(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:
As of December 31, 2019, there were 19,791,110 ordinary
shares, par value $0.01 per share, of the registrant issued and outstanding.
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):
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of
the Exchange Act. ¨
† 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 whether the registrant has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report. ¨
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As previously reported
by Ossen Innovation Co., Ltd. (the “Company”) in its current report on Form 6-K as filed with the U.S. Securities
and Exchange Commission on April 20, 2020, in accordance with the Securities and Exchange Commission Order Under Section 36
of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies
(Release No. 34-88465 dated March 25, 2020) (the “Order”), the Company disclosed: (i) that it was relying on
the relief provided by the Order in connection with the filing of this Annual Report on Form 20-F for the fiscal year ended
December 31, 2019 (the “Annual Report”), and (ii) as a result of the outbreak and spread of COVID-19, the
Company’s factories in Jiujiang and Ma’anshan were temporarily closed from China’s Spring Festival national
holiday in late January to March 9, 2020. Restrictions on access to the Company’s facilities have resulted in
delays by the Company in the preparation of its financial statements and by its independent public accountant in the completion
of the necessary audit procedures. This, in turn, has hampered the ability of the Company to complete its financial statements
and prepare the Annual Report in time to be filed by the original due date of April 30, 2020.
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, 2020,
the cash buying rate announced by the People’s Bank of China was RMB 7.12 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,” “continues,” “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, 2019, 2018 and
2017 and the balance sheet data as of December 31, 2019 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,
2016 and 2015 and the balance sheet data as of December 31, 2017, 2016 and 2015 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 Operations
and
Comprehensive Income
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
138,900,357
|
|
|
$
|
136,104,867
|
|
|
$
|
132,375,915
|
|
|
$
|
117,029,154
|
|
|
$
|
117,908,416
|
|
Cost of goods sold
|
|
|
116,541,972
|
|
|
|
115,585,803
|
|
|
|
117,721,799
|
|
|
|
100,932,528
|
|
|
|
102,197,994
|
|
Gross profit
|
|
|
22,358,385
|
|
|
|
20,519,064
|
|
|
|
14,654,116
|
|
|
|
16,096,626
|
|
|
|
15,710,422
|
|
Selling and distribution expenses
|
|
|
357,426
|
|
|
|
327,365
|
|
|
|
598,832
|
|
|
|
734,159
|
|
|
|
986,378
|
|
General and administrative expenses
|
|
|
6,155,316
|
|
|
|
5,263,914
|
|
|
|
6,002,121
|
|
|
|
6,376,383
|
|
|
|
4,478,413
|
|
Total Operating Expenses
|
|
|
6,512,742
|
|
|
|
5,591,279
|
|
|
|
6,600,953
|
|
|
|
7,110,542
|
|
|
|
5,464,791
|
|
Income from operations
|
|
|
15,845,643
|
|
|
|
14,927,785
|
|
|
|
8,053,163
|
|
|
|
8,986,084
|
|
|
|
10,245,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses, net
|
|
|
(2,382,405
|
)
|
|
|
(1,621,486
|
)
|
|
|
(1,610,337
|
)
|
|
|
(2,827,138
|
)
|
|
|
(2,823,952
|
)
|
Other income, net
|
|
|
297,438
|
|
|
|
208,071
|
|
|
|
147,108
|
|
|
|
90,584
|
|
|
|
371,894
|
|
Income before income taxes
|
|
|
13,760,676
|
|
|
|
13,514,370
|
|
|
|
6,589,934
|
|
|
|
6,249,530
|
|
|
|
7,793,573
|
|
Income taxes
|
|
|
(1,533,794
|
)
|
|
|
(2,129,387
|
)
|
|
|
(691,556
|
)
|
|
|
(926,048
|
)
|
|
|
(1,180,167
|
)
|
Net income
|
|
|
12,226,882
|
|
|
|
11,384,983
|
|
|
|
5,898,378
|
|
|
|
5,323,482
|
|
|
|
6,613,406
|
|
Less: Net Income attributable to non-controlling interest
|
|
|
1,137,712
|
|
|
|
1,005,530
|
|
|
|
553,067
|
|
|
|
499,509
|
|
|
|
716,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to controlling interest
|
|
|
11,089,170
|
|
|
|
10,379,453
|
|
|
|
5,345,311
|
|
|
|
4,823,973
|
|
|
|
5,896,804
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(1,744,846
|
)
|
|
|
(6,272,303
|
)
|
|
|
6,606,207
|
|
|
|
(6,975,100
|
)
|
|
|
(5,829,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(1,744,846
|
)
|
|
|
(6,272,303
|
)
|
|
|
6,606,207
|
|
|
|
(6,975,100
|
)
|
|
|
(5,829,470
|
|
Comprehensive Income (loss)
|
|
|
9,344,324
|
|
|
|
4,107,150
|
|
|
|
11,951,518
|
|
|
|
(2,151,127
|
)
|
|
|
67,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
19,791,110
|
|
|
|
19,791,110
|
|
|
|
19,791,110
|
|
|
|
19,804,164
|
|
|
|
19,862,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share*
|
|
|
0.56
|
|
|
|
0.52
|
|
|
|
0.27
|
|
|
|
0.24
|
|
|
|
0.30
|
|
* Calculation is based on net income attributable to controlling
interest and the weighted average shares outstanding, excluding foreign currency translation gain (loss).
|
|
December 31,
|
|
Selected Balance Sheets Data
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash and cash equivalents
|
|
$
|
2,576,677
|
|
|
$
|
3,444,421
|
|
|
$
|
950,225
|
|
|
$
|
217,631
|
|
|
$
|
812,277
|
|
Restricted cash
|
|
$
|
6,025,718
|
|
|
$
|
4,070,655
|
|
|
$
|
7,192,928
|
|
|
$
|
6,703,242
|
|
|
$
|
8,780,443
|
|
Total current assets
|
|
|
171,199,812
|
|
|
|
155,293,023
|
|
|
|
144,640,849
|
|
|
|
132,259,554
|
|
|
|
144,772,273
|
|
Total long-term assets
|
|
|
6,443,225
|
|
|
|
6,952,888
|
|
|
|
7,878,057
|
|
|
|
8,184,198
|
|
|
|
9,468,260
|
|
Total assets
|
|
|
177,643,037
|
|
|
|
162,245,911
|
|
|
|
152,518,906
|
|
|
|
140,443,752
|
|
|
|
154,240,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
47,097,942
|
|
|
|
42,182,852
|
|
|
|
37,568,527
|
|
|
|
37,997,958
|
|
|
|
50,106,311
|
|
Total shareholders’ equity
|
|
|
130,545,095
|
|
|
|
120,063,059
|
|
|
|
114,950,379
|
|
|
|
102,445,794
|
|
|
|
104,134,222
|
|
Total liabilities and shareholders’ equity
|
|
|
177,643,037
|
|
|
|
162,245,911
|
|
|
|
152,518,906
|
|
|
|
140,443,752
|
|
|
|
154,240,533
|
|
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
Our Chairman controls a large percentage
of our outstanding stock through an entity whose shares are listed on a foreign exchange and could significantly influence the
outcome of our corporate matters.
As of the date of this
report, Dr. Liang Tang, our Chairman, beneficially owns approximately 65.9% of our outstanding ordinary shares. Accordingly,
Dr. Liang Tang could have significant influence in determining the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations, the election of directors and other significant corporate
actions. This concentration of ownership in our shares controlled by Dr. Liang 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. Liang Tang, or the prospect of these sales, could adversely affect the market
price of our ordinary shares.
As a “controlled company”
under the Nasdaq listing rules, we may follow certain exemptions from certain corporate governance requirements that could adversely
affect our public shareholders.
Because Pujiang International
Group Limited (“Pujiang”), a Cayman Islands company listed on the Hong Kong Stock Exchange with Dr. Liang Tang,
our Chairman, being a 64.39% shareholder and chairman of Pujiang, beneficially holds approximately 65.9% of our outstanding ordinary
shares through its wholly-owned subsidiary, Acme Innovation Limited, a British Virgin Islands company (“Acme”), we
may be considered a "controlled company" within the meaning of the Nasdaq Stock Market (“Nasdaq”) corporate
governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, group
or another company is a “controlled company” and is permitted to phase in its compliance with the independent committee
requirements. Although we do not intend to rely on the “controlled company” exemptions under the Nasdaq listing rules,
we could elect to rely on these exemptions in the future. If we were to elect to rely on the “controlled company”
exemptions, a majority of the members of our board of directors might not be independent directors and our nominating and corporate
governance and compensation committees might not consist entirely of independent directors. Accordingly, if we rely on the exemptions,
during the period we remain a controlled company and during any transition period following a time when we are no longer a controlled
company, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate
governance requirements of Nasdaq.
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,
2019, we had approximately $2.6 million of cash and cash equivalents and $6.0 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 2019 and 2018,
we generated revenue of approximately $107.3 million and $103.4 million, respectively, or 77.2% 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, 2019 and 2018, our six largest customers contributed 66.8% and 68.3% of our total sales, respectively. As a
result of our reliance on a limited number of customers, we may face pricing and other competitive pressures, which may have a
material adverse effect on our profits and our revenues. The volume of products sold for specific customers varies from year to
year, especially since we are not the exclusive provider for any customers. In addition, there are a number of factors, other
than our performance, that could cause the loss of a customer or a substantial reduction in the products that we provide to any
customer and that may not be predictable. For example, our customers may decide to reduce spending on our products or a customer
may no longer need our products following the completion of a project. The loss of any one of our major customers, a decrease
in the volume of sales to these customers or a decrease in the price at which we sell our products to them could materially adversely
affect our profits and our revenues.
In addition, this
customer concentration may subject us to perceived or actual leverage that our customers may have in negotiations with us, given
their relative size and importance to us. If our customers seek to negotiate their agreements on terms less favorable to us and
we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition
and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly
depend upon the timing and volume of business from our largest customers and the financial and operational success of these customers.
As we expand our operations, we
may need to establish a more diverse supplier network for our raw materials. The failure to secure a more diverse supplier network
could have an adverse effect on our financial condition.
We currently purchase
almost all of our raw materials from a small number of suppliers. Purchases from our five largest suppliers accounted for 99.8%
and 99.8% of our raw material purchases in the years ended December 31, 2019 and 2018, 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 2019, the Chinese
central government focused on strictly controlling steel capacity increases after the Chinese central government addressed the
overcapacity in the steel industry and lowered steel production by approximately 150 million tons in prior years. However, due
to the uncertainty of the trade war between the United States and China and the slowdown of economic growth, as well as the increase
of capacity utilization of the Chinese steel industry, which resulted in the higher output of steel products, the average price
of steel products, including our products and principal raw materials, decreased in 2019.
Our business operations have been
and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19).
An outbreak of respiratory
illness caused by COVID-19 emerged in China in late 2019 and has expanded within the rest of China and globally. The Company’s
principal operations are located in China. The new strain of COVID-19 is considered to be highly contagious and poses a serious
public health threat. The World Health Organization (the “WHO”) is closely monitoring and evaluating the situation.
On March 11, 2020, the WHO declared the outbreak of COVID-19 a pandemic, expanding its assessment of the threat beyond the
global health emergency it had announced in January 2020.
Any outbreak of such
epidemic illness or other adverse public health developments in China or elsewhere in the world will materially and adversely
affect the global economy, our markets and our business. Restrictions on the movement of people and goods currently remain in
place in certain regions, which requires us to adjust certain of our sales and delivery processes. Our factories in Jiujiang and
Ma’anshan were temporarily closed from China’s Spring Festival national holiday in late January to March 9,
2020, as a result of the COVID-19 outbreak. A prolonged outbreak of COVID-19 could result in disruption of supply chain of certain
raw materials necessary for our products, decrease of customer demand, restrictions on our travel to support our sites or our
customers around the world, and delays in our production and construction of our new production facilities in Jiujiang, Jiangxi,
China. The extent to which COVID-19 impacts raw material prices in 2020 will depend on the future developments of the outbreak,
including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain
and unpredictable. All these factors may affect our overall financial performance in 2020, although we cannot quantify the overall
impact at this time.
We cannot foresee
whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If
the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially
and adversely affected as a result of the deteriorating market outlook, the slowdown in regional and national economic growth,
weakened liquidity and financial condition of our customers and other factors that we cannot foresee. Any of these factors and
other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the
regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact
our business, financial condition and results of operations.
Sales to customers outside China
and international developments expose us to risks inherent in international sales and increased competition.
We generated approximately
1.8% and 3.3%, respectively, of our revenue during the years ended December 31, 2019 and 2018 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 2018 and 2019, the United States imposed tariffs on more than $550 billion of Chinese goods, and China
retaliated with tariffs on more than $185 billion of US products. In January 2020, the two sides signed the Phase One Trade
Deal, which officially agreed to the rollback of tariffs, expansion of trade purchases, and renewed commitments on intellectual
property, technology transfer, and currency practices. 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 and 2019 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. Liang Tang and our Chief Executive Officer and
Chief Financial Officer, Mr. Wei 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 2019 and 2018, we had foreign currency translation loss of $1.7 million and $6.3 million,
respectively, primarily due to the depreciation of the RMB against the U.S. dollar in 2019 and 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 2019 and 2018,
the RMB depreciated 1.3% and 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, the reduction of 150 million tons of steel production announced
between 2016 and 2018 and the strict environmental protection measures imposed on the steel industry since 2017, 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 Group
constitutes a round-trip investment without governmental 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, or
MOFCOM, 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 (“Ossen Materials”), 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 accounting standards 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 $71,735
as of December 31, 2019) 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 and 2019, the United
States and China implemented certain trade policies, tariffs, other trade actions against each other 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. Although the two sides signed the Phase One Trade Deal in January 2020, which officially
agreed to the rollback of tariffs, expansion of trade purchases, and renewed commitments on intellectual property, technology
transfer, and currency practices, it is unclear as to what the long-term impact of such agreement will be. 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 (the “SEC”). 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.
In May 2013,
the PCAOB announced that it has entered into a Memorandum of Understanding (MOU) on Enforcement Cooperation with the China Securities
Regulatory Commission (the CSRC) and the Ministry of Finance (the MOF). The MOU establishes a cooperative framework between the
parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions.
More specifically, it provides a mechanism for the parties to request and receive from each other assistance in obtaining documents
and information in furtherance of their investigative duties. In addition to developing enforcement MOU, the PCAOB has been engaged
in continuing discussions with the CSRC and MOF to permit joint inspections in China of audit firms that are registered with the
PCAOB and audit Chinese companies that trade on U.S. exchanges.
On November 18,
2016, the PCAOB issued its 2016 to 2020 Strategic Plan on improving the quality of the audit for the protection and benefits of
investors, which revised the plan to update initiatives relating to the PCAOB’s new standard-setting process, planning for
and adopting a permanent broker-dealer inspection program, inspecting firms located in China, audit quality indicators, monitoring
and developing reports related to independence and the business model of the firms and business continuity. This may eventually
improve PCAOB’s ability to conduct inspections of independent registered public accounting firms operating in China.
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 Business Companies Act, 2004, or 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.”
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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4.A. 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
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. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC
at http://www.sec.gov.
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 $139,795 and $72,305 for the years ended December 31, 2019 and 2018, 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 2020 in connection with our production lines.
4.B. 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 PRC. 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, 2019, we generated revenue of approximately $107.3 million, or 77.2% of our total revenue (as compared to $103.4
million, or 76.0% of our total revenue, in 2018), 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 Ma’anshan 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 2020. 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
To echo the “13th-Five
Year Plan” promulgated by the People’s Republic of China’s government in 2017, in recent years, the government
places great effort in boosting the investment in transportation infrastructure sector in order to accelerate economic cooperation
between regions within China. In line with the plan, the government had also promulgated several directives in relation to the
improvement of transportation infrastructure aiming at alleviating poverty in areas with extreme poverty by providing them better
access to and from other regions. As such, the growth in the infrastructure construction industry in China is expected to remain
strong. Since December 2019, the National Development and Reform Commission has approved numerous infrastructure construction
projects, amounting to approximately RMB270 billion, focusing on high speed rail, transportation infrastructure aiming at fostering
communication and the mobility of people between cities and rural areas, in particular, the Western region, the Guangdong Province,
Shandong Province, Hebei Province and Fujian Province. In addition, in response to the impact of the COVID-19 pandemic, China’s
central and local governments have announced key infrastructure project investment plans for 2020. The total investment is approximately
RMB 25 trillion (approximately $3.6 trillion) and the planned investment in 2020 is approximately RMB 3.5 trillion (approximately
$500 billion). As the Company’s business is closely connected with the infrastructure investment in China, we believe that
these developments should create new opportunities for us in 2020 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 PRC.
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 thirty-seven patents
granted by the State Intellectual Property Office of the PRC, including seven invention patents and thirty utility model patents
as of May 18, 2020. 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
1.8% and 3.3%, respectively, of our revenue during the years ended December 31, 2019 and 2018 from sales to customers in
international markets including primarily Vietnam, South Korea, Japan, and Oman, 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 and 2019, 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. The measures imposed in 2018 and 2019 may have a negative impact on our
business and results of operations because Chinese-based steel product exporters may focus more of 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. Liang 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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·
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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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·
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PC wires, also
referred to as stabilized materials. These products are further divided among the following
three categories:
|
|
o
|
Plain
surface PC wires. This product consists of an individual round wire used in the construction
of buildings.
|
|
o
|
Indented
PC wires. This product consists of an individual round wire that contains an indentation
used in the construction of buildings.
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|
o
|
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 2018 and 2019, 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:
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Pricing.
Flexibility to control pricing of products and the ability to use economies of scale
to secure competitive pricing advantages;
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Technology.
Ability to manufacture products efficiently, utilize low-cost raw materials, and to achieve
better production quality; and
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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:
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the performance and cost effectiveness of our products;
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our ability to manufacture and deliver products in required volumes, on a timely basis, and
at competitive prices;
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superior quality and reliability of our products;
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·
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our after-sale support capabilities, from both an engineering and an operational perspective;
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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
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·
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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 January or 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., Shanghai Yehao Steel
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 99.8%of our raw material purchases in 2019 and 2018, respectively. Nonetheless,
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 2019, Chinese central
government focused on strictly controlling steel capacity increases after Chinese central government addressed the overcapacity
in the steel industry and lowered steel production by approximately 150 million tons in last a few years before 2019. However,
due to the uncertainty of the trade war between the United States and China and the slowdown of economic growth, as well as the
increase of capacity utilization of Chinese steel industry which resulted in the higher output of steel products, the average
price of our principal raw materials decreased in 2019.
The recent outbreak
of the coronavirus known as COVID-19 in China and other geographic areas may cause a disruption of the global supply chain for
certain raw materials necessary for our products. The extent to which COVID-19 impacts raw material prices in 2020 will depend
on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain
the outbreak, which are highly uncertain and unpredictable.
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:
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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.
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In the production
of strands, the individual wires (either 3 or 7 wires) are braided together to form a
strand.
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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:
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|
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.
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|
·
|
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.
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|
·
|
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.
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·
|
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.
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|
·
|
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.
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·
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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.
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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.
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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 2019 and 2018,
sales to our six largest customers, in the aggregate, accounted for approximately 66.8% and 68.3% 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 2019 and 2018
and the percentage of our revenues generated from such customers during these periods.
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2019 Revenues
|
|
|
2018 Revenues
|
|
Name of Customer
|
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(%)
|
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(%)
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Zhangjiagang Shajing Iron and Steel Trading Co., Ltd.
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21.4
|
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*
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|
Jiangsu Jinrun Steel Cable Co., Ltd.
|
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*
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13.6
|
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|
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Zhangjiagang OVM Machinery Co., Ltd.
|
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10.2
|
|
|
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14.1
|
|
|
|
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Shanghai Xingshun Steel Pipe Factory
|
|
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10.6
|
|
|
|
*
|
|
|
|
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|
|
|
|
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|
Zhejiang Kexin Engineering Material Co., Ltd.
|
|
|
*
|
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14.6
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|
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Liuzhou OVM Machinery Co., Ltd.
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*
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10.2
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* Less than 10% of our annual revenues.
The following table describes the breakdown
of our sales in 2019 and 2018 between our domestic and international customers.
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For the Year Ended December 31,
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|
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2019
|
|
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2018
|
|
Domestic Sales
|
|
$
|
136,414,471
|
|
|
$
|
131,642,673
|
|
|
|
|
|
|
|
|
|
|
International Sales
|
|
$
|
2,485,886
|
|
|
$
|
4,462,194
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
138,900,357
|
|
|
$
|
136,104,867
|
|
Research and Development
Our research and development
efforts are focused on three objectives:
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Superior product
safety and quality;
|
|
·
|
Reduction of
operating costs; and
|
|
·
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Sustaining
growth through the development of new products.
|
We have a research
and development team at each of our facilities. In total, seventeen employees are dedicated to research and development. We spent
$4.4 million and $3.3 million in 2019 and 2018, 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. On December 28, 2018, we have renewed our cooperation agreements with Jiujiang Institute
for two more years.
In 2019, we also have
three research and development projects listed as Jiujiang City Science and Technology Project. They are Φ15.20mm 1960MPa
unbonded galvanized PC strand, Φ5.00mm 1960MPa aluminum alloy galvanized PC wire and Φ5.00mm 1960MPa galvanized aluminum
and rare earth alloy galvanized PC wire. 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 May 18, 2020,
we have thirty-seven patents registered with the State Intellectual Property Office of the PRC, including seven invention patents
and thirty utility model patents.
Between January 1,
2019 and May 18, 2020, two previously-pending utility model patent was 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
|
Lubricating Device for Twisted Strand of Steel Strand
|
|
ZL201821549310.9
|
|
Ossen Materials
|
|
Registered
|
|
09/20/2028
|
|
|
|
|
|
|
|
|
|
Inductive Water Saving Device
|
|
ZL201220218155.4
|
|
Ossen Materials
|
|
Registered
|
|
06/25/2021
|
|
|
|
|
|
|
|
|
|
Anti-Impact Gear
|
|
ZL201220217756.3
|
|
Ossen Materials
|
|
Registered
|
|
06/23/2021
|
|
|
|
|
|
|
|
|
|
Lock Device for PC Strand Production Wheel
|
|
ZL201220218156.9
|
|
Ossen Materials
|
|
Registered
|
|
06/25/2021
|
|
|
|
|
|
|
|
|
|
New Dies for Wire Drawing
|
|
ZL201320723167.7
|
|
Ossen Materials
|
|
Registered
|
|
12/24/2022
|
|
|
|
|
|
|
|
|
|
Energy-saving Device for Acid Mist Drainage
|
|
ZL201320722838.8
|
|
Ossen Materials
|
|
Registered
|
|
12/24/2022
|
|
|
|
|
|
|
|
|
|
Cold Assembly Mould
|
|
ZL201420023335.0
|
|
Ossen Materials
|
|
Registered
|
|
1/14/2024
|
|
|
|
|
|
|
|
|
|
Prestressed Strand Spreader
|
|
ZL201420023447.6
|
|
Ossen Materials
|
|
Registered
|
|
1/14/2024
|
|
|
|
|
|
|
|
|
|
Pickling Pool Electric Heating Control System
|
|
ZL201620087931.4
|
|
Ossen Materials
|
|
Registered
|
|
1/26/2026
|
|
|
|
|
|
|
|
|
|
Air Compressor Motor Protection System
|
|
ZL201620087953.0
|
|
Ossen Materials
|
|
Registered
|
|
1/26/2026
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Air Circuit Control System
|
|
ZL201921561142.X
|
|
Ossen Materials
|
|
Registered
|
|
9/18/2029
|
|
|
|
|
|
|
|
|
|
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., an entity controlled by Dr. Liang Tang (“Shanghai Ossen”)
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, 2019, 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. Since April 1, 2019, the
VAT rate has been further reduced and is 13% for 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,
2019 and 2018, we had 176 and 184 full-time employees, respectively. As of May 18, 2020, we had 177 full-time employees.
The following table
shows the breakdown in numbers and percentages of employees by department as of December 31, 2019:
Functions
|
|
Number of
employees
|
|
|
% of total
|
|
Manufacturing
|
|
|
100
|
|
|
|
57
|
%
|
Research & Development
|
|
|
17
|
|
|
|
10
|
%
|
Quality Control
|
|
|
6
|
|
|
|
3
|
%
|
General Administration, Purchasing, Sales and Marketing
|
|
|
53
|
|
|
|
30
|
%
|
Total
|
|
|
176
|
|
|
|
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
$190,117 and $265,491 in 2019 and 2018, 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.
4.C. 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 Dr. Liang Tang, purchased:
|
·
|
600,000 shares from Fascinating Acme Development Limited, an entity controlled by the spouse of Wei Hua, our Chief Executive Officer and Chief Financial 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, a wholly-owned subsidiary of Pujiang and an entity 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, a British
Virgin Islands company wholly owned by Dr. Liang Tang. Consequently, Acme now holds 13,050,000 of our ordinary shares.
On May 28, 2019,
Pujiang, the parent entity of Acme, was successfully listed and commenced trading on the main board of the Hong Kong Stock Exchange.
Dr. Liang Tang, our Chairman, is currently a 64.39% shareholder and the chairman of Pujiang.
We are a “controlled
company” as defined under the Nasdaq listing rules because Pujiang beneficially own approximately 65.9% of the aggregate
voting power of our outstanding ordinary shares.
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. Liang Tang, our Chairman, since inception. In May 2010, Dr. Liang 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 company organized on February 7, 2002. Ossen Asia has one direct operating subsidiary in China, Ossen Materials.
Ossen Asia owns 81% of the equity of Ossen Materials.
Topchina is a British
Virgin Islands 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, 2019, Ossen Materials
owned 20.5% of the equity of Ossen Jiujiang and Topchina owned 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 and 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, 2019, our production facility and office in Maanshan City had a total gross floor area of approximately 14,668
square meters and we employed 46 production personnel at that facility. Our Maanshan facility contained seven processing lines.
As of December 31, 2019, our production facility and office in Jiujiang City had a total gross floor area of approximately
20,810 square meters and we employed 54 production personnel at that facility. Our Jiujiang facility contained eleven processing
lines. The production volume of our Ma’anshan facility and Jiujiang facility was 191,529 tons in 2019, as compared to 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 pieces
of equipment. We were able to overcome this temporary interruption by purchasing semi-finished zinc coated products to produce
finished zinc coated products. Since China’s Spring Festival national holiday in late January 2019 and up to March 9,
2020, due to the widespread of the COVID-19 pandemic in China, many cities imposed travel and work restrictions in efforts to
curb the spread of COVID-19. As a result, the factories situated in Jiujiang and Ma’anshan have been temporarily closed
after the Chinese New Year holiday until March 9, 2020 for the Jiujiang and Ma’anshan Site, and the supply of the raw
materials has been affected in February 2020. However, as of the date of this report, the factories are fully operational.
The
total annual production of our two facilities decreased slightly in 2019 compared to 2018 primarily due to less production of
rare earth coated products which had higher margin. In January 2020, we acquired a piece of land of approximately 63,000
square meters for the construction site of the new production facility in Jiujiang, Jiangxi Province. Due to delays caused by
the COVID-19 pandemic, we plan to commence the construction work in the second half of 2020, subject to the government’s
approval on the construction plan and any other potential delays relating to the pandemic or otherwise.
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. generally accepted accounting principles (“U.S. GAAP”).
5.A. 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 PRC. 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
COVID-19
Our factories in Jiujiang
and Ma’anshan were temporarily closed from China’s Spring Festival national holiday in late January to March 9,
2020, as a result of the COVID-19 outbreak. A prolonged outbreak of COVID-19 could result in disruption of supply chain of certain
raw materials necessary for our products, restrictions on our travel to support our sites or our customers around the world, decrease
of customer demand, restrictions on our travel to support our sites or our customers around the world, and delays in our production
and construction of our new production facilities in Jiujiang, Jiangxi, China. The extent to which COVID-19 impacts raw material
prices in 2020 will depend on the future developments of the outbreak, including new information concerning the global severity
of and actions taken to contain the outbreak, which are highly uncertain and unpredictable. All these factors may affect our overall
financial performance in 2020, although we cannot quantify the overall impact at this time.
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 95.7% in 2018 to
96.0% in 2019.
Overall gross margin
of our products was 16.1%, 15.1% and 11.1% respectively in 2019, 2018 and 2017. The increase of gross margin in 2018 was primarily
due to the increase of the prices of our steel products. The increase of gross margin in 2019 compared to 2018 was primarily due
to the increase in sales of high margin rare earth coated products.
As an overall
percentage of sales, sales of our coated products increased to 96.0% in 2019 from 95.7% in 2018 and 80.5% and 79.4%,
respectively, of our coated product sales in the years ended December 31, 2019 and December 31, 2018 were sales of
rare earth coated products and the remaining 19.5% and 20.6%, 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. In 2019, Chinese central government focused
on strictly controlling steel capacity increases after Chinese central government addressed the overcapacity in the steel industry
and lowered steel production by approximately 150 million tons in last a few years before 2019. However, due to the uncertainty
of the trade war between the United States and China and the slowdown of economic growth, as well as the increase of capacity
utilization of Chinese steel industry which resulted in the higher output of steel products, the average price of steel products,
including our products and principal raw materials, decreased in 2019. The recent outbreak of the coronavirus known as COVID-19
in China and other geographic areas may cause a disruption of the global supply chain for certain raw materials necessary for
our products and could threaten the health and safety of our employees. A prolonged outbreak of COVID-19 could create disruptions
that may, over time, slow down manufacturing in impacted jurisdictions and disrupt supply chain of certain raw materials necessary
for our products. The extent to which COVID-19 impacts raw material prices in 2020 will depend on the future developments of the
outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly
uncertain and unpredictable. We are unable to determine the full impact of the outbreak at this time and will continue to closely
monitor this developing situation.
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%,
99.8% and 99.7% of our total raw material purchases in 2019, 2018 and 2017, 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 it 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 and 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 2019, 2018 and
2017.
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,
|
|
|
|
2019
|
|
|
% of Revenue
|
|
|
2018
|
|
|
% of Revenue
|
|
|
2017
|
|
|
% of Revenue
|
|
Revenues
|
|
|
138,900,357
|
|
|
|
100.0
|
%
|
|
|
136,104,867
|
|
|
|
100.0
|
%
|
|
|
132,375,915
|
|
|
|
100.0
|
%
|
Cost of Goods Sold
|
|
|
116,541,972
|
|
|
|
83.9
|
%
|
|
|
115,585,803
|
|
|
|
84.9
|
%
|
|
|
117,721,799
|
|
|
|
88.9
|
%
|
Gross profit
|
|
|
22,358,385
|
|
|
|
16.1
|
%
|
|
|
20,519,064
|
|
|
|
15.1
|
%
|
|
|
14,654,116
|
|
|
|
11.1
|
%
|
Selling expenses
|
|
|
357,426
|
|
|
|
0.3
|
%
|
|
|
327,365
|
|
|
|
0.2
|
%
|
|
|
598,832
|
|
|
|
0.5
|
%
|
General and administrative expenses
|
|
|
6,155,316
|
|
|
|
4.4
|
%
|
|
|
5,263,914
|
|
|
|
3.9
|
%
|
|
|
6,002,121
|
|
|
|
4.5
|
%
|
Total operating expenses
|
|
|
6,512,742
|
|
|
|
4.7
|
%
|
|
|
5,591,279
|
|
|
|
4.1
|
%
|
|
|
6,600,953
|
|
|
|
5.0
|
%
|
Income from operation
|
|
|
15,845,643
|
|
|
|
11.4
|
%
|
|
|
14,927,785
|
|
|
|
11.0
|
%
|
|
|
8,053,163
|
|
|
|
6.1
|
%
|
Financial expenses, net
|
|
|
(2,382,405
|
)
|
|
|
-1.7
|
%
|
|
|
(1,621,486
|
)
|
|
|
-1.2
|
%
|
|
|
(1,610,337
|
)
|
|
|
-1.2
|
%
|
Other income, net
|
|
|
297,438
|
|
|
|
0.2
|
%
|
|
|
208,071
|
|
|
|
0.2
|
%
|
|
|
147,108
|
|
|
|
0.1
|
%
|
Income before income taxes
|
|
|
13,760,676
|
|
|
|
9.9
|
%
|
|
|
13,514,370
|
|
|
|
9.9
|
%
|
|
|
6,589,934
|
|
|
|
5.0
|
%
|
Income Taxes
|
|
|
(1,533,794
|
)
|
|
|
-1.1
|
%
|
|
|
(2,129,387
|
)
|
|
|
-1.6
|
%
|
|
|
(691,556
|
)
|
|
|
-0.5
|
%
|
Net Income
|
|
|
12,226,882
|
|
|
|
8.8
|
%
|
|
|
11,384,983
|
|
|
|
8.6
|
%
|
|
|
5,898,378
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net income attributable to non-controlling interest
|
|
|
1,137,712
|
|
|
|
0.8
|
%
|
|
|
1,005,530
|
|
|
|
0.7
|
%
|
|
|
553,067
|
|
|
|
0.4
|
%
|
Net income attributable to Ossen Innovation Co. Ltd.
|
|
|
11,089,170
|
|
|
|
8.0
|
%
|
|
|
10,379,453
|
|
|
|
7.6
|
%
|
|
|
5,345,311
|
|
|
|
4.0
|
%
|
Other comprehensive income- Foreign currency translation
gain (loss)
|
|
|
(1,744,846
|
)
|
|
|
-1.3
|
%
|
|
|
(6,272,303
|
)
|
|
|
-4.6
|
%
|
|
|
6,606,207
|
|
|
|
5.0
|
%
|
Total other comprehensive income (loss)
|
|
|
(1,744,846
|
)
|
|
|
-1.3
|
%
|
|
|
(6,272,303
|
)
|
|
|
-4.6
|
%
|
|
|
6,606,207
|
|
|
|
5.0
|
%
|
Comprehensive Income
|
|
|
9,344,324
|
|
|
|
6.6
|
%
|
|
|
4,107,150
|
|
|
|
3.0
|
%
|
|
|
11,951,518
|
|
|
|
9.0
|
%
|
Year Ended December 31, 2019
Compared to Year Ended December 31, 2018
Revenues. During
the year ended December 31, 2019, we had revenues of approximately $138.9 million as compared to revenues of approximately
$136.1 million during year ended December 31, 2018, an increase of approximately $2.8 million, or 2.1%. The increase in our
revenues during the year ended December 31, 2019 was mainly attributable to a 3.8% increase in sales of rare earth coated
PC wires and PC strands and a 151.8% increase in other products, partially offset by a 41.4% decrease in plain surface products
and a 2.9% decrease in zinc coated PC wires and PC strands.
The following table
provides a breakdown of our revenues during the years ended December 31, 2019 and 2018, respectively:
|
|
Year ended December 31,
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Revenue ($)
|
|
|
% of Total Revenue
|
|
|
Difference
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plain surface PC strands
|
|
|
2,820,075
|
|
|
|
2.0
|
%
|
|
|
4,812,541
|
|
|
|
3.5
|
%
|
|
|
-41.4
|
%
|
Zinc coated PC wires and PC strands
|
|
|
26,064,009
|
|
|
|
18.8
|
%
|
|
|
26,834,870
|
|
|
|
19.7
|
%
|
|
|
-2.9
|
%
|
Rare earth coated PC wires and PC strands
|
|
|
107,273,567
|
|
|
|
77.2
|
%
|
|
|
103,368,148
|
|
|
|
76.0
|
%
|
|
|
3.8
|
%
|
Others
|
|
|
2,742,706
|
|
|
|
2.0
|
%
|
|
|
1,089,308
|
|
|
|
0.8
|
%
|
|
|
151.8
|
%
|
Total
|
|
|
138,900,357
|
|
|
|
100
|
%
|
|
|
136,104,867
|
|
|
|
100
|
%
|
|
|
2.1
|
%
|
In 2019, we focused
on the production and sale of rare earth coated PC wires and PC strands due to the increase in the average price and profitability
of such products. As a result, the sales of rare earth coated PC wires and PC strands increased by $3.9 million, or 3.8%,
to $107.3 million for the year of 2019.
The sales of zinc
coated PC wires and PC strands were $26.1 million during the year ended December 31, 2019, a decrease of 2.9%, compared to
the year ended December 31, 2018. The decrease of sales generated by zinc coated products in 2019 was primarily due to the
decrease in market demand and the lower average price of such products in 2019.
The sales of plain
surface PC strands and PC wires were $2.8 million during the year ended December 31, 2019, a decrease of $2.0 million, or
41.4%, compared to the year ended December 31, 2018. This decrease of sales generated by plain surface PC strands and PC
wires was primarily due to the decrease in market demand during the period.
Other sales were $2.7
million during the year ended December 31, 2019, an increase of $1.6 million, or 151.8%, compared to the year ended December 31,
2018. This increase was primarily due to more scrap materials sold in 2019 compared to 2018 and the increase of service revenue.
Cost of Goods Sold.
Cost of goods sold was approximately $116.5 million during the year ended December 31, 2019, as compared to approximately
$115.6 million during the year ended December 31, 2018, representing an increase of 0.8%, or approximately $0.9 million.
This increase occurred mainly because the total sales increased in 2019. As a percentage of revenues, cost of goods sold decreased
from 84.9% during the year ended December 31, 2018 to 83.9% during the year ended December 31, 2019.
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 9.0% to approximately $22.4 million during the year ended December 31, 2019, from approximately $20.5 million
for the same period in 2018. For the years ended December 31, 2019 and 2018, our gross margin was 16.1% and 15.1%, respectively.
The increase of gross margin was primarily due to the improvement of the profitability of rare earth coated PC wires and PC strands.
Selling Expenses.
Selling expenses totaled $0.4 million for the year ended December 31, 2019, as compared to $0.3 million for the year ended
December 31, 2018, an increase of 9.2%. This increase was primarily due to higher transportation cost for domestic sales
in 2019, partially offset by lower freight and sales commission for international sales.
General and Administrative
Expenses. General and administrative expenses totaled $6.2 million for the year ended December 31, 2019, as compared
to $5.3 million for the year ended December 31, 2018, an increase of 16.9%. The increase in 2019 was primarily due to higher
research and development cost in 2019.
Operating
Income. As a result of the foregoing, operating income for the year ended December 31, 2019 was approximately
$15.8 million, an increase of 6.1% as compared to approximately $14.9 million for the same period in 2018. As a percentage of
net sales, operating income increased from 11.0% during the year ended December 31, 2018 to 11.4% during the year ended
December 31, 2019. This increase was primarily due to higher sales and gross profit.
Income Taxes.
We incurred income tax expenses of $1.5 million and $2.1 million in the fiscal years ended December 31, 2019 and 2018, respectively.
The decrease was primarily due to more tax incentive received in 2019. Ossen Materials and Ossen Jiujiang were subject to a 15%
tax rate as the result of being designated as high-tech enterprises through 2019.
Net Income.
As a result of the foregoing, our net income totaled approximately $12.2 million for the year ended December 31, 2019, as
compared to approximately $11.4 million for the year ended December 31, 2018, an increase of 7.4%.
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 $1.1 million for the year ended December 31, 2019, as compared to approximately
$1.0 million for the year ended December 31, 2018.
Foreign Currency
Income (Loss). For the year ended December 31, 2019, foreign currency exchange loss was $1.7 million, compared to
foreign currency exchange loss of $6.3 million, for the year ended December 31, 2018. The loss was due to the weakening of
the exchange rate of the RMB versus the US dollar in 2019.
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.
Critical Accounting Policies and Estimates
Our consolidated financial
statements 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 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
ASC Topic 606, Revenue from Contracts with Customers, the Company recognizes revenues when products are transferred to customers
in an amount that reflects the consideration which the Company expects to receive in exchange for those products. In determining
when and how revenues are 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 revenues
when (or as) the Company satisfies each performance obligation. The Company derives revenues from the processing, distribution
and sale of its own products. The Company recognizes its revenues net of value-added taxes (“VAT”). The Company is
subject to VAT which had been levied at the rate of 17% on the invoiced value of sales until April 30, 2018, after which date
the rate was reduced to 16%. VAT rate was further reduced to 13% starting from April 1, 2019. 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.
Revenues are 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 based on the terms defined in the
contract and each of the criteria under ASC 606 have been met. Contracts terms for domestic sales 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. The Company recognizes its revenues net of
VAT.
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, 2019, 2018 and 2017.
The Company has adopted
ASC 606 on January 1, 2018, using the transition method of Modified-Retrospective Method. The adoption of ASC 606 had no
impact on the Company’s beginning balance of retained earnings.
Research and Development
Research and development
costs are expensed as incurred and totaled approximately $4.4 million, $3.3 million and $4.3 million for the years ended December 31,
2019, 2018 and 2017, 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, 2019, 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 $78,484,535 that are subject to the PRC dividend withholding tax as
of December 31, 2019, 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, notes payable-bank acceptance notes, other payables and accrued liabilities, and short-term bank loans.
The carrying value
of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts payable, notes payable-bank acceptance
notes, other payables and accrued liabilities, and short-term bank loans 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 $1.3 million and $0.9 million at December 31, 2019
and 2018, respectively. The increase was mainly due to the increase of accounts receivable as of December 31, 2019.
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, 2019 and
2018, the Company has $119,775 and $121,370 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 $74.4 million and $70.0 million at December 31, 2019 and 2018, respectively. Among the balance of $74.4 million, the
aging of $46.2 million was within 60 days, $19.0 million was between 60-180 days, $9.1 million was between 180 days and 1 year,
and $0.1 million was over 1 year. 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,
2019 increased from 2018 in order to secure favorable treatment in terms of supply of raw materials. No allowance was provided
for the prepayments balance at December 31, 2019 since we have not experienced any difficulty with the collectability of
the balance with our suppliers who have the payment for over 1 year.
In 2019, Chinese central
government focused on strictly controlling steel capacity increases after Chinese central government addressed the overcapacity
in the steel industry and lowered steel production by approximately 150 million tons in last a few years before 2019. However,
due to the uncertainty of the trade war between the United States and China and the slowdown of economic growth, as well as the
increase of capacity utilization of Chinese steel industry which resulted in the higher output of steel products, the average
price of steel products, including our products and principal raw materials, decreased in 2019. We were able to receive raw materials
delivered by our suppliers in 2019 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.
Lease
In February 2016,
the FASB issued ASU 2016-02, Leases (Topic 842). Lessees are required to recognize a right-of-use asset and a
lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability
is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments, such as
for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either
operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the prior accounting
standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting
standard). Lessor accounting is similar to the prior model, but updated to align with certain changes to the lessee model (e.g.,
certain definitions, such as initial direct costs, have been updated) and the new revenue standard, ASU 2014-9.
The Company adopted
this new accounting standard on January 1, 2019 and the adoption has no material impact on the Consolidated Financial Statements.
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, 2019, 2018 and 2017.
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 February 2016,
the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees
to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended
by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements
to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU)
that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than
12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of
expense recognition in the income statement. Operating leases result in straight-line expense (similar to operating leases under
the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under
the prior accounting standard). The amendments in this Update are effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years for a public business entity. Early application of the amendments in
this Update is permitted for all entities. The Company started adoption of ASU 2016-02 for the fiscal year ended December 31,
2019, including interim periods within those fiscal years. The adoption of this new standard did not impact our consolidated statements
as the Company did not have any lease arrangements.
Recently Issued Accounting Pronouncements
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.
The Company is currently evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements.
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 does not expect the adoption to have a material
impact 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.
5.B. 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 $2.6 million and $6.0 million, respectively,
at December 31, 2019, as compared to $3.4 million and $4.1 million, respectively, at December 31, 2018. The decrease
in cash and cash equivalents and the increase in restricted cash were mainly because the increase in bank acceptance notes. For
the years ended December 31, 2018 and 2019, 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
2019, the People’s Bank of China relaxed monetary policy and lowered its reserve requirement ratio for all banks, which
encouraged more bank loans to Chinese companies. We also 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 $4.6 million
of accounts receivable aged over 180 days as of December 31, 2019. We had $5.8 million of accounts receivable aged over 180
days as of December 31, 2018. As of May 1, 2020, we have collected approximately $34.5 million of the $72.5 million
of accounts receivable outstanding as of December 31, 2019. The remaining approximately $38.0 million of uncollected accounts
receivable are mainly from construction companies that have long-term business relationship with us. Based on our historical experience,
most of these projects are government sponsored programs and we are confident that we will be able to collect the balance when
the projects are completed.
In May 2019, we
borrowed approximately $2.6 million from Pujiang. The annual interest rate of the loan is 8% and it has a one-year term. We used
the proceeds of approximately $1.7 million to pay off the balance due to Dr. Liang Tang and approximately $0.9 million for
general corporate purposes. We plan to renew this loan with Pujiang when it is due in May 2020.
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. We continue, however,
to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate
during these uncertain times. If we experience an adverse operating environment or unanticipated and unusual capital expenditure
requirements, additional financing may be required. Consequently, we are actively monitoring spending and taking action, when
necessary, to align spending with sales performance. We also plan to defer non-essential capital investments amid the COVID-19
pandemic. 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 2019 and 2018,
the accounts receivable collection period of our domestic customers was approximately 175 and 150 days after receiving the materials
at their construction site, respectively. As of December 31, 2019, our accounts receivable increased to $72.5 million from
$60.6 million at December 31, 2018 as a result of slower collection of accounts receivable in 2019.
The average Days Sales
Outstanding (“DSO”) of 2019 and 2018 were 175 and 150 days, respectively. The DSO as of December 31, 2019 and
2018 were 191 and 162 days, respectively. The increase in DSO as of December 31, 2019 was primarily due to the slower payments
from our customers during 2019.
The following table
describes the aging of our accounts receivable during 2019 and 2018:
As of Date
|
|
Account Receivables
Balance (in US
Dollars)
|
|
|
<60 days
|
|
|
60-90 days
|
|
|
90-180 days
|
|
|
>180 days
|
|
December 31, 2019
|
|
|
72,544,202
|
|
|
|
52,336,097
|
|
|
|
4,723,410
|
|
|
|
10,928,413
|
|
|
|
4,556,282
|
|
December 31, 2018
|
|
|
60,586,869
|
|
|
|
40,328,956
|
|
|
|
7,571,838
|
|
|
|
6,900,964
|
|
|
|
5,785,111
|
|
Major Customers
During the years ended
December 31, 2019, 2018 and 2017, our six largest customers contributed 66.8%, 68.3% and 74.8% 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,
2019, we had approximately $17.1 million of short-term bank loans and $8.9 million of bank acceptance notes outstanding, as compared
to approximately $13.6 million of short-term bank loans and $8.7 million of bank acceptance notes outstanding at December 31,
2018. In 2019, Chinese government and Chinese banks relaxed monetary policy and lowered its reserve requirement ratio for all
banks which encouraged more bank loans to Chinese companies including steel industry and our domestic customers.
Our notes payable
of $8.7 million at December 31, 2018 and $8.9 million at December 31, 2019 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 $6.0 million and $4.1 million of
restricted cash as of December 31, 2019 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 5.48%, 5.71% and 6.41% as of December 31, 2019, 2018 and 2017, respectively.
Interest expense was $1.6 million, $0.9 million and $0.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
In 2019, we were able
to rollover substantially all short-term bank loans and obtain new short-term bank loans from local Chinese banks, and we anticipate
rollovers of substantially all current facilities that are set to mature in 2020. We also anticipate an increase in the availability
of short-term bank loans in 2020 and 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 $130.2 million at December 31, 2019, as compared to $113.1 million at December 31, 2018.
The working capital
increase of $17.1 million in 2019 as compared with 2018 was due primarily to the increase of accounts receivable and advance to
suppliers, partially offset by the decrease in inventories and the increase in short-term bank loans.
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 2019, our cash
flow from operations was positive primarily due to the increase in inventories, customer deposits and due to related party, partially
offset by 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, 2019
and 2018
The following table
sets forth a summary of our net cash flow information for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash provided by operating activities
|
|
$
|
401,192
|
|
|
$
|
7,619,314
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(139,795
|
)
|
|
|
(72,305
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,904,019
|
|
|
|
(700,151
|
)
|
Operating Activities
Net cash provided in
operating activities was approximately $0.4 million in 2019, as compared to $7.6 million of net cash provided in operating activities
in 2018. This was the result of a $3.1 million increase in accounts receivable due to slower payment from our customers, a $5.7
million increase in advance to suppliers due to more prepayments for raw materials, a $6.2 million decrease in customer deposits
from related parties due to less business opportunity from our related parties, and a $3.0 million decrease in due to shareholder
due to repayment of the balance due to the chairman of Ossen Innovation, partially offset by a $5.8 million increase in inventories
due to lower consumption of raw materials at the end of 2019, a $2.8 million increase in customer deposits, and a $2.3 million
increase in due to related party.
Investing Activities
Net cash used in investing
activities was $139,795 in 2019, as compared to $72,305 of net cash used in investing activities in 2018 as the result of more
spending in maintenance and repair of production lines in 2019.
Financing Activities
Net cash provided in
financing activities in 2019 was approximately $2.9 million, as compared to approximately $0.7 million of net cash used in financing
activities in 2018. This was the result of a $67.6 million increase in proceeds from short-term bank loans, a $6.2 million increase
in proceeds from long-term bank loans, partially offset by a $64.2 million increase in repayments of short-term bank loans and
an increase in repayments of long-term bank loans.
5.C. Research and Development, Patents and Licenses, etc.
See the discussion under the headings “Research
and Development,” “Intellectual Property” and “Patents” in Item 4 above.
5.D. Trend Information
See discussion in
Parts A and B of this item.
5.E. Off-Balance Sheet Arrangements
As of December 31,
2019 we guaranteed $86.0 million short-term debt 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, 2019:
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
CONTRACTUAL OBLIGATIONS
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Land Use Right
|
|
|
912,436
|
|
|
|
912,436
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short-term
debt obligations (1)
|
|
|
25,967,974
|
|
|
|
25,967,974
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest Commitments – Short-term bank loans
|
|
|
481,827
|
|
|
|
481,827
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term debt obligations (2)
|
|
|
6,097,453
|
|
|
|
-
|
|
|
|
6,097,453
|
|
|
|
-
|
|
|
|
-
|
|
Interest Commitments – Long-term bank loans
|
|
|
1,425,969
|
|
|
|
536,576
|
|
|
|
889,393
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
34,885,659
|
|
|
|
27,898,813
|
|
|
|
6,986,846
|
|
|
|
-
|
|
|
|
-
|
|
(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 and Senior Management
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
|
|
52
|
|
|
|
|
|
Wei Hua
|
|
Chief Executive Officer, Chief Financial Officer and Director
|
|
57
|
|
|
|
|
|
Junhong Li
|
|
Director
|
|
53
|
|
|
|
|
|
Yingli Pan
|
|
Director
|
|
64
|
|
|
|
|
|
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.
The address of each of our directors and executive officers is c/o Ossen Innovation Co., Ltd., 518 Shangcheng Road, Floor
17, Shanghai, People’s Republic of China 200120.
Executive Officers and Directors
Dr. Liang Tang was
appointed as our Chairman following our business combination. Dr. Tang has been the executive Director and the Chairman of
the Board of Pujiang International Group Limited since December 2018. He has more than 20 years of experience in the steel
industry. Prior to joining the Company, 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 and since April 2004, Dr. Tang has served as the president of Ossen Group Co, Ltd.
(PRC). 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 Chief Executive Officer and a director of ours following our business combination. In January 1, 2017, Mr. Hua
was appointed as our Chief Financial Officer. 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 August 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.
Ms. Yingli
Pan has been one of our directors since August 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 1984 until 2005, Professor Pan was a professor in the Finance Department
at East China Normal University. Ms. Pan has been the independent non-executive director of Pujiang International Group Limited
since December 2018, and the independent non-executive director of Postal Savings Bank of China since December 2019.
From November 2011 to November 2018, she was the independent non-executive director of China Merchants Bank Co., Ltd. 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 August 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 years ended
December 31, 2019 and 2018, the aggregate cash compensation that we paid to our executive officers and directors were approximately
$83,000 and $86,300, respectively. 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. Liang 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. Liang 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 or she 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 Zhongcai Wu, each of whom satisfies the independence requirements of Rule 10A-3 under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 Zhongcai Wu, 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 Junghong Li, 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 4B. above.
6.E. Share Ownership
As of May 18, 2020,
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 May 18, 2020.
The following table
sets forth information with respect to the beneficial ownership of our ordinary shares as of May 18, 2020 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, People’s
Republic of China 200120.
Name
|
|
Number of
Shares
|
|
|
Percentage
|
|
5% or Greater Shareholders (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pujiang International Group Limited (2)
|
|
|
13,050,000
|
|
|
|
65.9
|
%
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers (1) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liang Tang (2)
|
|
|
13,050,000
|
|
|
|
65.9
|
%
|
|
|
|
|
|
|
|
|
|
Wei Hua
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Junhong Li
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Yingli Pan
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Zhongcai Wu
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (five individuals):
|
|
|
13,050,000
|
|
|
|
65.9
|
%
|
|
(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 May 18, 2020 and the ordinary shares underlying any options and warrants exercisable by such person within 60 days of the date of this filing.
|
|
(2)
|
Represents ordinary shares held by Acme Innovation Limited,
a wholly-owned subsidiary of Pujiang International Group Limited. Pujiang International Group Limited is a Cayman Islands
company listed on the Hong Kong Stock Exchange Dr. Liang Tang is a 64.39% shareholder and the chairman of Pujiang International
Group Limited. See Item 4.C. above. The address of Pujiang International Group Limited is Floor 16, 518 Shangcheng Road, Shanghai,
China 200120.
|
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. Liang 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. Liang Tang. We have not procured any steel wire rods from Ossen Materials Research since 2014.
Sales to a Related Party
In 2019 and 2018,
we sold $2.9 million and $2.8 million, respectively, of our products to Shanghai Pujiang Cable Co., Ltd., a subsidiary Shanghai
Ossen acquired in September 2010 (“Shanghai Pujiang”). We sold $1.6 million and $2.9 million of our products
to Zhejiang Pujiang Cable Co., Ltd., a subsidiary of Shanghai Pujiang in 2019 and 2018 (“Zhejiang Pujiang”).
In 2019 and 2018, we generated approximately 3.2% and 4.2% of our revenue from sales to Shanghai Pujiang and Zhejiang Pujiang.
Guarantees
During the years ended
December 31, 2019, 2018 and 2017, 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 $3.5 million, $0 and $3.7 million and notes payable in the amount of $0, $0 and
$4.9 million in 2019, 2018 and 2017, respectively. Ossen Shanghai guaranteed loans in the amount of $0 in 2019, $0.6 million
in 2018 and $0 in 2017. Shanghai Pujiang guaranteed loans in the amount of $0 in 2019, $9.4 million in 2018 and $3.7 million
in 2017. Pujiang International guaranteed loans in the amount of $7.8 million in 2019, $0 in 2018 and $0 in 2017. These
guarantees in 2019, 2018 and 2017 were provided for no consideration. In addition, in 2019, 2018 and 2017, we guaranteed
loans in the amount of $86.0 million, $74.1 million and $5.4 million and notes payable in the amount of $0, $2.9 million and
$0 for Shanghai Pujiang, we guaranteed loans in the amount of $0, $0 and $18.8 million for Ossen Material Research, and we
guaranteed notes payable in the amount of $0, $0 and $25.4 million for Zhejiang Pujiang.
There can be no assurance
that Ossen Material Research, Shanghai Pujiang, Ossen Shanghai
and Pujiang International 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.
Loan from related party
In May 2019, we
borrowed approximately $2.6 million from Pujiang. The annual interest rate of the loan is 8% and it has a one-year term. We used
the proceeds of approximately $1.7 million to pay off the balance due to Dr. Liang Tang and approximately $0.9 million for
general corporate purposes. We plan to renew this loan with Pujiang when it is due in late May 2020.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8.
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FINANCIAL INFORMATION
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Consolidated Statements and Other Financial Information
The financial statements
required by this item may be found at the end of this report on 20-F, beginning on page F-1.
Legal Proceedings
We are not currently,
and have not recently been, a party to any material legal or administrative proceedings. We are not aware of any material legal
or administrative proceedings threatened against us. From time to time, we are subject to various legal or administrative proceedings
arising in the ordinary course of our business.
Dividends
We have never declared
or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the future.
We currently intend to retain all future earnings to finance our operations and to expand our business.
No Significant Changes
No significant changes
to our financial condition have occurred since the date of the annual financial statements contained herein.
ITEM 9.
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THE OFFER AND LISTING
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9.A. Offer and Listing Details
Our ADSs 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 $1.9467 on May 15, 2020.
On May 28, 2019,
Pujiang, the parent entity of Acme, was successfully listed and commenced trading on the main board of the Hong Kong Stock Exchange.
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
Our company (formerly
known as Ultra Glory International, Ltd.) 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.
United States Federal
Income Taxation of U.S. Holders
Distributions
Subject to the discussion
of Passive Foreign Investment Companies, or PFICs, below, distributions made by us with respect to our ADSs or ordinary shares
to a U.S. Holder will constitute dividends to the extent of our current or accumulated earnings and profits, as determined under
U.S. federal income tax principles. Distributions in excess of our earnings and profits will be treated first as a nontaxable
return of capital to the extent of the U.S. Holder’s tax basis in our ADSs or ordinary shares, and thereafter as capital
gain. Because we are not a U.S. corporation, U.S. Holders that are corporations will generally not be entitled to claim a dividends-received
deduction with respect to any distributions they receive from us.
Subject to the discussion
of PFICs below, dividends paid on our ADSs or ordinary shares that are received by U.S. Holders that are individuals, estates or
trusts will be taxed at the rate applicable to long-term capital gains (a maximum rate of 15% for taxable years beginning on or
before December 31, 2013), provided that such dividends meet the requirements of "qualified dividend income." For
this purpose, qualified dividend income includes dividends paid by a non-U.S. corporation if certain holding period and other requirements
are met, and the stock of the non-U.S. corporation with respect to which dividends are paid is readily tradable on an established
securities market in the U.S. (such as the Nasdaq Capital Market). Dividends that fail to meet such requirements, and dividends
received by corporate U.S. Holders, are taxed at ordinary income rates. No dividend received by a U.S. Holder will be a qualified
dividend (i) if the U.S. Holder held the ordinary share with respect to which the dividend was paid for less than 61 days
during the 121-day period beginning on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding
for this purpose, under the rules of Code Section 246(c), any period during which the U.S. Holder has an option to sell,
is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise
nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such ordinary
share (or substantially identical securities); or (ii) to the extent that the U.S. Holder is under an obligation (pursuant
to a short sale or otherwise) to make related payments with respect to positions in property substantially similar or related to
the ADS or ordinary share with respect to which the dividend is paid. If we were to be a "passive foreign investment company"
(as such term is defined in the Code) for any taxable year, dividends paid on our ADSs or ordinary shares in such year or in the
following taxable year would not be qualified dividends. In addition, a non-corporate U.S. Holder will be able to take a qualified
dividend into account in determining its deductible investment interest (which is generally limited to its net investment income)
only if it elects to do so; in such case the dividend will be taxed at ordinary income rates
Sale, Exchange
or Other Disposition of ADSs or ordinary shares
Subject to the discussion
of PFICs below, a U.S. Holder will recognize taxable gain or loss upon a sale, exchange or other taxable disposition of our ADSs
or ordinary shares in an amount equal to the difference between the amount realized by the U.S. Holder from such disposition and
the U.S. Holder’s tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the U.S.
Holder’s holding period is greater than one year at the time of the disposition. Long-term capital gains of non-corporate
U.S. Holders may be eligible for reduced rates of taxation. A U.S. Holder’s ability to deduct capital losses is subject
to certain limitations.
Tax Consequences
If We Are A Passive Foreign Investment Company
We will be a passive
foreign investment company (a “PFIC”) if, after applying certain pass-through rules, either: (i) 75% or more
of our gross income in any taxable year consists of “passive income” (including dividends, interest, gains from the
sale or exchange of investment property and certain rents and royalties); or (ii) at least 50% of our assets in any taxable
year (averaged over the year and generally determined on a quarterly basis) produce or are held for the production of passive
income.
We do not believe
that we were a PFIC for our 2016 taxable year. However, because the determination of our PFIC status is based on such factual
matters as the composition of our income and assets the valuation of our assets, and our market capitalization, there is no assurance
that the United Stated Internal Revenue Service (“IRS”) will agree with our position for the 2016 taxable year or
any prior taxable year. In addition, there can be no assurance that we will not become a PFIC for the current taxable year ending
December 31, 2018 or in future taxable years.
If we were to be treated
as a PFIC for any taxable year during the period in which a U.S. Holder owns our ADSs or ordinary shares (and regardless of whether
we remain a PFIC for subsequent taxable years), each U.S. Holder who is treated as owning our stock for purposes of the PFIC rules would
be liable to pay U.S. federal income tax at the highest applicable income tax rates on ordinary income upon the receipt of “excess
distributions” (i.e., the portion of any distributions received by the U.S. Holder on our ADSs or ordinary shares in a taxable
year in excess of 125 percent of the average annual distributions received by the U.S. Holder in the three preceding taxable years,
or, if shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares) and on any gain from the disposition of
our ADSs or ordinary shares, plus interest on a portion of such amounts, as if such excess distributions or gain had been recognized
ratably over the U.S. Holder’s holding period of our ADSs or ordinary shares.
The above rules relating
to the taxation of excess distributions and dispositions will not apply to a U.S. Holder who has made a timely “qualified
electing fund” (“QEF”) election for all taxable years that the holder has held our ADSs or ordinary shares and
if we comply with certain reporting requirements. Instead, each U.S. Holder who has made a timely QEF election is required for
each taxable year that we are a PFIC to include in income a pro rata share of our ordinary earnings as ordinary income and a pro
rata share of our net capital gain as long term capital gain, regardless of whether we have made any distributions of the earnings
or gain. The U.S. Holder’s basis in our ADSs or ordinary shares will be increased to reflect taxed but undistributed income.
Distributions of income that had been previously taxed will result in a corresponding reduction in the basis of the ADSs or ordinary
shares and will not be taxed again once distributed. A U.S. Holder making a QEF election will generally recognize capital gain
or loss on the sale, exchange or other taxable disposition of our ADSs or ordinary shares. If we determine that we are a PFIC
for any taxable year, we may provide each U.S. Holder with all necessary information in order to make the QEF election described
above.
Alternatively, if we
were to be treated as a PFIC for any taxable year and provided that our ADSs or ordinary shares are treated as “marketable
stock” (e.g., “regularly traded” on the Nasdaq Capital Market) a U.S. Holder may make a mark-to-market election.
Under a “mark-to-market” election, in any taxable year that we are a PFIC, any excess of the fair market value of the
ADSs or ordinary shares at the close of any taxable year over the U.S. Holder’s adjusted tax basis in the ADSs or ordinary
shares is included in the U.S. Holder’s income as ordinary income. In addition, the excess, if any, of the U.S. Holder’s
adjusted tax basis at the close of any taxable year over the fair market value of the ADSs or ordinary shares is deductible in
an amount equal to the lesser of the amount of the excess or the amount of the net mark-to-market gains that the U.S. Holder included
in income in prior years. A U.S. Holder’s tax basis in its ADSs or ordinary shares would be adjusted to reflect any such
income or loss. For any taxable year that we are a PFIC, gain realized on the sale, exchange or other disposition of our ADSs or
ordinary shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the ADSs
or ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains
previously included by the U.S. Holder. There can be no assurances that there will be sufficient trading volume with respect to
the ADSs or ordinary shares for the ADSs or ordinary shares to be considered “regularly traded,” or that our ADSs or
ordinary shares will continue to trade on the Nasdaq Capital Market. Accordingly, there are no assurances that our ADSs or ordinary
shares will be marketable stock for these purposes.
A U.S. Holder who
holds our ADSs or ordinary shares during a period when we are a PFIC will be subject to the foregoing rules for that taxable
year and all subsequent taxable years with respect to that U.S. Holder’s holding of our ADSs or ordinary shares, even if
we cease to be a PFIC, subject to certain exceptions for U.S. Holders who made a timely mark-to-market or QEF election. U.S. Holders
are urged to consult their tax advisors regarding the PFIC rules in the event that we are a PFIC, including as to the advisability
and consequences of making a QEF or mark-to-market election.
U.S. Federal Income
Taxation of Non-U.S. Holders
Except as described
in “Backup Withholding and Information Reporting” below, non-U.S. Holders will generally not be subject to U.S. federal
income tax or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our ADSs or ordinary shares
unless, in the case of U.S. federal income taxes, the income is effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States (“effectively connected income”) (and, if an income tax treaty applies,
the income is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States or, in the case
of an individual, the income is attributable to a fixed place of business).
Non-U.S. Holders will
generally not be subject to U.S. federal income tax or withholding tax on any gain realized upon the sale, exchange or other disposition
of our ADSs or ordinary shares, unless either:
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the gain is effectively connected income (or, if a treaty applies, the gain is
attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States or, in the case of an individual,
the income is attributable to a fixed place of business); or
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the Non-U.S. Holder is an individual who is present in the United States for 183
days or more during the taxable year of disposition and certain other conditions are met.
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Effectively connected
income may be subject to regular U.S. federal income tax in the same manner as discussed in the section above relating to the
taxation of U.S. Holders, unless exempt under an applicable income tax treaty. In addition, effectively connected income of a
corporate Non-U.S. Holder may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified
by an applicable income tax treaty.
Non-U.S. Holders may
be subject to tax in jurisdictions other than the United States on dividends received from us on our ADSs or ordinary shares and
on any gain realized upon the sale, exchange or other disposition of our ADSs or ordinary shares. Non-U.S. Holders should consult
with their own tax advisors regarding such other jurisdictions.
Backup Withholding
and Information Reporting
U.S. Holders (other
than certain exempt recipients) may be subject to information reporting requirements with respect to the payment of dividends
on, or proceeds from the disposition of, our ADSs or ordinary shares. In addition, a U.S. Holder may be subject, under certain
circumstances, to backup withholding at a rate of up to 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 Exchange Act 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 our website 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,
2019 and 2018, 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.
Other risks
In addition to the
risks described above, our business operations have been and may continue to be materially and adversely affected by the outbreak
of the COVID-19. Our factories in Jiujiang and Ma’anshan were temporarily closed from China’s Spring Festival national
holiday in late January to March 9, 2020, as a result of the COVID-19 outbreak. A prolonged outbreak of COVID-19 could
result in disruption of supply chain of certain raw materials necessary for our products, decrease of customer demand, restrictions
on our travel to support our sites or our customers around the world, and delays in our production and construction of our new
production facilities in Jiujiang, Jiangxi, China. The extent to which COVID-19 impacts raw material prices in 2020 will depend
on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain
the outbreak, which are highly uncertain and unpredictable. All these factors may affect our overall financial performance in
2020, although we cannot quantify the overall impact at this time.
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 depositary’s office is located at 4 New York Plaza,
Floor 12, New York, New York, 10004.
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.
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.
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 has not provided for income
taxes on accumulated earnings amounting $78,484,535 that are subject to the PRC dividend withholding tax as of December 31,
2019, since these earnings are intended to be permanently reinvested.
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.
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 a 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 Consolidated Condensed Balance Sheets to total cash, cash equivalents and restricted cash in the Consolidated
Condensed Statements of Cash Flows as of December 31, 2019 and December 31, 2018:
• 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, notes
payable-bank acceptance notes, other payables and accrued liabilities, and short-term bank loans.
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.
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
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.
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 February 2016, the FASB established
Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance
sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land
Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases;
and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee
to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will
be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in
the income statement. Operating leases result in straight-line expense (similar to operating leases under the prior accounting
standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting
standard). The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years for a public business entity. Early application of the amendments in this Update is permitted
for all entities. The Company started adoption of ASU 2016-02 for the fiscal year ended December 31, 2019, including interim
periods within those fiscal years. The adoption of this new standard did not impact our consolidated statements as the Company
did not have any lease arrangements.
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. The Company
is currently evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements.
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 does not expect the adoption to have a material impact 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.
The balance of Accounts receivable-related
parties consist of amounts from Shanghai Pujiang for the sale of products.
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.
The balance of Due to related parties
consists of the loans to the Company from Pujiang International and the interest payable to Top Innovation.
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:
The average annual interest rate of the
short-term bank loans was 5.48% and 5.71% as of December 31, 2019 and 2018, respectively. Interest expense, included in the
financial expenses in the statement of operations, was $1,569,047, $897,840 and $932,596 for the years ended December 31,
2019, 2018 and 2017, respectively. The Company was in compliance of their financial covenants at December 31, 2019 and 2018,
respectively.
All long-term bank loans are obtained
from local banks in China and are repayable over one year. All long-term bank loans are secured by a portion of our property,
plant and equipment and land use rights, or guaranteed by related parties. None of our long-term bank loans have financial covenants.
However, each loan contains a covenant restricting our use of funds to purchases raw materials or for working capital purposes.
Interest expense, included in the financial expenses in the
statement of operations, was $580,497, $612,622 and $600,663 for the years ended December 31, 2019, 2018 and 2017, respectively.
Basic earnings per share are computed
by dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during
the period.
Diluted earnings per ordinary share reflects
the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted
into ordinary shares.
The following table sets forth the computation of basic and
diluted earnings per share for the periods indicated:
Reconciliation from the expected income tax expenses calculated
with reference to the statutory tax rate in the PRC of 25% is as follows:
The Company's accounting for deferred
taxes involves the evaluation of a number of factors concerning the realizability of the Company's deferred tax assets. Assessing
the realizability of deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future
taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. The Company's
management forecasts taxable income by considering all available positive and negative evidence including its history of operating
income or losses and its financial plans and estimates which are used to manage the business. These assumptions require significant
judgment about future taxable income. The amount of deferred tax assets considered realizable is subject to adjustment in future
periods if estimates of future taxable income are reduced. The Company's management determined, based on the Company's history
of earnings coupled with its forecasted profitability, that it is more likely than not that all of deferred tax assets will be
realized in the foreseeable future.
The accounting for uncertain tax positions prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. The Company is required to recognize in the financial statements the impact of a tax position, if
that position is more-likely than-not of being sustained on audit, based on the technical merits of the position. The company
does not have uncertain tax position as of December 31, 2019.
The Company does not have any tax positions for which it is
reasonably possible the total amount of gross unrecognized tax benefits will increase or decrease over the next year. The unrecognized
tax benefits may increase or change during the next year for items that arise in the ordinary course of business.
The Company includes interest and penalties related to unrecognized
tax benefits within the benefit from (provision for) income taxes. The company does not have interest and penalties as of December 31,
2019.
The Company's China income tax returns are generally not subject
to examination by the tax authorities for tax years before 2015.
Our management does not capture financial information or utilize
operating segments to make decisions about the business. Management believes that it operates in one business segment. However,
our management does rely on sales by geographical area as useful information in managing the business.
On January 30, 2020, the World Health Organization (“WHO”)
announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”)
and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the
WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve
as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s
financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its
financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak
and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results
of operations, financial condition, or liquidity1 for fiscal year 2020.
Although the Company cannot estimate the length or gravity
of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have an adverse effect on the Company’s
results of future operations, financial position, and liquidity in fiscal year 2020.