of nil and $340,140, respectively,
were used as collateral for the Company’s short-term bank loans.
Unrealized foreign exchange translation
gain/(loss) for the year ended December 31, 2018, 2017 and 2016 was ($181,553), $217,105 and ($247,088), respectively, which has
been included in other comprehensive income/(loss). Amortization expense for the years ended December 31, 2018, 2017 and 2016 was
$93,094, $91,277 and $89,911, respectively. As of December 31, 2018 and 2017, a net book value of nil and $2,357,834, respectively,
were used as collateral for the Company’s long-term bank loans.
Amortization expense for the next five years and thereafter
is as follows:
The balance of Customer deposits-related parties consist of
amounts paid to the Company in advance from Shanghai Pujiang and Zhejiang Pujiang for the sale of products.
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 because the Company guarantees $74,114,996 of the outstanding short term debt. Next, the Company evaluated
if Shanghai Pujiang is variable interest entities. Using both qualitative and quantitative analysis, the Company does not have
the power to direct Shanghai Pujiang’s activities that significantly impact its economic performance and does not have the
obligation to absorb losses or the right to receive benefits from the entity. Thus, the Company is not the primary beneficiary
of Shanghai Pujiang. As a result, the Company determined Shanghai Pujiang was 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 because Dr. Tang is most
closely associated with the Shanghai Pujiang. Dr. Tang had the power to direct the activities of Shanghai Pujiang that most significantly
impact its economic performance and has the obligation to absorb losses of Shanghai Pujiang 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 $4,653,631 and $7,192,928 restricted cash, as of December
31, 2018 and 2017, respectively.
All the notes payable are subject to bank charges of 0.05% of
the principal amount as commission on each loan transaction.
Contract liabilities primarily represent
the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration.
The consideration received remains a contract liability until goods or services have been provided to the customer.
The following table provides information
about contract liabilities from contracts with customers: